July 20, 2011

Mellanox Technologies, Ltd. Announces Record Quarterly Results

58.5 Percent Year-over-Year Revenue Growth

SUNNYVALE, Calif. & YOKNEAM, Israel--(BUSINESS WIRE)-- Mellanox® Technologies, Ltd. (NASDAQ:MLNX)(TASE:MLNX), a leading supplier of end-to-end connectivity solutions for servers and storage systems, today announced record revenue of $63.3 million for its fiscal second quarter 2011, ended June 30, 2011, exceeding the quarter billion dollar annualized revenue run rate milestone.

Second Quarter Highlights

  • Revenues were $63.3 million
  • GAAP gross margins were 64.9 percent; non-GAAP gross margins were 68.9 percent
  • GAAP operating income was $2.8 million; non-GAAP operating income was $10.9 million, or 17.3 percent of revenues
  • GAAP net income: $2.1 million; non-GAAP net income $10.3 million
  • GAAP net income per diluted share: $0.06; non-GAAP net income per diluted share $0.27
  • $12.5 million in cash provided by operating activities
  • $107.1 million in total cash and investments at June 30, 2011; a sequential increase of $13.7 million

Financial Results

In accordance with U.S. generally accepted accounting principles (GAAP), the company reported revenue of $63.3 million, up 15.1 percent from $55.1 million in the first quarter of 2011, and up 58.5 percent from $40.0 million in the second quarter of 2010.

GAAP gross margins in the second quarter of 2011 were 64.9 percent, compared with 64.7 percent in the first quarter of 2011 and 74.5 percent in the second quarter of 2010.

Non-GAAP gross margins in the second quarter of 2011 were 68.9 percent, compared with 68.4 percent in the first quarter of 2011 and 74.7 percent in the second quarter of 2010.

GAAP net income in the second quarter of 2011 was $2.1 million or $0.06 per diluted share, compared with net loss of ($1.6) million or ($0.05) per diluted share in the first quarter of 2011, and $5.3 million or $0.15 per diluted share in the second quarter of 2010.

Non-GAAP net income in the second quarter was $10.3 million, or $0.27 per diluted share, compared with $9.2 million or $0.24 per diluted share in the first quarter of 2011, and $10.4 million, or $0.29 per diluted share in the second quarter of 2010.

The second quarter 2011 non-GAAP net income results exclude $5.4 million of share-based compensation expenses compared to $4.3 million in the first quarter of 2011. It also excludes amortization of acquired intangible assets of $2.8 million associated with the acquisition of Voltaire, Ltd. on February 7, 2011, compared to $2.1 million in the first quarter of 2011. The first quarter 2011 non-GAAP net income results also excluded $4.4 million of other acquisition related charges.

Total cash and investments were $107.1 million at June 30, 2011. The company generated $12.5 million in cash from operating activities during the quarter.

"Reaching the quarter-billion dollar annualized revenue run rate is a significant milestone for Mellanox," said Eyal Waldman, chairman, president and CEO of Mellanox Technologies. "We completed the successful integration of Voltaire into Mellanox, and during the quarter we introduced our end-to-end FDR 56Gb/s InfiniBand and 40 Gigabit Ethernet interconnect solutions. We are encouraged by the momentum of design-wins and traction we see in various vertical markets and applications for these solutions."

Recent Mellanox Press Release Highlights

Conference Calls

Mellanox will broadcast its second quarter conference call at 2 p.m. Pacific Time (5 p.m. Eastern). To listen to the call, dial 877-831-3840 approximately ten minutes prior to the start time.

Mellanox will also conduct a conference call on Thursday, July 21 at 9 a.m. Israel Time to discuss the company's second quarter 2011 financial results in Hebrew. To listen to the call, dial +972-3-9180609 approximately 10 minutes prior to the start of the call.

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

About Mellanox

Mellanox Technologies is a leading supplier of end-to-end InfiniBand and Ethernet connectivity solutions and services for servers and storage. Mellanox products optimize data center performance and deliver industry-leading bandwidth, scalability, power conservation and cost-effectiveness while converging multiple legacy network technologies into one future-proof architecture. The company offers innovative solutions that address a wide range of markets including HPC, enterprise, mega warehouse data centers, cloud computing, Internet and Web 2.0.

Founded in 1999, Mellanox Technologies is headquartered in Sunnyvale, California and Yokneam, Israel. For more information, visit Mellanox 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 financial measures, including non-GAAP gross profit, operating income, net income and earnings per share. These supplemental measures exclude share-based compensation expenses, changes in certain deferred tax assets and acquisition related charges. 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 expenses, changes in deferred tax assets and acquisition related charges 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 and changes in certain deferred tax assets 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 adjustments is also presented in the financial statements portion of this release and is posted under the "Investors" section at our web site.

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. 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, the impact of our acquisition of Voltaire discussed herein on the Company's actual financial results, negative customer reaction to the acquisition, 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 customers, 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, our ability to successfully integrate Voltaire's operations with our operation following the closing of the transaction, and our ability to protect our intellectual property rights.

