TXN Texas Instruments Incorporated

Marvell Technology Group (MRVL) has reported third quarter fiscal 2012 adjusted earnings per share (EPS) of 35 cents, in line with the Zacks Consensus Estimate. However, the EPS was 14.6% below the year-ago level, mostly due to lower revenue and higher expenses and tax rate.

Revenue

Marvell reported revenues of $950.4 million in the third quarter, down 0.9% year over year. The reported revenue was on the lower end of the company’s guided range of $940.0–$980.0 million. The unexpected drop in year-over-year comparison was due to the adverse effect of the Thailand flood. However, the 6% sequential increase in the revenue was mostly attributable to strong performance in its mobile and wireless business.

Revenues from the mobile and wireless end market grew 24.0% from the prior quarter and contributed 31% of the total revenue. The sequential improvement reflects the adoption of new products such as TD in China, and seasonal growth from wireless connectivity solutions. Marvell stated that the company is now serving over 15 mobile customers with more than 30 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 2.0% from the prior quarter, mainly on lower hard disk drive demand affected by 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

In the third quarter, the GAAP gross margin declined 270 basis points (bps) year over year to 56.6% due to higher commodity costs and foundry prices. Operating margin on a GAAP basis decreased 690 bps year over year to 20.1%. Total operating expenses were $347.0 million, up 12.1% from the earlier-year quarter. Higher operating expenses reflect continued investments in relation to product launches.

GAAP net income in the quarter was $195.1 million, or 32 cents per share, compared to $255.7 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 $213.9 million, or 35 cents per share, compared to $277.8 million, or 41 cents in the year-earlier period.

Balance Sheet & Cash Flow

Marvell ended the quarter with cash, equivalents and short-term investments of $2.4 billion, flat sequentially. Accounts receivables were $451.1 million, compared to $405.8 million in the prior quarter. Inventories decreased to $310.0 million from $322.0 million in the preceding quarter. The company carries no long-term debt.

Cash from operating activities was $261.6 million in the third quarter, compared to $263.4 million in the prior quarter. Capital expenditure was $20.1 million. Free cash flow was $239.0 million, which was roughly 25% 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 15 million shares for a total value of $215.0 million.

Fourth Quarter Outlook

Marvell gave a cautious revenue forecast as widespread flooding in Thailand hurt demand for its hard-drive controllers. But the chipmaker is positive about its long-term growth story in China and plans to invest more in the region to sustain the leadership position there.

According to Marvell, the damage caused by the floods will have a near-term impact on its fundamentals. The company believes that its diversified revenue model will enable it to withstand such unpredictable events.

Revenue from the mobile and wireless end market is expected to decline by double digits (10% to 15%) as the growth in mobile will be more than offset by seasonal decline in connectivity. Wireless connectivity business is hyper-seasonal and typically experiences a significant drop-off in sales around the fall season. In the networking end market, revenues are projected to remain flat sequentially as demand for new design wins and products will be offset by less demand for the existing products. Given the current impacts of the recent flooding in Thailand, Marvell anticipates the storage end markets to decline by double digits (between 20% to 30%) sequentially.

Overall, Marvell Tech expects fourth quarter revenues in the range of $775.0 million to $825.0 million, representing a sequential decline of roughly 16% on the mid-point.

Non-GAAP gross margin is projected in the range of 54.5% to 55.5%. The company continues to expect high commodity prices, costs related to new product introduction and flat foundry pricing to pose threats to the gross margin expansion in the interim period. The company anticipates non-GAAP operating expenses to remain roughly flat sequentially (+/- $5 million). Research and development (R&D) expenses are estimated at approximately $240.0 million and selling, general and administrative expenses at approximately $60.0 million. Marvell expects operating margin of approximately 18% (+/- 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 615 million. Considering all the above, non-GAAP EPS is estimated roughly at 23 cents. GAAP EPS is expected to be lower than the non-GAAP estimate by about 7 cents (+/- $0.01). The Zacks Consensus Estimate for the third quarter is 23 cents.

Overall, management remains optimistic about its investment in TD-SCDMA and SSD and expects it to improve 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.

Our Take

The quarter’s results were not decent enough to turn on the moods of investors. Marvell’s EPS was in line the Zacks Consensus Estimate. But the strong mobile and wireless business performance and continuous share buybacks were the positives of the quarter. The fourth quarter guidance reflects mostly the adverse effect of the Thailand flood. But we are pleased with an improving demand situation in China and new product adoption.

Management sounds positive on its diverse revenue model and stable balance sheet and hence remains upbeat on fighting the flood effect. Even we think that Marvell has every possibility to fight the jeopardizing effect of the flood and to return to profitability as soon as the HDD supply chain rebounds.

Marvell makes the chips that are used in HDDs. Hence, we believe that it could have an inventory issue cropping up in the near term from the stalled production of HDD manufacturers. There is a chance that the higher inventory position could lead to lower factory utilization and cost absorption. This could ultimately lead to a higher cost of production, keeping a lid on the gross margin.

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 #5 Rank, implying a short-term Strong Sell recommendation.

 
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