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Mellanox (MLNX) Down 2.4% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Mellanox (MLNX - Free Report) . Shares have lost about 2.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Mellanox due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Mellanox Earnings and Revenues Tops Estimates in Q1

Mellanox delivered first-quarter 2019 non-GAAP earnings of $1.59 per share, beating the Zacks Consensus Estimate of $1.45. The reported figure also increased from 98 cents registered in the year-ago quarter.

Revenues of $305.21 million improved 21.6% from the year-ago quarter and also outpaced the Zacks Consensus Estimate of $301 million. Robust demand of Ethernet adapters, switches and LinkX cables drove the top line. Robust demand for InfiniBand product was an added positive.

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

Quarter in Details

Mellanox’s Ethernet business is doing well. Markedly, the need to access and process data at a faster speed owing to data growth is fueling increased demand for high-speed Ethernet adapters.

During the quarter under review, Mellanox announced the launch of a storage virtualization solution — NVMe SNAP (Software-defined, Network Accelerated Processing). Increased innovations in Mellanox’s Ethernet adapters, switches and cables are anticipated to bolster adoption further.

Additionally, the company has been attracting more customers backed by its strength in Ethernet-based portfolio. In this regard, it is imperative to mention that the company recently announced that JD.com, a Chinese e-commerce company, is leveraging its ConnectX Ethernet network adapters.

Per the press release, “HDR InfiniBand connected tens-of-thousands of compute and storage end-points across supercomputing, hyperscale, and cloud data centers around the globe to achieve breakthrough performance.”

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

As on Mar 11, 2019, NVIDIA (NVDA - Free Report)showed its intention to acquire all the issued and outstanding shares of Mellanox in an all cash deal.

Notably, the Israel-based Mellanox is one of the major suppliers of 25, 40, 50 and 100GB Ethernet adapters, switches and cables. The company enjoys a robust demand for its InfiniBand solutions. Mellanox’s customers include datacenter owners and the companies that build datacenter. Alibaba, Dell and Hewlett Packard Enterprise are some of its notable clients.  This has made Mellanox an interesting acquisition target.

Operating Results

Non-GAAP gross margin in the first quarter was 68%, down 100 basis points (bps) on a year-over-year basis.

Non-GAAP operating expenses in the quarter were almost flat year over year and came in at $121.2 million. Non-GAAP operating income totaled $86.3 million compared with $52.1 million reported in the year-ago quarter. Non-GAAP operating margin was 28.3% compared with 20.8% in the year-ago quarter.

Balance Sheet & Cash Flow

Mellanox exited the first quarter with cash & investments worth $552.5 million compared with $438.5 million in the previous quarter.

In the first quarter, the company generated cash of $88.4 million from operations.

Guidance

The pending acquisition of NVIDIA, refrained Mellanox from providing second-quarter guidance.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Mellanox has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Mellanox has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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