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Marvell (MRVL) to Post Q2 Earnings: What Lies in Store?

Zacks Equity Research

Marvell Technology Group Ltd. MRVL is set to report second-quarter fiscal 2020 results on Aug 29.

The company surpassed the Zacks Consensus Estimate twice in the trailing four quarters, and missed it twice, the average negative surprise being 2.93%.

In the fiscal first quarter, non-GAAP earnings of 16 cents beat the Zacks Consensus Estimate of 15 cents. However, it declined 50% from the year-ago quarter.

Marvell’s revenues increased 9.6% year over year to $662.5 million, and surpassed the consensus estimate of $650 million.

Strong growth in networking business led to the top-line improvement. However, due to the export restriction, which was implemented early in the quarter, both networking and revenues were affected.

Marvell Technology Group Ltd. Price and EPS Surprise

Marvell Technology Group Ltd. Price and EPS Surprise

Marvell Technology Group Ltd. price-eps-surprise | Marvell Technology Group Ltd. Quote

What to Expect in Q2
    
Marvell projects second-quarter fiscal 2020 revenues of $650 million, up or down up to 3%.

The company anticipates non-GAAP earnings per share in the band of 13-17 cents.

The Zacks Consensus Estimate for revenues is pegged at $649.78 million, indicating a decrease of 2.33% from the year-ago reported figure. The consensus mark for earnings is 15 cents, suggesting a decline of 46.43%.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Marvell expects the decline in demand from its wireless base station customers, as they prepare to transition from 4G to 5G products later this year, to affect fiscal second-quarter revenues from its embedded processors.

Furthermore, delay in talks of a trade deal between the United States and China, which continues to affect the overall chip industry, is likely to be an overhang on Marvell’s fiscal second-quarter performance. This is because of the company’s significant dependence on semiconductor sales for revenues.

Demand for Marvell Storage Controllers is expected to be soft due to continued weak macroeconomic conditions. Impact of the export restrictions and accounting for the customer factory transition is expected to lead to an approximate mid-single digit sequential decline in storage revenues for the quarter.

Revenues from networking are expected to decline slightly sequentially due to the export restriction.

Moreover, management expects non-GAAP gross margin to be between 63% and 64%, reflecting a weaker product mix due to the impact of export restriction and low storage revenues. Additionally, the Huawei ban has led the company to expect zero shipments to the telecom equipment maker in the fiscal second quarter and thereafter. This is likely to further affect the product mix and put pressure on margins.
    
However, a seasonal customer based product ramp is expected to be a tailwind for the margins for the quarter to be reported.

Moreover, the worldwide PC market has shown signs of turnaround in the second quarter of calendar 2019 after witnessing a slowdown in shipment in the last two quarters. This is likely to take the steam off the headwinds in the demand for the company’s storage controllers for the to-be-reported quarter.

Marvell’s core switch, PHY and OCTEON family of high-end embedded processors are expected to sustain the uptrend. The company’s automotive Ethernet business is also gaining traction.

Moreover, the Cavium business is expected to be accretive to the company’s fiscal second-quarter top line by attracting design wins. Besides, with successful integration of the Cavium business completed in the fiscal first quarter, Marvell expects to reach its operating expenses goals well ahead of time in the fiscal second quarter.

What Does the Zacks Model Say?

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Stocks with a Zacks Rank #4 (Sell) or 5 (Strong Sell) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Marvell currently currently carries a Zacks Rank #2, which increases the predictive power of ESP. However, its Earnings ESP of 0.00% in the combination makes surprise prediction difficult.

Stocks With Favorable Combination

Here are some stocks worth considering as our model shows that these have the right combination of elements to beat on earnings in their upcoming releases:

The Cooper Companies, Inc. COO has an Earnings ESP of +1.50% and a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Burlington Stores, Inc. BURL has an Earnings ESP of +0.17% and is Zacks #2 Ranked.

Bank of Nova Scotia BNS has an Earnings ESP of +0.97% and a Zacks Rank #2.

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