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Mellanox Crushes Estimates in 2Q

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The fabless semiconductor company Mellanox Technologies Ltd. (MLNX - Free Report) reported second quarter 2012 earnings of 80 cents per share (including stock-based compensation), which breezed past the Zacks Consensus Estimate by 25 cents. Earnings surged 67 cents from 13 cents per share reported in the year-ago quarter, primarily driven by better-than-expected revenue growth and margin expansion.

Quarter Details

Total revenue in the quarter soared 110.7% on a year-over-year basis to $133.5 million and comfortably surpassed the Zacks Consensus Estimate of $120.0 million.

The strong revenue growth was primarily driven by higher demand for FDR (Fourteen Data Rate) InfiniBand products, which contributed 54% of the total revenue in the quarter. InfiniBand contributed 90.0% of the total revenue during the quarter.

Hewlett-Packard Co. (HPQ - Free Report) and International Business Machines Corp. (IBM - Free Report) were the only two customers accounting for 10.0% or more of revenues during the quarter.

Gross profit shot up 115.7% from the year-ago quarter to $93.7 million. Gross margin for the quarter stood at 70.2% compared with the year-ago level of 68.5%.

Total operating expenses jumped 56.6% year over year to $59.8 million. This was primarily driven by strong growth in research & development (up 59.0% year over year), sales & marketing (up 58.3% year over year) and general & administrative expense (up 36.0% year over year) in the quarter.

Despite higher operating expenses, operating profit jumped to $34.3 million from $5.5 million in the year-ago quarter, driven by strong revenue growth and higher gross margin base. Net income also increased to $34.7 million from $4.9 million in the year-ago quarter.

Mellanox exited the quarter with $320.2 million in cash and investments versus $259.8 million in the previous quarter. Cash flow from operations was $59.2 million compared with $23.6 million reported in the previous quarter.

Third Quarter Guidance

For the forthcoming third quarter 2012, total revenue is projected in the range of $150.0 million to $155.0 million and gross margins in the range of 70% to 71%. Operating expenses are expected to increase 6.0% to 8.0% on a sequential basis.

Our Recommendation

We believe that Mellanox will continue to outperform its peers based on strong demand for InfiniBand products particularly from the high performance computing, cloud data centers and web 2.0 markets. Moreover, the company’s expansions in the cloud and enterprise storage segments are the other positives. The upcoming release of Microsoft’s (MSFT - Free Report) Windows Server 2012 operating system is also expected to drive results in the near term.

We have an Outperform recommendation on Mellanox over the long term. Currently, Mellanox has a Zacks #2 Rank, which translates into a ‘Buy’ rating in the short term.

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