October 27, 2016

Mellanox Achieves Record Quarterly Revenue in the Third Quarter 2016

Quarterly Revenue Growth of 31 Percent Year-over-Year to $224.2 Million

25/50/100 Gigabit Ethernet Revenues Grew 72 Percent Sequentially

InfiniBand Revenues Grew 9 Percent Sequentially

SUNNYVALE, Calif. & YOKNEAM, Israel--(BUSINESS WIRE)-- Mellanox® Technologies, Ltd. (NASDAQ:MLNX) today announced financial results for its third quarter ended September 30, 2016.

"We are pleased to report the sixth consecutive quarter of record revenue. We see strong customer adoption of our 25/50/100 Gigabit Ethernet solutions. We believe the transition to 25/50/100 Gigabit Ethernet provides Mellanox significant growth opportunities due to our first mover advantage. We saw strong sequential growth in our InfiniBand business, driven by continued adoption of our 100 Gigabit EDR solutions," said Eyal Waldman, president and CEO of Mellanox Technologies. "Our third quarter results show continued leadership in both Ethernet and InfiniBand, and we expect growth to continue, driven by our interconnect and processor technologies."

Third Quarter 2016 Highlights

  • Revenues of $224.2 million increased 4.4 percent, compared to $214.8 million in the second quarter of 2016.
  • GAAP gross margins of 65.1 percent in the third quarter compared to 62.8 percent in the second quarter of 2016.
  • Non-GAAP gross margins of 71.8 percent, compared to 71.4 percent in the second quarter of 2016.
  • GAAP operating income was $14.5 million, compared to $6.6 million in the second quarter of 2016.
  • Non-GAAP operating income was $49.2 million, or 22.0 percent of revenue, compared to non-GAAP operating income of $45.5 million, or 21.2% percent of revenue in the second quarter of 2016.
  • GAAP net income was $12.0 million, compared to $4.7 million in the second quarter of 2016.
  • Non-GAAP net income was $46.2 million, compared to $42.7 million in the second quarter of 2016.
  • GAAP net income per diluted share was $0.24 in the third quarter compared to $0.09 in the second quarter of 2016.
  • Non-GAAP net income per diluted share was $0.93 in the third quarter compared to $0.87 in the second quarter of 2016.
  • $48.7 million in cash was provided by operating activities, compared to $44.8 million in the second quarter of 2016.
  • Cash and investments totaled $292.4 million at September 30, 2016, compared to $276.5 million at June 30, 2016.

Fourth Quarter 2016 Outlook

We currently project:

  • Quarterly revenues of $222 million to $228 million
  • Non-GAAP gross margins of 71 percent to 72 percent
  • An increase in non-GAAP operating expenses of 2 percent to 4 percent
  • Share-based compensation expense of $17.4 million to $17.9 million
  • Non-GAAP diluted share count of 49.8 million to 50.3 million shares

Recent Mellanox Press Release Highlights

October 3, 2016 Open Ethernet Gains Further Momentum with Deployment of Standard Linux Operating Systems over Ethernet Switches
September 28, 2016 Mellanox Delivers Advanced Network Capabilities and Crypto Functions with New Innova IPsec 10/40G Ethernet Adapters
September 27, 2016 Mellanox and Micron Smash 1 Terabit per Second Storage Performance Record with Windows Server 2016
September 17, 2016 Mellanox Technologies and Oclaro Team Up to Connect 100Gb/s PSM4 Silicon Photonics to Next Generation 25Gb/s LR Transceivers for Servers and Storage
September 6, 2016 Mellanox and Cumulus Deliver First Complete 10/25/50/100 Gb/s Ethernet Open Networking Switch Portfolio
September 5, 2016 Mellanox Launches 25 Gb/s Ethernet SFP28 Optical Transceivers and Active Optical Cables for Data Center Networks
August 31, 2016 Mellanox Ethernet Solutions Accelerate Germany's Most Advanced Cloud Data Center
August 29, 2016 Mellanox Ethernet Offload Engines Enable New Levels of Application Efficiency With VMware vSphere
August 23, 2016 Mellanox Expands Asia-Pacific Presence, New Singapore Headquarters and State-of-the-Art Solutions Centre to Strengthen Footprint in Asia
August 16, 2016 Mellanox Demonstrates Accelerated NVMe Over Fabrics at Intel Developers Forum
 

