Business context and reporting period
Marvell Technology, Inc. (Nasdaq: MRVL) filed this unaudited Form 10-Q for its fiscal first quarter of fiscal 2022, the three months ended May 1, 2021. The filing describes Marvell as a fabless semiconductor supplier serving data-center, carrier, enterprise networking, consumer, and automotive and industrial markets. Year-over-year comparisons are against the three months ended May 2, 2020.
Marvell completed its acquisition of Inphi on April 20, 2021. The quarter includes Inphi’s results only from that date through quarter-end; Inphi contributed $21.8 million of revenue and a $13.9 million net loss in that period. The transaction also made Marvell’s parent company U.S.-domiciled.
Financial performance and position
| Metric | Q1 FY2022 | Prior comparable quarter |
|---|---|---|
| Revenue | $832.3 million | $693.6 million |
| Gross profit / gross margin | $418.1 million / 50.2% | $326.9 million / 47.1% |
| Operating loss | $82.3 million | $96.0 million |
| Net loss / diluted loss per share | $88.2 million / $0.13 | $113.0 million / $0.17 |
| Cash from (used in) operations | $(13.7) million | $175.6 million |
| Cash and cash equivalents at period-end | $522.5 million | $748.5 million at January 30, 2021 |
Revenue increased 20%. Networking revenue rose 26% and storage revenue 17%; other-product revenue fell 24%. Management attributed growth to stronger demand, including for Ethernet, embedded processor, automotive networking, and SSD controller products. Unit shipments increased 8% and average selling prices increased 12% year over year. Networking represented 60% of revenue and storage 36%.
Gross margin improved 3.1 percentage points, primarily due to product mix. Operating expenses were $500.5 million, including $201.5 million of selling, general and administrative expense, up 65% year over year. The increase included $45.8 million of Inphi transaction costs and $43.8 million of accelerated-vesting share-based compensation related to Inphi awards. Interest expense rose to $35.1 million from $16.8 million, reflecting new borrowings and an $11.4 million write-off of bridge-loan commitment costs. The $27.8 million income-tax benefit included discrete items; the prior-year quarter had a $5.0 million tax expense.
Operating cash flow was negative despite non-cash add-backs, principally because of a $221.1 million working-capital outflow, including lower accrued compensation and payables and higher receivables. Investing cash outflow was $3.6 billion, primarily for the Inphi acquisition. Financing cash inflow was $3.4 billion, principally from debt issuance.
At May 1, 2021, total borrowings were $4.94 billion at face value ($4.90 billion net carrying amount), versus $1.20 billion at January 30, 2021. Current liabilities were $1.16 billion and current assets $1.89 billion. The company had $522.5 million of cash, of which approximately $350.3 million was held by foreign subsidiaries. The $750 million revolving credit facility was undrawn at quarter-end; Marvell drew $75 million on May 4, after quarter-end. Management stated that cash, expected operating cash flow, and available revolver capacity should cover needs for at least the next 12 months.
Material changes and notable items
- The Inphi acquisition’s preliminary consideration was $9.92 billion, including $3.64 billion cash consideration and $5.87 billion in Marvell stock. The acquisition added $5.63 billion of goodwill and $4.42 billion of acquired intangible assets; purchase accounting remains preliminary and may be revised.
- Marvell funded the acquisition with cash and new debt, including $1.75 billion of term loans and $2.0 billion of new senior notes due 2026, 2028, and 2031. It assumed Inphi convertible notes. At quarter-end, $193.3 million of convertible debt was classified current. Marvell reported compliance with its term-loan covenants.
- Acquired intangible amortization was $128.6 million in the quarter. The filing estimates $827.8 million of amortization for the remainder of fiscal 2022 and $1.01 billion in fiscal 2023.
- Inventory rose to $538.1 million from $268.2 million, including $173.5 million from the Inphi inventory fair-value step-up. Goodwill rose to $11.0 billion from $5.3 billion.
- Restructuring charges were $12.9 million, including $9.8 million for a new plan to realign the organization; completion is expected by the end of fiscal 2023.
- The $40.6 million quarterly dividend was paid. The share-repurchase program remained suspended as Marvell focused on reducing debt; $564.5 million remained authorized.
Outlook, commentary, and risks
The filing provides no specific numerical revenue or earnings guidance. Management said demand was growing but industry-wide supply constraints were limiting its ability to fully meet demand for some networking products. It expected supply constraints to continue during calendar 2021 and expected U.S. export restrictions on certain Chinese customers to continue affecting fiscal 2022 revenue. Management also cited integration and synergy execution following Inphi, COVID-19 disruption, customer-order variability, and the company’s significant new debt as important uncertainties.
Other disclosed risks include concentrated manufacturing and assembly capacity in Asia, component and packaging shortages, export-control and trade-policy changes, customer cancellations or inventory adjustments, competition and product-development execution, variable-rate debt and LIBOR transition, foreign tax changes following U.S. domiciliation, and potential impairment of substantial goodwill and acquired intangibles. Marvell said it could not predict outcomes or estimate potential losses for many pending legal matters, but did not expect their resolution to have a material adverse effect individually or in aggregate. It had approximately $819.5 million of outstanding foundry purchase orders; cancellation may require payment of costs incurred.
Important facts for investors to verify
- How quickly Marvell can integrate Inphi and realize expected strategic benefits, and how the preliminary purchase-price allocation changes as it is finalized.
- Whether constrained supply limits shipments and whether customer demand, pricing, and product mix sustain the reported revenue and gross-margin improvement.
- Debt repayment plans, interest costs, covenant headroom, and the cash impact of convertible-note conversions or redemptions.
- Whether operating cash flow recovers from the quarter’s working-capital outflow and how much cash is practically accessible from foreign subsidiaries.
- The effect of acquisition-related amortization, restructuring, and stock compensation on future reported earnings, plus developments in China export restrictions and tax exposures.