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Mellanox Q3 Earnings Below Expectations

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Mellanox Technologies Ltd. (MLNX - Free 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 - Free Report) and IBM Corp (IBM - Free 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 may act as headwinds, going forward.

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