Marvell Technology Misses on Q1 Earnings - Analyst Blog

Shares of Marvell Technology Group MRVL went down 2.6% in after-hours trading following the release of its first quarter of fiscal 2015 results. The company reported adjusted earnings (including stock-based compensation but excluding amortization, acquisition, restructuring and legal related expenses) of 21 cents per share, which missed the Zacks Consensus Estimate by a penny.

However, earnings per share increased from 13 cents reported in the year-ago quarter primarily aided by higher revenues and operating margin expansion.

Quarter Details

Marvell reported revenues of $957.8 million in the first quarter, up 30.4% year over year. Revenues surpassed the Zacks Consensus Estimate of $889.0 million and also came ahead of management's guidance range of $870.0–$910.0 million. The year-over-year improvement in revenues was primarily attributed to better-than-expected demand from the mobile and wireless business.

By end markets, storage revenues were positively impacted by strong demand from SSD customers and share gains in the HDD segment.

The networking business remained flat sequentially as the company witnessed modest demand for its products. However, Network Processing Units (NPU) witnessed double-digit sequential growth attributable to better-than-expected demand for its LTE solutions in China. Moreover, continuous product launches and 4G LTE ramp in China positively impacted sales in mobile and wireless end markets.

Marvell's adjusted gross profit was $464.9 million, up 16.5% from the year-ago quarter. Gross margins dropped 578 basis points (bps) on a year-over-year basis to 48.5% primarily due to unfavorable product mix.

Adjusted operating expenses in the quarter increased 3.6% on a year-over-year basis to $357.2 million, primarily due to higher research & development (up 4.3%) and general and administrative expenses (up 8.2%). Operating expenses as a percentage of revenues contracted 964 bps from the year-ago quarter to 37.3%.

Marvell's adjusted operating income for the quarter was up 98.5% on a year-over-year basis to $107.7 million, primarily due to lower operating expenses as a percentage of revenues. Operating margin expanded 385 bps to 11.2% during the same period.  

The company reported adjusted net income (including stock-based compensation but excluding amortization, acquisition, restructuring and legal related expenses) of $114.2 million or 21 cents per share compared with $64.6 million or 13 cents per share in the year-ago quarter. Marvell's adjusted net margins expanded 312 bps year over year to 11.9%.

Marvell exited the quarter with cash, cash equivalents and short-term investments of $2.15 billion compared with $1.97 billion in the previous quarter. The company generated $235.1 million cash from operating activities and had free cash flow of $211.0 million. The company carries no long-term debt. During the quarter, Marvell paid dividends of $30.0 million.

Guidance

Marvell expects second-quarter fiscal 2015 revenues in the range of $940.0–$980.0 million, higher than the Zacks Consensus Estimate of $921.0 million.

Revenues from Storage are expected to be flat sequentially due to seasonality. The company expects networking revenues and mobile and wireless revenues to be flat as well. Nonetheless, management expects strong demand for the company's 4G LTE platform and seasonal growth in connectivity business, which is expected to be offset by a decline in 3G businesses.

Management expects non-GAAP gross margin to be 50.0% (+/-100 bps) for the forthcoming quarter while non-GAAP operating expenses are expected to be $330.0 million (+/-$10 million). The company expects non-GAAP earnings per share to be 28 cents (+/- 2 cents) while the Zacks Consensus Estimate is pegged at 19 cents.

Our Take

Marvell delivered mixed first-quarter results wherein the top line came ahead of the Zacks Consensus Estimate while the bottom line missed the same. Revenue contributions from end markets were better than expected and increased both sequentially and on a year-over-year basis. Moreover, the company provided an encouraging second guidance as well.

We believe that the strong demand for Marvell's 4GLTE products could be the growth driver in the forthcoming quarters. We also remain positive on Marvell's diverse revenue base and stable balance sheet.

However, competition in the semiconductor market from major players such as Intel Corp. INTC and Texas Instruments Inc. TXN remains a headwind. Moreover, sluggish macroeconomic conditions, a shrinking PC market, the impending damage payment and higher material costs are the other challenges in the near term.

Currently, Marvell Technology has a Zacks Rank #2 (Buy). Investors can also consider Micron Technology Inc. MU carrying a Zacks Rank #2.