Mellanox Has Great Q1. But Q2?

News Analysis Brian Santo, Senior editor, Test & Measurement / Components, Light Reading 4/22/2016

Mellanox reported record Q1 earnings, with $196 million in revenue, up 34% from the like quarter a year ago, beating analyst expectations. But analysts freaked out about Mellanox's target for next quarter, prompting a 12% drop in the stock value on Thursday.

Mellanox Technologies Ltd. (Nasdaq: MLNX) suggested a Q2 revenue target of $210 million to $215 million. Analysts really, really want $216 million. So for a spread that might be as little as $1 million -- or half a percentage point, Mellanox was … corrected.

Mellanox is highly optimistic about the new revenue opportunities that will result from combining its interconnect with the line of network processors it picked up with its recent acquisition of EZChip. Mellanox believes that incorporating intelligence directly into interconnect will lead to a number of benefits in high performance computing, specifically HPC applications in data centers. CEO Eyal Waldman said EZChip integration remains on track.

Mellanox's development of intelligent interconnect is being countered by Intel Corp. (Nasdaq: INTC) with its new Omni-Path architecture, a fabric network approach dependent on optimized PCIe adapters, silicon, switches, cables and management software.

Part of the question is who will get to market first.

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Waldman said, "We recognized Intel's Omni-Path remains a leading topic of discussion among investors. During the quarter we did not learn of any new Omni-Path installations. We were able to conduct several system-level performance tests comparing Mellanox's 100Gbit/s EDR InfiniBand solutions and Intel's Omni-Path offerings. The test demonstrated Mellanox's InfiniBand delivered between 35% and 63% better application level performance."

And he wasn't done. Waldman continued: "The performance advantage of InfiniBand increases with scale. In some cases, Mellanox delivered higher system performance using only half of the servers needed by Omni-Path. Application performance is the leading criteria for high-performance computing customers, thus we believe InfiniBand will continue to be the interconnect of choice for this market." Waldman's comments were taken from the transcript of the company's call with analysts, provided by Seeking Alpha.

— Brian Santo, Senior Editor, Components, T&M, Light Reading