Marvell Technology : Q3 2021 Additional Earnings Information

Marvell Technology Group Ltd.

Third Quarter of Fiscal Year 2021

December 3, 2020

Discussion of Non-GAAP Financial Measures

Non-GAAP financial measures exclude the effect of share-based compensation expense, amortization of the inventory fair value adjustment associated with the Aquantia and Avera acquisitions, amortization of acquired intangible assets, acquisition and divestiture-related costs, restructuring and other related charges (including, but not limited to, asset impairment charges, employee severance costs, and facilities related charges), resolution of legal matters, and certain expenses and benefits that are driven primarily by discrete events that management does not consider to be directly related to Marvell's core business.

Marvell uses a non-GAAP tax rate to compute the non-GAAP tax provision. This non-GAAP tax rate is based on Marvell's estimated annual GAAP income tax forecast, adjusted to account for items excluded from GAAP income in calculating Marvell's non-GAAP income, as well as the effects of significant non-recurring and period specific tax items which vary in size and frequency. Marvell's non-GAAP tax rate is determined on an annual basis and may be adjusted during the year to take into account events that may materially affect the non-GAAP tax rate such as tax law changes; significant changes in Marvell's geographic mix of revenue and expenses; or changes to Marvell's corporate structure. For the third quarter of fiscal 2021, a non-GAAP tax rate of 5.0% has been applied to the non-GAAP financial results.

Marvell believes that the presentation of non-GAAP financial measures provides important supplemental information to management and investors regarding financial and business trends relating to Marvell's financial condition and results of operations. While Marvell uses non-GAAP financial measures as a tool to enhance its understanding of certain aspects of its financial performance, Marvell does not consider these measures to be a substitute for, or superior to, financial measures calculated in accordance with GAAP. Consistent with this approach, Marvell believes that disclosing non-GAAP financial measures to the readers of its financial statements provides such readers with useful supplemental data that, while not a substitute for GAAP financial measures, allows for greater transparency in the review of its financial and operational performance.

© 2020 Marvell confidential. All rights reserved.

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Discussion of Non-GAAP Financial Measures (continued)

Externally, management believes that investors may find Marvell's non-GAAP financial measures useful in their assessment of Marvell's operating performance and the valuation of Marvell. Internally, Marvell's non-GAAP financial measures are used in the following areas:

• Management's evaluation of Marvell's operating performance;
• Management's establishment of internal operating budgets;
• Management's performance comparisons with internal forecasts and targeted business models; and
• Management's determination of the achievement and measurement of certain performance-based equity awards (adjustments may vary from award to award).

Non-GAAP financial measures have limitations in that they do not reflect all of the costs associated with the operations of Marvell's business as determined in accordance with GAAP. As a result, you should not consider these measures in isolation or as a substitute for analysis of Marvell's results as reported under GAAP. The exclusion of the above items from our GAAP financial metrics does not necessarily mean that these costs are unusual or infrequent.

© 2020 Marvell confidential. All rights reserved.

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Marvell Technology Group Ltd.

Unaudited Condensed Consolidated Balance Sheets

(In thousands)

