Mellanox (MLNX) Q4 Earnings: What Lies Ahead for the Stock?

Mellanox Technologies, Ltd. MLNX is set to report fourth-quarter fiscal 2017 earnings results on Jan 18. In the last reported quarter, the company delivered a positive earnings surprise of 10.9%.

We believe that strong demand for Mellanox’s InfiniBand solutions along with collaborations with the likes of NEC Corporation, Atos, VMware and Hewlett Packard Enterprise are likely to act as catalysts.

Let’s see how things are shaping up prior to this announcement.

Expect What?

The Zacks Consensus Estimate for the quarter is pegged at 68 cents, reflecting a year-over-year decrease of 17.1%. Further, the earnings estimate has not shown any sign of movement of late. However, the Zacks Consensus Estimate for revenues is pegged at $235 million, up roughly 5.9% from the year-ago quarter.

Factors Likely to Influence Q4 Results

Q3 Earnings Highlight

Mellanox reported mixed third-quarter fiscal 2017 results, wherein the bottom line surpassed the Zacks Consensuses Estimates and the top line missed the same. Revenues improved on a year-over-year basis primarily driven by strong customer adoption of Gigabit EDR solutions in machine learning, artificial intelligence, high-performance computing, database, storage and more.

Further, InfiBand’s adoption helped the company to maintain its leadership position in the high-performance interconnects space.

Moreover, it provided encouraging fourth-quarter revenue guidance. For the fourth quarter, the company anticipates revenues to remain in a range of $230-$240 million. The Zacks Consensuses Estimates is pegged at $235.2 million.

Notably, its shares have gained 50.4% year over year, outperforming the 34.8% rally of the industry it belongs to.

Collaboration & InfiniBand Adoption: Key Catalyst

The company recently announced collaboration with NEC Corporation to provide support to NEC’s newly announced SX-Aurora TSUBASA systems with InfiniBand adapters. InfiniBand is highly scalable and its off-loading capabilities that reduce load on CPUs are attracting artificial intelligence (AI), machine learning and deep learning providers.

The addition of InfiniBand to NEC’s latest high-end high-performance computing (HPC) platform boosts the systems processing performance and scalability.

Moreover, InfiniBand has been the preferred interconnect for AI and deep learning systems. Mellanox had announced that leading deep learning frameworks such as TensorFlow, Caffe2, Microsoft Cognitive Toolkit, and Baidu PaddlePaddle use the company’s offloading capability across multiple AI servers.

Mellanox also clinched design contracts on multiple platforms. These design wins include more than 20 AI projects globally, which is significant for the company’s top-line growth.

Apart from strong demand for Mellanox’s InfiniBand solutions, collaborations with the likes of Atos, VMware and Hewlett Packard Enterprise have helped the company expand footprint in the cloud and datacenter market.

Mellanox’s collaboration with Microsemi Corporation is also expected to reinforce the company’s footprint in the high performance computing market going forward.

Further, Mellanox is winning contracts from the likes of NetApp. The network storage provider recently selected Mellanox’s ConnectX 100Gb/s InfiniBand adapters for two of its most advanced storage platforms — the EF570 and E5700.

The University of Toronto also selected the Mellanox InfiniBand solutions to accelerate its new leading supercomputer in Canada. Earlier, the NASA Ames Research Center selected the company’s EDR InfiniBand solutions along with HPE SGI 8600 liquid cooled platform to expand its “Electra” supercomputing cluster.

These factors are likely to positively impact the to-be-reported quarter.

What the Zacks Model Unveils?

Zacks ESP: Mellanoxcurrently has an Earnings ESP of -2.37%. This is because the Most Accurate estimate is at 66 cents, while the Zacks Consensus Estimate is pegged higher at 68 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Mellanoxcurrently sports a Zacks Rank #1 (Strong Buy). While this increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.

It should be noted that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated Stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Some Stocks With Favorable Combination

Here are a few companies which, as per our model, have the right combination of elements to post an earnings beat this quarter:

Western Digital Corporation WDC, with an Earnings ESP of +0.83% and a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Seagate Technology PLC STX, with an Earnings ESP of +2.51% and a Zacks Rank of 2.

Helmerich & Payne, Inc. HP, with an Earnings ESP of +11.62% and a Zacks Rank of 3 (Hold).

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