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Use Marvell Technologies Like a Crystal Ball

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It will help you form pictures of end-demand and the state of business.

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Marvell Technology Group (MRVL) will be reporting results for its fiscal third quarter tonight after the close. I don't own the stock but it's one of the companies that I like to watch because its semiconductors are used by a broad base of customers in a diverse set of end-markets. From my perspective, it gives me a good read on the state of business.

As you can see in the graph below, Marvell experienced the classic business cycle. Along with the rest of the industry, Marvell took a huge hit late last year as business simply disappeared. Off that bottom, we've seen the snap-back as inventories were replenished from bare-bones levels and end-demand started to pick up. What's interesting is that the current street consensus revenue for the fiscal third quarter still represents a 3% decline from the year-ago period. We're coming out of the recession but we're not out yet.



About half of Marvell's revenue comes from the storage original equipment manufacturers (OEM), both hard disk drives (HDD) and solid-state drives (SSD). The company supplies a variety of components including controllers, read channel and preamps. As the recovery started to take place in PC sales, Marvell's revenue in this business segment jumped 20% sequentially in fiscal second-quarter results whereas normal seasonality would expect revenue to be down sequentially.

When management provided fiscal third-quarter guidance, they anticipated the sequential change in storage revenue to be "up in the low-to-mid single digits." We've had both Dell (DELL) and Hewlett-Packard (HPQ) indicate that consumer sales have been solid but commercial accounts remain restrained in the capital spending. Consequently, I'm not expecting any big surprise from this business segment.

Another 20% or so of Marvell's revenue stems from mobile and wireless end-markets. The company is a purveyor of many different types of radios, including WiFi, Bluetooth and FM (including combo versions) for all manner of wireless devices. In the cellular arena it sells digital basebands for GSM networks with Research In Motion (RIMM) as its most prominent OEM. Marvell has also entered into the applications-processor space for use in such products as digital picture frames, mobile Internet devices, and e-books.

Like the storage business, mobile and wireless experienced 20% sequential growth last quarter. However, management expects sequential growth to remain strong at about 20% into October. Much of this product segment is consumer-related which, like PCs, has seen a faster rebound in spending. Given the anecdotal evidence from Black Friday sales, it appears consumer electronics remain a favorite with shoppers. If there's upside to Marvell's numbers, it's likely to come from this segment.

Networking is the last major category for products for Marvell and it generates another 20% of total revenue. The company's Fast Ethernet and Gigabit Ethernet parts address the gamut of switching/routing applications from large enterprises to a home office.

Last quarter, the sequential growth of networking revenue was 10% and it's expected to be "up low double-digits" in the October quarter. The anticipated growth is somewhat surprising given the lack of corporate spending. However, Cisco's (CSCO) comments last month suggested that there might be some change in capital spending. Management's commentary here will be interesting.

Marvell's not the only company that you can use like a set of binoculars. National Semiconductor (NSM) is another one, and it will be reporting next week. But keep in mind that these aren't absolutes; they're just one tool in your toolbox. Use them all in concert to form a picture of end-demand.

No positions in stocks mentioned.
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