Marvell: Scaling Operations In Response To Demand Shifts

Dr. Jack Haddad and Alex Wu submit: Whenever people say to buy a stock because it has a good track record and an exceptional management team, chances are it is usually priced for perfection; that said, any failure to deliver that perfection would result in a disaster. However, there are good companies that continue to defy skeptics and set records quarter after quarter, such as Marvell (MRVL). It has done just that for several years under its current management team.

This article is a literature review of Marvell Technology Group's (MRVL) plans for alternate technologies, and quantitative and qualitative analysis of financial conditions and results of operations evident in the registered SEC Form 8 and 10-K ending in January 28, 2006. It is to the best knowledge of both authors that the information contained has never been detailed in an associated press release.

In the past, a significant portion of Marvell's business depended on the hard drive industry. Due to the industry's cyclical nature -- with periods of increased demand and rapid growth followed by periods of oversupply and subsequent contraction -- MRVL has begun to concentrate on alternate technologies (semiconductor optical storage).

MRVL is planning to employ the use of flash memory because memory manufacturers have been reducing the prices of their products, thereby enabling them to compete more effectively with small form factor hard disk drive products. Obviously, MRVL realizes the advantageous merits of flash memory products, especially if the technology can meet customers' cost and capacity requirements. As a result, the demand for hard disk drives could severely be hindered.

Also, MRVL is evaluating the benefits and feasibility of migrating to smaller geometry process technology in order to reduce cost and improve performance. This is because finer manufacturing processes lead to enhanced performance, smaller silicon chip size, and lower power requirements.

MRVL has feared that loss from any of their four largest customers (Western Digital, Samsung, Toshiba, Fujitsu) could harm their financial condition and results of operations. To counter such a crucial risk factor, the company has achieved the following:

1) obtained a better control over timing and number of design wins with each customer; and

2) increased the diversity of their customer's base as they expand into new markets.

As a result of these measures, MRVL's net revenue derived from sales of its largest customers have increased significantly in fiscal year of 2006 compared with that of 2005, and 2004. According to Form 10-K for the fiscal year ended January 28 2006, approximately 55% of the company's revenue was derived from sales of its four largest customers compared to 46% and 38% in 2004 and 2003, respectively. Moreover, for fiscal year ending January 28 2006, MRVL has appreciated a significant increase in the selling of products pursuant to long-term purchase commitments rather than the typical purchase orders on short notice when compared with 2005 and 2004. This notable improvement has aided the company tremendously with excess or obsolete inventory.

Furthermore, MRVL is continuously anticipating the need to expand in an effort to appropriately scale the operations in response to changes in demand and new products. The company has significantly increased the scope of its operations and expanded their workforce from 1,205 employees in January 31 2004 to 2,500 as of January 31 2006. The company has assembled a core team of engineers who have extensive experience in the areas of signal circuit design, digital signal processing, embedded microprocessors, CMOS technology, and system-level architectures.

They have invested and expect that they will continue to invest significant funds for research and development. The company's research and development expense was approximately $311.5 million in fiscal 2006, $263.3 million in 2005, and $213.7 million in 2004. All of the company's endeavors in expanding and increasing their workforce has materialized as a result of an implemented enterprise planning [ERP] and a new human resources management [HRM].

The company's acquisitions of the hard disk & and tape drive controller semiconductor business of QLogic Corporation, the semiconductor design business of UTStarcom, Inc., and the printer design of Avago Technologies has not result in concurrent issuances of dilutive equity securities or payment of cash as once feared by Morgan Stanley and UBS analysts in March of 2006 and April of 2006, respectively.

The acquisition of Intel’s mobile processing business (XScale Technology) makes strategic sense, as it complements current product lines in storage and Ethernet communication while giving MRVL access to handset customers such as Motorola and Samsung. With INTC's Communications business purchase, Marvell will design and market a family of processors (codenamed Monahans) for wireless and embedded applications. These products are based on the third generation of Intel Xscale® technology. This family of processors, which is starting to ship in volume, offers a wide range of performance, power and integration levels to meet the needs of feature handsets, smartphones, handhelds and consumer electronic devices. The Monahans family will deliver improved performance and extended battery life, enabling advanced applications that offer end-users a richer experience, less power, and multitasking ability to increase both user satisfaction and overall usage. Marvell continues to increase its investment in development of highly integrated CPU families, like 'Feroceon' and 'Monahans,' that push the limits of MIPS/mw capabilities of next generation mobile devices.

MRVL's past sales and profitability have resulted, to large extent, from the company's ability to anticipate changes in technology and industry standards and to develop and introduce new enhanced products incorporating the technologies. MRVL's ability to adapt to these changes and to anticipate future standards, and the rate of adoption and acceptance of those standards will be a significant factor in maintaining the company's competitive position and prospects for growth.

Disclosure: Authors are long MRVL

MRVL 1-yr chart:

Co-author Alex Wu Alex graduated with an MBA from the Santa Clara University, Santa Clara, CA. He has achieved 1st place winner of Santa Clara MBA Finance Connection investment Conte. He is currently in the works of establishing an auction website for software companies.