Marvell: Fiscal 4Q16 Financial Results

Marvell Technology Group Ltd. reported financial results for the fourth fiscal quarter and fiscal year 2016, ended January 30, 2016, and reported updated financial results for the second and third quarters of fiscal 2016, ended August 1, 2015 and October 31, 2015, respectively.
 

Fourth Quarter of Fiscal 2016 and Fiscal Year 2016 Financial Highlights           

• Revenue: Q4 FY 2016, $616 million; FY 2016, $2.7 billion
• GAAP Net Earnings (Loss): Q4 FY 2016, $4 million; FY 2016, ($811) million (includes the settlement with CMU described below)
• GAAP Diluted Earnings (Loss) Per Share: Q4 FY 2016, $0.01; FY 2016, ($1.59)
• Non-GAAP Net Income: Q4 FY 2016, $55 million; FY 2016 $194 million
• Non-GAAP Diluted EPS: Q4 FY 2016, $0.11; FY 2016 $0.37
• Cash Flow from Operations: Q4 FY 2016, $53 million; FY 2016 $205 million
• Cash and ST Investments: $2.3 billion (prior to giving effect to the settlement with Carnegie Mellon University

Fourth Quarter of Fiscal 2016 and Fiscal Year 2016 Summary
Revenues for the fourth quarter of fiscal 2016 were $616 million, down approximately 9% from $675 million in the third quarter of fiscal 2016, ended October 31, 2015, and down approximately 28% from $857 million in the fourth quarter of fiscal 2015, ended January 31, 2015.

In the fourth quarter of fiscal 2016, storage revenue increased 12% sequentially, reflecting improved demand from HDD customers but was partially offset by slightly lower SSD controller sales.

Networking revenue in the fourth quarter of fiscal 2016 grew 8% sequentially due to broad-based demand improvement across most of our product areas.  

Mobile and wireless revenue decreased 34% sequentially, mainly driven by the previously anticipated declines in revenue resulting from Marvell’s exit of the mobile handset business. The company anticipates mobile handset platform-related revenue to decline through fiscal year 2017 due to the restructuring actions announced on September 24, 2015.

For the fiscal year end January 30, 2016, revenue was $2.7 billion, a decrease of 26% from $3.7 billion for the fiscal year ended January 31, 2015.

For the fiscal year 2016, storage revenues declined 31% from fiscal year 2015 mainly due to soft PC demand compounded by lower SSD controller shipments. 

Networking revenue in fiscal 2016 declined 18% due to weak enterprise switching/routing demand. 

Mobile and wireless revenue in fiscal 2016 declined 27% mainly due to lower mobile handset platform-related revenue resulting from Marvell’s exit of the mobile handset business.

GAAP net earnings for the fourth quarter of fiscal 2016 was $4 million, or $0.01 per share (diluted) compared with a GAAP net loss of ($58) million, or ($0.11) loss per share (diluted), for the third quarter of fiscal 2016, and GAAP net income of $82 million, or $0.16 per share (diluted), for the fourth quarter of fiscal 2015.

For the fiscal year ended January 30, 2016, GAAP net loss was ($811) million, or ($1.59) per share (diluted), compared with GAAP net income of $435 million, or $0.84 per share (diluted), for the fiscal year ended January 31, 2015.  The GAAP net loss in fiscal year 2016 was largely due to the payment of $750 million related to the Carnegie Mellon University litigation settlement.

Non-GAAP net income for the fourth quarter of fiscal 2016 was $55 million, or $0.11 per share (diluted), which included adjustments of approximately $50 million including: $4 million for restructuring related to the mobile handset platform business, $32 million for share-based compensation, $4 million for litigation reserves and settlements, and $10 million for other items. By comparison, non-GAAP net income for the third quarter of fiscal 2016 was $29 million, or $0.06 per share (diluted), which included adjustments of $87 million including: $46 million for restructuring related to the mobile handset platform business, $31 million for share-based compensation, $1 million for litigation reserves and settlements, and $9 million for other items. Non-GAAP net income for the fourth quarter of fiscal 2015 was $131 million, or $0.25 per share (diluted), which included adjustments of $49 million including: $38 million for share-based compensation and $11 million for other items.

For the fiscal year ended January 30, 2016, non-GAAP net income was $194 million, or $0.37 per share (diluted), compared with non-GAAP net income of $611 million, or $1.15 per share (diluted) for the fiscal year ended January 31, 2015.

GAAP gross margin percentage for the fourth quarter of fiscal 2016 was 50.9%, compared to 43.8% for the third quarter of fiscal 2016 and 51.4% for the fourth quarter of fiscal 2015. GAAP gross margin for fiscal year 2016 was 45.2% as compared to 50.3% in fiscal year 2015.

Non-GAAP gross margin percentage for the fourth quarter of fiscal 2016 was 51.9%, compared to 46.0% for the third quarter of fiscal 2016 and 51.8% for the fourth quarter of fiscal 2015. The sequential improvement in fourth quarter GAAP and Non-GAAP gross margin%ages was mainly due to a more lower mix of lower margin mobile handset platform-related revenues relative the prior quarter. Non-GAAP gross margin for fiscal year 2016 was 49.1% compared to 50.5% in fiscal year 2015. The decline in GAAP and non-GAAP gross margin%ages in fiscal year 2016 was mainly due to a higher mix of lower margin mobile handset platform-related revenues relative to fiscal year 2015. 

