Marvell's warning of a soft third quarter is just a hiccup and worth waiting out

Published Thu, Aug 25 20227:17 PM EDT

Marvell Technology (MRVL) reported a solid quarter Thursday after the closing bell, but a small hiccup in its supply chain caused the company to guide data center revenues down on a sequential basis for the current quarter, resulting in an outlook that was below the Street's expectations. On the bright side, management sees its supply chain pressures easing in the fourth quarter. When combined with a healthy demand outlook and new product ramps, the company sees fourth-quarter revenue growth accelerating from the third quarter, and full-year revenue growth tracking above management's initial plan. Revenue rose 41% to $1.517 billion for the second quarter of its fiscal 2023, roughly in line with estimates of $1.52 billion, according to Refinitiv. Adjusted earnings per share of $0.57 beat estimates of $0.56, according to Refinitiv. Adjusted gross margin of 65.0% and that was slightly below estimates of 65.2%. Bottom line Due to the weakness in consumer electronics right now (think PCs, smartphones, gaming) and the industry strength in cloud, 5G, and auto, we thought Marvell would be one of the best positioned semiconductor companies for the current environment. After all, the semiconductor company has strong exposure to data infrastructure end markets and, among its peers, the least exposure to consumer end markets. Although the demand outlook in Marvell's secular growing end markets remains healthy thanks to positive industry trends and company specific design wins and product ramps, it appears that the company hit a supply related speed bump for the third quarter, causing them to offer up guidance that was slightly below expectations. It's a disappointment to see for a company that has so effectively managed its supply chain through the worst of the chip shortage. But we do not want to be too negative because the company's overall demand (outside of consumer) continues to outpace supply. With those supply pressures expected to ease in the fourth quarter and hopefully through next year, and demand remaining strong, this lower-than-anticipated outlook is more of a short-term setback and not a long-term concern. The semis are a tricky and volatile group right now and each one is experiencing its own strengths and challenges. But what we come back to with Marvell is its product leadership in some of the most attractively growing end markets, as well as its operating leverage, which explains why the company continues to grow earnings faster than revenue growth. For these reasons, we are staying patient with Marvell. Shares are down about $2, or 3.61%, in after-hours trading Thursday after gaining $2.85, or 5.46%, in the session. Guidance Although the quarter was solid, management's outlook for the third quarter was below expectations. Marvell expects net revenue of $1.56 billion, plus or minus 3%. The consensus estimate is for revenue of $1.58 billion. Adjusted gross margins are expected to be 65%, plus or minus 0.25%, and that's a touch below estimates of 65.2%. And for adjusted earnings per share, Marvell is expecting $0.59, plus or minus $0.03. That's two pennies lower than the consensus estimate. By end market: Data center sales to decline mid-single digits on a percentage basis sequentially due to supply chain challenges. Driving this decline, management expects cloud customer sales to be flat sequentially due to some challenges in supply, and the on-premise market declining. The team does expect cloud sales to be up sequentially in the fourth quarter as new products ramp and supply challenges ease. On an annual basis, the team anticipates an increase of over 20% versus the year-ago period driven by cloud. Carrier infrastructure sales are also expected to decline mid-single digits on a percentage basis sequentially as wireless growth is driven by 5G deployments and is more than offset by a sequential decline in wired revenue. On an annual basis, growth is projected to be in the mid-20% range driven by the wireless end market. The strong demand from the enterprise networking end market is expected to continue throughout the third quarter. Management noted that they are seeing "pockets of supply opening up, which should enable [them] to begin catching up to demand." As a result, the team anticipates over 20% growth sequentially and roughly 70% growth on an annual basis. Automotive and industrial revenues are expected to increase in the mid-teens range sequentially on a percentage basis and sustain at an above 40% annual rate with Marvell's content per vehicle continuing to grow as vehicles become increasingly more connected. Consumer revenue is expected to be flat sequentially and decline roughly 10% on an annual basis due to weaker consumer HDD (old school, slower, "hard disk drives" with spinning platters) demand that is only partially offset by continued growth in consumer SSD (newer, faster "solid state drives" with no moving parts, making them more durable) demand. Despite the soft third-quarter guide, Marvell sees trends improving in the fourth quarter. Management said it projects its revenue growth to accelerate on a sequential basis in the fourth thanks to more supply and new product ramps. For the full fiscal year, management believes it is tracking towards revenue growth in the high 30% range, an improvement from the low 30% range management discussed last December. While this is great to hear, it appears that analysts are ahead of management. The consensus estimate for revenue growth this year is 38.6%, suggesting full-year numbers may need to come down by a very slight amount. Quarterly sales breakdown Data center sales were $643.4 million, up 48% year over year, and missed estimates of $657 million. Revenues were flat quarter over quarter and below management expectations of low single digit growth. On a sequential basis, Marvell saw continued growth from its cloud business, but that was offset by a decline in its on-premise business that was driven primarily from its fiber channel and Ethernet adapters. It's worth noting that Marvell has very limited revenue exposure with Chinese hyperscale data centers today. We call this out because Nvidia (NVDA) pointed out last night a slowdown in spending from these companies. Carrier infrastructure sales of $285.2 million, up 45%, beat estimates of $272 million. Marvell saw strong growth from both its wired and wireless end markets, the latter of which continues to benefit from growth in 5G adoption. Enterprise networking sales were $340.3 million, up 53% year over year, beating estimates of $325 million. The key driver of the upside to expectations here was improvements in supply. Marvell's enterprise networking business saw strong growth primarily due to the company's own unique product cycles. In addition, Marvell is seeing the dual benefit of share gains and an increase in content with its customers. Consumer sales of $164.4 million, down 1%, were about in line with estimates of $167 million. Results were below guidance as demand from the HDD =market weakened, though consumer SSD controllers grew both sequentially and year over year. Automotive/industrial sales were $83.6 million. That's up 46% year over year but analysts had higher hopes as expectations were for $94 million. Auto revenues grew sequentially, but this was more than offset by the industrial business, which ran into trouble due to supply. (Jim Cramer's Charitable Trust is long MRVL and NVDA. See here for a full list of the stocks.) 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Matt Murphy, CEO, Marvell Technology

Scott Mlyn | CNBC