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 form 10-Q filed with the SEC on May 9, 2011, and our form 10-K filed with the SEC on March 7, 2011. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

Mellanox, BridgeX, ConnectX, CORE-Direct, InfiniBridge, InfiniHost, InfiniScale, PhyX, Virtual Protocol Interconnect and Voltaire are registered trademarks of Mellanox Technologies, Ltd. FabricIT, MLNX-OS, and SwitchX are trademarks 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 Ended   Six Months Ended
June 30, June 30,
  2011       2010     2011       2010  
 
Total revenues $ 63,345 $ 39,958 $ 118,402 $ 76,168
Cost of revenues   22,249     10,189     41,665     19,212  
Gross profit 41,096 29,769 76,737 56,956
Operating expenses:
Research and development 23,689 13,995 43,999 26,272
Sales and marketing 9,989 5,409 18,544 10,422
General and administrative   4,659     2,749     13,104     5,385  
Total operating expenses 38,337 22,153 75,647 42,079
Income from operations 2,759 7,616 1,090 14,877
Other income, net   88     49     136     162  
Income before taxes 2,847 7,665 1,226 15,039
Provision for taxes on income   (719 )   (2,349 )   (722 )   (4,485 )
Net income $ 2,128   $ 5,316   $ 504   $ 10,554  
Net income per share — basic $ 0.06   $ 0.16   $ 0.01   $ 0.32  
Net income per share — diluted $ 0.06   $ 0.15   $ 0.01   $ 0.30  

Shares used in computing income per share:

Basic

35,147 33,557 34,820 33,260
Diluted 37,279 35,580 37,079 35,220

Mellanox Technologies, Ltd.

Reconciliation of Non-GAAP Adjustments

(in thousands, except per share data and percentages, unaudited)

 
  Three Months Ended   Six Months Ended
June 30, June 30,
  2011       2010     2011       2010  
 

Reconciliation of GAAP net income to non-GAAP:

GAAP net income $ 2,128 $ 5,316 $ 504 $ 10,554
Adjustments:
Share-based compensation expense:
Cost of revenues 225 97 369 187
Research and development 3,004 1,942 5,357 3,835
Sales and marketing 1,298 610 2,317 1,253
General and administrative   904     773     1,666     1,535  
Total share-based compensation expense 5,431 3,422 9,709 6,810
Amortization of acquired intangibles:
Cost of revenue 2,316 4,168
Sales and marketing   438         692      
Total amortization of acquired intangibles 2,754 4,860
Other acquisition related charges 4,394
Deferred taxes in Israel       1,701         3,468  
Non-GAAP net income $ 10,313   $ 10,439   $ 19,467   $ 20,832  
 
 

Reconciliation of GAAP gross profit to non-GAAP:

Revenues $ 63,345 $ 39,958 $ 118,402 $ 76,168
GAAP gross profit 41,096 29,769 76,737 56,956
GAAP gross margin 64.9 % 74.5 % 64.8 % 74.8 %
Share-based compensation expense 225 97 369 187
Acquisition related charges   2,316         4,168      
Non-GAAP gross profit $ 43,637   $ 29,866   $ 81,274   $ 57,143  
Non-GAAP gross margin 68.9 % 74.7 % 68.6 % 75.0 %
 
 

Reconciliation of GAAP operating expenses to non-GAAP:

GAAP operating expenses $ 38,337 $ 22,153 $ 75,647 $ 42,079
Share-based compensation expense (5,206 ) (3,325 ) (9,340 ) (6,623 )
Acquisition related charges   (438 )       (5,086 )    
Non-GAAP operating expenses $ 32,693   $ 18,828   $ 61,221   $ 35,456  
 
 

Reconciliation of GAAP income from operations to non-GAAP:

GAAP income from operations $ 2,759 $ 7,616 $ 1,090 $ 14,877
Share-based compensation expense 5,431 3,422 9,709 6,810
Acquisition related charges   2,754         9,254      
Non-GAAP income from operations $ 10,944   $ 11,038   $ 20,053   $ 21,687  

Mellanox Technologies, Ltd.

Reconciliation of Non-GAAP Adjustments

(in thousands, except per share data and percentages, unaudited)

 
  Three Months Ended   Six Months Ended
June 30, June 30,
  2011       2010     2011       2010  
 
GAAP shares - basic 35,147 33,557 34,820 33,260
Adjustments:
Impact from weighted outstanding shares*   294     179     621     476  
Non-GAAP shares - basic   35,441     33,736     35,441     33,736  
 
GAAP shares - diluted 37,279 35,580 37,079 35,220
Adjustments:
Impact from weighted outstanding shares* 294 179 621 476
Effect of dilutive securities under GAAP** (2,132 ) (2,023 ) (2,259 ) (1,960 )
Total options vested and exercisable   3,018     2,734     3,018     2,734  
Non-GAAP shares - diluted   38,459     36,470     38,459     36,470  
 
