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Marvell (MRVL) Down 4.4% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Marvell Technology (MRVL - Free Report) . Shares have lost about 4.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Marvell due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Marvell Q2 Earnings Lag, Storage Demand Drives Sales

Marvell reported second-quarter fiscal 2019 non-GAAP earnings of 28 cents which declined 6.7% from the year-ago quarter and missed the Zacks Consensus Estimate of 34 cents. This is attributed to the company's recent buyout of Cavium. Excluding the acquisition, Marvell reported earnings of 35 cents per share, which recorded year-over-year improvement.

Marvell’s revenues increased 9.9% year over year to $665 million and surpassed the Zacks Consensus Estimate of $616 million. Strong growth in networking and continued growth in the storage business, which now includes Cavium’s fiber channel products, led to the impressive top-line results.

Before the acquisition of Cavium, Marvell’s revenues were divided into three core business revenues — storage, networking and connectivity. There was another category called “other” under which the company reported revenues from a legacy set of businesses.

In order to accommodate Cavium’s products, the company has restructured its business segments and will report revenues from two core businesses — storage and networking — going forward. This apart, the company will continue to report the “other” segment.  

Quarter Details

In the end markets, storage revenues (50% of total revenues) grew 7.8% year over year to $335.8 million. The growth can be attributed to the company’s constant efforts to gain more share in the nearline segment of the HDD market, driven by strong demand for cloud data storage, and its increasing foothold in the SSD (Solid-State Drive) market. The company is also trying to expand into enterprise and data center segment of the SSD market.

Management is optimistic about three new storage architecture solutions that the company released last month, which are based on the NVMe SSD chipset. These solutions include Cavium’s products for servers and Marvell developed products for SSD devices.

These architectures enable cloud data center customers to scale and share storage without the need of using additional servers, simultaneously lowering total cost of ownership.

The networking business (43%) grew 15.3% year over year to $283.3 million, driven by robust IT spending, as well as the continued ramp of refreshed switch and PHY products. The partial lifting of export ban in the quarter further helped the business due to the redemption of shipment to DTE. The inclusion of Cavium’s products further strengthened the networking segment.

The company’s automotive Ethernet business is also gaining traction with continued ramping of switch products into wireless base stations. Revenue contribution from its refreshed switching products rose more than 50% from a year ago.

The company generated connectivity revenues of $88 million which declined 11% year over year. This is attributed to Marvell’s transitioning from older gaming connectivity products during the reported quarter. The company recently introduced the 802.11ax set of solutions, which will help it capitalize on the market shift to the next generation of Wi-Fi.

Other product (7%) revenues during the quarter declined 2.5%, on a year-over-year basis, to $46.2 million.

Marvell also completed its annual portfolio review, prioritizing R&D resource allocation to maximize future growth and profitability. It is reallocating resources to higher-return areas and limiting investments in lower-return products like Cavium's MontaVista Software product line, which it sold off.

Margins

Marvell’s non-GAAP gross profit came in at $423.8 million, up 14.5% on a year-over-year basis. Gross margin also increased 250 basis points (bps) to 63.7%,

Non-GAAP operating expenses rose 15% year over year to $246.1 million. Non-GAAP operating margin increased 90 bps to 26.7%.

The company reported non-GAAP net income from continuing operations of approximately $161.9 million during the quarter compared with $153.5 million reported in the prior-year quarter.

Balance Sheet

Marvell exited the quarter with cash, cash equivalents and short-term investments of $523.7 billion compared with $1.8 billion in the previous quarter. The company has a long-term debt of $1.8 billion. Cash from operating activities during the quarter amounted to $61.9 million.

During the quarter, Marvell paid dividend of around $39.4 million to its shareholders.

Outlook

Marvell projects third-quarter fiscal 2019 revenues in the range of $825-$865 million. The company expects Cavium businesses to contribute approximately $210 million to revenues.

Storage revenues are anticipated to be approximately 48% of total revenue.

Revenues from networking, which, going forward will include Cavium's embedded processors, security processors and Ethernet connectivity products, are expected to attribute to approximately 46% of total revenues.

Other revenues are projected at nearly 6% of total revenues.

Management expects non-GAAP gross margin to be between 64% and 65%. Non-GAAP operating expenses are estimated to be within $300-$305 million.

The company anticipates non-GAAP earnings per share in the band of 30-34 cents.
 

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -39.15% due to these changes.

VGM Scores

At this time, Marvell has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Marvell has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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