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Mellanox (MLNX) Q4 Earnings and Revenues Beat Estimates

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Mellanox Technologies, Ltd. (MLNX - Free Report) reported earnings (excluding stock based compensation and all one-time items) of 82 cents per share for the fourth-quarter of 2017, which beat the Zacks Consensus Estimate of 68 cents but remained flat year over year.

Revenues increased 7.2% year over year and 5.3% sequentially to $237.6 million, primarily driven by strong adoption of the company’s 25 gigabit per second and above Ethernet switch business. Also, revenues surpassed the Zacks Consensus Estimate of $235 million. Additionally, increased adoption and enhanced performance of Mellanox’s products aided the top-line.

Moreover, adoption of 100 Gigabit EDR solutions in machine learning, artificial intelligence, high-performance computing, database and storage contributed toward revenue growth. Also, InfiBand’s adoption aided Mellanox to continue its leadership position in the high-performance interconnects space.

We note that shares of Mellanox have gained 50.6% in the last year, outperforming the Zacks  industry’s rally of 33%.

 

Revenue Details

In fourth-quarter 2017, InfiniBand revenues were $102 million, which increased 1.9% sequentially driven by growth from the company’s high-performance computing and artificial intelligent customers. InfiniBand-based products contributed 43% of total revenues during the quarter, Mellanox was selected by a tier 1 U.S. (Original Equipment Manufacturer) OEM in order to supply 25 gigabit per second Ethernet adapters. Users are selecting Mellanox due to the robustness and feature advantages of its ConnectX solutions over its peers’ products.

Ethernet revenues grew 73% on a year-over-year basis and sequentially 11%, driven by significant increase in customer demand for the company’s 2550 and 100 gigabit per second Ethernet Solutions.

The transition to 25 gigabit, 50 gigabit and 100 gigabit Ethernet will help Mellanox to post multi-year growth across various sectors such as cloud, storage, hyperscale and machine learning.

However, management decided to discontinue its 1550 nanometer silicon photonics development activities as the business did not generate profits. Moreover it believes that this decision will not have an impact on the company’s revenues going forward.

The company started shipping BlueField chips during the quarter, resulting from EZchip acquisition, which has been experiencing increased market traction.

Operating Results

Non-GAAP gross margin was 68.8%, which declined 310 basis points (bps) on a year-over-year basis, primarily due to lower margin product.

Non-GAAP operating expenses during the quarter came in at $125.4 million, up 9% year over year. R&D expenses increased 9.9% year over year. Sales and marketing expenses increased 9%. General and administrative expenses increased 4%. 

Non-GAAP operating income was $38 million, which declined 14.3% year over year. Non-GAAP operating margins came in at 16% as compared with 20% from the year-ago quarter.

Balance Sheet

Mellanox exited the fourth quarter with cash and cash equivalent balance of $62.5 million, up from $58.4 million reported in the last quarter.

Inventory was $64.7 million, up from $61.6 million reported in the last quarter.

Guidance

Mellanox expects first-quarter 2018 revenues to be in the range of $222 million to $232 million. The company is well positioned to reap the benefits of the release of BlueField system chips as well as introduction of 200 gigabit per second Infiniband and Ethernet products. The Zacks Consensus Estimates for revenues is pegged at $221.1 million. Non-GAAP gross margin is expected in the range of 68.5% to 69.5%. Moreover, management expects non-GAAP operating expenses to be in the range of $120 million to $122 million.

For fiscal 2018, the company expects revenue to be in the range of $970 million to $990. The Zacks Consensus Estimate for revenues is pegged at $974.61 million.

Non-GAAP gross margin is expected in the range of 68% and 69%. Moreover, Non-GAAP operating margin is to be in the range of 18% to 19%.

Our Take

Mellanox reported stellar fourth-quarter results, and provided an encouraging first-quarter and fiscal 2018 revenue guidance. We believe the transition from 40 gigabit to 50 gigabit and 100 gigabit and introduction of 200 gigabit Ethernet solutions augur well for the company given growing demand for such products.

Also, new design wins for Spectrum products is likely to benefit the company.

Zacks Rank and Other Stocks to Consider

Mellanox sports a Zacks Rank #1 (Strong Buy).

Other top-ranked stocks in the broader technology sector include IntriCon Corporation (IIN - Free Report) , Analog Devices, Inc. (ADI - Free Report) and STMicroelectronics N.V. (STM - Free Report) , all sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

IntriCon, Analog Devices and STMicroelectronics have a long-term expected earnings growth rate of 20%, 10.40% and 5%, respectively.

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