Fabless semiconductor company Mellanox Technologies Ltd. ( MLNX - Snapshot Report ) reported third quarter 2012 earnings of $1.14 per share (including stock-based compensation), which breezed past the Zacks Consensus Estimate by 22 cents. Earnings surged 94 cents from 20 cents per share reported in the year-ago quarter, primarily driven by better-than-expected revenue growth and margin expansion.

Quarter Details

Total revenue in the quarter soared 130% on a year-over-year basis to $156.5 million and comfortably surpassed the Zacks Consensus Estimate of $153.0 million. This was slightly above management’s guided range of $150.0 million to $155.0 million.

The strong revenue growth was primarily driven by higher demand for FDR (Fourteen Data Rate) InfiniBand products, which contributed 57% of the total revenue in the quarter.

Hewlett-Packard Co. ( HPQ - Analyst Report ) , IBM Corp. ( IBM - Analyst Report ) and Polywell Computers were the three customers accounting for 10.0% or more of revenues during the quarter.

Gross profit shot up 145.0% from the year-ago quarter to $108.5 million. Gross margin for the quarter stood at 69.3% compared with the year-ago level of 65.1%.

Total operating expenses jumped 53.5% year over year to $58.9 million. This was primarily due to a sharp rise in research & development (up 55.0% year over year), sales & marketing (up 56.9% year over year) and general & administrative expense (up 37.3% year over year) in the quarter.

Despite higher operating expenses, operating profit jumped to $51.5 million from $8.2 million in the year-ago quarter, driven by strong revenue growth and higher gross margin base. Net income also increased to $50.7 million from $7.4 million in the year-ago quarter.

Mellanox exited the quarter with $397.7 million in cash and investments versus $320.2 million in the previous quarter. Cash flow from operations was $74.4 million compared with $59.2 million reported in the previous quarter.

Fourth Quarter Guidance

For the fourth quarter of 2012, total revenue is projected in the range of $145.0 million to $150.0 million and gross margins in the range of 68.5% to 69.5%. Operating expenses are expected to increase 6.0% to 8.0% on a sequential basis.

Our Recommendation

We believe that Mellanox will continue to outperform its peers based on strong demand for InfiniBand products particularly from the high performance computing, cloud data centers and web 2.0 markets. Moreover, the company’s expansions in the cloud and enterprise storage segments are the other positives.

We have an Outperform recommendation on Mellanox over the long term. Currently, Mellanox has a Zacks #2 Rank, which translates into a Buy rating in the short term.