Marvell (MRVL) Reports Encouraging 2Q

Marvell Technology Group Ltd. (MRVL) reported second quarter fiscal 2011 adjusted earnings per share (EPS) of 36 cents, ahead of the Zacks Consensus Estimate of 35 cents. The adjusted earnings per share exclude amortization of intangible assets and restructuring charges, but include stock-based compensation expenses.

The outperformance in the quarter’s results was driven by strong demand from the company’s mobile and wireless end-markets.

Revenues

Marvell reported revenues of $896.5 million in the second quarter, up 40.0% from $640.6 million in the prior-year quarter. Revenues from the sale of new products were $220.0 million, representing 25% of the quarter’s total revenue. The newly launched 3G processors, ARMADA application processors and Wi-Fi products were particularly strong.

Overall, revenues were fueled by a 140% year-over-year revenue growth in Marvell’s mobile and wireless end-markets. Management stated that growth was largely on account of the success of new products, which ramped up much faster than was expected going into the quarter. The networking end-market grew 30% year over year. However, uneven PC sales and slower sales into the storage market partially offset the strength in other areas.

According to management, the quarter’s performance was also impacted by the adverse effects of macroeconomic headwinds in Europe.

Operating Results

Non-GAAP gross margin (including stock compensation expenses) was 59.1%, an increase of 410 basis points from the year-earlier period.

Non-GAAP operating income (including stock compensation expenses) was $240.6 million (26.9% of revenue), compared to $97.6 million (15.2% of revenue) in the year-earlier quarter.

GAAP net income in the quarter was $220.0 million, or 33 cents per share, compared to $58.0 million, or 9 cents in the year-earlier period.

Excluding stock-based compensation as well as other special items net income on non-GAAP basis was $273.0 million, or 40 cents per share, compared to $119.0 million, or 18 cents in the year-earlier period.

However, including stock-based compensation, the adjusted net income was $242.6 million or 36 cents, compared to $88.7 million or 14 cents in the year-earlier quarter.

Balance Sheet & Cash Flow

Marvell ended the quarter with cash, equivalents and short-term investments of $2.4 billion, up from $2.1 billion in the prior quarter. Accounts receivables were $490.8 million, compared to $448.7 million in the prior quarter. Inventories increased $32.6 million from the preceding quarter to $239.2 million. The rise in inventories was due to lower-than-expected global PC sales, which was affected by the macroeconomic backdrop. The company bears no long-term debt.

Cash from operating activities was $319.2 million in the second quarter, compared to $182.3 million in the prior-year quarter. Capital expenditure increased $6.5 million from the year-earlier quarter to $22.9 million. Free cash flow was $292 million, up from $175.0 million reported in prior-year quarter.

Share Repurchase

During the quarter, Marvell received the board’s authorization to repurchase up to $500.0 million of its outstanding common shares. Marvell expects to use funds from its current cash position for the buyback.

Outlook

With an expected shift in business toward high-growth areas, such as mobile and wireless, Marvell expects revenues to be in the range of $930.0–$970.0 million (up 4% to 8% sequentially) in the third quarter of 2011.

The company expects revenues from storage and networking to be flat sequentially, which is slightly conservative, reflecting current trends. Marvell also expects revenues from the sale of mobile and wireless products to grow in the range of 15.0% to 20.0% sequentially.

For the third quarter, non-GAAP gross margin is expected to range between 59% and 60%. Management expects non-GAAP operating expenses to be in the range of $265.0–$275.0 million. Research and development expenses are expected to be roughly $205.0 million while selling, general and administrative expenses are expected to be approximately $65.0 million.

Non-GAAP operating margin is expected to be approximately 31%. Net interest expense or income is expected to be around $1.0 million and non-GAAP tax expense to range between $4 million and $6 million. Non-GAAP EPS is expected to be in the range of 41–44 cents, considering diluted share count of roughly 675 million. Marvell expects GAAP EPS to be lower than the non-GAAP figure by roughly 8 cents.

Marvell expects to generate a healthy cash balance of approximately $2.6 billion and free cash flow of $250.0 million.

Our Recommendation

We remain encouraged by the strong demand for Marvell’s new products, which led to the impressive second quarter results. The guidance for the third quarter was also impressive, though a bit conservative due to macroeconomic issues. We are also encouraged by Marvell’s continuous endeavors to enter new markets. Earlier this month, Marvell tied up with international audio and infotainment equipment company Harman International Industries Inc. (HAR) to enter the automobile market. In June, Marvell tied up with Hanwang, the leading eReader solution provider in China, to unveil next-generation, versatile eReaders at pocket-friendly prices.

Despite strong quarterly results, an encouraging outlook and new business opportunities, 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). A significant number of pending lawsuits and the company’s European exposure are also causes for concern.

Consequently, the Zacks Rank for the stock is currently #3, implying a short-term Hold recommendation.

MARVELL TECH GP (MRVL): Free Stock Analysis Report

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