Mellanox beats analysts, raises guidance

Eyal Waldman  photo: courtesy Mellanox Technologies
Eyal Waldman photo: courtesy Mellanox Technologies

The company is projecting $1.065-1.085 billion in revenue in 2018.

Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX) outperformed the analysts' expectations in the second quarter and raised its guidance for 2018 as a whole. Mellanox published its results yesterday after the end of trading, thereby becoming the first Wall Street-listed Israeli company to report its second-quarter results. The company's share price was up 1.4% to $85.90 in late trading, reflecting a $4.5 billion market cap.

Mellanox develops and markets communications equipment for high-speed data transmission using Ethernet and InfiniBand technologies. The company reported $268 million in revenue in the second quarter, 26.7% more than in the second quarter of 2017 and 7% more than in the first quarter of 2018. Mellanox's revenue totaled $519 million in the first half of 2018, 29.7% more than in the corresponding period last year.

Despite a drop in gross profit margins in comparison with the corresponding quarter in 2017, Mellanox turned its operating loss and an $8 million net loss in the second quarter of 2017 into a $16.6 million operating profit and a $16.5 million net profit in the second quarter of this year, according to GAAP accounting standards. Mellanox's first half GAAP net profit was $54.4 million, compared with a $20.2 million net loss in the corresponding period last year.

On a non-GAAP basis that excludes various accounting expenses, Mellanox's net profit grew from $22.4 million in the second quarter of 2017 to $66.6 million in the second quarter of 2018.

"Mellanox has achieved another record financial performance in the second quarter 2018," said Mellanox president and CEO Eyal Waldman. He added that the company's strong revenue growth reflected years of investment in Ethernet and InfiniBand technologies at speeds of 25 gigabit per second or greater. "Our record profitability demonstrates the leverage we are producing in the business by focusing our investments in the right products. We continue to see strong traction with our 25 gigabit per second and above solutions as they become the preferred solution of choice in hyperscale, cloud, high performance computing, artificial intelligence, storage, financial services and other markets across the globe." Waldman said that revenue from Ethernet had grown 81% in the second quarter in comparison with the corresponding quarter last year, adding that the company's performance in the quarter had demonstrated the advantage of investing in diversification of revenue sources.

"… we look forward to continuing our momentum into the second half of the year… We expect our margin expansion to continue with further revenue growth and operational efficiency. We are confident that our strategy, investments and innovation will continue to produce market-leading products that drive growth for Mellanox for the rest of 2018 and beyond," Waldman said.

Mellanox has generated a $102 million positive cash flow from activity since the beginning of the year and had $283 million in cash as of the end of the second quarter. In a conference call after publication of the company's results, Waldman was asked about the use of this cash. He answered that the company believes that the best use would be for acquisitions that would add technology to the company and contribute to accelerating its growth. Mellanox's most recent major acquisition was in 2016, when it paid over $800 million for Israeli company EZchip Semiconductor.

Mellanox is projecting $270-280 million in revenue in the third quarter of 2018, 22% more than in the corresponding quarter in 2017. The company's guidance predicts a 68.5-69.5% non-GAAP gross profit ratio, compared with 69.1% in the second quarter, while operating expenses are expected to reach $122-124 million.

Mellanox is also raising its guidance for 2018 to $1.065-1.085 billion in revenue, 24.5% more than in 2017, which was not a growth year for the company. Mellanox's previous guidance from two months ago gave $1.05-1.07 billion in revenue. The company is now projecting an operating profit margin of 23.24%.

Mellanox recently concluded a proxy contest conducted by its shareholder, the Starboard fund, with a compromise. The fund demanded the replacement of Mellanox's board of directors, complaining that the company's profit margins were lower than those of its competitors. The parties eventually agreed on the appointment of three new directors in place of three directors who resigned from the board, while another director will resign several months from now. Following the compromise agreement, Starboard sold shares in Mellanox at a handsome profit, remaining with a stake of less than 9%.

Published by Globes [online], Israel business news - www.globes-online.com - on July 18, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Eyal Waldman  photo: courtesy Mellanox Technologies
Eyal Waldman photo: courtesy Mellanox Technologies
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