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Mellanox (MLNX) Earnings and Revenue Beat Estimates in Q4

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Mellanox (MLNX - Free Report) delivered fourth-quarter 2018 non-GAAP earnings of $1.42 per share, beating the Zacks Consensus Estimate of $1.31 per share. The figure increased 73.2% year over year.

The company reported revenues of $290.1 million, up 22.1% from the year-ago quarter. The figure beat the Zacks Consensus Estimate of $285 million.

Innovations in Ethernet adapters, switches and LinkX cables bolstered demand, which in turn drove the top line. Further, robust demand for InfiniBand product was a key positive.

Notably, Mellanox fortified its leadership in the 25 gigabit per second (gbps) and above merchant adapter market in the reported quarter.

Shares went up more than 7% yesterday, following fourth-quarter results. Notably, Mellanox stock has returned 34.8% year over year, substantially outperforming the industry’s rally of 2.9%.

Quarter in Details

Mellanox has a 69% market share in the Ethernet business. Notably, the business grew 21% year over year. The need to access and process data at a faster speed due to data growth is fueling increased demand for high-speed Ethernet adapters.

The company’s HDR 200 gigabit InfiniBand enhances competitive advantage in the artificial intelligence (AI) market. During the reported quarter, Mellanox announced that Alibaba (BABA) is leveraging its remote direct memory access (“RDMA”) over Ethernet or “RoCE” ConnectX Ethernet network adapters. The adapters have a data transfer speed of 25 Gbps.

InfiniBand surged 33% year over year during the fourth quarter due higher demand for HDR 200. Revenues were $135.2 million, up 38% sequentially. Moreover, InfiniBand accounted for 47% of revenues in this quarter, up from 35% in the prior quarter.

Revenues run rate of was greater than $100 million for Ethernet switch business during the reported quarter.  Notably, the company’s boards revenues represented 38% of total revenues down from 47% reported in the previous quarter.

Moreover, the company is witnessing massive demand for BlueField (system-on-a-chip device) from the world's leading hyperscale cloud and storage companies.

During the reported quarter, Dell EMC and Hewlett Packard Enterprise Company (HPE - Free Report) , accounted for 14% and 11% of total revenues, respectively. Notably, these two customers represented more than 10% of the company’s revenues.

Operating Results

Non-GAAP gross margin in the fourth quarter was 69%, up 20 basis points (bps) on a year-over-year basis.

Non-GAAP operating expenses in the quarter decreased 3.2% year over year to $121.4 million. This in turn positively impacted the operating results. Non-GAAP operating income was $78.6 million compared with $38 million reported in the year-ago quarter. Non-GAAP operating margin was 27.1% compared with 16% in the year-ago quarter.

Fiscal 2018 Highlights

For fiscal 2018, Mellanox reported non-GAAP earnings of $5.01 per share compared with $2.28 per share reported in fiscal 2017. The company reported revenues of $1.088 billion, up 26% year over year.

Ethernet revenues increased 54% year over year in fiscal 2018. This can be attributed to early transition to 25-gigabit and above Ethernet suite. Ethernet switch revenues were up 70% year over year in fiscal 2018.

InfiniBand increased 8% year over year in fiscal 2018, due to high demand for HDR 200.

Balance Sheet & Cash Flow

Mellanox exited the fourth quarter with cash & investments worth $438.5 million compared with $350.2 million in the previous quarter.

In the fourth quarter, the company generated cash of $96.4 million from operations.

Guidance

Mellanox expects first-quarter 2019 revenues in the range of $295 million to $305 million. The Zacks Consensus Estimate is pegged at $283.7 million.

The company is well positioned to reap the benefits of the release of BlueField system chips and introduction of 200 gigabit per second InfiniBand and Ethernet products.

Non-GAAP gross margin is expected in the range of 68% to 69%. Moreover, management expects non-GAAP operating expenses to be in the range of $123 million to $125 million.

Zacks Rank and Other Stocks to Consider

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

Some other top-ranked stocks in the broader technology space are Xilinx, Inc. (XLNX - Free Report) and salesforce.com, inc. (CRM - Free Report) , both flaunting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Xilinx and salesforce is estimated at 12% and 24.2%, respectively.

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