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Factors to Consider Ahead of Mellanox's (MLNX) Q2 Earnings

Zacks Equity Research

Mellanox Technologies, Ltd. MLNX is scheduled to report second-quarter 2019 results on Jul 24.

Notably, the company beat the Zacks Consensus Estimate in the trailing four quarters, with an average positive surprise of 11.2%.

Performance in Q1

In the last reported quarter, the company delivered non-GAAP earnings of $1.59 per share, beating the Zacks Consensus Estimate by 9.7% and surged 62.2% year over year.

Revenues of $305.21 million improved 21.6% from the year-ago quarter and also outpaced the Zacks Consensus Estimate of $301 million.

Noteworthy Developments Shaping Q2 Estimates

It is to be noted that on Mar 11, 2019, Mellanox entered into a definitive agreement with NVIDIA NVDA, by which the acquirer will buy shares of Mellanox for $125 per share in cash, indicating a total enterprise value of around $6.9 billion.
Mellanox refrained from issuing second-quarter guidance owing to the pending acquisition of NVIDIA. The buyout is expected to close by the end of calendar year 2019.

The Zacks Consensus Estimate for second-quarter earnings is pegged at $1.53, declining 1.3% in the past 30 days. Nonetheless, the figure suggests growth of about 22.4% from the year-ago quarter.

Meanwhile, the consensus mark for revenues is pegged at $307.24 million, indicating an improvement of 14.5% from the year-ago reported figure.



Markedly, shares of Mellanox have returned 34% in the past year, substantially outperforming the industry’s rally of 27.6%.

Let’s see how things are shaping up for the upcoming announcement.

Factors Likely to Influence Q2 Performance

Mellanox is benefiting from robust adoption of Ethernet adapters, switches and LinkX cables, which is expected to drive the top line in the second quarter. The company is striving to enhance Ethernet clientele, which already comprises JD.com, Alibaba, among others, via robust enhancements and product roll outs.

In June 2019, Mellanox announced integration with Check Point CHKP, a notable cybersecurity solutions provider, with an aim to bolster adoption of its Ethernet switches. Integration of Check Point’s hyperscale network security platform “Maestro” with Mellanox’s Ethernet switches is expected to aid the company secure new deal wins, which favors growth prospects.

Recently, Mellanox introduced Ethernet Cloud Fabric (ECF) technology aimed at enhancing the performance of its Spectrum-2 family of Ethernet switches, which offer data transfer speed of 100/200/400 Gb/s (or Gigabits per second).

Markedly, the need to access and process data at a faster speed due to data growth is fueling increased demand for high-speed Ethernet solutions. The latest ECF technology is anticipated to bolster incremental adoption of Mellanox’s Ethernet offerings, which bodes well for upcoming quarterly results.

Moreover, Mellanox banks on solid demand of its Gigabit EDR solutions in machine learning, AI, high-performance computing (HPC), database and storage. In the quarter under review, the company rolled out HDR 200G InfiniBand adapters, which will be utilized in Lenovo’s ThinkSystem SD650 server platform.

Further, Mellanox recently declared that its InfiniBand solutions are being utilized in six out of top 10 HPC and AI Supercomputers, according to the June TOP500 list, at INTERNATIONAL SUPERCOMPUTING CONFERENCE.

Growing clout of Ethernet adapters and InfiniBand solutions in high growth datacenter and HPC market remains a tailwind.

However, exposure to foreign currency amid an uncertain macroeconomic environment is a major concern, which is likely to limit growth in the second quarter.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Mellanox has a Zacks Rank #2 and an Earnings ESP of 0.00%, which makes surprise prediction difficult. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stock to Consider

Here is a stock that you may consider, as our proven model shows that it has the right combination of elements to post an earnings beat this quarter.

CGI Group, Inc. GIB has an Earnings ESP of +1.27% and a Zacks Rank #2. The company is set to report third-quarter 2019 earnings on Jul 31. You can see the complete list of today’s Zacks #1 Rank stocks here.

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