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Marvell Technology Group (MRVL - Snapshot Report) reported first quarter fiscal 2014 adjusted earnings per share (EPS) of 12 cents, surpassing the Zacks Consensus Estimate of 7 cents. However, the quarter’s result was 32.8% below the year-ago level, mostly due to higher expenses. Shares rallied 6.54% in the after hours, reflecting investor confidence in the quarter’s results and upbeat guidance, which exceeded Street expectations.

Revenues

Marvell reported revenues of $734.4 million in the first quarter, down 7.8% year over year and 5.3% sequentially. The quarter’s result came within the company’s guidance range of $700.0–$740.0 million and was above the Zacks Consensus Estimate of $722.0 million. As per management, product demand was better than expected with share gains witnessed in the Storage and Networking end markets. However, ongoing macro uncertainty, a lackluster PC market and weakness in Mobile and Wireless end market dragged down revenue growth.

By end market, Storage revenues were roughly flat sequentially and represented around 53% of total sales. Strength in SSDs was offset by a sluggish HDD business. Networking revenues were down 2% sequentially and were 24% of total sales. Amid continuing weakness in the networking market, a double-digit sequential growth was noticed in network processors and PON (Passive Optical Network). Mobile and Wireless end markets declined roughly 24% sequentially and represented roughly 18% of total revenue.

Operating Results

Reported gross margin grew 30 basis points (bps) year over year to 54.3% due to favorable product mix. Operating margin was 5.8%, down from 11.8% in the year-ago quarter. Total operating expenses were $356.1 million, up 5.9% from the year-earlier quarter.

GAAP net income in the quarter was $53.2 million, or 11 cents per share, compared with $94.5 million, or 16 cents in the year-ago period. Excluding amortization and restructuring but including stock-based compensation expenses, net income on non-GAAP basis was $64.6 million, or 12 cents per share, compared with $111.5 million or 18 cents in the year-earlier period.

Balance Sheet & Cash Flow

Marvell ended the quarter with cash, cash equivalents and short-term investments of $1.73 billion, down from $1.92 billion in the prior quarter. Accounts receivable were $370.4 million compared with $330.2 million in the prior quarter. Inventories increased to $270.7 million from $250.4 million in the preceding quarter. The company carries no long-term debt.

Cash from operating activities was $83.9 million in the first quarter compared with $204.6 million in the prior quarter. Capital expenditure was $20.1 million. Free cash flow was $53.0 million, which was roughly 7.2% of revenues, down from 20.1% of revenues in the prior quarter.

During the quarter, Marvell Tech bought back 20.0 million shares for a total value of $200.0 million. The company also paid $30.3 million toward quarterly cash dividend of 6 cents per common share.

Second Quarter Guidance

After witnessing a difficult 2013, management now expects many of its investments and key initiatives to pay off in fiscal 2014 across all its end markets.

Marvell provided a solid second-quarter 2014 revenue forecast anticipating increased traction in areas such as mobile handsets, tablets, connectivity and SSDs.

Marvell Tech expects second quarter revenues in the range of $770.0–$810.0 million, representing growth of 7.6% sequentially at the mid-point. In terms of end market, the company expects mobile and wireless end markets to grow in double-digits sequentially, driven by ramp in its unified 3G platform for mobile and advanced wireless connectivity solutions.

Storage market is expected to remain flat sequentially with double-digit growth in SSD business and a lackluster HDD business (mainly due to slowing PC market). The company expects networking to grow low-to-mid single digits.

Gross margin is projected to be 52.2% (+/- 100 basis points) on a GAAP basis and 52.5% (+/- 100 bps) on a non-GAAP basis. The company anticipates operating expenses to be approximately $370.0 million (+/- $10.0 million) on a GAAP basis and $315.0 million (+/- $10.0 million) on a non-GAAP basis. Research and development expenses are estimated at approximately $255.0 million and selling, general and administrative expenses at approximately $60.0 million. Marvell expects non-GAAP operating margin of approximately 13.0% (+/- 1.0%). Net interest (expense)/other income are expected to be approximately $100.0 million. Non-GAAP tax expense is likely to be $1.0 million.

The share count is projected at 517 million. Considering the above-mentioned estimates, non-GAAP EPS is estimated within the 17–21 cents range. GAAP EPS is expected in the range of 7–11 cents. The Zacks Consensus Estimate for the second quarter is 12 cents.

Our Take

Marvell delivered solid first quarter results crushing our estimates. Revenue contributions from the end markets were in line with expectations. Also, continuous share buybacks were a positive. The second quarter guidance reflects strength and gives an overall positive view for the rest of the year.

We remain positive on Marvell’s diverse revenue model and stable balance sheet. However, we remain concerned about stiff competition in the semiconductor market from major players, such as Intel Corp. (INTC - Analyst Report), Texas Instruments Inc. (TXN - Analyst Report) and LSI Corp. . 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 Rank #3 (Hold).

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