Wireless Industry Analyst

[Originally for Sramana Mitra's site]

In my previous article on Marvell, I provided a brief overview of the company strategy and product portfolio. Before we move on to dissect the various business areas, let us take a brief look at the fiscal 2008 financials. Marvell’s total revenue for fiscal 2008 is $2.9bn at a gross margin of 48.7% and an operating loss of 3.6%. This represents a 29% increase from fiscal 2007’s revenue of $2.24bn. The net revenue increase is due to increased volume shipments of storage SoC, a full year’s revenue from the Intel acquisition and the printer business from the Avago acquisition.

The gross margin decrease from 2007’s 50.8% is primarily due to the lower margin cellular and handset products acquired from Intel. Marvell was contractually obligated to purchase from Intel under a supply agreement. With the terms of this agreement being met, the company has partly transitioned to its fabrication partners and is looking to get incrementally higher margins this year.

The operating loss was incurred mainly due to the 50% increase in the R&D expense. The company spent $971mn on R&D as compared to fiscal 2007’s $645mn. This comes directly from the additional salary and related costs of $161mn (about 5.5% of revenue) incurred in fiscal 2008 related to the Intel and Avago acquisitions. Fiscal 2007’s R&D expenses were also 80% higher than the fiscal 2006 numbers due to the personnel increase coming with the Avago, UTStarcom and Intel acquisitions. While the lay-offs and restructuring measures may bring the R&D expenses back to the 30% range, the total operating expense will be about 47%. This is alarmingly high as compared to the semiconductor industry average about 32%.

Marvell’s current cash and cash equivalents stand at about $600mn, 20% of its annual revenue. Broadcom, its similar-sized competitor has a cash position of about $2.3bn or 60% of its annual revenue. Western Digital accounted for 17% and sales to Asian customers represented 84% of fiscal 2008 revenues.

While Marvell has a broad portfolio, a significant portion of its revenue comes from the highly cyclical and competitive hard disk drive industry. Besides, even for a fan of long-term vision and strategic spending like me, the expenses and their outlook are staggering and out of proportion. But for fiscal 2006, when the OpEx was about 38% of the revenue, the company has in recent years had 45% or greater OpEx. It seems that Marvell’s growth comes with very high associated costs. Sehat reiterated in the recent conference call that the company is committed to a reduction of costs. I wonder how quickly and efficiently this can be put in place.