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Mellanox (MLNX) Q2 Earnings Lag Estimates, Revenues Beat

Zacks Equity Research

Mellanox Technologies, Ltd. MLNX reported second-quarter 2019 non-GAAP earnings of $1.52 per share, missing the Zacks Consensus Estimate by a penny. However, the same increased from the year-ago quarter’s figure of $1.25.

Revenues of $310.3 million improved 15.6% from the year-ago quarter and also outpaced the Zacks Consensus Estimate of $307 million. Robust demand of Ethernet adapters, switches and LinkX cables drove the top line. Robust demand for InfiniBand product was an added positive.

Further, the company strengthened its dominant position in the 25 gigabit per second (gbps) and above merchant adapter market in the reported quarter.

In a year’s time, Mellanox stock has returned 39.1%, substantially outperforming the industry’s rally of 25.5%.

Quarter in Details

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 third-quarter guidance due to the pending acquisition of NVIDIA. The buyout is expected to close by the end of calendar year 2019.

Notably, the Israel-based Mellanox is one of the major suppliers of 25, 40, 50 and 100GB Ethernet adapters, switches and cables. The company enjoys a robust demand for its InfiniBand solutions. Mellanox’s customers include datacenter owners and companies that build datacenters. Alibaba, Dell and Hewlett Packard Enterprise are some of its notable clients.  These factors made the company a lucrative acquisition target.

This apart, Mellanox’s Ethernet business is doing well. Markedly, the need to access and process data at a faster speed due to data growth is fueling increased demand for high-speed Ethernet adapters.

During the quarter under review, Mellanox announced integration with Check Point, 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 a positive.

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 speeds of 100/200/400 Gb/s (or Gigabits per second).

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.

Operating Results

Non-GAAP gross margin in the second quarter was 67.9%, down 120 bps on a year-over-year basis.

Non-GAAP operating expenses in the quarter were up 5.8% year over year and came in at $126.2 million. Non-GAAP operating income totaled $84.7 million compared with $66.2 million reported in the year-ago quarter. Non-GAAP operating margin was 27.3% compared with 24.7% in the year-ago quarter.

Balance Sheet & Cash Flow

Mellanox exited the second quarter with cash & investments worth $610.6 million compared with $552.5 million in the previous quarter.

In the second quarter, the company generated cash of $58.6 million from operations compared with $88.4 million in the previous quarter.

Guidance

Mellanox refrained from providing second-quarter guidance due to the pending acquisition by NVIDIA.

Zacks Rank and Other Key Picks

Mellanox carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the broader technology sector are Mitek Systems, Inc. MITK, and Lattice Semiconductor Corporation LSCC, both flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Mitek Systems and Lattice Semiconductor have a long-term earnings growth rate of 15% and 12.5%, respectively.

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