Marvell: Fiscal 3Q16 Financial Results

Marvell Technology Group Ltd. reported preliminary financial results for the third quarter of fiscal 2016, ended October 31, 2015, and reported updated preliminary financial results for the second quarter of fiscal 2016, ended August 1, 2015.

Key Third Quarter of Fiscal 2016 Financial Highlights (Preliminary)              

• Revenue: $674 Million
• GAAP Net Loss: ($62) Million
• GAAP Loss Per Share: ($0.12)    
• Non-GAAP Net Income:  $28 Million
• Non-GAAP Diluted EPS: $0.05    
• Free Cash Flow: $54 Million
• Restructuring and other related charges: $46 Million
• Cash and ST Investments: $2.3 Billion

Third Quarter of Fiscal 2016
Revenues for the third quarter of fiscal 2016 were $674 million, down approximately 5% from $711 million in the second quarter of fiscal 2016, ended August 1, 2015, and down approximately 28% from $930 million in the third quarter of fiscal 2015, ended November 1, 2014.

In the third quarter of fiscal 2016, storage revenue declined 16% sequentially reflecting lower demand from HDD customers but was offset slightly by better-than-expected SSD controller sales.

Networking revenue in the third quarter of fiscal 2016 declined 8% sequentially reflecting continued weak demand for enterprise networking products while mobile and wireless revenue grew 15% sequentially on stronger smartphone demand, particularly in the low-end.

Marvell is restructuring its mobile business as it relates to mobile handsets only. The company anticipates mobile handset platform-related revenue to decline through fiscal year 2017 due to the restructuring actions announced on September 24, 2015.

The company is in the process of assessing which transactions should be considered as ‘pull-in’ transactions for which revenue is properly recognized in a quarter but would have been expected to be received and earned in the subsequent quarter. This process includes continued assessment of the amount of revenue recognized in the second quarter of fiscal 2016 derived from pull-in transactions, which is subject to the Audit Committee’s investigation. Although the company believes revenue attributable to pull-ins was properly recognized in the second and third quarters of fiscal 2016, the amount of pull-ins has had an impact on the revenue attributable to each such quarter.

The U.S. GAAP net loss for the third quarter of fiscal 2016 was ($62) million, or ($0.12) loss per share compared with a GAAP net loss of ($403) million, or ($0.78) loss per share, for the second quarter of fiscal 2016, and GAAP net income of $115 million, or $0.22 per share (diluted), for the third quarter of fiscal 2015.

Non-GAAP net income for the third quarter of fiscal 2016 was $28 million, or $0.05 per share (diluted), which included adjustments of approximately $90 million including: $46 million for restructuring related to the mobile handset platform business, $31 million for share-based compensation, $6 million for litigation reserves and approximately $6 million for other items. By comparison, non-GAAP net income for the second quarter of fiscal 2016 was $62 million, or $0.12 per share (diluted), which included adjustments of approximately $465 million including; $395 million for litigation reserves, $37 million for share-based compensation, $27 million in restructuring expense which includes a $14 million write-down of inventory related to the mobile handset platform business, and approximately $7 million for other items. Non-GAAP net income for the third quarter of fiscal 2015 was $155 million, or $0.29 per share (diluted), which included adjustments of approximately $40 million including; $34 million for share-based compensation and approximately $6 million for other items. Refer to the GAAP to Non-GAAP reconciliation table and related footnotes contained in this press release for more details.
 
GAAP gross margin percentage for the third quarter of fiscal 2016 was 43.3%, compared to (7.3%) for the second quarter of fiscal 2016 and 51.1% for the third quarter of fiscal 2015.

Gross margin percentage was impacted in the third and second quarters of fiscal 2016 by restructuring and other related charges of $10 million and $14 million, respectively, an additional $6 million in litigation reserves for the third quarter and $383 million in litigation reserves in the second quarter. Excluding the impact of these and other items, the non-GAAP gross margin%age for the third quarter of fiscal 2016 was 46.1%, compared to 48.9% for the second quarter of fiscal 2016 and 51% for the third quarter of fiscal 2015. The third quarter GAAP and Non-GAAP gross margin%ages were negatively impacted due to a higher mix of lower margin mobile-related revenues. Refer to the GAAP to Non-GAAP reconciliation table and related footnotes at the end of this press release for more details.

Operating expenses on a GAAP basis for the third quarter of fiscal 2016 were $354 million, or 3% lower compared with $366 million in the second quarter of fiscal year 2016, and 1% lower compared to $360 million in the third quarter of fiscal 2015.

Excluding the impact of the restructuring charges of $35 million and $13 million in the third and second quarter of fiscal year 2016, respectively, $12 million of additional litigation reserves in the second quarter as well as other items which are included in operating expenses, non-GAAP operating expenses were $283 million in the third quarter compared to $300 million in the second quarter, a 6% decline and $319 million in the third quarter of fiscal 2015, an 11% decline. Refer to the GAAP to Non-GAAP reconciliation and related footnotes contained in this press release for more details.

Shares used to compute GAAP net income per diluted share for the third quarter of fiscal 2016 were 505 million shares, compared with 516 million shares in the second quarter of fiscal 2016 and 520 million shares in the third quarter of fiscal 2015.