Conference Call

Mellanox will hold its third quarter 2016 financial results conference call today at 2 p.m. Pacific Time (5 P.M. Eastern Time) to discuss the Company's financial results. To listen to the call, dial +1-877-876-9176, or for investors outside the U.S., +1-785-424-1667, approximately ten 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 (NASDAQ: MLNX) is a leading supplier of end-to-end Ethernet and InfiniBand intelligent interconnect solutions and services for servers, storage, and hyper-converged infrastructure. Mellanox's intelligent interconnect solutions increase data center efficiency by providing the highest throughput and lowest latency, delivering data faster to applications and unlocking system performance. Mellanox offers a choice of high performance solutions: network and multicore processors, network adapters, switches, cables, software 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, network security, telecom 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 (loss) 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, gains (losses) on equity investments 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, gains (losses) on equity investments, 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 guidance for the three months ended December 31, 2016, statements related to trends in the market for our solutions and services, opportunities for our company in 2016 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 26, 2016. All forward-looking statements in this press release, including the outlook for the three months ended December 31, 2016, 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 Ended
September 30,
Nine Months Ended
September 30,
2016 2015 2016 2015
Total revenues $ 224,211 $ 171,377 $ 635,822 $ 481,200
Cost of revenues 78,191   49,129   228,479   137,394  
Gross profit 146,020 122,248 407,343 343,806
Operating expenses:
Research and development 83,611 65,861 236,969 186,555
Sales and marketing 34,408 24,816 98,212 70,740
General and administrative 13,501   10,944   54,933   31,315  
Total operating expenses 131,520   101,621   390,114   288,610  
Income from operations 14,500 20,627 17,229 55,196
Interest expense (2,195 ) (5,408 )
Other income (loss) 606   441   982   (1,116 )
Other (loss) income, net (1,589 ) 441   (4,426 ) (1,116 )
Income before taxes 12,911 21,068 12,803 54,080
Provision for taxes on income (874 ) (1,116 ) (3,280 ) (4,384 )
Net income $ 12,037   $ 19,952   $ 9,523   $ 49,696  
Net income per share — basic $ 0.25   $ 0.43   $ 0.20   $ 1.08  
Net income per share — diluted $ 0.24   $ 0.42   $ 0.19   $ 1.05  
Shares used in computing net income per share:
Basic 48,385 46,583 47,883 46,158
Diluted 49,494 47,725 49,232 47,542
 
Mellanox Technologies, Ltd.
Reconciliation of Non-GAAP Adjustments
(in thousands, except percentages, unaudited)
       
Three Months Ended
September 30,
Nine Months Ended
September 30,
2016 2015 2016 2015

Reconciliation of GAAP net income to non-GAAP:

GAAP net income $ 12,037 $ 19,952 $ 9,523 $ 49,696
Adjustments:
Share-based compensation expense:
Cost of revenues 627 592 1,773 1,749
Research and development 10,396 7,183 30,318 21,504
Sales and marketing 3,837 2,621 11,374 7,765
General and administrative 2,716   2,434   10,471   6,816  
Total share-based compensation expense 17,576 12,830 53,936 37,834
Amortization of acquired intangibles:
Cost of revenues 13,519 2,074 37,479 5,621
Research and development 195 194 584 584
Sales and marketing 2,230   196   5,483   977  
Total amortization of acquired intangibles 15,944 2,464 43,546 7,182
Settlement costs:
General and administrative     5,106    
Total settlement costs 5,106
Acquisition related charges:
Cost of revenues 729 8,261
Research and development 407 290 1,047 1,893
Sales and marketing 206 450
General and administrative 85   742   6,746   742  
Total acquisition related charges 1,221 1,032 16,260 3,085
Impairment loss on equity investment in a private company 3,189
Tax effects and adjustments (585 )   (207 )  
Non-GAAP net income $ 46,193   $ 36,278   $ 128,164   $ 100,986  
 

Reconciliation of GAAP gross profit to non-GAAP:

Revenues $ 224,211 $ 171,377 $ 635,822 $ 481,200
GAAP gross profit 146,020 122,248 407,343 343,806
GAAP gross margin 65.1 % 71.3 % 64.1 % 71.4 %
Share-based compensation expense 627 592 1,773 1,749
Amortization of acquired intangibles 13,519 2,074 37,479 5,621
Acquisition related charges 729     8,261    
Non-GAAP gross profit $ 160,895   $ 124,914   $ 454,856   $ 351,176  
Non-GAAP gross margin 71.8 % 72.9 % 71.5 % 73.0 %
 

Reconciliation of GAAP operating expenses to non-GAAP:

GAAP operating expenses $ 131,520 $ 101,621 $ 390,114 $ 288,610
Share-based compensation expense (16,949 ) (12,238 ) (52,163 ) (36,085 )
Amortization of acquired intangibles (2,425 ) (390 ) (6,067 ) (1,561 )
Settlement costs (5,106 )
Acquisition related charges (492 ) (1,032 ) (7,999 ) (3,085 )
Non-GAAP operating expenses $ 111,654   $ 87,961   $ 318,779   $ 247,879  
 
Mellanox Technologies, Ltd.
Reconciliation of Non-GAAP Adjustments
(in thousands, except per share data, unaudited)
       
Three Months Ended
September 30,
Nine Months Ended
September 30,
2016 2015 2016 2015
 
Reconciliation of GAAP income from operations to non-GAAP:
GAAP income from operations $ 14,500 $ 20,627 $ 17,229 $ 55,196
Share-based compensation expense 17,576 12,830 53,936 37,834
Settlement costs 5,106
Amortization of acquired intangibles 15,944 2,464 43,546 7,182
Acquisition related charges 1,221   1,032   16,260   3,085  
Non-GAAP income from operations $ 49,241   $ 36,953   $ 136,077   $ 103,297  
 
