Can Israeli-based tech companyMellanox Technologies (
) pull off another big beat in revenue and earnings and jolt
shares higher for the third quarter in a row?
Investors will get an answer Wednesday, when the maker of
high-performance interconnects for quickly transferring and
storing data reports third-quarter results.
Mellanox crushed Wall Street views in the first and second
quarters on exploding demand for its products, sending shares
soaring more than 50% and 40%, respectively.
Demand is being fueled by growth in data with the rise of new
Internet uses in the age of social media, e-commerce and other
online verticals, and all the data and cloud computing they
Mellanox can move data as fast as 56 gigabits a second with
its core interconnect products, based on an industry standard it
helped develop, known as InfiniBand.
The leading and fastest InfiniBand vendor's products include
silicon, adapter cards, switch systems, cables and software.
Analysts say business fundamentals are still strong and expect
another good quarter.
"The story remains intact," said ThinkEquity analyst Rajesh
Ghai, who says the firm is seeing new demand from companies
involved in storage and Web 2.0 markets.
But since analysts have raised estimates to reflect Mellanox's
outsize performance, the likelihood of a big upside surprise is
less likely this time.
"High expectations are already baked into analysts' estimates,
so it reduces the potential for a massive surprise," said
Wunderlich Securities analyst Brian Freed.
"It's still a rockin' business," he added.
But the raised bar puts more pressure on Mellanox to deliver
-- or overdeliver.
"They have to meet or exceed consensus estimates or the stock
is going to get crushed," Freed said.
Analysts estimate Q3 profit will jump 265% over the year prior
to $1.13 a share, roughly the same percentage gain as in Q2, when
analysts were caught off guard and missed by a big margin, as
they did in Q1, when earnings rose 113%.
Quarter-to-quarter sequentially, revenue moved up 22% in Q1
and 50% in Q2. On a year-over-year basis, revenue jumped more
than 61% in Q1 and almost 111% in Q2.
For Q3, analysts now estimate that revenue will rise 125% over
the earlier year to $153 million. They see 105% growth for the
full year, to $532 million.
"It's hard to keep putting up blockbuster quarters," said
Ghai. "The Street is expecting some upside. Will it be
blockbuster along the lines of the last couple of quarters? I
While the bar has been raised due to its spectacular results
of late, Mellanox is still enjoying strong new demand for its
core InfiniBand products, watchers say.
"Storage will be the next big catalyst for Mellanox," Ghai
He suspects Mellanox will land new business with current
enterprise storage customerEMC (
) should EMC adopt new InfiniBand technology in the future, as he
suspects it will based on his talks with people at EMC.
Other new growth in the storage market could come from current
) as it ramps up its new IBM-XIV storage-system line, which uses
InfiniBand technology from Mellanox, Ghai says.
Meanwhile,Intel 's (
) new, high-speed Romley processor has been one of the reasons
for some of Mellanox's revenue upside lately, says analyst Kevin
Cassidy of Stifel Nicolaus.
"Companies that want higher-speed servers use Romley," he
said. "You need faster networks if you've got these faster
Enter InfiniBand, just such a high-speed network. And Mellanox
offers "the highest speed right now at 56 gigabits a second," he
"If you just bought a Ferrari, you need an autobahn to drive
it on," he said as a kind of comparison.
Romley users include such companies asAmazon (
) andFacebook (FB), Cassidy says.
Mellanox doesn't typically sell directly to Amazon and other
Web 2.0 companies, he says. Rather, he says, it sells to
customersHewlett-Packard (HPQ),Dell (DELL), IBM and EMC, among
others, who, in turn, sell to Web 2.0 concerns such as Amazon,
Facebook,Apple (AAPL),Google (GOOG) and others.
Intel also is involved in InfiniBand technology through its
acquisition ofQLogic 's (QLGC) assets. But the technology is
considered a generation behind Mellanox's.
In June, Intel chose an InfiniBand adapter silicon from
Mellanox to deploy in new servers. That speaks to the superiority
of Mellanox's products, some analysts say.
Still, Cassidy moved to the "sidelines" on Mellanox in early
September, when he downgraded shares to "hold" based on what he
viewed as its full valuation and "a more gradual revenue
increase" compared with Q1 and Q2.
He thinks revenue growth will slow to 27% next year, after
growing 100% this year.
He conceded in his note then that the downgrade may be
"premature" considering "the somewhat secretive nature of Web 2.0
companies' cloud deployments."
He also pointed out that Mellanox may need to step up spending
as it moves toward 100-gigabit-per-second networks and continues
to broaden its markets.
In a phone call Thursday, he said he expects Mellanox to reach
100 gigabits per second by the end of 2013 or early 2014. He
doesn't expect Intel to reach that goal until sometime in
"It's still outgrowing anything in high tech right now," he
said of Mellanox. "PC growth this year will be negative."