Marvell (MRVL) Gains on Restructuring Plan Announcement

Shares of Marvell Technology Group Ltd.MRVL gained 5% in yesterday's after-hour trade following the company's announcement of a major restructuring initiative, including job cuts.

Per the plan, the chip maker intends to significantly downsize the mobile platform business to "refocus its technology to emerging opportunities in IoT [Internet of Things], automotive and networking." Marvell generated nearly $122 million in revenues and $13 million of gross profit from the business in the first half of fiscal 2016.

This planned restructuring initiative is anticipated to cut approximately 17% of the company's global workforce and save $170 million to $220 million annually.

Marvell expects to incur total charges of $100 million to $130 million as part of the restructuring plans for which adjustments will be made in the third and fourth quarters of fiscal 2016. Though the company planned to start the restructuring process immediately, the major activities are likely to take place through the end of fiscal 2016.

We believe that this is a strategic move on the company's part given IoT's potential. The IoT is projected to bring about a massive change by increasing connectivity between people and things significantly. It is a computing concept where physical objects of everyday use will be connected to the Internet and characterized by autonomous provisioning, organization and monitoring.

IoT will connect billions of devices and systems with applications ranging from sensors and mobile devices to home appliances and cars. Research firm IDC quoted the Wall Street Journal that the market could nearly triple, going ahead. In 2014, the global IoT market was worth $655.8 billion and might hit $1.7 trillion by 2020.

According to the news source, more than 90% of the world's data has been created over the last two years and by taping this opportunity would ensure solid long-term growth, in our view. In its Jun 2015 report, the McKinsey Global Institute projected that IoT applications could reach as much as $11.1 trillion every year by 2025.

Marvell's efforts toward capitalizing on the emerging opportunities are encouraging. However, we believe that it is too early to determine whether the company's plans will succeed given the new challenges it has been countering over the past two weeks.

Recent Troubles

Marvell has been in troubled water for some time now following the dismal second-quarter fiscal 2016 results and an internal probe in relation to certain accounting inconsistencies.

Marvell's revenues plunged 26% year over year to $711.3 million. Moreover, it was toward the lower end of the company's guidance range of $710-$740 million and missed the Zacks Consensus Estimate of $723 million. The company blamed the softer-than-expected demand from storage end markets and the emerging markets for the weak performance.

The company reported loss per share of 74 cents as against 27 cents earned a year ago. The bottom line also compared unfavorably with the Zacks Consensus Estimate of earnings of 5 cents.

Furthermore, Marvell is investigating whether the board had sufficiently discharged its duties related to revenue recognition. The probe came after Levi & Korsinsky, a national law firm, launched an investigation into Marvell for possible violations of the Federal Securities Laws.

The complaint alleged that Marvell's revenue recognition and control measures were inappropriate, leading to material misstatements of key metrics including those related to its business, operations and prospects.

Secondly, the internal investigation focuses on roughly 7% to 8% of revenue recognized in second-quarter fiscal 2016 which should have been accounted for in the third quarter.

Here we note that it if there were accounting irregularities, results may actually be weaker than reported right now. Also, if no inconsistencies are found, it would mean that the next quarter's results will be short by the amount pulled into this quarter. Consequently, the next quarter will also be weak.

Currently, Marvell carries a Zacks Rank #5 (Strong Sell).

Stocks to Consider

Given the sell-rating and challenges associated with Marvell, it is better to avoid the stock. Some better-ranked stocks in the broader technology sector are ARM Holdings plc ARMH , Avago Technologies Limited AVGO and Pixelworks, Inc. PXLW , all carrying a Zacks Rank #2 (Buy).

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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 Nasdaq, Inc.

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

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