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

Cash flow from operations for the third quarter of fiscal 2016 were $67 million, compared to $27 million in the second quarter of fiscal 2016 and $181 million reported in the third quarter of fiscal 2015. Free cash flow for the third quarter of fiscal 2016 was $54 million, compared to the $3 million in the second quarter of fiscal 2016 and the $154 million reported in the third quarter of fiscal 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.

Under the company’s authorized share repurchase program, Marvell repurchased approximately 18 million shares for a total of $239 million in the third and second quarters of fiscal 2016. The remaining authorized amount for share repurchases at the end of the third quarter of fiscal 2016 was approximately $183 million. Marvell paid a quarterly dividend of $0.06 per share on October 22, 2015 to all shareholders of record as of October 8, 2015. On December 1, 2015, Marvell’s board of directors declared a quarterly dividend of $0.06 per share to all shareholders of record on December 16, 2015.

The payment of future quarterly cash dividends on Marvell’s common shares is subject to, among other things, the completion of the restructuring of the mobile handset platform business, the best interests of 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.

NASDAQ Compliance Plan
Marvell announced on September 14, 2015 that it received a notice from The NASDAQ Stock Market stating that the company is not in compliance with NASDAQ Marketplace Rule 5250(c)(1) because the company has not timely filed its Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2015. On December 1, 2015, Marvell received notification from NASDAQ that, in response to the previously filed compliance plan, it has granted the company an extension of time to March 8, 2016 to regain compliance with continued listing requirements, including with respect to filing its Form 10-Q for third quarter of fiscal 2016, which will be due December 10, 2015 but which will not be filed timely as a result of the Audit Committee’s investigation and discussions with accounting firms in connection with the company’s ongoing process to engage a new independent registered public accounting firm. Marvell intends to take all necessary steps to achieve compliance with the NASDAQ continued listing requirements as soon as practicable.

Carnegie Mellon University Litigation
As previously disclosed, in May of 2014, CMU obtained a judgment against the company from the U.S. District Court (W.D. Pennsylvania) in the amount of approximately $1.54 billion (plus an ongoing royalty) based on patent infringement claims, which decision was appealed to the Federal Circuit. On August 4, 2015, a panel of the Federal Circuit (Panel Decision) affirmed on liability and royalty rate (50 cents per chip), affirmed denial of laches, reversed on willfulness and related enhancement, affirmed on the portion of the royalty base attributable to chips imported into the U.S., vacated the portion of the royalty base attributable to chips not imported into the U.S.,  and remanded for a partial new trial on the location of the company’s remaining sales, namely,  whether additional sales of chips that did not enter the U.S. were “U.S. sales.”  Both parties sought a rehearing en banc by the entire Federal Circuit, which was denied by the Federal Circuit on November 17, 2015, except that the Federal Circuit held any decision on willfulness and enhancement in abeyance pending the Supreme Court’s decision in Halo Electronics, Inc. v. Pulse Electronics, Inc ., 769 F.3d 1371 (Fed. Cir. 2014) cert. granted, No. 14-1513, 2015 WL 3883472 (U.S. Oct. 19, 2015) and Stryker Corp. v. Zimmer, Inc., 782 F.3d 649 (Fed. Cir. 2015) cert. granted, No. 14-1520, 2015 WL 3883499 (U.S. Oct. 19, 2015).

The company will be seeking review of the Panel Decision by the U.S. Supreme Court, and in any event several issues remain in dispute that could materially affect damages ultimately awarded to CMU. Pending further legal developments, however, the company has been accounting for its damages exposure based on the Panel Decision and the reserve for this litigation is included in the litigation reserves discussed above. Additional royalties would accrue on continuing sales after November 1, 2015 through expiration of the relevant patents on April 3, 2018. The amount of such future royalties may vary substantially and may be materially affected by, among other potential factors, the total level of the company’s sales, the customer mix for such sales, and the variability in U.S. importation rates for such customers, and accordingly, the company cannot reliably estimate such future royalty payments. The company has established a litigation reserve covering such estimated royalties on sales of chips through October 31, 2015, and, subject to further legal developments, expects to add to such reserve quarterly based on appropriate sales data.

No additional reserve has been taken with respect to the issues to be considered in the partial new trial on remand to the U.S. District Court because the company believes there is no legal basis for imposing U.S. patent infringement damages on sales of chips that do not enter the U.S. and the company intends to vigorously contest any claims to the contrary.

The company has indemnity obligations to sureties under two surety bonds in connection with the litigation with CMU: (1) one bond which is secured by the company’s campus located in Santa Clara, California, which bond was in the initial amount of $216 million and is subject to commitments by such sureties to issue up to an additional $95M in bonding under certain conditions, and (2) one bond in the aggregate amount of $1.54 billion (the Primary Bond). As previously reported, the Primary Bond has been unsecured and supported by a Bond -Specific Indemnity Agreement pursuant to which the sureties are allowed to demand that Marvell provide collateral to secure its obligations. In light of the current status of the CMU litigation, the company is in discussions with a representative of the sureties under the Primary Bond which the company anticipates may result in a restricted cash arrangement for approximately $300 million to support the company’s indemnity obligations to such sureties under the Primary Bond.

Other Matters:
The board of directors has engaged an international executive search firm to conduct a search for additional independent board members and with another firm to conduct a search for a permanent CFO. David Eichler has been appointed as interim CFO since October 15, 2015 as previously announced.