Chipmaker Marvell (NASDAQ:MRVL), which was originally supposed to report its fiscal second-quarter results on Aug. 20, just announced preliminary financial results for the quarter. They're preliminary because the audit committee of Marvell's board of directors is conducting an "investigation of certain accounting and internal control matters in the second quarter of fiscal 2016."
Full results, as well as guidance for the current quarter, are expected to be issued at a later date. In its press release, Marvell said the audit committee's investigation hasn't revealed any material issues "to date" and that the company "believes the investigation will have no material impact on its previously issued financial statements."
Putting aside these potential accounting issues -- although I'm not going to take it on faith that something won't come up -- Marvell's preliminary results don't really look too great. Let's take a closer look.
Revenue at the low end of guidance, a large unexpected net loss
Marvell's preliminary earnings results showed net revenue of $711 million and a net loss of $382 million on the basis of generally accepted accounting principles, or GAAP, translating into a loss per share of $0.74.
In its earnings release last quarter, the company guided to revenue of between $710 million and $740 million, putting these results right at the low end of its prior guidance and handily missing analyst consensus of $721.9 million.
Though the revenue picture doesn't look great, the bottom line looks even worse. Marvell's prior guidance had called for earnings per share on a GAAP basis of $0.02,. give or take a penny. The $0.74-per-share loss is obviously a huge surprise.
The culprit for this loss, though, is an unexpected increase in cost of goods sold, which brought the company's gross profit margin for the quarter into negative territory. This increase is due to what the company says is a "litigation accrual of approximately $394 million recognized by the Company under ASC Topic 450, 'contingencies.'"
This "litigation accrual," per the 8-K form filed with the SEC in conjunction with this announcement, is "in connection with the Carnegie Mellon University and certain other pending litigation."
To comply with U.S. GAAP standards, a company must recognize such a contingency "if and only if" the following two conditions are true:
- "It is probable that an asset has been impaired or a liability has been incurred at the reporting date."
- "The amount of the loss can be reasonably estimated."
With that out of the way, how did Marvell's business fare even without this "litigation accrual"?
Even without the litigation accrual hit, the business is looking in poor shape
If we add back the "litigation accrual" amount that Marvell was forced to recognize, then Marvell would have generated $354.35 million in gross profit. After deducting operating expenses of $363.55 million, the company still would have generated an operating loss, and the results still would probably have disappointed investors.
More troubling, in the press release accompanying the preliminary results, Marvell said it's seeing "weaker than expected demand for [hard disk drive] products" as a result of both a slower-than-expected PC market as well as a macroeconomic weakness.
I'm staying far away from Marvell shares
At this point, I'm not even thinking about owning Marvell stock -- although I admit wishing that I had shorted the stock as soon as the company failed to report earnings on the previously scheduled date. Not only is the company's business apparently faring poorly, but the potential for accounting issues to be unearthed also means that things could get worse for the share price before they get better.