Macro Backdrop Hurts Marvell???s 2Q

Zacks

Marvell Technology Group (MRVL) reported second quarter fiscal 2013 adjusted earnings per share (EPS) of 19 cents, missing the Zacks Consensus Estimate of 22 cents. The quarter’s result was also 24.6% below the year-ago level, mostly due to lower revenue and higher expenses.

Revenue

Marvell reported revenues of $816.1 million in the second quarter, down 9.1% from $897.5 million in the year-ago quarter. The quarter’s result came below the company’s guidance range $840.0-$890.0 million. The decline was mainly due to macro-economic slowdown, which affected Marvell’s storage and mobile businesses. The company witnessed lower volumes at its largest North American cellular customer, and slowing demand from Chinese smartphone customers.

Revenues from the mobile and wireless end market fell 5.0% from the prior quarter. The segment contributed 27.0% to total revenue. Revenues from the storage end market increased 7.0% from the prior quarter, mainly driven by increased shipment of 500-gigabyte per platter mobile drives and strong demand for SSDs (solid state drive). The segment contributed 47.0% of total sales. Marvell also noticed outperformance in its networking end market driven by strength of new products and share gains.

Operating Results

Reported gross margin declined 470 basis points (bps) year over year to 53.2% due to higher commodity costs and foundry prices. Operating margin was 11.1%, down from 21.7% in the year-ago quarter. Total operating expenses were $344.0 million, up 5.9% from the earlier-year quarter. Higher operating expenses reflect continued investments related to product launches.

GAAP net income in the quarter was $93.1 million, or 16 cents per share, compared with $192.4 million, or 31 cents in the year-ago period. Excluding amortization and restructuring but including stock-based compensation expenses, net income on non-GAAP basis was $108.8 million, or 19 cents per share, compared with $204.1 million, or 33 cents in the year-earlier period.

Balance Sheet & Cash Flow

Marvell ended the quarter with cash, cash equivalents and short-term investments of $2.13 billion, down from $2.20 billion in the prior quarter. Accounts receivable were $390.8 million, compared with $417.4 million in the prior quarter. Inventories decreased to $345.7 million from $353.4 million in the preceding quarter. The company carries no long-term debt.

Cash from operating activities was $189.2 million in the second quarter, compared with $198.7 million in the prior quarter. Capital expenditure was $10.8 million. Free cash flow was $174.0 million, which was roughly 21.0% of revenue, slightly down from 22.4% of revenue in the prior quarter.

Share Buyback & Dividend

During the quarter, Marvell Tech bought back 20.0 million shares for a total value of $250.0 million.

Considering its cash position, Marvell decided to return shareholder value through dividend payment. The quarterly cash dividend of 6 cents per common shares will be paid in October 2012.

Third Quarter Guidance

Marvell Tech expects third quarter revenue in the range of $800.0–$850.0 million. In terms of end market, the company expects mobile and wireless end market to decrease in the mid-single digit range sequentially due to continued demand weakness from smartphone customers.

Networking end market is expected to improve in the low single-digit range sequentially on new product adoption. Storage end market is expected to increase low single digits sequentially aided by strength in 500 gigabytes mobile platter and SSD controllers.

Non-GAAP gross margin is projected in the range of 33.0% to 34.0%. The company anticipates non-GAAP operating expenses to be approximately $300.0 million, plus or minus $5.0 million. Research and development expenses are estimated at approximately $245.0 million and selling, general and administrative expenses at approximately $55.0 million. Marvell expects operating margin of approximately 17.0% (+/- 1.0%). Net interest (expense)/other income are expected to be approximately $2.0 million. Non-GAAP tax expense is likely to be $2.0 million.

The diluted share count is projected at 580 million. Considering the above-mentioned estimates, non-GAAP EPS is estimated roughly at 24 cents. GAAP EPS is expected to be lower than the non-GAAP estimate by about 8 cents (+/-1 cent). The Zacks Consensus Estimate for the third quarter is 25 cents.

Our Take

The quarter’s results were disappointing with Marvell’s bottom line missing the Zacks Consensus Estimate. Revenue contributions from the end markets, barring mobile, were modest. But continuous share buybacks were a positive. The third quarter guidance reflects signs of improving networking and storage end markets. But the smartphone weakness concerns us.

We remain positive on Marvell’s diverse revenue model and stable balance sheet. However, we remain concerned about stiff competition in the semiconductor market from major players, such as Intel Corp. (INTC), Texas Instruments Inc. (TXN) and LSI Corp. (LSI). We are also concerned about the significant number of pending lawsuits, higher material costs and the company’s European exposure.

Currently, Marvell Technology has a Zacks #4 Rank, implying a short-term Sell rating.

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