TXN Texas Instruments Incorporated

Marvell Inc. (MRVL) reported first quarter fiscal 2012 adjusted earnings per share (EPS) of 24 cents, which was 2 cents shy of the Zacks Consensus Estimate of 26 cents. The ongoing volatility in the mobile computing market, which is affecting chip demand, is the chief cause for the quarter’s underperformance. Despite the miss, shares increased 8.86% in after-market trade on encouraging second quarter guidance.

Revenue

Marvell reported revenues of $804.2 million in the first quarter, down 6.2% from $855.6 million in the prior-year quarter and 10.9% from $900.5 million in the prior quarter. The quarter’s revenue also failed to meet the Zacks Consensus Estimate of $838.0 million. The quarter was affected mostly by low mobile and wireless revenues and supply chain disruptions caused by the Japan earthquake, which hurt HDD demand in the back half of the quarter.

Revenues from the mobile and wireless end market declined 30.0% from the prior quarter. The sequential decline reflects the typical seasonality in consumer end markets and continued softness at one of the larger customers. Unanticipated product shift at one of the leading mobile customers, also added to the weakness.

Revenues from the storage end market decreased marginally from the prior quarter, mainly due to supply disruption related to the Japan disaster.

Marvell witnessed a 4.0% sequential gain in its revenues from the networking end market. The sequential growth came on the back of a resolution in inventory issues that customers faced in prior quarters and new platform ramps.

Operating Results

In the first quarter, gross margin on a GAAP basis declined 150 basis points (bps) year over year to 58.3%. Gross margin declined as a result of higher commodity costs. Operating margin on a GAAP basis decreased 590 bps year over year to 18.5%. Total operating expenses were $319.8 million, up 5.5% from $303.2 million in the earlier-year quarter. Higher operating expenses reflect continuous investments in relation to new product launches.

GAAP net income in the quarter was $146.9 million, or 22 cents per share, compared to $205.8 million, or 30 cents in the year-ago period. Excluding amortization and restructuring but including stock-based compensation expenses, net income on non-GAAP basis was $161.8 million, or 24 cents per share, compared to $233.3 million, or 34 cents in the year-earlier period.

Balance Sheet & Cash Flow

Marvell ended the quarter with cash, equivalents and short-term investments of $2.27 billion, down from $2.93 billion in the prior quarter. The reduction in cash balance was mainly due to lower cash generated from operating activities and huge cash used up in investing and financing activities. Accounts receivables were $425.5 million, compared to $459.4 million in the prior quarter. Inventories increased to $299.1 million, up from $245.4 million in the preceding quarter. The company carries no long-term debt.

Cash from operating activities was $177.1 million in the first quarter, compared to $250.8 million in the prior quarter. Capital expenditure was $17.0 million. Free cash flow was $157.0 million, compared to $213.0 million in the prior quarter.

During the quarter, Marvell Tech purchased back 50 million shares for a total value of $803.5 million.

Second Quarter Outlook

Marvell Tech expects second quarter revenues in the range of $870.0 million to $910.0 million.

Revenue from the mobile and wireless end market is expected to grow more than 20% driven by growth at existing mobile customers, the growth in TD chips and seasonal increases in wireless connectivity. In the networking end market, revenues are projected to increase sequentially from new design wins at existing and new customers. For the storage end market, Marvell expects revenues to increase low to mid single digits sequentially.

Non-GAAP gross margin is projected in the range of 58% to 58.5%. The company anticipates non-GAAP operating expenses of roughly $285.0 million (+/- $5 million). Research and development (R&D) expenses are estimated at approximately $225.0 million and selling, general and administrative expenses at approximately $60.0 million. Marvell expects operating margin of approximately 26% (+/- 1.0%). Net interest expense and other income are expected to be approximately a $2 million benefit.

The diluted share count is projected at 630 million. Considering all the above expectations, non-GAAP EPS is estimated at 37 cents. GAAP EPS is expected to be lower than the non-GAAP estimate by about 7 cents (+/- $0.01).

Overall, management remains optimistic about their investment in TD-SCDMA and SSD and expects it to result in improved results throughout the year.

Our Take

The quarter’s results were disappointing, as both the top and bottom lines were below the Zacks Consensus Estimates. But the second quarter guidance reflects an improving demand situation and product adoption. Marvell’s endeavour to expand its chip sales in China through the establishment of an R&D centre there is encouraging.

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 and the company’s European exposure.

Currently, Marvell Technology has a Zacks #3 Rank, implying a short-term Hold recommendation.

 
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