July 26, 2017

Mellanox Reports Second Quarter 2017 Results

InfiniBand Revenues Up 12 Percent Sequentially; EDR Up 50 Percent Sequentially

InfiniBand Has 2.5X More New Systems in June Top500 Supercomputer List Compared to OmniPath

Ethernet Revenues Up 8 Percent Sequentially Led By Growth in 25 Gigabit

SUNNYVALE, Calif. & YOKNEAM, Israel--(BUSINESS WIRE)-- Mellanox® Technologies, Ltd. (NASDAQ: MLNX) today announced financial results for its second quarter ended June 30, 2017.

"Our second quarter InfiniBand revenues achieved double digit sequential growth, driven by deployments of 100 gigabit EDR solutions. Mellanox's second quarter results demonstrate InfiniBand'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 of Mellanox Technologies. "During the second quarter Ethernet revenues grew eight percent sequentially, as adoption of our 25 gigabit Ethernet solutions continued to accelerate. In the second half of 2017, we anticipate multiple growth catalysts for both our Ethernet and InfiniBand solutions."

Second Quarter 2017 - Highlights

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

Third Quarter 2017 Outlook

We currently project:

  • Quarterly revenues of $222 million to $232 million
  • Non-GAAP gross margins of 70.5 percent to 71.5 percent
  • 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
       

Recent Mellanox Press Release Highlights

 
July 11, 2017 Mellanox InfiniBand and Ethernet Solutions Accelerate New Intel® Xeon® Scalable Processor-Based Platforms for High Return on Investment
July 6, 2017 Mellanox Introduces Spectrum-2 - World's Most Scalable 200 and 400 Gigabit Open Ethernet Switch Solution
June 21, 2017 Mellanox Ethernet and InfiniBand Chosen by AMD as the Preferred Interconnect Solutions to Accelerate New EPYC Data Center Platforms
June 20, 2017 Mellanox Interconnect Solutions Scale Deep Learning Platforms to World-Leading Performance
June 19, 2017 Kyushu University's New Supercomputer Accelerated by Mellanox EDR InfiniBand Solutions
June 19, 2017 NASA Ames Research Center Selects Mellanox InfiniBand for New Scalable Supercomputer
June 19, 2017 InfiniBand Accelerates Majority of New Systems on TOP500 Supercomputer List
June 16, 2017 Mellanox Announces a Strategic Collaboration with HPE to Advance Innovations in High Performance Computing and Machine Learning Platforms
June 15, 2017 Mellanox Announces Innovative SHIELD Technology, Enabling Industry's Most Resilient and Scalable Data Center Networks
June 7, 2017 Mellanox Powers the First 25, 50 and 100 Gigabit Ethernet Fabric for HPE Synergy Platform
 

Conference Call

Mellanox will hold its second quarter 2017 financial results conference call today, at 2 p.m. Pacific Time, to discuss the company's financial results. To listen to the call, dial 1-888-632-3384, or for investors outside the U.S., +1-785-424-1675, approximately 10 minutes prior to the start time.

The Mellanox financial results conference call will be available via live webcast on the investor relations section of the Mellanox website at: http://ir.mellanox.com. Access the webcast 15 minutes prior to the start of the call to download and install any necessary audio software. A replay of the webcast will also be available on the Mellanox website.

About Mellanox

Mellanox Technologies is a leading supplier of end-to-end InfiniBand and Ethernet interconnect solutions and services for servers and storage. Mellanox interconnect solutions increase data center efficiency by providing the highest throughput and lowest latency, delivering data faster to applications and unlocking system performance capability. Mellanox offers a choice of fast interconnect products: adapters, switches, software, cables and silicon that accelerate application runtime and maximize business results for a wide range of markets including high-performance computing, enterprise data centers, Web 2.0, cloud, storage and financial services. More information is available at www.mellanox.com.

