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Mellanox Technologies Ltd. (MLNX - Snapshot Report) reported third-quarter earnings of 2 cents per share (including stock-based compensation), which was much below the Zacks Consensus Estimate of 8 cents per share. 

Quarter Details

Revenues plunged 33.5% from the year-ago quarter to $104.1 million and were well below the Zacks Consensus Estimate

During the third quarter, FDR 56Gb/s InfiniBand revenues contributed 48.0% of the total revenue while Ethernet products contributed 15.0%. Moreover, Mellanox’s 40-gigabit Ethernet revenues also increased.

Additionally, its customers Hewlett-Packard Co. (HPQ - Analyst Report) and IBM Corp (IBM - Analyst Report) contributed 12% and 17% respectively, accounting for 29% of the total revenue.

Non-GAAP gross profit was down 35.0% from the year-ago quarter to $71.8 million, primarily due to lower revenue base. Gross margin for the quarter stood at 68.5% compared with 70.3% in the year-ago quarter. Including stock-based compensation, gross profit came in at $71.4 million.

Non-GAAP operating expenses increased 17.4% year over year to $58.1 million. As a percentage of revenues, operating expenses increased from 31.6% in the year-ago quarter to 55.8%. Including stock-based compensation, operating expenses came at $69.6 million.

Non-GAAP operating profit for the quarter was $13.7 million, down from $60.9 million in the year-ago quarter, primarily due to higher operating expenses. Operating margin was down from 38.9% in the year-ago quarter to 13.1%. Including stock-based compensation, Mellanox reported operating income of $1.7 million.

Non-GAAP net income was $13.0 million, down from $60.1 million in the year-ago quarter. Including stock-based compensation, net income came in at $0.9 million or 2 cents per share down from $51.5 million or $1.16 per share in the year-ago quarter.

Balance Sheet

Mellanox exited the quarter with $306.4 million in cash and investments versus $411.3 million in the previous quarter. Moreover, the company paid $123.5 million in cash for its acquisitions of Kotura, Inc. and IPtronics A/S. Cash flow from operations was $16.4 million compared with $11.5 million cash used in operations in the previous quarter.

Guidance

For the fourth quarter of 2013, revenues are projected in the range of $105 million to $110 million and gross margin in the range of 67% to 68%. Operating expenses are expected to increase 9% to 11.0% on a sequential basis.

Our Take

Mellanox reported mediocre third-quarter results but provided modest 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.

Currently, Mellanox has a Zacks Rank #2 (Buy).

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