(MRVL) Marvell Technology GroupBeats – Outlook Bright

Marvell Technology Group (MRVL) has reported first quarter fiscal 2013 adjusted earnings per share (EPS) of 18 cents, beating the Zacks Consensus Estimate of 16 cents. However, EPS was 24.6% below the year-ago level, mostly due to lower revenue and higher expenses.


Marvell reported revenues of $796.4 million in the first quarter, down 0.8% from $802.4 million in the year-ago quarter. The reported revenue surpassed the Zacks Consensus Estimate of $769.0 million.

Revenues from the mobile and wireless end market grew 14.0% from the year-ago quarter, but fell 1.0% from the prior quarter. The segment contributed 29.0% to the total revenue. Revenues from the storage end market increased 20.0% from the prior quarter, mainly due to hard disk drive demand recovery post Thai floods. Marvell also witnessed a 1.0% sequential drop in its revenues from the networking end market.

Operating Results

Reported gross margin declined 430 basis points (bps) year over year to 54.0% due to higher commodity costs and foundry prices. Operating margin decreased 670 bps year over year to 11.8%. Total operating expenses were $336.1 million, up 5.1% from the earlier-year quarter. Higher operating expenses reflect continued investments in relation to product launches.

GAAP net income in the quarter was $94.5 million, or 16 cents per share, compared to $146.9 million, or 22 cents in the year-ago period. Excluding amortization and restructuring but including stock-based compensation expenses, net income on non-GAAP basis was $111.5 million, or 18 cents per share, compared to $161.8 million, or 24 cents in the year-earlier period.

Balance Sheet & Cash Flow

Marvell ended the quarter with cash, cash equivalents and short-term investments of $2.20 billion, down from $2.25 billion in the prior quarter. Accounts receivables were $417.4 million, compared to $407.3 million in the prior quarter. Inventories decreased to $353.4 million from $354.1 million in the preceding quarter. The company carries no long-term debt.

Cash from operating activities was $198.7 million in the first quarter, compared to $69.1 million in the prior quarter. Capital expenditure was $18.9 million. Free cash flow was $178.0 million, which was roughly 22.4% of revenue, up from a mere 5.0% of revenue in the prior quarter.

Share Buyback & Dividend

During the quarter, Marvell Tech bought back 15.0 million shares for a total value of $223.0 million. With this, Marvell has repurchased approximately $1.7 billion of its previously authorized $2.0 billion program. During the first quarter, the board approved an additional $500.0 million under the authorization. Now, with the addition, the remaining shares under the current repurchase program come to $848.0 million.

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

Second Quarter Guidance

Marvell Tech expects second quarter revenue to grow 6–12.0% sequentially to a range of $840.0 to $890.0 million. By end market, the company expects mobile and wireless end market to increase in the mid to high single-digit range sequentially, with growth driven by over 20% sequential growth in TD smartphone revenue and positive seasonality in connectivity.

Networking end market is expected to improve in the mid single-digit range sequentially. While, storage end market is expected to increase between 10% and 15% sequentially, with an estimated 50.0% growth in the 500-gigabyte TD-mobile revenue.

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 $305.0 million, plus or minus $5 million. Research and development expenses are estimated at approximately $235.0 million and selling, general and administrative expenses at approximately $60 million. Marvell expects operating margin of approximately 19% (+/- 1.0%). Net interest expense and other income are expected to be an approximately $2 million benefit. Non-GAAP tax expense will be $2.0 million.

The diluted share count is projected at 602 million. Considering all the above, non-GAAP EPS is estimated roughly at 28 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 first quarter is 23 cents.

Our Take

The quarter’s results were impressive with Marvell’s top and bottom lines beating the Zacks Consensus Estimates. Revenue contributions from all the end markets were modest. But continuous share buybacks were the quarter’s positives. The second quarter guidance reflects signs of improving TD-Mobile business. 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 #4 Rank, implying a short-term Sell recommendation.

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