If one needed more evidence that chip companies and cloud software companies are generally dealing with two very different sets of expectations when it comes to beating analyst estimates, Marvell Technology (MRVL) and Workday (WDAY) just provided it.
Marvell fell about 1% on Friday after it issued weak October guidance to go with a July quarter sales and EPS beat. Citing "a worsening macro environment along with the ongoing impact from the current restrictions on shipments to Huawei," Marvell guided for revenue of $660 million, plus or minus 3%, and non-GAAP EPS of $0.15 to $0.19, below consensus analyst estimates of $694.8 million and $0.21. The midpoint of Marvell's revenue guidance range implies a 22% annual revenue drop.
Workday, meanwhile, fell about 5.5% after comfortably beating July quarter revenue, EPS and billings estimates, issuing October quarter subscription revenue guidance that was a little above consensus estimates at the midpoint and slightly raising its fiscal 2020 (ends in Jan. 2020) subscription revenue guidance to a range of $3.06 billion to $3.07 billion (up 28% to 29%) from a prior range of $3.045 billion to $3.06 billion.
Valuations have a bit to do with the very different receptions that Marvell and Workday's reports have received, though it's worth noting that Marvell is more richly valued than some of its peers following a healthy 2019 run-up. Marvell went into earnings trading for 20 times its reported EPS for fiscal 2019 (it ended in January); on average, analysts polled by FactSet expect EPS to drop to $0.71 in fiscal 2020 amid an industry downturn, but to rebound to $1.13 in fiscal 2021 and rise to $1.49 in fiscal 2022.
And while Workday went into earnings carrying lower multiples than those sported by some other fast-growing cloud/SaaS software firms, it still had an enterprise value (market cap minus net cash) equal to 8.5 times its expected fiscal 2021 billings and 63 times its expected fiscal 2021 free cash flow.
Differences in valuation aren't the only factor at play, however. Between Huawei export restrictions and the soft guidance issued both by some of Marvell's peers and some major customers such as Cisco Systems (CSCO) , Marvell's light quarterly outlook didn't come as a complete shock to Wall Street. As Marvell's fiscal 2021 and fiscal 2022 EPS estimates suggest, markets have been betting that business conditions will be markedly better for Marvell in the coming years.
And in spite of Marvell's light guidance, the company's earnings call commentary gave some fresh reasons to be optimistic about the growth outlook for some parts of Marvell's business in the coming years.
On the call, CEO Matt Murphy forecast that Marvell, which had revenue of $2.87 billion in fiscal 2019, could get over $600 million in 5G-related revenue in a few years' time. Thanks to its $6 billion Cavium acquisition, Marvell is a major base station processor supplier, and has argued that 5G presents opportunities to extend Cavium's mobile infrastructure footprint beyond its traditional stronghold in the baseband (signal-processing) portion of a base station, and into radio heads. In addition, the company expects 5G deployments to boost its sales of Ethernet switching and physical layer (PHY) chips for telecom equipment.
Separately, Murphy asserted that Marvell's recent $452 million purchase of Ethernet PHY supplier Aquantia positions to be the leader in the fast-growing automotive Ethernet market. And notably, he indicated that Marvell's huge storage controller business, which has been pressured this year by customer inventory corrections, weak enterprise hardware spending and a cloud capital spending pause, has begun seeing customer inventory levels improve. While soft enterprise storage demand and declining hard drive shipments will likely remain long-term headwinds for this business, solid-state drive (SSD) drive adoption and cloud infrastructure investments should act as long-term tailwinds.
Workday offered plenty of upbeat comments on its earnings call as well. Among other things, the company asserted demand remained strong for its core cloud human capital management (HCM) software offerings, reported 50% sales growth for its financial management offerings and disclosed its Adaptive Insights business planning software unit (acquired last year for $1.55 billion) added over 200 "planning-first customers" during the quarter.
But on the whole, the commentary wasn't very different from what Workday has shared on past calls. It has generally been well-understood that times are very good for the enterprise software industry in general, and that Workday has been executing pretty well within this environment. As a result, markets were expecting another beat-and-raise quarter, and wound up disappointed that Workday's "raise" was a modest one.
Just like the post-earnings rally that Nvidia (NVDA) saw in spite of issuing below-consensus sales guidance, or the sharp selloff that Autodesk (ADSK) witnessed following a modest guidance cut, Marvell and Workday's post-earnings moves drive home the fact that "whisper" numbers are often meaningfully below Street estimates for chip companies, and often meaningfully above them for cloud software firms.