Marvell (MRVL) Q1 Earnings Beat on Core Business Growth

Marvell Technology Group Ltd. MRVL reported impressive first-quarter fiscal 2019 results, wherein the top- and the bottom-line figures came ahead of the Zacks Consensus Estimate. Additionally, both the metrics recorded year-over-year improvement. Growth in the company’s core business and improved operational efficiency led to the better-than-expected results.

On a per share basis, non-GAAP earnings came in at 32 cents, up 33.3% from the year-earlier quarter’s earnings of 24 cents. Quarterly non-GAAP earnings also came ahead of the mid-point of the guided range of 29-33 cents (mid-point 31 cents) and beat the Zacks Consensus Estimate by a penny.

Quarter Details

Marvell’s revenues increased 5.6% year over year to $605 million and surpassed the Zacks Consensus Estimate of $600 million. Moreover, reported revenues came ahead of the mid-point of the guided range of $585-$615 million (mid-point $600 million).

In the end markets, storage revenues (52.4% of total revenues) grew 4.4% year over year but declined 2% sequentially. The year-over-year growth was driven by surging demand at the SSD (Solid-State Drive) segments, along with elevated demand from enterprise and data-center operators.

Management is optimistic about the first-ever NVMe SSD chipset meant to address the requirements of new-age cloud and enterprise data center applications. Notably, this chipset is aligned with the recently announced project of Microsoft MSFT called Denali.

The networking business (25.4%) increased 6.2% year over year but decreased 1% sequentially. The year-over-year increase came on the back of robust adoption of new products. The switch and PHY solutions for the enterprise campus market also saw impressive adoption.

The company’s automotive ethernet business is also gaining traction. NVIDIA NVDA recently selected Marvell’s automotive ethernet switch for its Pegasus platform that is used for handling level V driverless vehicles.

Revenues from connectivity (15%) climbed 18.9% year over year and 5% sequentially. The increase was primarily attributed to higher demand for the company’s solutions across all the markets it caters to, with performance client and enterprise access taking center stage.

Other product (7.2%) revenues during the quarter declined 10% on a year-over-year basis and 13% from the previous quarter.

Marvell’s non-GAAP gross profit came in at $377.6 million, up 8.8% on a year-over-year basis. Gross margin also increased from 60.6% to 62.5% on a year-over-year basis, primarily buoyed by a favorable product mix and higher revenue base.

Non-GAAP operating expenses decreased 3.5% year over year to $211.8 million. As a percentage of revenues, operating expenses contracted 330 basis points to 35%. Marvell’s non-GAAP operating margin came in at 27.4% compared with 22.2% reported in the year-ago quarter. The results were positively influenced by higher gross margin and lower operating expenses as a percentage of revenues.

The company reported non-GAAP net income of approximately $164.6 million during the quarter compared with $125.5 million reported in the prior-year quarter.

Balance Sheet

Marvell exited the quarter with cash, cash equivalents and short-term investments of $1.879 billion compared with $1.841 billion in the previous quarter. The company carries no long-term debt. Cash from operating activities during the quarter amounted to $128.8 million.

During the quarter, Marvell paid dividend of around $30 million to its shareholders.

Outlook

Marvell projects second-quarter fiscal 2019 revenues in the range of $600-$630 million (mid-point $615 million), excluding around $7 million of revenues from a Chinese original equipment manufacturer pertaining to trade restrictions by the U.S. government.

Management expects GAAP and non-GAAP gross margin to be approximately 63% and 64%, respectively. GAAP operating expenses are expected to be between $260 million and $270 million, while non-GAAP operating expenses are estimated to be approximately $210 million.

The company anticipates non-GAAP earnings per share in the band of 32-36 cents (mid-point 34 cents), while the Zacks Consensus Estimate is pegged at 33 cents. On a GAAP basis, earnings are projected to be between 22 cents and 26 cents per share.

Update on Cavium Acquisition

The company has moved a step closer toward the acquisition after the Committee on Foreign Investment in the United States (“CFIUS”) cleared the deal of any type of unresolved national security concerns.

Shareholders of the both the companies have also voted in favor of the merger.

The company is waiting for the final approval from China's State Administration for Market Regulation, which is expected to be completed by mid-2018.

Conclusion

Marvell Technology reported stellar first-quarter fiscal 2019 results on the back of its core business of storage, networking and connectivity solutions, which collectively grew 7% on a year-over-year basis.

Management is positive about keeping up the performance by improving product mix and through other margin expansion efforts. They are also extremely optimistic about reaching the target of 30% non-GAAP operating margin in the second quarter, six months ahead of the deadline.

Going ahead, Marvell’s latest deal to acquire Cavium will broaden its offerings beyond hard disk drives microprocessors and help it enter high growth areas such as data centers and wireless communications. The buyout will give Marvell direct access to the server microprocessor market, which is currently dominated by Intel INTC and thereby boost its top line.

Marvell currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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