Marvell Technology Group (MRVL - Snapshot Report) reported third-quarter fiscal 2015 adjusted earnings (including stock-based compensation but excluding amortization, acquisition, restructuring and legal related expenses) of 23 cents per share, which beat the Zacks Consensus Estimate of 22 cents.

Earnings declined both sequentially and year over year, mainly because the company adjusted tax benefits in both historical periods. Significantly higher non-operating income in the fiscal second quarter and a much higher share count in the last quarter (compared to the year-ago quarter) also impacted comparisons.

Quarter Details

Marvell’s revenues fell 3.3% sequentially and 0.1% year over year to $930.1 million. Moreover, it was significantly lower than the company’s guidance range of $960 million–$1.0 billion and also missed the Zacks Consensus Estimate of $980 million. The lower-than-expected top-line performance was mainly due to lower revenues from its networking business and soft performance by mobile business which more than offset the stronger storage business.

By end markets, storage revenues were positively impacted by strong demand from SSD customers and share gains in the HDD segment. Revenues from the storage end market were up 3% on a quarterly basis.

The networking business decreased 7% sequentially as the company witnessed lower demand by service providers.

Although continuous 4G LTE ramp in China was a positive, lower-than-expected demand from the 3G mobile business impacted sales in mobile and wireless end markets, which declined 13% from the last quarter.

Marvell’s adjusted gross profit was $472.1 million, down 2.6% sequentially and up 1.3% from the year-ago quarter. The gross margin expanded 34 basis points (bps) sequentially and 69 bps on a year-over-year basis to 50.8% primarily due to a favorable product mix.

Adjusted operating expenses dropped 1.5% sequentially as a result of focused cost control, but were more or less consistent with the year-ago quarter levels.

Marvell’s adjusted operating income dropped 5.6% sequentially but was up 7.7% on a year-over-year basis to $120.9 million. The operating margin shrank 32 bps sequentially and expanded 94 bps year over year to 13.0% during the same period.

The company reported adjusted net income (including stock-based compensation but excluding amortization, acquisition, restructuring and legal related expenses) of $120.7 million or 23 cents per share compared with $146.5 million or 29 cents in the previous quarter and $120.2 million or 24 cents in the year-ago quarter.

Marvell exited the quarter with cash, cash equivalents and short-term investments of $2.40 billion. Further, it generated $194.6 million of cash from operating activities and free cash flow of $157 million. The company carries no long-term debt. During the quarter, Marvell paid dividends of $30.9 million and repurchased stocks of worth $43.8 million.

Guidance

Marvell expects fourth-quarter fiscal 2015 revenues in the range of $880–$900 million, lower than the Zacks Consensus Estimate of $932 million.

Management expects non-GAAP gross margin to be 50.5% (+/-100 bps), while non-GAAP operating expenses are expected to be $320 million (+/-$10 million). The company expects non-GAAP earnings per share to be 24 cents (+/- 2 cents), while the Zacks Consensus Estimate is pegged at 19 cents.

Our Take

We believe that the strong demand for Marvell’s 4G LTE products could be the growth driver in the forthcoming quarters. Additionally, synergies from product launches and product innovations continue to drive growth. We also remain positive on Marvell’s diverse revenue base and stable balance sheet.

However, competition in the semiconductor market from major players such as Intel Corp. (INTC - Analyst Report) and Texas Instruments Inc. (TXN - Analyst Report) remains a headwind. Sluggish macroeconomic conditions, a shrinking PC market and higher material costs are the other challenges in the near term.

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

Investors can also consider TriQuint Semiconductor, Inc. (TQNT - Analyst Report) carrying a Zacks Rank #2 (Buy).

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