GAAP to Non-GAAP Reconciliation

To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), Mellanox uses non-GAAP measures of net income which are adjusted from results based on GAAP to exclude share-based compensation expense, amortization expense of acquired intangible assets, acquisition related expense, settlement costs, and income tax effects and adjustments. The purpose of income tax effects and adjustments is to exclude tax consequences associated with the above excluded expenses items, as well as the non-cash impact on the tax provision pertaining to changes in deferred tax assets associated with carryforward losses of group entities subject to tax holiday in Israel. The company believes the non-GAAP results provide useful information to both management and investors, as these non-GAAP results exclude expenses that are not indicative of our core operating results. Management believes it is useful to exclude share-based compensation expense, amortization expense of acquired intangible assets, acquisition related expense, settlement costs, and income tax effects and adjustments because it enhances investors' ability to understand our business from the same perspective as management, which believes that such items are not directly attributable to nor reflect the underlying performance of the company's business operations. Further, management believes certain non-cash charges such as share-based compensation, amortization of acquired intangible assets, changes related to recognition of deferred taxes and the net impact on the company's tax provision for non-GAAP adjustments do not reflect the cash operating results of the business. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. These non-GAAP measures may be different than the non-GAAP measures used by other companies. A reconciliation of GAAP to non-GAAP condensed consolidated statements of operations is also presented in the financial statements portion of this release and is posted under the "Investor Relations" section on our website.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

All statements included or incorporated by reference in this release, other than statements or characterizations of historical fact, are forward-looking statements, including the outlook for the three months ended September 30, 2017, statements related to trends in the market for our solutions and services, opportunities for our company in 2017 and beyond, and future product capabilities. These forward-looking statements are based on our current expectations, estimates and projections about our industry and business, management's beliefs and certain assumptions made by us, all of which are subject to change.

Forward-looking statements can often be identified by words such as "projects," "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "continue," "ongoing," similar expressions and variations or negatives of these words. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause our actual results to differ materially and adversely from those expressed in any forward-looking statement. The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements include the continued expansion of our product line, customer base and the total available market of our products, the continued growth in demand for our products, the continued, increased demand for industry standards-based technology, our ability to react to trends and challenges in our business and the markets in which we operate, our ability to anticipate market needs or develop new or enhanced products to meet those needs, the adoption rate of our products, our ability to establish and maintain successful relationships with our OEM partners, our ability to effectively compete in our industry, fluctuations in demand, sales cycles and prices for our products and services, our success converting design wins to revenue-generating product shipments, the continued launch and volume ramp of large customer sales opportunities, our ability to protect our intellectual property rights, our ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses, our success in realizing the anticipated benefits of mergers and acquisitions, and our ability to obtain debt at competitive rates or in sufficient amounts in order to fund our contractual commitments. Furthermore, the majority of our quarterly revenues are derived from customer orders received and fulfilled in the same quarterly period. We have limited visibility into actual end-user demand as such demand impacts us and our OEM customer inventory balances in any given quarter. Consequently, this introduces risk and uncertainty into our revenue and production forecasts and business planning and could negatively impact our financial results. In addition, current uncertainty in the global economic environment poses a risk to the overall economy as businesses may defer purchases in response to tighter credit conditions, changing overall demand for our products, and negative financial news. Consequently, our results could differ materially from our prior results due to these general economic and market conditions, political events and other risks and uncertainties described more fully in our documents filed with or furnished to the Securities and Exchange Commission.

More information about the risks, uncertainties and assumptions that may impact our business is set forth in our annual report on Form 10-K filed with the SEC on February 17, 2017. All forward-looking statements in this press release, including the outlook for the three months ended September 30, 2017, are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

Mellanox is a registered trademark of Mellanox Technologies, Ltd. All other trademarks are property of their respective owners.

 
Mellanox Technologies, Ltd.
Condensed Consolidated Statements of Operations
(in thousands, except per share data, unaudited)
               
Three months ending Six months ending
June 30, June 30,
2017 2016 2017 2016
       
Total revenues $ 211,962 $ 214,801 $ 400,613 $ 411,611
Cost of revenues 73,427   79,807   137,877   150,288  
Gross profit 138,535 134,994 262,736 261,323
Operating expenses:
Research and development 92,348 82,324 180,839 153,358
Sales and marketing 38,110 32,576 73,867 63,804
General and administrative 12,476   13,494   24,995   41,432  
Total operating expenses 142,934 128,394 279,701 258,594
Income (loss) from operations (4,399 ) 6,600 (16,965 ) 2,729
Interest expense (1,996 ) (2,215 ) (3,989 ) (3,213 )
Other income, net 827   315   1,510   376  
Interest and other, net (1,169 ) (1,900 ) (2,479 ) (2,837 )
Income (loss) before taxes on income (5,568 ) 4,700 (19,444 ) (108 )
Provision for taxes on income 2,423   46   791   2,406  
Net income (loss) $ (7,991 ) $ 4,654   $ (20,235 ) $ (2,514 )
Net income (loss) per share — basic $ (0.16 ) $ 0.10   $ (0.41 ) $ (0.05 )
Net income (loss) per share — diluted $ (0.16 ) $ 0.09   $ (0.41 ) $ (0.05 )
Shares used in computing net income (loss) per share:
Basic 50,056 47,900 49,698 47,629
Diluted 50,056 49,194 49,698 47,629
 
