Mellanox confounds expectations again

Shmulik Shelach

Just as the growth was not completely clear, the explanations about the drop in performance are also inadequate.

For a moment during last night's conference call, it seemed that Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX) chairman, president and CEO Eyal Waldman was simply lost for words. Analysts, some of whom work for the world's top investment banks, were politely aggressive, but the subtext of their questions and impatience was clear: we're fed up.

Anyone wondering about Mellanox should remember what it's all about. It is the vision of one man, Waldman, who carried the company for years through the technological wilderness, even when he says that the board of directors wanted to fire him. In other words, Waldman is not afraid to butt his head against the wall. He decides, he sets the targets, and he will meet them. If you don’t like this, then maybe Mellanox isn't the company for you.

No one questions that Mellanox's technology and products are successful and worthy. The big question is what is the source of the gap between expectations and the capital market in the past few months. In the dry language of Wall Street, this is known as "expectations management", but the issue could be something much deeper, better understood as the company's performance.

Poor performance is not something characteristic of Waldman, but the scale of the poor performance requires more than just conservatism vis-à-vis the capital market - the solution that Mellanox believes will solve the problem. It may need an operational overhaul.

Ultimately, Mellanox is a good company. $80 million in quarterly sales, or a rate of $110 million as things seem at the moment, is a quite impressive figure, although it is disappointing for Wall Street. This is precisely the point: how long can the company run on Wall Street without investors and the market clearly understanding where the company is headed?

The TASE and Wall Street were captivated by Mellanox's vision in the second half of 2012. Growth was rapid, expectations were in the stratosphere, and the share price skyrocketed. Everyone was euphoric: investors, analysts, journalists, and possibly even the company's management. But just as the growth was not completely clear, the explanations about the drop in performance are also inadequate.

What remains is to hope is that this is a problem in conduct, and that things will return to normal later this year. A hint that things may be a bit more complicated can be found in the company's explanations for the growth in operating expenses during the fourth quarter of 2012. These included a jump of hundreds of thousands of dollars in legal costs, implying that a lawsuit has been filed or is pending. Alternatively, they may imply major strategic moves.

Published by Globes [online], Israel business news - - on January 24, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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