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Mellanox: Fiscal 2Q17 Financial Results

Loss and lower revenue; IB sales up 12% and EDR 50% sequentially

(in $ million) 2Q16 2Q17 6 mo. 16 6 mo. 17
Revenue 214.8 212.0 411.6 400.6
Growth   -1%   -3%
Net income (loss) 4.7 (8.0) (2.5) (20.2)

Mellanox Technologies, Ltd. announced financial results for its second quarter ended June 30, 2017.

Our second quarter IB revenues achieved double digit sequential growth, driven by deployments of 100Gb EDR solutions. Mellanox’s second quarter results demonstrate IB’s continued leadership in high speed interconnects for customers’ deployments across high-performance computing, artificial intelligence, cloud and database,” said Eyal Waldman, president and CEO. “During the second quarter Ethernet revenues grew 8% sequentially, as adoption of our 25GbE solutions continued to accelerate. In the second half of 2017, we anticipate multiple growth catalysts for both our Ethernet and IB solutions.”

Second Quarter 2017 – Highlights
• Revenues of $212.0 million decreased 1.3%, compared to $214.8 million in 2Q16.
• GAAP gross margins of 65.4%, compared to 62.8% in the second quarter of 2016.
• Non-GAAP gross margins of 70.6%, compared to 71.4% in 2Q16.
• GAAP operating loss was $4.4 million, compared to operating income of $6.6 million in 2Q16.
• Non-GAAP operating income was $26.5 million, or 12.5% of revenue, compared to $45.5 million, or 21.2% of revenue in 2Q16.
• GAAP net loss was $8.0 million, compared to net income of $4.7 million in 2Q16.
• Non-GAAP net income was $22.4 million, compared to $42.7 million in 2Q16.
• GAAP net loss per diluted share was $0.16, compared to net income per diluted share of $0.09 in 2Q16.
• Non-GAAP net income per diluted share was $0.44, compared to $0.87 in t2Q16.
• $6.4 million in cash was provided by operating activities, compared to $40.0 million in 2Q16.
Cash and investments totaled $310.3 million at June 30, 2017, compared to $328.4 million at December 31, 2016.

Third Quarter 2017 Outlook
Quarterly revenues of $222 million to $232 million
• Non-GAAP gross margins of 70.5% to 71.5%
• Non-GAAP operating expenses of $124 million to $126 million
• Share-based compensation expense of $18.8 million to $19.3 million
• Non-GAAP diluted share count of 51.4 million to 51.9 million shares

Comments

Second quarter revenue was $212 million, a sequential increase of 12.3% and down 1.3% from $214.8 million in 2Q16.

Mellanox is not the leader in Ethernet but the king of high-speed connectivity solutions in IB - with only Intel OmniPath as competitor -, and now in Ethernet in 25GbE and above since the acquisition of Voltaire in 2010 for $214 million. But the company continues to get more sales up to now in IB than Ethernet.

Growth of Ethernet market at 25Gb/s and above
Click to enlarge

Source: Crehan Research: Q2’16 Server Class Adapter Market Share; Crehan Research: Long Range Forecast – Server- class Adapters & LOM (July 2016); Crehan Research: Long Range Forecast – Data Center Switch (July 2016)

Most recent quarter IB revenue were $108.1 million growing 11.5% sequentially but declining 2.6% Y/Y. It represented 51% of sales compared to 51.7% of revenues in 2Q16.

EDR 100Gb IB products were up 140% Y/Y and represented 55% of IB revenues.

Quarterly Ethernet sales were $87 million, up 8.1% sequentially and down 1.1% Y/Y, representing 41% of second quarter revenue.

Revenue outlook for September quarter is between $222 million to $232 million or 5% to 9%.

But it will be quite impossible for Mellanox to become this year a $10 billion company and even to surpass 2016 revenue $857.5 million following a CAGR 30% between 2013 and 2016.

Historical Quarterly Revenue Growth ($ million)
Click to enlarge

Abstracts of the earnings call transcript

Eyal Waldman, president and CEO:
"Adoption of our EDR solutions increased significantly during the second quarter, driven by deployments at the U.S. Department of Energy laboratories. Shipments began during the second quarter with additional deliveries scheduled to occur in the third or fourth quarter of 2017.
"During the second quarter of 2017, we shipped tens of thousands of 25GbE NICs to Chinese Web 2.0 and hyperscale customers. We expect Chinese hyperscale customers to accelerate purchases of 25GbEt and above solutions as they transition to higher networking speeds. In the coming years, we see the Chinese market as a key growth driver for Mellanox. We are starting to see 100Gb NIC deployments and expect 100Gb endpoints to the server to become more utilized in 2018. This will pull 400GbE switch backbone."

Jacob Shulman, CFO:
"Revenues from RICs represented 16% of second quarter revenue, revenue from boards were 38%, and switch system revenue accounted for 27%.
"We had three more than 10% customer in the second quarter. They were IBM with 15%, HPE with 14%, and Dell with 11% of revenue."

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