			February 2,			May 4,			August 3,		November 2,		February 1,			May 2,			August 1,		October 31,
				2019			2019			2019			2019			2020			2020			2020			2020
Assets
Current assets:
Cash and cash equivalents	$	582,410	$	571,893	$	573,496	$	438,369	$	647,604	$	667,548	$	831,534	$	832,041
Accounts receivable, net			493,122			470,347			452,746			495,216			492,346			468,760			483,542			490,271
Inventories			276,005			260,981			240,421			308,299			322,980			270,374			262,875			268,396
Prepaid expenses and other current assets			43,721			39,711			37,069			43,789			74,567			72,282			54,136			68,618
Assets held for sale			-			-			597,675			600,893			-			-			-			-
	Total current assets			1,395,258			1,342,932			1,901,407			1,886,566			1,537,497			1,478,964			1,632,087			1,659,326
Property and equipment, net			318,978			326,599			319,761			316,214			357,092			348,066			335,035			331,769
Goodwill			5,494,505			5,494,505			4,933,719			5,161,312			5,337,405			5,337,405			5,337,405			5,336,356
Acquired intangible assets, net			2,560,682			2,480,942			2,399,975			2,500,215			2,764,600			2,651,678			2,489,815			2,380,382
Deferred tax assets			12,460			11,989			9,789			14,192			639,791			639,470			645,633			646,837
Other non-current assets			234,869			391,251			416,489			424,763			496,850			525,946			486,507			470,102
	Total assets		$	10,016,752		$	10,048,218		$	9,981,140		$	10,303,262		$	11,133,235		$	10,981,529		$	10,926,482		$	10,824,772
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	185,362	$	191,249	$	211,422	$	212,955	$	213,747	$	185,711	$	238,537	$	224,112
Accrued liabilities			330,594			333,680			312,987			305,827			346,639			380,653			406,804			406,986
Accrued employee compensation			115,925			122,441			90,659			130,062			149,780			124,277			131,241			187,982
Short-term debt			-			-			-			-			-			-			448,248			349,004
Deferred income			4,915			-			-			-			-			-			-			-
Liabilities held for sale			-			-			5,604			5,610			-			-			-			-
	Total current liabilities			636,796			647,370			620,672			654,454			710,166			690,641			1,224,830			1,168,084
Long-term debt			1,732,699			1,684,281			1,685,359			2,036,441			1,439,024			1,439,852			992,436			992,801
Other non-current liabilities			340,847			486,435			471,297			446,549			305,465			315,414			291,679			274,270
	Total liabilities			2,710,342			2,818,086			2,777,328			3,137,444			2,454,655			2,445,907			2,508,945			2,435,155
Shareholders' equity:
Common shares			1,317			1,323			1,334			1,341			1,328			1,330			1,340			1,343
Additional paid-in-capital			6,188,598			6,200,231			6,271,120			6,355,723			6,135,939			6,144,907			6,225,242			6,260,906
Accumulated other comprehensive income			-			-			-			37			-			868			450			-
Retained earnings			1,116,495			1,028,578			931,358			808,717			2,541,313			2,388,517			2,190,505			2,127,368
	Total shareholders' equity			7,306,410			7,230,132			7,203,812			7,165,818			8,678,580			8,535,622			8,417,537			8,389,617
	Total liabilities and shareholders' equity		$	10,016,752		$	10,048,218		$	9,981,140		$	10,303,262		$	11,133,235		$	10,981,529		$	10,926,482		$	10,824,772
GAAP inventory turns			6.1			4.6			5.1			4.2			5.1			5.4			5.6			5.5
GAAP days in inventory			60			79			71			87			71			67			65			66

Marvell Technology Group Ltd.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

			February 2,			May 4,			August 3,		November 2,		February 1,			May 2,			August 1,		October 31,
				2019			2019			2019			2019			2020			2020			2020			2020
Net revenue	$	744,799	$	662,452	$	656,568	$	662,470	$	717,671	$	693,641	$	727,297	$	750,143
Cost of goods sold			422,797			301,024			305,866			322,403			412,927			366,739			368,041			369,083
Gross profit			322,002			361,428			350,702			340,067			304,744			326,902			359,256			381,060
Operating expenses:
	Research and development			256,102			266,867			266,354			267,781			279,389			279,584			277,139			255,637
	Selling, general and administrative			106,168			110,005			113,990			118,993			121,592			122,027			112,794			115,501
	Restructuring related charges			12,740			5,682			16,586			14,802			18,258			21,287			120,590			19,312
	Total operating expenses			375,010			382,554			396,930			401,576			419,239			422,898			510,523			390,450
Operating loss			(53,008)			(21,126)			(46,228)			(61,509)			(114,495)			(95,996)			(151,267)			(9,390)
	Interest income			1,236			1,268			1,077			1,092			1,379			1,058			577			608
	Interest expense			(21,953)			(21,203)			(20,531)			(21,241)			(22,656)			(16,830)			(15,635)			(16,066)
	Other income (loss), net			4,377			(116)			(2,197)			689			1,124,179			3,754			(440)			299
	Interest and other income (loss), net			(16,340)			(20,051)			(21,651)			(19,460)			1,102,902			(12,018)			(15,498)			(15,159)
Income (loss) before income taxes			(69,348)			(41,177)			(67,879)			(80,969)			988,407			(108,014)			(166,765)			(24,549)
Provision (benefit) for income taxes			191,350			7,273			(10,548)			1,532			(784,266)			5,019			(8,872)			(1,641)
Net income (loss)		$	(260,698)		$	(48,450)		$	(57,331)		$	(82,501)		$	1,772,673		$	(113,033)		$	(157,893)		$	(22,908)
Net income (loss) per share - basic	$	(0.40)	$	(0.07)	$	(0.09)	$	(0.12)	$	2.66	$	(0.17)	$	(0.24)	$	(0.03)
Net income (loss) per share - diluted	$	(0.40)	$	(0.07)	$	(0.09)	$	(0.12)	$	2.62	$	(0.17)	$	(0.24)	$	(0.03)
Weighted average shares - basic			657,835			658,963			663,603			668,178			665,562			663,547			667,574			670,487
Weighted average shares - diluted			657,835			658,963			663,603			668,178			675,700			663,547			667,574			670,487

