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Fabless semiconductor company Mellanox Technologies Ltd. (MLNX - Snapshot Report) 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 - Analyst Report) with 10% and International Business Machines Corp (IBM - Analyst Report) 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 - Analyst Report) 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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