Mellanox Beats Q2 Earnings Estimates

Zacks

Fabless semiconductor company Mellanox Technologies Ltd. (MLNX) reported second-quarter earnings of 4 cents per share (including stock-based compensation), which was much better than the Zacks Consensus Estimate of a loss of 4 cents per share. 

On a non-GAAP basis, earnings were 30 cents per share compared with 99 cents in the year-ago quarter.

Quarter Details

Total revenue was down 26.5% from the year-ago quarter to $98.2 million. Reported revenues beat the Zacks Consensus Estimate of $96.0 million. The company’s revenues improved 18.2% on a sequential basis.

During the second quarter, FDR 56Gb/s InfiniBand revenues contributed 52.0% of the total revenue. 40Gb/s InfiniBand-based products and 20Gb/s InfiniBand-based products represented 25% and 5% of the total revenue, respectively.

Moreover, Hewlett-Packard Co. (HPQ) with 10% and International Business Machines Corp (IBM) with 19% accounted for 29% of the total revenue.

Non-GAAP gross profit was down 27.6% from the year-ago quarter to $68.1 million, primarily due to lower revenue base. Gross margin for the quarter stood at 69.4% compared with 70.5% in the year-ago quarter. Sequentially, gross profit increased 20.5%. Including stock-based compensation, gross profit came in at $67.7 million.

Non-GAAP operating expenses increased 1.9% year over year to $52.3 million. As a percentage of revenue, operating expenses increased from 38.5% in the year-ago quarter to 53.3%. Including stock-based compensation, operating expenses came at $63.1 million.

Non-GAAP operating profit for the quarter was $15.8 million down from $42.7 million in the year-ago quarter, primarily due to higher operating expenses. Operating margin was down from 32.0% in the year-ago quarter to 16.1%. However, operating income increased from $4.9 million reported in the previous quarter. Including stock-based compensation, Mellanox reported operating income of $4.6 million.

Non-GAAP net income was down from $42.9 million in the year-ago quarter to $13.8 million. Sequentially, net income improved from $4.3 million. Including stock-based compensation, net income came in at $1.7 million.

Balance Sheet

Mellanox exited the quarter with $357.5 million in cash and investments versus $396.2 million in the previous quarter. Cash flow from operations was $11.5 million compared with $6.6 million cash used in operations in the previous quarter.

Guidance

For the third quarter of 2013, total revenue is projected in the range of $104 million to $109 million (Mellanox reported $156 million in the third quarter of 2012) and gross margin in the range of 67% to 68%. Operating expenses are expected to increase 9% to 11.0% on a sequential basis.

Recommendation

Mellanox reported tepid second-quarter results and also provided tepid revenue guidance when compared on a year-over-year basis. However, we believe that Mellanox’s product offerings such as InfiniBand products and Ethernet solutions will help the company to drive top-line growth.

Moreover, the acquisitions of Kotura and IPtronics will drive 100Gb/s InfiniBand and ethernet solutions revenues in the long run.

However, sluggish macroeconomic environment, and increasing competition from its peers such as QLogic (QLGC) may act as headwinds, going forward. Moreover, customer concentration could be another headwind for the stock.

Currently, Mellanox has a Zacks Rank #4 (Sell).

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