Marvell Beats EPS, Lags Rev - Analyst Blog

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Marvell Technology Group ( MRVL ) has reported fourth quarter fiscal 2012 adjusted earnings per share ( EPS ) of 16 cents, beating the Zacks Consensus Estimate of 12 cents. However, the EPS was 55.3% below the year-ago level, mostly due to lower revenue and higher expenses. Overall results were affected by macro uncertainties, natural calamities (earthquake in Japan and massive floods in Thailand), a lackluster mobile business in China and product transitions at one of Marvell's largest customers.

Revenue

Marvell reported revenues of $742.7 million in the fourth quarter, down 17.5% year over year. The reported revenue came within the company's guided range of $735.0-$745.0 million (revised in January) and below the Zacks Consensus Estimate of $752.0 million. The unexpected drop in year-over-year comparison was due to the adverse effect of the Thailand flood and softer demand for mobile and wireless products, particularly in China.

Revenues from the mobile and wireless end market fell 21.0% from the prior quarter and contributed 31% to the total revenue. The sequential decline was mostly seasonal and the Chinese customers' decision to keep their respective inventory level low. Marvell added that the company is now serving over 20 mobile customers with more than 40 handsets in that region. Moreover, the company started shipping its WCDMA solutions to new customers during the quarter.

Revenues from the storage end market decreased 31.0% from the prior quarter, mainly due to lower hard disk drive demand following the flood.

Marvell also witnessed a 1.0% sequential drop in its revenues from the networking end market. The sequential decline was because of lower demand from its large customers, which are not showing any interest presently to pile their stocks with Marvell chips.

Operating Results

Reported gross margin declined 460 basis points (bps) year over year to 54.1% due to higher commodity costs and foundry prices. Operating margin decreased 1460 bps year over year to 9.4%. Total operating expenses were $331.6 million, up 5.9% from the earlier-year quarter. Higher operating expenses reflect continued investments in relation to product launches.

GAAP net income in the quarter was $80.7 million, or 13 cents per share, compared to $222.9 million, or 38 cents in the year-ago period. Excluding amortization and restructuring but including stock-based compensation expenses, net income on non-GAAP basis was $95.2 million, or 16 cents per share, compared to $241.6 million, or 36 cents in the year-earlier period.

Balance Sheet & Cash Flow

Marvell ended the quarter with cash, equivalents and short-term investments of $2.3 billion, down from $2.4 billion in the prior quarter. Accounts receivables were $407.3 million, compared to $451.1 million in the prior quarter. Inventories increased to $354.1 million from $310.0 million in the preceding quarter. The company carries no long-term debt.

Cash from operating activities was $69.1 million in the fourth quarter, compared to $261.6 million in the prior quarter. Capital expenditure was $26.4 million. Free cash flow was $38.0 million, which was roughly 5.0% of revenue. With an established business structure, Marvell has overcome the cyclical nature of the semiconductor sector and macroeconomic challenges to generate positive free cash flow.

During the quarter, Marvell Tech bought back 13.5 million shares for a total value of $186.5 million.

First Quarter 2013 Outlook

Marvell has already faced the severity of the Thailand flood. But now the company expects to tide over from the recovery in the hard disk drive industry. Despite being cautious, management outlined some positive aspects that could impact the upcoming quarter positively. During the last quarter, Marvell noticed that its China TD business is producing material results, SSD (solid state drive) revenue has exceeded expectations and networking business is growing on new products and share gains. Accordingly, Marvell expects steady improvement in each of the end markets in fiscal 2013.

Revenue from the mobile and wireless end market is expected to decline by a high single digit. In the networking end market, revenues are projected to remain flat sequentially. Given the possibility of recovery in the hard drive supply, Marvell anticipates the storage end markets to increase between 10% and 20% sequentially. Overall, Marvell Tech expects first quarter revenue to be flat to up 6% sequentially.

Non-GAAP gross margin is projected in the range of 54.0% to 55.0%. The company anticipates non-GAAP operating expenses to be approximately $295.0 million, plus or minus $5 million. Research and development (R&D) expenses are estimated at approximately $237.0 million and selling, general and administrative expenses at approximately $58.0 million. Marvell expects operating margin of approximately 16% (+/- 1.0%). Net interest expense and other income are expected to be approximately a $2 million benefit. Non-GAAP tax expense will be $2.0 million.

The diluted share count is projected at 610 million. Considering all the above, non-GAAP EPS is estimated roughly at 20 cents (+/- 2 cents). GAAP EPS is expected to be lower than the non-GAAP estimate by about 7 cents (+/-1 cent). The Zacks Consensus Estimate for the fourth quarter is 14 cents.

Overall, management remains optimistic about its investment in TD-SCDMA and SSD and expects improved results throughout the year. Management also commented that it will remain focused on investments on initiatives designed to increase revenue and profits through new products and share gains. The chipmaker is positive about its long-term growth story in China and plans to invest more in the region to sustain its leadership position there.

Our Take

The quarter's results were not decent enough to turn on the moods of investors. Though Marvell's EPS was above the Zacks Consensus Estimate, the top line missed. Revenue contributions from all the end-markets were poor. But continuous share buybacks were the quarter's positives. The first quarter guidance reflects some positive signs. We are also pleased with the improving demand situation in China and new product adoption.

We see that China Mobile is continually increasing its investments in TD-SCDMA and TD LTE. Given that Marvell has a strong product line-up in both of these technologies, we believe the company will be able to take advantage of this expected growth.

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 #3 Rank, implying a short-term Hold recommendation.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

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