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Marvell Technology Group (MRVL - Snapshot Report) reported third quarter fiscal 2013 adjusted earnings per share (EPS) of 14 cents, marginally missing the Zacks Consensus Estimate of 15 cents. The quarter’s result was also 58.9% below the year-ago level, mostly due to lower revenue.

Revenue

Marvell reported revenues of $780.9 million in the third quarter, down 17.8% from $950.4 million in the year-ago quarter. The quarter’s result came below the company’s guidance range of $800.0–$850.0 million. The year-over-year decline was mainly due to macro-economic slowdown and a lackluster PC market, which badly affected its chip demand.

Revenues from the mobile and wireless end market fell 10.0% from the prior quarter. The segment contributed 25.0% to total revenue. The decline was due to lower-than-expected demand for gaming solutions and an inventory correction at its enterprise customers. Revenues from the storage end market declined 3.0% from the prior quarter, mainly due to lower HDD TAM (total available market), partially offset by increased shipment of 500-gigabyte per platter mobile drives and strong demand for SSDs (solid state drive). The segment contributed 47.0% of total sales. Marvell also noticed 1.0% revenue decline in its networking end market driven by inventory corrections at its infrastructure-related customers.

Operating Results

Reported gross margin declined 460 basis points (bps) year over year to 52.0% due to higher commodity costs and product mix. Operating margin was 8.6%, down from 20.1% in the year-ago quarter. Total operating expenses were $339.6 million, down 2.1% from the year-earlier quarter.

GAAP net income in the quarter was $68.8 million, or 12 cents per share, compared with $195.1 million, or 32 cents in the year-ago period. Excluding amortization and restructuring but including stock-based compensation expenses, net income on non-GAAP basis was $82.6 million, or 14 cents per share, compared with $213.9 million, or 35 cents in the year-earlier period.

Balance Sheet & Cash Flow

Marvell ended the quarter with cash, cash equivalents and short-term investments of $2.02 billion, down from $2.13 billion in the prior quarter. Accounts receivable were $374.8 million, compared with $390.8 million in the prior quarter. Inventories decreased to $324.0 million from $345.7 million in the preceding quarter. The company carries no long-term debt.

Cash from operating activities was $136.6 million in the third quarter, compared with $189.2 million in the prior quarter. Capital expenditure was $19.4 million. Free cash flow was $113.0 million, which was roughly 14.4% of revenue, significantly down from 21.0% of revenue in the prior quarter.

During the quarter, Marvell Tech bought back 23.0 million shares for a total value of $203.0 million. The company also paid $33.5 million toward quarterly cash dividend of 6 cents per common share.

Fourth Quarter Guidance

Marvell provided a weak fourth-quarter revenue forecast citing weakness in the personal computer market, which will continue to affect its HDD businesses.

Marvell Tech expects fourth quarter revenue in the range of $700.0–$740.0 million, representing a decline of 8% sequentially at the mid-point. In terms of end market, the company expects mobile and wireless end market to decrease 30.0% sequentially due to continued demand weakness from smartphone customers.

Networking end market is expected to improve in the low single-digit range sequentially attributable to growth of the switching business. Storage end market is expected to remain roughly flat sequentially along with better-than-expected SSD performance.

Non-GAAP gross margin is projected in the range of 52.5% to 53.5%. The company anticipates non-GAAP operating expenses to be approximately $310.0 million, plus or minus $5.0 million. Research and development expenses are estimated at approximately $248.0 million and selling, general and administrative expenses at approximately $62.0 million. Marvell expects operating margin of approximately 10.0% (+/- 1.0%). Net interest (expense)/other income are expected to be approximately $2.0 million. Non-GAAP tax expense is likely to be $2.0 million.

The diluted share count is projected at 560 million. Considering the above-mentioned estimates, non-GAAP EPS is estimated roughly at 13 cents. GAAP EPS is expected to be lower than the non-GAAP estimate by about 8 cents. The Zacks Consensus Estimate for the fourth quarter is 15 cents.

Our Take

The quarter’s results were disappointing with Marvell’s bottom line missing the Zacks Consensus Estimate. Revenue contributions from the end markets were soft. But continuous share buybacks were a positive. The fourth quarter guidance reflects signs of improving networking and storage end markets. But smartphone weakness and guidance cut at its largest HDD customers Western Digital Corp. (WDC - Analyst Report) and Seagate Technology plc (STX - Analyst Report) concern us.

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. (LSI - Analyst Report). 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 #4 Rank, implying a short-term Sell rating.

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