LSI Life Storage Inc

Marvell Inc. (MRVL) has reported second quarter fiscal 2012 adjusted earnings per share (EPS) of 33 cents, beating the Zacks Consensus Estimate by a penny. Last Friday, the shares witnessed a 10.69% increase in after-market trade on encouraging third quarter guidance.

Revenue

Marvell reported revenues of $897.5 million in the second quarter, up 0.1% from the prior-year quarter and 12.0% from the prior quarter. Revenue came within the company’s guided range of $870.0–$910.0 million. The quarter’s improvement was largely attributed to broad-based strength in the mobile computing market, which boosted chip demand. The market seems to be in a recovery mode after suffering supply chain disruptions caused by the Japan earthquake. New product launches also provided some support.

Revenues from the mobile and wireless end market grew 18.0% from the prior quarter. The sequential improvement reflects the adoption of new products such as TD in China, and seasonal growth from wireless connectivity solutions.

Revenues from the storage end market increased 13.0% from the prior quarter, mainly on share gains at Hitachi Mobile Drive, which is now in demand, as well as strong seasonal demand.

Marvell witnessed a 3.0% sequential gain in its revenues from the networking end market. The sequential growth came on the back of share gains and new product growth at existing and new enterprise and home networking customers.

Operating Results

In the second quarter, gross margin on a GAAP basis declined 120 basis points (bps) year over year to 57.9%. Gross margin declined as a result of higher commodity costs and foundry prices. Operating margin on a GAAP basis decreased 260 bps year over year to 21.7%. Total operating expenses were $324.8 million, up 4.2% from $311.7 million in the earlier-year quarter. Higher operating expenses reflect continued investments in relation to product launches.

GAAP net income in the quarter was $192.4 million, or 31 cents per share, compared to $219.8 million, or 33 cents in the year-ago period. Excluding amortization and restructuring but including stock-based compensation expenses, net income on non-GAAP basis was $204.1 million, or 33 cents per share, compared to $242.7 million, or 37 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, up from $2.3 billion in the prior quarter. Accounts receivables were $405.8 million, compared to $425.5 million in the prior quarter. Inventories increased to $322.0 million from $299.1 million in the preceding quarter. The company carries no long-term debt.

Cash from operating activities was $263.4 million in the second quarter, compared to $177.1 million in the prior quarter. Capital expenditure was $25.2 million. Free cash flow was $235.0 million, compared to $157.0 million in the prior quarter.

During the quarter, Marvell Tech bought back 9 million shares for a total value of $135.7 million.

Third Quarter Outlook

Marvell Tech expects third quarter revenues in the range of $940.0 million to $980.0 million.

Revenue from the mobile and wireless end market is expected to grow in double digits sequentially, 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 in high single digits from new design wins at existing and new customers. For the storage end market, Marvell expects revenues to remain flat sequentially.

Non-GAAP gross margin is projected in the range of 56.5% to 57.5%. The company anticipates non-GAAP operating expenses of roughly $295.0 million (+/- $5 million). Research and development (R&D) expenses are estimated at approximately $235.0 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 620 million. Considering all the above, non-GAAP EPS is estimated at 41 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 37 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 toward investments on initiatives designed to increase revenue and profit through both new products and share gains.

Our Take

The quarter’s results were decent with the bottom line surpassing the Zacks Consensus Estimate. But the third 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, 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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