GAAP diluted net income per share $ 0.06 $ 0.15 $ 0.01 $ 0.30
Adjustments:
Share-based compensation expense 0.14 0.09 0.27 0.19
Amortization of acquired intangibles 0.07 0.00 0.13 0.00
Other acquisition related charges 0.00 0.00 0.12 0.00
Deferred taxes in Israel 0.00 0.05 0.00 0.10
Impact from weighted outstanding shares* 0.00 0.00 (0.01 ) (0.01 )
Effect of dilutive securities under GAAP** 0.02 0.02 0.03 0.03
Total options vested and exercisable   (0.02 )   (0.02 )   (0.04 )   (0.04 )
Non-GAAP diluted income per share $ 0.27   $ 0.29   $ 0.51   $ 0.57  

* Under GAAP, shares used in computing income per share are adjusted for the amount of time they are outstanding during the period. The number of shares used in computing income per share has been adjusted to a non-GAAP measure as if those ordinary shares were outstanding during the entire period to provide a comparable share number in future quarters.

** This adjustment adds back the GAAP effect of additional ordinary shares that would have been outstanding if the dilutive potential common shares from stock options had been issued under the Treasury method.

Mellanox Technologies, Ltd.

Condensed Consolidated Balance Sheets

(in thousands, unaudited)

 
  June 30,   December 31,
  2011   2010
ASSETS
Current assets:
Cash and cash equivalents $ 72,797 $ 107,994
Short-term investments 29,037 141,959
Restricted cash 5,218 3,353
Accounts receivable, net 45,512 19,893
Inventories 15,474 11,717
Deferred taxes 681 616
Prepaid expenses and other   5,418   3,871
Total current assets 174,137 289,403
Property and equipment, net 21,836 15,490
Severance assets 9,584 5,792
Intangible assets, net 31,426 290
Goodwill 132,885
Deferred taxes 954 1,422
Other long-term assets   6,823   3,358
Total assets $ 377,645 $ 315,755
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,550 $ 6,526
Other accrued liabilities 27,132 15,885
Deferred revenue 4,426 1,051
Capital lease obligations, current   316   316
Total current liabilities 49,424 23,778
Accrued severance 12,731 7,355
Deferred revenue 2,606 563
Capital lease obligations 158
Other long-term obligations   4,676   2,211
Total liabilities 69,437 34,065
Shareholders' equity
Ordinary shares 145 141
Additional paid-in capital 291,309 265,481
Accumulated other comprehensive income 1,136 954
Retained earnings   15,618   15,114
Total shareholders' equity   308,208   281,690
Total liabilities and shareholders' equity $ 377,645 $ 315,755

Mellanox Technologies, Ltd.

Condensed Consolidated Statement of Cash Flows

(in thousands, unaudited)

 
  Six Months Ended June 30,
  2011       2010  
Cash flows from operating activities:
Net income $ 504 $ 10,554
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,896 2,457
Deferred income taxes 579 3,468
Share-based compensation expense 9,709 6,810
Gain on investments (116 ) (87 )
Excess tax benefit from share-based compensation (387 ) (690 )
Changes in assets and liabilities:
Accounts receivable, net (13,196 ) (740 )
Inventory 842 (2,867 )
Prepaid expenses and other assets 263 1,015
Accounts payable 8,483 1,285
Accrued liabilities and other payables   10,503     573  
Net cash provided by operating activities   26,080     21,778  
 
Cash flows from investing activities:
Acquisition of Voltaire Ltd., net of cash acquired of $3,961 (203,704 )
Purchase of severance-related insurance policies (425 ) (390 )
Purchases of short-term investments (22 ) (104,024 )
Proceeds from sale of short-term investments 135,474 96,742
Proceeds from maturities of short-term investments 4,425 22,096
Increase in restricted cash deposit (2,200 )
Purchase of property and equipment (4,487 ) (6,521 )
Purchase of equity investment in a private company       (135 )
Net cash provided by (used) in investing activities   (70,939 )   7,768  
 
Cash flows from financing activities:
Principal payments on capital lease obligations (158 ) (349 )
Proceeds from issuance of common stock to employees 9,433 5,420
Excess tax benefit from share-based compensation   387     690  
Net cash provided by financing activities   9,662     5,761  
 
Net increase (decrease) in cash and cash equivalents (35,197 ) 35,307
Cash and cash equivalents at beginning of period   107,994     43,640  
Cash and cash equivalents at end of period $ 72,797   $ 78,947  

Mellanox Technologies, Ltd.
Press/Media Contact:
Brian Sparks, 408-970-3400
media@mellanox.com
U.S. Investor Contact:
Janine Zanelli, 408-916-0012
janine@mellanox.com
or
Israel Investor Contact:
Gelbart Kahana Investor Relations
Nava Ladin, +972-3-6074717
nava@gk-biz.com

Source: Mellanox Technologies, Ltd.

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