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Morningstar | Marvell’s Trio of Moves Further Refines Portfolio; Raising FVE to $22. See Updated Analyst Note from 31 May 2019

Marvell Technologies’ first-quarter fiscal 2020 results were slightly above our estimates on both top and bottom lines, while management’s outlook for the upcoming quarter was slightly below our expectations due in part to the Huawei ban. However, the most important information in our view were details on the firm’s recently announced acquisitions and divestiture. As we described in our note on May 29, Marvell announced the sale of its connectivity business for $1.76 billion to NXP, which is scheduled to be completed by the first quarter of calendar year 2020. This was preceded by Marvell announcing the purchases of chip marker Avera Semiconductor from GlobalFoundries for up to $740 million and automotive Ethernet player Aquantia for $452 million. We believe there is sufficient strategic rationale to justify these three moves. Should the three be approved, Marvell would reduce its exposure to lower margin WiFi and Bluetooth products (for which it did not have the microcontroller and end market focus to realize all the benefits) and would gain ASIC capabilities and exposure to an additional growth opportunity in the automotive market. After updating our model to account for this activity, we are raising our fair value estimate to $22 though we will maintain our no-moat rating at present. Shares remain fully valued in our view.

Revenue in the first quarter was $662 million, which represented an 11% sequential decline but was well within management’s prior guidance. Networking revenue declined by 12% sequentially (though growing nearly 40% versus the first quarter of 2019, due to Cavium’s revenue), while storage sales declined 12% both sequentially and year over year. While storage revenue was slightly above management’s expectations, they highlighted that the macroeconomic environment remained soft and that the weak demand that has been exhibited in cloud customers in recent quarters was beginning to emerge with enterprise customers as well.

Management expects revenue of $650 million in the upcoming quarter, implying a 2% loss sequentially and year over year. While storage remains a difficult environment, the largest impact is from the Huawei ban. Management disclosed that Huawei-related networking sales account for a mid-single-digit percent of total revenue and as a result they expect networking sales to be slightly down sequentially. In terms of profitability, management expect adjusted gross margins to contract 50 basis points sequentially to 63.5% at the midpoint and for adjusted earnings per share to be between $0.13 and $0.17 per share.

Management provided some insights on its trio of moves to boost our longer-term outlook modestly. To summarize, Marvell is selling $300 million in annual connectivity revenue and gaining an initial $400 million in annual sales, between both Aquantia and Avera, in markets which are more attuned to management’s overall infrastructure focus. They are also adding at least $500 million in cash to the balance sheet in the process. Marvell expects both purchases to be accretive to adjusted operating income and earnings in the full years after acquisition. Based on the current details available, we believe the intended purchases and sale are attractive as Marvell is gaining access to high-growth markets in addition to technological expertise which would be costly to develop organically.