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Morningstar | MRVL Updated Forecasts and Estimates from 10 Sep 2018

Marvell announced fiscal second-quarter results for the core business which were on par with our expectations while also including the impact of the completed Cavium acquisition. Cloud and data center SSD demand remains strong and Marvell's recently refreshed switching products continued to drive sales for networking products. After incorporating management's synergy expectations for the combined firm, we are maintaining our fair value estimate of $18.50 for the no-moat semiconductor company. Shares were up in after-hours trading and we would recommend waiting for a margin of safety before investing.

Second-quarter revenue, before Cavium’s contribution was $623.9 million, an increase of 3% versus the prior-year period. Including the addition of Cavium sales, revenue totaled $665.3 million. With the inclusion of Cavium, storage sales increased 8% year over year to $335.8 million while only 3% from Marvell sales alone. While SSD controllers and other products continue to grow at a double-digit pace, helping increase storage as a percent of the total revenue to 51%, HDDs declined. However, Marvell was able to increase sales from near-line HDDs, due to continued demand from cloud customers, helping to offset weakness in other HDD products.

Management announced that they were consolidating networking and the declining connectivity businesses into the same reporting segment after the Cavium merger. As we have previously reported, our bullishness on the Cavium merger is in large part due to its ability to make Marvell’s networking offering more robust and we are optimistic that the combined firm will be better positioned to compete with titans Broadcom and Intel. As a whole, networking revenue increased 15% year over year to $283.3 million with core networking sales growing better than previous guidance. This was partly because of the inclusion of ZTE sales after the U.S. lifted its export ban but predominantly due to the ongoing strength in demand from enterprise IT.

Guidance for third-quarter revenue is between $825 million and $865 million. This would represent a sequential increase of 27% at the midpoint, with Cavium contributing roughly $210 million. Stripping out Cavium’s contribution, the guidance implies 2% growth sequentially and 5% growth year over year from Marvell’s core business. Management are maintaining longer-term targets for annual revenue growth of 6%-8% ahead of their upcoming Analyst Day when we anticipate they will provide further insights into synergies they expect to realize with Cavium. GAAP gross margin for the upcoming quarter is expected to decline significantly year over year to roughly 45% from 62% as the Cavium acquisition is bedded in. While we expect margins to tighten in the near term due to the integration of lower margin Cavium, we continue to forecast widening operating margin and increasing profitability as management ekes out operating improvements and brings the new businesses in line with the existing core.