 
Mellanox Technologies, Ltd.
Reconciliation of Non-GAAP Adjustments
(in thousands, except percentages, unaudited)
               
Three months ending Six months ending
June 30, June 30,
2017 2016 2017 2016

Reconciliation of GAAP net income (loss) to non-GAAP:

GAAP net income (loss) $ (7,991 ) $ 4,654 $ (20,235 ) $ (2,514 )
Adjustments:
Share-based compensation expense:
Cost of revenues 575 671 1,056 1,146
Research and development 10,297 10,770 18,988 19,922
Sales and marketing 4,010 3,889 7,348 7,537
General and administrative 2,783   2,764   5,041   7,755  

Total share-based compensation expense

17,665 18,094 32,433 36,360
Amortization of acquired intangibles:
Cost of revenues 10,614 13,533 21,200 23,962
Research and development 194 196 386 391
Sales and marketing 2,230   2,232   4,460   3,255  
Total amortization of acquired intangibles 13,038 15,961 26,046 27,608
Settlement costs:
General and administrative       5,106  
Total settlement costs 5,106
Acquisition related charges:
Cost of revenues 4,233 7,533
Research and development 153 164 436 640
Sales and marketing 150 60 206
General and administrative   313   134   6,661  
Total acquisition related charges 153 4,860 630 15,040
Tax effects and adjustments (492 ) (887 ) (1,843 ) 378  
Non-GAAP net income $ 22,373   $ 42,682   $ 37,031   $ 81,978  
 

Reconciliation of GAAP gross profit to non-GAAP:

Revenues $ 211,962 $ 214,801 $ 400,613 $ 411,611
GAAP gross profit 138,535 134,994 262,736 261,323
GAAP gross margin 65.4 % 62.8 % 65.6 % 63.5 %
Share-based compensation expense 575 671 1,056 1,146
Amortization of acquired intangibles 10,614 13,533 21,200 23,962
Acquisition related charges   4,233     7,533  
Non-GAAP gross profit $ 149,724   $ 153,431   $ 284,992   $ 293,964  
Non-GAAP gross margin 70.6 % 71.4 % 71.1 % 71.4 %
 

Reconciliation of GAAP operating expenses to non-GAAP:

GAAP operating expenses $ 142,934 $ 128,394 $ 279,701 $ 258,594
Share-based compensation expense (17,090 ) (17,423 ) (31,377 ) (35,214 )
Amortization of acquired intangibles (2,424 ) (2,428 ) (4,846 ) (3,646 )
Settlement costs (5,106 )
Acquisition related charges (153 ) (627 ) (630 ) (7,507 )
Non-GAAP operating expenses $ 123,267   $ 107,916   $ 242,848   $ 207,121  
 
 
Mellanox Technologies, Ltd.
Reconciliation of Non-GAAP Adjustments
(in thousands, except per share data, unaudited)
               
 
Three months ending Six months ending
June 30, June 30,
2017 2016 2017 2016

Reconciliation of GAAP income (loss) from operations to non-GAAP:

GAAP income (loss) from operations $ (4,399 ) $ 6,600 $ (16,965 ) $ 2,729
Share-based compensation expense 17,665 18,094 32,433 36,360
Settlement costs 5,106
Amortization of acquired intangibles 13,038 15,961 26,046 27,608
Acquisition related charges 153   4,860   630   15,040  
Non-GAAP income from operations $ 26,457   $ 45,515   $ 42,144   $ 86,843  
 
Shares used in computing GAAP diluted net income (loss) per share: 50,056 49,194 49,698 47,629
Adjustments:
Effect of dilutive securities under GAAP (1,294 )
Total options vested and exercisable 1,069   1,360   1,069   1,360  
Shares used in computing non-GAAP diluted net income (loss) per share: 51,125   49,260   50,767   48,989  
 
