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Mellanox Technologies Ltd. (MLNX - Snapshot Report) reported fourth-quarter 2013 loss of 5 cents per share, in line with the Zacks Consensus Estimate. The loss includes stock based compensation but excludes other one-time items.

Quarter Details
    
Revenues plunged 13.6% from the year-ago quarter to $105.5 million and were short of the Zacks Consensus Estimate of $108.0 million. FDR 56Gb/s InfiniBand revenues contributed 55.0% of revenues while Ethernet products contributed 15.0%.

During the quarter, Hewlett-Packard Co. (HPQ - Analyst Report) and IBM Corp (IBM - Analyst Report) contributed 15.0% and 11.0% of revenues, respectively.

Non-GAAP gross profit was down 15.4% from the year-ago quarter to $72.3 million, primarily due to lower revenue base. Gross margin for the quarter stood at 68.5% compared with 70.0% in the year-ago quarter. Including stock-based compensation, gross profit came in at $71.9 million.

Non-GAAP operating expenses increased 28.3% year over year to $63.2 million. As a percentage of revenues, operating expenses increased from 40.4% in the year-ago quarter to 49.9%. Including stock-based compensation, operating expenses came at $52.0 million.

Non-GAAP operating profit for the quarter was $9.1 million, down from $36.2 million in the year-ago quarter, primarily due to higher operating expenses. Operating margin was down from 29.6% in the year-ago quarter to 8.62%. Including stock-based compensation, Mellanox reported operating loss of $2.6 million.

Non-GAAP net income was $9.7 million, down from $30.7 million in the year-ago quarter.

Mellanox exited the quarter with $330.2 million in cash and investments versus $306.4 million in the previous quarter. During the quarter, accounts receivable decreased $3.3 million to $70.6 million. Cash flow from operations was $30.7 million compared with $16.4 million cash used in operations in the previous quarter.

Guidance

For the first quarter of 2014, revenues are projected in the range of $100.0 million to $105.0 million and gross margin in the range of 67.5% to 68.5%. Operating expenses are expected to increase 2.0% to 4.0% on a sequential basis. Non-GAAP diluted share count for the quarter is expected to be in the range of 46.0 million to 46.5 million shares.

Our Take

Mellanox reported dismal fourth-quarter results. 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, its association with multiple partners in the ecosystem is likely to create a more significant value-add to cloud solutions and consumers going forward.

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 #4 (Sell).

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