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Mellanox Incurs Loss in 1Q

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Fabless semiconductor company Mellanox Technologies Ltd. (MLNX - Free Report) reported first quarter 2013 loss of 14 cents per share (including stock-based compensation), deteriorating from 34 cents per share earned in the year-ago quarter. However, loss per share was narrower than the Zacks Consensus Estimate of a loss of 20 cents. 

On non-GAAP basis, earnings per share were 10 cents compared with 51 cents per share in the year-ago quarter.

Quarter Details

Total revenue for the quarter was down 6.4% year over year to $83.1 million. Reported revenue beat the Zacks Consensus Estimate of $81.0 million. Hewlett-Packard Co. (HPQ - Free Report) with 16% and International Business Machines Corp (IBM - Free Report) with 19% were the two customers who accounted for 35% of the total revenue.

Non-GAAP gross profit was down 8.9% from the year-ago quarter to $56.6 million, primarily due to lower revenue base. Gross margin for the quarter stood at 68.1% compared with 70.0% in the year-ago quarter. Including stock-based compensation, gross profit came in at $56.1 million.

Non-GAAP operating expenses jumped 31.7% year over year to $51.7 million. This was primarily due to a sharp rise in research & development (up 30.5% year over year), sales & marketing (up 29.2% year over year) and general & administrative expense (up 46.2% year over year) in the quarter.

Non-GAAP operating profit for the quarter was $4.9 million down from $22.8 million in the year-ago quarter, primarily due to higher operating expenses. Operating margin was down from 25.7% in the year-ago quarter to 5.8%. Including stock-based compensation, Mellanox reported operating loss of $5.5 million.

Non-GAAP net income was down from $22.0 million in the year-ago quarter to $4.3 million. Including stock-based compensation, net loss came in at $6.1 million.

Balance Sheet

Mellanox exited the quarter with $396.2 million in cash and investments versus $426.3 million in the previous quarter. Cash used in operations was $6.6 million compared with $24.5 million cash provided by operations in the previous quarter.


For the second quarter of 2013, total revenue is projected in the range of $92.5 million to $97.5 million and gross margin in the range of 68% to 69%. Operating expenses are expected to increase 10.0% to 11.0% on a sequential basis.


Mellanox reported tepid first quarter results and also provided tepid revenue guidance on a year-over-year basis. However, we believe that Mellanox’s product offerings such as InfiniBand products and Ethernet solutions will help the company to drive top-line growth.

However, sluggish macroeconomic environment, and increasing competition from its peers such as QLogic may act as headwinds going forward. Moreover, customer concentration could be another headwind for the stock.

Currently, Mellanox has a Zacks Rank #2 (Buy).

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