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Marvell Technology Group (MRVL - Snapshot Report) reported second-quarter fiscal 2014 non-GAAP earnings (excluding stock-based compensation expense, amortization of acquired intangible assets, acquisition-related costs, restructuring costs and other one-time expenses and benefits) of 23 cents, down 4.2% from the year-ago quarter but ahead of management’s guided range of 17 cents–21 cents.

Including stock-based compensation, earnings came in at 15 cents per share and beat the Zacks Consensus Estimate by a couple of cents.

Revenues

Marvell reported revenues of $807.1 million in the second quarter, down 1.1% year over year. The quarter’s result came within the company’s guidance range of $770.0 million–$810.0 million and was above the Zacks Consensus Estimate of $791.0 million.

By end market, Storage revenues increased 10.0% from the year-ago quarter due to strength in SSDs and HDD business. Networking revenues decreased 4% on a sequential basis due to weak demand from its PON customers and irregular order pattern. Mobile and Wireless end markets declined roughly 30.0% sequentially.

Operating Results

Marvell’s non-GAAP gross profit decreased 2.2% from the year-ago quarter to $427.6 million and margins contracted 60 basis points during the same period to 53.0%, primarily due to lower revenue base. However, the non-GAAP gross margins during the quarter exceeded management’s guidance of 52.5% primarily due to favorable business mix. Including stock-based compensation, gross profit came in at $425.7 million with margins of 52.8%.

Non-GAAP operating income decreased 22.4% from the year-ago quarter to $108.0 million while margins contracted from 17.1% in the year-ago quarter to 13.4% due to higher operating expenses (up 7.0% year over year). Including stock-based compensation, operating income came in at $66.9 million with margins of 8.3%.

Non-GAAP net income decreased 17.0% from the year-ago quarter to $117.9 million while margins came in at 14.6% versus 17.4% reported in the year-ago quarter. Including stock-based compensation, net income came in at $76.8 million.

Balance Sheet & Cash Flow

Marvell ended the quarter with cash, cash equivalents and short-term investments of $1.73 billion which remained flat in comparison with the previous quarter. The company carries no long-term debt.

Cash from operating activities was $86.5 million in the second quarter compared with $83.9 million in the prior quarter.

During the quarter, Marvell Tech bought back 7.2 million shares for a total value of $83.0 million. The company also paid dividend of 6 cents per share.

Third-Quarter Guidance

Marvell Tech expects third-quarter revenues in the range of $850.0 million–$890.0 million. In terms of end market, the company expects mobile and wireless end markets to grow in double digits sequentially, driven by ramp up 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 but a lackluster HDD business (mainly due to slow growing PC market). The company expects networking to grow in low single digits sequentially, driven by NPU’s and Enterprise Network products.

Management expects non-GAAP gross margin to be 51.0% (+/-100 bps) for the forthcoming quarter while non-GAAP operating expenses are expected to be $315.0 million (+/-$10 million). The company expects non-GAAP earnings per share to be 25 cents (+/- 2 cents).

Our Take

Marvell delivered solid second-quarter results which came ahead of the Zacks Consensus Estimate. Revenue contributions from the end markets were in line with expectations. Also, continuous share buybacks were a positive. The third-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. . Sluggish macroeconomic conditions coupled with higher material costs and the company’s European exposure could pose near-term headwinds for the company.

Currently, Marvell Technology has a Zacks Rank #3 (Hold).

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