The following table presents details of total share-based compensation expense included in each functional line item in the unaudited condensed consolidated statements of income above:

Cost of goods sold	$	2,942	$	2,926	$	3,662	$	3,990	$	3,181	$	3,538	$	4,082	$	4,435
Research and development			32,658			39,477			40,492			42,997			34,088			37,815			39,678			36,856
Selling, general and administrative			14,980			16,195			19,522			20,378			15,901			18,334			18,826			18,496
Total share-based compensation		$	50,580		$	58,598		$	63,676		$	67,365		$	53,170		$	59,687		$	62,586		$	59,787

Marvell Technology Group Ltd.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

	February 2,		May 4,			August 3,		November 2,		February 1,			May 2,			August 1,		October 31,
	2019	2019			2019			2019	2020			2020			2020	2020
Cash flows from operating activities:
Net income (loss)	$ (260,698)	$ (48,450)	$	(57,331)	$	(82,501)	$ 1,772,673	$	(113,033)	$	(157,893)	$ (22,908)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization	37,627	38,654			37,926			36,082	43,996			50,483			51,605	47,834
Share-based compensation	50,580	58,598			63,676			66,762	53,171			59,687			62,586	59,787
Amortization of acquired intangible assets	78,688	79,740			80,967			92,760	114,615			112,922			111,579	109,433
Amortization of inventory fair value adjustment	97,597		-			-			3,316	52,510			17,284			-		-
associated with acquisitions
Amortization of deferred debt issuance costs and debt	2,064	1,681			1,178			1,181	2,723			927			931	1,359
discounts
Restructuring related impairment charges (gain)	(12,081)	3,816			6,281			6,146	1,328			2,823			114,723	6,013
Other expense, net	344	7,080			3,586			6,495	9,287			7,701			5,351	6,396
Deferred income taxes	146,322	4,356			(1,982)			(10,275)	(777,257)			2,372			(2,816)	859
Loss (gain) on sale of business	-		-			1,009			505	(1,123,223)			-			-		-
Changes in assets and liabilities:
Accounts receivable	(39,347)	22,775			17,601			(32,002)	2,870			23,586			(14,782)	(6,729)
Inventories	2,489	15,848			(7,174)			(39,276)	43,361			35,834			(33)	(5,984)
Prepaid expenses and other assets	189	8,004			(15,997)			(3,046)	(43,099)			(6,694)			3,679	(5,677)
Accounts payable	(28,753)	(1,873)			24,370			8,304	(29,143)			(3,557)			33,204	5,121
Accrued liabilities and other non-current liabilities	57,297	(30,929)			(49,188)			(26,141)	(76,635)			10,796			10,732	5,289
Accrued employee compensation	(25,677)		6,516			(31,782)			37,193		8,661			(25,503)			6,964		56,741
Net cash provided by operating activities	106,641	165,816			73,140			65,503	55,838			175,628			225,830	257,534
Cash flows from investing activities:
Sales of available-for-sale securities	-		-			-			18,832		-			-			-		-
Purchases of technology licenses	(359)	(1,484)			(38)			(414)	(2,776)			(3,684)			(3,080)	(1,712)
Purchases of property and equipment	(28,886)	(19,183)			(23,010)			(20,742)	(18,986)			(35,343)			(17,540)	(35,359)
Proceeds from sales of property and equipment	42,707	216			231			84	89			365			34	133
Cash payment for acquisition, net of cash and cash	-		-			-			(477,579)	(593,500)			-			-		-
equivalents acquired
Net proceeds (payments) from sale of business	-		-			(390)			(662)	1,699,835			-			-		-
Other, net	2,275		(558)			112			(826)		(405)			300			-		(609)
Net cash provided by (used in) investing activities	15,737		(21,009)			(23,095)			(481,307)		1,084,257			(38,362)			(20,586)		(37,547)

