Despite Marvell's Strong Quarter, Guidance Disappoints

After the closing bell Thursday, Marvell Technology Group (MRVL) reported a top- and bottom-line beat with its second quarter of fiscal year 2020 financial results. Revenue of $657 million (-1% YoY) exceeded estimates of $650 million, while adjusted earnings per share of 16 cents (-43% YoY) beat consensus estimates by a penny.

"Marvell delivered solid second quarter results with revenue above the mid-point of our guidance and we fully achieved the operating expense reductions we had outlined last year, two quarters ahead of schedule," Marvell CEO Matt Murphy said in the press release. 

Guidance Takes Hit

But industry conditions are expected to get tougher next quarter. So, while the headline results came in better than expected, guidance was a different story.

"In our third quarter we face a worsening macro environment along with the ongoing impact from the current restrictions on shipments to Huawei, offset by a stabilizing storage business and the earlier than expected first production shipments of our 5G solutions," Murphy added.

Revenue in the third quarter is expected to be $660 million +/- 3%, well short of the $695 million consensus expectation, with adjusted gross margins in the 63% to 64% range. On the adjusted EPS side, management is expecting 15 cents to 19 cents, well short of 21 cent expectations. We note that this guidance incorporates the U.S. Government's export restrictions on Huawei, and some consensus estimates may not currently reflect this (it should have for the second quarter). Still, it's a very disappointing outlook and shares are negatively reacting to this in after-hours trading. We would not be surprised to see Marvell's cautious outlook ripple through to other semiconductor stocks in Friday's session.

Strong Results for Quarter

Revenue from its storage business, which is consists of HDD and SSD controllers, fiber channel adapters and data center storage solutions, was $274.9 million (+16% YoY, -1% QoQ) vs. $265 million expectations. Looking ahead, management expects an approximate high single digit sequential growth in storage revenue, thanks to increased demand for storage controller's data center and enterprise markets, up-trending demand for fiber channel adapter, offset by softness for HDDs from PCs and gaming. These are all encouraging signs for a business of which investors are waiting for a recovery.

Meanwhile, revenue from its networking business (the segment that will benefit from 5G down the road), which consists of ethernet switchers and transceivers, automotive ethernet, security adapters and processers and more, was nearly $330 million (-18% YoY, -3% QoQ) vs. $337 million expectations. Driving the results in the quarter was seasonal growth in Wi-Fi products that was more than offset by the U.S. government export restrictions on Huawei and a pause in demand for base stations due to transition from 4G to 5G. Interestingly, Marvell saw stronger-than-expected demand from a Chinese customer not subject to the restrictions, but management thinks this relative strength may be due an inventory build to get ahead of future disruptions, and therefore it does not expect this benefit to persist.

Looking ahead to the next quarter, management expects a low single digit sequential decline in networking revenue, primarily reflecting softness in demand from the enterprise-networking-end market (related to a key enterprise networking customer forecast) and seasonal decline in Wi-Fi, offset by the start of 5G base station production shipments. Third quarter 5G revenue will be small, but expect the real, full-quarter ramp to begin in Q4 into 2020.

Other revenue, which comes mainly from printer solutions, application processors and others, was $52.05 million (+12% YoY, +22% QoQ) vs. $49 million expectations.

Overall, we are not pleased with the guidance, but still see plenty of reasons to be invested in this one for the longer term.

As Murphy said during the conference call, "next calendar year is expected to be an inflection point for 5G adoption."

Indeed, projections for 5G macro base station penetration are estimated to jump from 10% this year to 38% next year and 55% in 2021, according to industry analysts.

Combining industry analyst forecasts with a constant rate in customer market share, management estimates that its 5G-related revenue potential could exceed a $600 million annual run rate in the next few years -- and keep in mind this number doesn't reflect future incremental wins.

When we bring the 5G ramp with the strategic benefits of the recent M&A activity and the near-term stabilization in storage, the potential strength of Marvell's earnings power over the next two years looks very attractive. We believe the long term thesis is intact, it's just moving a bit slower than what we had hoped. So what we will continue to do in the interim is follow the playbook we set earlier in the week in our trade Alert herein that we bought a little before the quarter, and we'll look to add to our position again in the near-term on this weakness. While there may be general macro uncertainty now, we believe the 5G catalyst is a visible one that will send this stock higher.

Action AlertsPLUS, which Cramer co-manages as a charitable trust, is long on MRVL.