GAAP diluted net income (loss) per share $ (0.16 ) $ 0.09 $ (0.41 ) $ (0.05 )
Adjustments:
Share-based compensation expense 0.36 0.37 0.66 0.75
Amortization of acquired intangibles 0.26 0.33 0.53 0.58
Settlement costs 0.11
Acquisition related charges 0.10 0.01 0.32
Tax effects and adjustments (0.01 ) (0.02 ) (0.04 ) 0.01
Effect of dilutive securities under GAAP 0.02
Total options vested and exercisable (0.01 ) (0.02 ) (0.02 ) (0.05 )
Non-GAAP diluted net income per share $ 0.44   $ 0.87   $ 0.73   $ 1.67  
 
       
Mellanox Technologies, Ltd.
Condensed Consolidated Balance Sheets
(in thousands, unaudited)
 
June 30, December 31,
2017 2016
ASSETS
Current assets:
Cash and cash equivalents $ 55,722 $ 56,780
Short-term investments 254,545 271,661
Accounts receivable, net 149,548 141,768
Inventories 71,961 65,523
Other current assets 20,726   17,346  
Total current assets 552,502 553,078
Property and equipment, net 121,173 118,585
Severance assets 17,814 15,870
Intangible assets, net 253,440 278,031
Goodwill 471,228 471,228
Deferred taxes and other long-term assets 50,506   36,713  
Total assets $ 1,466,663   $ 1,473,505  
 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 58,754 $ 59,533
Accrued liabilities 94,446 105,042
Deferred revenue 23,013 24,364
Current portion of term debt 21,773   23,628  
Total current liabilities 197,986 212,567
Accrued severance 23,041 19,874
Deferred revenue 15,237 15,968
Term debt 191,570 218,786
Other long-term liabilities 33,741   30,580  
Total liabilities 461,575 497,775
Shareholders' equity:
Ordinary shares 215 209
Additional paid-in capital 820,217 774,605
Accumulated other comprehensive income (loss) 3,836 (928 )
Retained earnings 180,820   201,844  
Total shareholders' equity 1,005,088   975,730  
Total liabilities and shareholders' equity $ 1,466,663   $ 1,473,505  
 
   
Mellanox Technologies, Ltd.
Condensed Consolidated Statement of Cash Flows
(in thousands, unaudited)
 
Six months ended June 30,
2017     2016
Cash flows from operating activities:
Net loss $ (20,235 ) $ (2,514 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 50,814 46,231
Deferred income taxes (704 ) 1,266
Share-based compensation 32,433 31,551
Gain on investments, net (1,701 ) (489 )
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (7,780 ) (16,886 )
Inventories (7,679 ) 10,598
Prepaid expenses and other assets (2,667 ) 3,598
Accounts payable 48 9,679
Accrued liabilities and other liabilities (1,141 ) 5,583  
Net cash provided by operating activities 41,388   88,617  
 
Cash flows from investing activities:
Purchase of severance-related insurance policies (651 ) (546 )
Purchase of short-term investments (69,110 ) (153,486 )
Proceeds from sales of short-term investments 74,359 200,457
Proceeds from maturities of short-term investments 13,590 97,388
Purchase of property and equipment (27,120 ) (15,755 )
Purchase of intangible assets (1,647 )
Purchase of investments in private companies (11,000 ) (107 )
Acquisition, net of cash acquired of $87.5 million   (693,692 )
Net cash used in investing activities (21,579 ) (565,741 )
 
Cash flows from financing activities:
Proceeds from term debt 280,000
Principal payments on term debt (30,000 ) (7,000 )
Term debt issuance costs (5,521 )
Payments on capital lease and intangible asset financings (3,263 ) (491 )
Proceeds from issuances of ordinary shares through employee equity incentive plans 12,396   10,438  
Net cash provided by (used in) financing activities (20,867 ) 277,426  
 
Net decrease in cash and cash equivalents (1,058 ) (199,698 )
Cash and cash equivalents at beginning of period 56,780   263,199  
Cash and cash equivalents at end of period $ 55,722   $ 63,501  

Mellanox Technologies, Ltd.
Press/Media Contact
McGrath/Power Public Relations and Communications
Allyson Scott, +1-408-727-0351
allysonscott@mcgrathpower.com
or
Investor Contact
Jeffrey Schreiner, +1-408-916-0012
jschreiner@mellanox.com
or
Israel PR Contact
Galai Communications Public Relations
Jonathan Wolf, +972 (0) 3-613-52-48
yoni@galaipr.com

Source: Mellanox Technologies, Ltd.

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