Mellanox Tech (MLNX 83.85, -0.85, -1.00%) opened modestly higher today after
reporting Q2 earnings last night. The company is a supplier of interconnects
using InfiniBand and Ethernet technology. Servers, storage systems, and
embedded system equipment all need to talk to each other and transmit data
between them. Mellanox makes the interconnections that allow these pieces of
equipment to talk with each other. Its products include adapters, gateway and
switch ICs, adapter cards, switch and gateway systems, software, and cables.
High-performance interconnects are valuable because they remove bottlenecks by enabling fast transfer of data, latency reduction, and more. For example, when Intel launches a new generation of architecture for the enterprise market, greater demands is placed on the rest of the system, so you basically need a bigger pipe between the pieces of equipment, and MLNX provides that.
Addressing its 2018 growth engines, the company expected that its Ethernet switch would act as the number one revenue driver, with sales expected to significantly more than double as customers sought alternatives to Broadcom (AVGO) offerings. More OEMs have been turning to its Spectrum switches, and MLNX is now penetrating into the storage switching market by providing Spectrum as a storage fabric in some applications. In the Ethernet NIC market, MLNX is leads in the 25GB and above category. InfiniBand was expected to be flat to slightly up in 2018.
Turning to the Q2 results, non-GAAP EPS nearly tripled year/year $1.25 from $0.44 last year. This was much better than market expectations. Revenue rose 26.7% year/year to $268.5 mln, which was above prior guidance of $260-270 mln. Non-GAAP operating margin jumped to 24.7% from 12.5% a year ago and above Q1's result of 20.8%. In terms of guidance, MLNX expects Q3 revenue of $270-280 mln, which is above market expectations. For all of 2018, it expects revenue of $1.065-1.085 bln, up from prior guidance of $1.05-1.07 bln.
On the call last night, MLNX talked about how it is capitalizing on market opportunities for higher Ethernet speeds by posting record Ethernet revenue. Ethernet revenue was up 15% sequentially and 81% year/year, driven by increased adoption of its 25 gigabit per second (Gbps) and above ConnectX network adapters, spectrum switches, and LinkX cables and transceivers.
Customers recognize the performance efficiency, scalability, and software advantages Mellanox delivers across 25Gbps, 50Gbps and 100Gbps. MLNX cited independent research that showed it's capturing 67% of the network adapter market at these speeds, which is forecasted to grow at a more than 50% CAGR over the next five years.
In Q2, its Ethernet switch revenue was up 26% sequentially and more than doubled year/year with 114% growth, driven by a growing demand by OEMs, global hyperscale, enterprise data centers, financial services, and artificial intelligence customers. Multiple Tier 1 and Tier 2 OEMs have selected its Spectrum Ethernet switch as their Ethernet switch of choice for their storage and complete platforms and spectrum adoption. MLNX expects its switch business to continue its momentum from the first half and more than double for the full year of 2018 compared to 2017.
MLNX’s InfiniBand segment has not historically been the company’s growth driver; Q2 segment revenue was flat sequentially. MLNX remains confident InfiniBand will grow in low-single digits for the year.
In sum, this was another nice quarter for MLNX with a nice Q2 beat and upside revenue guidance for Q3. Looking ahead, MLNX expects its 25Gbps and above Ethernet adapters, switches, and cables will remain key growth drivers in 2018 and beyond. MLNX sees itself at the leading edge of a significant upgrade cycle, and the company is well-positioned to take advantage of the move to higher performance networks that will continue for multiple years.
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