Marvell Technology Group Ltd.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

		February 2,		May 4,			August 3,		November 2,		February 1,			May 2,			August 1,		October 31,
		2019	2019			2019			2019			2020			2020			2020	2020
Cash flows from financing activities:
Repurchases of common stock	(50,005)	(48,022)			(16,250)			-			(300,000)			(25,202)			-		-
Proceeds from employee stock plans		40,189	31,084			50,230			21,795			44,167			5,458			42,776	2,256
Tax withholding paid on behalf of employees for net	(9,248)	(28,758)			(32,884)			(19,220)			(17,440)			(31,501)			(25,213)	(25,912)
share settlement
Dividend payment to shareholders		(39,489)	(39,467)			(39,889)			(40,140)			(40,077)			(39,763)			(40,119)	(40,229)
Payments on technology license obligations	(16,676)	(15,268)			(13,056)			(28,889)			(15,053)			(23,807)			(18,702)	(34,285)
Proceeds from issuance of debt		-		-			-			350,000			600,000			-			-		-
Principal payments of debt	(75,000)	(50,000)			-			-			(1,200,000)			-			-	(100,000)
Payment of equity and debt financing costs		-		-			-			-			-			-			-	(22,313)
Other, net	-		(4,893)			3,407			(2,869)			(2,457)			(2,507)			-		1,003
Net cash provided by (used in) financing activities	(150,229)	(155,324)			(48,442)			280,677			(930,860)			(117,322)			(41,258)	(219,480)
Net increase (decrease) in cash and cash equivalents		(27,851)	(10,517)			1,603			(135,127)			209,235			19,944			163,986	507
Cash and cash equivalents at beginning of period	610,261		582,410			571,893			573,496			438,369			647,604			667,548		831,534
Cash and cash equivalents at end of period		$ 582,410	$ 571,893	$	573,496	$	438,369	$	647,604	$	667,548	$	831,534	$ 832,041

Marvell Technology Group Ltd.

Unaudited Reconciliations from GAAP to Non-GAAP

(In thousands)

