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Mellanox: Fiscal 2Q16 Financial Results

Fifth consecutive quarter of record revenue

(in $ million) 2Q15 2Q16 6 mo. 15 6 mo. 16
Revenue 163.1 214.8 309.8 411.6
Growth   32%   33%
Net income (loss) 19.4 4.7 29.7 (2.5)

Mellanox Technologies, Ltd. announced financial results for its second quarter ended June 30, 2016.

We are pleased to report the fifth consecutive quarter of record revenue. We saw strong growth in our Ethernet business, driven by growth in our 25, 50 and 100GbE products,” said Eyal Waldman, president and CEO. “We are pleased with the execution in IB, and believe strength in HPC markets will lead to further growth of our IB solutions during the second half of this year. We continue to see strong customer interest in our Spectrum Ethernet switch. The transition from 10GbE to 25, 50, and 100GbE has begun and represents a multi-year growth opportunity.”

Second Quarter 2016 Highlights

  • Revenues of $214.8 million increased 9.1%, compared to $196.8 million in the first quarter of 2016.
  • GAAP gross margins of 62.8% in the second quarter compared to 64.2% in the first quarter of 2016.
  • Non-GAAP gross margins of 71.4%, unchanged from the first quarter of 2016.
  • GAAP operating income was $6.6 million, compared to operating loss of $3.9 million in the first quarter of 2016.
  • Non-GAAP operating income was $45.5 million, or 21.2% of revenue, compared to non-GAAP operating income of $41.3 million, or 21.0% of revenue in the first quarter of 2016.
  • GAAP net income was $4.7 million, compared to net loss of $7.2 million in the first quarter of 2016.
  • Non-GAAP net income was $42.7 million, compared to $39.3 million in the first quarter of 2016.
  • GAAP net income per diluted share was $0.09 in the second quarter compared to net loss per diluted share of $0.15 in the first quarter of 2016.
  • Non-GAAP net income per diluted share was $0.87 in the second quarter compared to $0.81 in the first quarter of 2016.
  • $44.8 million in cash was provided by operating activities, compared to $48.6 million in the first quarter of 2016.
  • Cash and investments totaled $276.5 million at June 30, 2016, compared to $261.8 million at March 31, 2016.

Third Quarter 2016 Guidance

  • Quarterly revenues of $221 million to $227 million
  • Non-GAAP gross margins of 71% to 72%
  • An increase in non-GAAP operating expenses of 2% to 4%
  • Share-based compensation expense of $17.9 million to $18.4 million
  • Non-GAAP diluted share count of 49.3 million to 49.8 million shares

Comments

Revenue increased 9% Q/Q and 32% Y/Y at $215 million, on top of what was expected ($210 million to $215 million), and will be up 3% to 6% next quarter according to company's guidance.

Founded in 1999 and headquartered in Sunnyvale, CA, and Yokneam, Israel, Mellanox first concentrated on IB with a great success and profitability and with a near monopoly following the acquisition of competitor Voltaire in 2010.

The company decided later to enter also into high-speed Ethernet competing vigorously for HPC connections, but in a market with much more actors and consequently lower margins. Faster IB continues to be the preferred choice for HPCs but the battle with Ethernet will mainly depends on prices.

For Mellanox the situation has deeply changed since the arrival of Intel with its own IB product, Omni-Path.

Mellanox's president and CEO Eyal Waldman said during a conference call: "During the quarter, we were able to conduct several additional application level tests comparing costs between Mellanox's EDR IB solutions and Intel's Omni-Path offering. The average performance advantage for EDR IB was 45% while providing 27% better average cost per application. IB continues to demonstrate significant performance advantages versus Omni-Path. (...) Intel does have some design wins, and I think they have eight entries in the TOP500 list of supercomputers. We are seeing some price pressure in some locations. We don't expect to lose significant market share, but Intel is seeing some success where people that say good enough is good enough for them."

IB contributed 52% of firm's total revenue or $111 million as it was 58% for the former quarter, the decline being mainly explained by a significant Chinese build-out and material Web 2.0 purchases in 1FQ16.

EDR 100Gb IB product represented 22% of IB revenue to be compared to 67% for FDR 56Gb devices.

The firm expects IB sales continuing to grow in next two quarters.

In 2FQ16, company's Ethernet business was 41% of total revenue, up from 35% last three-month period.

HP is the firm's largest customer representing 12% of global sales.

Acquisitions of Mellanox

Year  Company acquired  Price in $ million Activity of acquired company
2010 Voltaire 214 Server and storage fabric switches
2013 XLoom Communications (assets) NA Opto-electric chip-scale packaging
2013 Kotura 82 Silicon photonics for 100Gb/s speed and more
2013 IPtronics 47.5 Optical interconnect component
2014 Integrity Project NA Software for connectivity, low-level development, real-time applications and security
2016 EZchip 811 high-performance processing solutions for carrier and data center networks

To read the earnings call transcript

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