Shares used in computing GAAP diluted earnings per share 49,494 47,725 49,232 47,542
Adjustments:
Effect of dilutive securities under GAAP* (1,109 ) (1,142 ) (1,349 ) (1,384 )
Total options vested and exercisable 1,265   1,644   1,265   1,644  
Shares used in computing non-GAAP diluted earnings per share 49,650   48,227   49,148   47,802  
 
GAAP diluted net income per share $ 0.24 $ 0.42 $ 0.19 $ 1.05
Adjustments:
Share-based compensation expense 0.35 0.27 1.10 0.79
Amortization of acquired intangibles 0.32 0.05 0.89 0.15
Settlement costs 0.10
Acquisition related charges 0.03 0.02 0.33 0.06
Impairment loss on equity investment in a private company 0.07
Tax effects and adjustments (0.01 )
Effect of dilutive securities under GAAP* 0.02 0.02 0.07 0.06
Total options vested and exercisable (0.02 ) (0.03 ) (0.07 ) (0.07 )
Non-GAAP diluted net income per share $ 0.93   $ 0.75   $ 2.61   $ 2.11  

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

   

Mellanox Technologies, Ltd.

Condensed Consolidated Balance Sheets

(in thousands, unaudited)

 
September 30,
2016
December 31,
2015
ASSETS
Current assets:
Cash and cash equivalents $ 55,455 $ 263,199
Short-term investments 236,934 247,314
Accounts receivable, net 133,135 84,273
Inventories 61,910 62,473
Other current assets 20,038   19,979  
Total current assets 507,472 677,238
Property and equipment, net 113,621 100,018
Severance assets 16,429 9,514
Intangible assets, net 288,722 32,154
Goodwill 476,037 200,743
Deferred taxes and other long-term assets 32,763   33,715  
Total assets $ 1,435,044   $ 1,053,382  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 50,450 $ 44,600
Accrued liabilities 90,437 74,787
Deferred revenue 23,400 17,743
Current portion of term debt 20,065    
Total current liabilities 184,352 137,130
Accrued severance 20,583 12,464
Deferred revenue 15,507 12,439
Term debt 228,850
Other long-term liabilities 29,356   24,668  
Total liabilities 478,648 186,701
Shareholders' equity:
Ordinary shares 207 200
Additional paid-in capital 761,374 684,824
Accumulated other comprehensive income (loss) 1,966 (1,669 )
Retained earnings 192,849   183,326  
Total shareholders' equity 956,396   866,681  
Total liabilities and shareholders' equity $ 1,435,044   $ 1,053,382  
 

Mellanox Technologies, Ltd.

Condensed Consolidated Statement of Cash Flows

(in thousands, unaudited)

 
Nine months ended September 30,
2016   2015
Cash flows from operating activities:
Net income $ 9,523 $ 49,696
Adjustments to reconcile net income to net cash provided by operating activities, net of effects from acquired company:
Depreciation and amortization 73,264 30,464
Deferred income taxes 1,266 134
Share-based compensation expense 53,936 37,834
Gain on investments (1,190 ) (2,193 )
Impairment of equity investment in a private company 3,189
Changes in assets and liabilities:
Accounts receivable, net (32,698 ) 229
Inventory 12,624 (23,988 )
Prepaid expenses and other assets 5,343 (504 )
Accounts payable 4,876 2,119
Accrued liabilities and other payables 15,132   18,817  
Net cash provided by operating activities 142,076   115,797  
 
Cash flows from investing activities:
Purchase of severance-related insurance policies (865 ) (563 )
Purchase of short term investments (218,642 ) (219,459 )
Proceeds from sale of short term investments 209,456 148,697
Proceeds from maturities of short term investments 130,187 62,144
Restricted cash 3,604
Purchase of property and equipment (32,748 ) (36,972 )
Purchase of intangible finite-lived assets (6,060 ) (210 )
Purchase of equity investments in private companies (1,284 )
Acquisition, net of cash acquired $87.5 million (698,501 )  
Net cash used in investing activities (618,457 ) (42,759 )
 
Cash flows from financing activities:
Proceeds from term debt 280,000
Principal payments on term debt (27,000 )
Term debt issuance costs (5,521 )
Principal payments on capital lease obligations (491 ) (831 )
Proceeds from issuance of common stock under employee stock plans 21,649   16,978  
Net cash provided by financing activities 268,637   16,147  
 
Net (decrease) increase in cash and cash equivalents (207,744 ) 89,185
Cash and cash equivalents at beginning of period 263,199   51,326  
Cash and cash equivalents at end of period $ 55,455   $ 140,511  

Press/Media Contact
McGrath/Power Public Relations and Communications
Allyson Scott, +1-408-727-0351
allysonscott@mcgrathpower.com
or
Investor Contact
Mellanox Technologies, Ltd.
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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