			February 2,			May 4,			August 3,		November 2,		February 1,			May 2,			August 1,		October 31,
				2019			2019			2019			2019			2020			2020			2020			2020
GAAP Net income (loss)	$	(260,698)	$	(48,450)	$	(57,331)	$	(82,501)	$	1,772,673	$	(113,033)	$	(157,893)	$	(22,908)
(1)	Cost of goods sold
	Share-based compensation			2,942			2,926			3,662			3,990			3,181			3,538			4,082			4,435
	Amortization of acquired intangible assets			57,591			59,906			61,132			72,146			86,383			86,567			85,225			83,078
	Other costs of goods sold			97,598			450			-			4,758			52,510			18,562			11,630			4,296
(2)	Research and development
	Share-based compensation			32,658			39,477			40,492			42,997			34,088			37,815			39,678			36,856
	Other operating expenses			220			12			5,042			668			1,203			2,418			824			501
(3)	Selling, general and administrative
	Share-based compensation			14,980			16,195			19,522			20,378			15,901			18,334			18,826			18,496
	Amortization of acquired intangible assets			21,097			19,834			19,835			20,614			28,232			26,355			26,354			26,355
	Other operating expenses			7,172			6,557			15,634			18,827			15,418			16,985			7,301			8,989
(4)	Restructuring and other exit related costs in Operating Expense			12,740			5,682			16,586			14,802			18,258			21,287			120,590			19,312
(5)	Interest and other (income) loss, net
	Restructuring and other related items			157			(338)			75			(946)			(1,122,988)			434			-			(1,002)
	Write-off of debt issuance costs			782			458			-			-			1,621			-			-			453
	Gain on sale of intellectual property			(3,500)			-			-			-			-			-			-			-
	Deal costs			-			-			1,009			496			-			-			-			-
(6)	Provision for income taxes:
	Tax-related adjustments			184,348			2,324			(15,728)			(3,773)			(789,761)			(1,229)			(16,226)			(10,502)
Non-GAAP Net income	$	168,087	$	105,033	$	109,930	$	112,456	$	116,719	$	118,033	$	140,391	$	168,359
Non-GAAP Operating income	$	193,990	$	129,913	$	135,677	$	137,671	$	140,679	$	135,865	$	163,243	$	192,928

Marvell believes that the presentation of non-GAAP financial measures provides important supplemental information to management and investors regarding financial and business trends relating to its financial condition and results of operations. Marvell uses non-GAAP financial measures as a tool to enhance its understanding of certain aspects of its financial performance, Marvell does not consider these measures to be a substitute for, or superior to, the information provided by GAAP financial measures. Consistent with this approach, Marvell believes that disclosing non-GAAP financial measures to the readers of its financial statements provides such readers with useful supplemental data that, while not a substitute for GAAP financial measures, allows for greater transparency in the review of its financial and operational performance. Marvell has chosen to provide this information to investors to enable them to perform comparisons of operating results in a manner similar to how Marvell analyzes its operating results internally. Management also believes that these non-GAAP financial measures may be used to facilitate comparisons of Marvell's results with that of other companies in its industry.

Quarterly Revenue Trend

(in thousands)

		Q4 2019		Q1 2020		Q2 2020		Q3 2020		Q4 2020		Q1 2021		Q2 2021		Q3 2021
		Feb 02, 2019		May 04, 2019		Aug 03, 2019		Nov 02, 2019		Feb 01, 2020		May 02, 2020		Aug 01, 2020		Oct 31, 2020
Networking1	$	387,457	$	341,344	$	329,605	$	329,962	$	376,724	$	393,920	$	406,008	$	444,756
Storage2		317,042		278,667		274,905		287,708		296,486		258,688		290,495		276,279
Total Core		704,499		620,011		604,510		617,670		673,210		652,608		696,503		721,035
Other3		40,300		42,441		52,058		44,800		44,461		41,033		30,794		29,108
Total Revenue	$	744,799	$	662,452	$	656,568	$	662,470	$	717,671	$	693,641	$	727,297	$	750,143
		Q4 2019		Q1 2020		Q2 2020		Q3 2020		Q4 2020		Q1 2021		Q2 2021		Q3 2021
% of Total		Feb 02, 2019		May 04, 2019		Aug 03, 2019		Nov 02, 2019		Feb 01, 2020		May 02, 2020		Aug 01, 2020		Oct 31, 2020
Networking1		52%		52%		50%		50%		52%		57%		56%		59%
Storage2		43%		42%		42%		43%		41%		37%		40%		37%
Total Core		95%		94%		92%		93%		93%		94%		96%		96%
Other3		5%		6%		8%		7%		7%		6%		4%		4%
Total Revenue		100%		100%		100%		100%		100%		100%		100%		100%

1. Networking products are comprised primarily of Ethernet Solutions, Embedded Processors and Custom ASICs.
2. Storage products are comprised primarily of Storage Controllers and Fibre Channel Adapters.
3. Other products are comprised primarily of Printer Solutions.

© 2020 Marvell confidential. All rights reserved.

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