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.
INTEL CORP (INTC): Free Stock Analysis Report
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