Operating expenses on a GAAP basis for the fourth quarter of fiscal 2016 were $311 million, or 12% lower compared with $355 million in the third quarter of fiscal year 2016, and 14% lower compared to $360 million in the fourth quarter of fiscal 2015. Operating expenses on a GAAP basis for fiscal year 2016 were $2 billion, or 41% higher compared to $1.5 billion in fiscal year 2015. GAAP operating expenses for fiscal 2016 include approximately $655 million related to the Carnegie Mellon University litigation settlement, with $78.9 million of the $750 million settlement recorded in COGS. Operating expenses for the third and fourth quarters of fiscal year 2016 include $6 million and $11 million, respectively, of legal and accounting fees related to the audit committee investigation, and the related shareholder litigation and inquiries by the SEC and United States attorney’s office.

Non-GAAP operating expenses were $267 million in the fourth quarter compared to $283 million in the third quarter, a 6% decline, and $315 million in the fourth quarter of fiscal 2015, a 15% decline. For fiscal year 2016, non-GAAP operating expenses were $1.2 billion (excluding the impact of $655 million related to Carnegie Mellon University litigation settlement recorded in operating expenses), a decline of 10% from $1.3 billion in fiscal year 2015. 

Shares used to compute GAAP net income per diluted share for the fourth quarter of fiscal 2016 were 509 million shares, compared with 505 million shares in the third quarter of fiscal 2016 and 522 million shares in the fourth quarter of fiscal 2015.  Shares used to compute GAAP net income per diluted share for fiscal year 2016 were 511 million shares as compared with 521 million shares for fiscal year 2015.

Shares used to compute non-GAAP net income per diluted share for the fourth quarter of fiscal 2016 were 519 million shares, compared with 519 million shares for the third quarter of fiscal 2016 and 533 million shares for the fourth quarter of fiscal 2015.  Shares used to compute non-GAAP net income per diluted share for fiscal year 2016 were 526 million shares as compared with 532 million shares for fiscal year 2015.

Cash flow from operations for the fourth quarter of fiscal 2016 was $53 million, compared to $67 million in the third quarter of fiscal 2016 and $155 million reported in the fourth quarter of fiscal 2015. Cash flow from operations for fiscal year 2016 was $205 million, compared to $729 million in fiscal year 2015. Free cash flow for the fourth quarter of fiscal 2016 was $47 million, compared to the $64 million in the third quarter of fiscal 2016 and the $135 million reported in the fourth quarter of fiscal 2015. Free cash flow for fiscal year 2016 was $147 million, compared to $636 million in fiscal year 2015. Free cash flow as presented above is defined as cash flow from operations, less capital expenditures and purchases of technology licenses reported under investing and financing activities in the consolidated statement of cash flows.

Marvell made no share repurchases in the fourth quarter of fiscal 2016. In fiscal year 2016, under the company’s authorized share repurchase program, Marvell repurchased approximately 19.7 million shares for about $261 million. The remaining authorized amount for share repurchases at the end of fiscal 2016 was approximately $183 million.

Marvell paid a quarterly dividend of $0.06 per share on December 29, 2015 to all shareholders of record as of December 16, 2015.  On March 16 and May 18, 2016, the company declared cash dividends of $0.06 per share that were paid on April 22 and July 12, 2016, respectively.

The payment of future quarterly cash dividends on Marvell’s common shares is subject to, among other things, the best interests of the company and its shareholders, its results of operations, cash balances and future cash requirements, financial condition, developments in ongoing litigation, statutory requirements of Bermuda law, and other factors that the board of directors may deem relevant.

CMU Settlement
On February 17, 2016, Marvell announced that, pursuant to a court-ordered mediation, the company and CMU settled their patent infringement lawsuit. The parties resolved the case on mutually acceptable terms, including an aggregate payment by Marvell to CMU of $750 million, with no ongoing royalty payments.  Marvell paid the $750 million in the first quarter of fiscal 2017.

Nasdaq Compliance Plan

• On May 3, 2016, the company received written notification from Nasdaq that, following Marvell’s hearing before The Nasdaq Hearings Panel on April 14, 2016, it granted the company an extension of time to September 6, 2016 to regain compliance with continued listing requirements.  Until that time, shares of Marvell stock will remain listed on The Nasdaq Stock Market.
• On February 22, 2016, the audit committee approved the engagement of Deloitte & Touche LLP as the company’s new independent public accounting firm. On March 1, 2016, the company reported the results of the Audit Committee’s independent investigation of certain accounting and internal control matters. The preparation and filing of the company’s annual report on Form 10-K for fiscal 2016 and its quarterly reports on Form 10-Q for the second and third quarters of fiscal 2016 and for the first quarter of fiscal 2017 have yet to be completed. The company is working diligently to complete these filings as soon as practicable, at which time Marvell believes it will regain full compliance with continued listing requirements.

Additions to company leadership

• On April 5, 2016, Marvell announced a senior leadership transition with the departure of CEO Sehat Sutardja and president Weili Dai from their management positions. On May 1, 2016, Richard S. Hill was appointed COB. He will also serve as the company’s principal executive officer through the filing of Marvell’s quarterly report on Form 10-Q for the quarter ended July 30, 2016.
• On July 11, 2016, Matthew J. Murphy joined Marvell as president and CEO and as a director.A veteran of Maxim Integrated, he joins an executive team and board of directors that has seen a significant infusion of new talent over the past few months, and will be leading that team in the transformation of the company with a focus on profitable growth.
• In addition to Murphy and Hill, joining the board of directors since April 1, 2016 are Peter A. Feld, Oleg Khaykin, Robert E. Switz and Michael Strachan. Recent additions to the executive team include Mitchell Gaynor, EVP and chief legal officer, Chris Koopmans, EVP marketing and sales, and Andy Micallef, COO. Maya Strelar-Migotti has returned to her role as EVP of the smart networked devices and solutions business group and Pantelis Alexopoulos has returned to his role as EVP of the storage business froup. While a search for a permanent CFO is on-going, the company also recently announced Willem Meintjes as SVP of finance.