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Factors Setting the Tone for Mellanox (MLNX) in Q4 Earnings

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Mellanox Technologies, Ltd. (MLNX - Free Report) is set to report fourth-quarter 2018 results on Jan 30.

Notably, the company beat the Zacks Consensus Estimate in the trailing four quarters, delivering average positive surprise of 16.3%.

In the last reported quarter, the company delivered earnings of $1.33 per share, outpacing the Zacks Consensus Estimate by 13 cents. Furthermore, the figure increased 87.3% year over year.

Revenues of $279.2 million surged 23.7% year over year and surpassed the Zacks Consensus Estimate of $276 million. Innovations in Ethernet adapters, switches and cables bolstered demand, which in turn drove the top line.

Guidance & Estimates

Mellanox expects fourth-quarter 2018 revenues to be in the range of $280 million to $290 million. The company is well positioned to reap the benefits of the release of BlueField system chips, and the introduction of 200 gigabit per second InfiniBand and Ethernet products.

The Zacks Consensus Estimate for the to-be-reported quarter is pegged at $285.3 million, up roughly 20.1% from the year-ago quarter. Further, the consensus mark for earnings is pegged at $1.31 per share, indicating year-over-year surge of 59.8%.

Let’s see how things are shaping up for the upcoming announcement.

Factors to Consider

Mellanox’s strength in Ethernet-based portfolio and expanding customer base is a tailwind. The company recently announced that Alibaba’s (BABA - Free Report) Infrastructure Services is leveraging its “RoCE” ConnectX Ethernet network adapters.

The adapters which are aiding Alibaba in supporting dynamic workloads in a cost-effective manner have a data transfer speed of 25 Gbps (or Gigabits per second).

In the third quarter of 2018, the company’s Ethernet business grew 59% year over year driven by robust adoption of the company’s high-speed Ethernet network adapters and LinkX transceivers and cables.

Robust innovations in Mellanox’s Ethernet solutions are leading to rapid adoption which in turn is anticipated to drive the ongoing momentum in the to-be-reported quarter.

Moreover, growing clout of InfiniBand solution is expected to aid Mellanox in strengthening its leadership position in the high-performance interconnects space.

In the quarter under review, the company’s HDR 200 gigabit InfiniBand solution was selected by High-Performance Computer Center of the University of Stuttgart (“HLRS”) to accelerate a new 5000-node supercomputer, Hawk.

Further, the InfiniBand solution has also been adopted by Texas Advanced Computing Center (“TACC”) to improve the performance and efficiency of Frontera, which is ranked among the top five fastest supercomputers worldwide.

Similar win from research computing arm at University of Michigan for the accelerated scalable performance of new supercomputer, Great Lakes, in the to-be-reported quarter is a positive.

Notably, InfiniBand accounted for 35% of revenues in the last reported quarter. The ongoing rapid adoption of the interconnect solution, from the likes of Los Alamos National Laboratory (“LANL”), among others, is expected to aid Mellanox to maintain its competitive position against Intel’s (INTC - Free Report) OmniPath offering.

Additionally, the company's ongoing collaborations with the likes of Microsoft, VMware, Hewlett Packard Enterprise and Microsemi Corporation are enabling it to expand footprint in the cloud and datacenter as well as high performance computing market.

However, exposure to foreign currency amid an uncertain macroeconomic environment remains a headwind.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Mellanox has a Zacks Rank #3 and an Earnings ESP of 0.00%. This makes surprise prediction difficult. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stock that Warrants a Look

Here is a stock you may consider, as our proven model shows that it has the right combination of elements to post an earnings beat this quarter.

Archer Daniels Midland Company (ADM - Free Report) has an Earnings ESP of +2.45% and a Zacks Rank #1. The company is slated to report fourth-quarter 2018 earnings on Feb 5. You can see the complete list of today’s Zacks #1 Rank stocks here.

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