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Mellanox Technologies, Ltd. Announces Fourth Quarter and Fiscal Year 2013 Financial Results

Mellanox® Technologies, Ltd. (NASDAQ: MLNX), a leading supplier of end-to-end connectivity solutions for servers and storage systems, today announced financial results for its fourth quarter and fiscal year 2013.

Fourth Quarter and Fiscal Year 2013 Highlights

  • Revenues were $105.5 million in the fourth quarter, and $390.9 million in fiscal year 2013.
  • GAAP gross margins were 64.9 percent in the fourth quarter, and 65.4 percent in fiscal year 2013.
  • Non-GAAP gross margins were 68.5 percent in the fourth quarter, and 68.8 percent in fiscal year 2013.
  • GAAP operating loss was $7.9 million in the fourth quarter, and $20.3 million in fiscal year 2013.
  • Non-GAAP operating income was $9.1 million in the fourth quarter, and $43.4 million in fiscal year 2013.
  • GAAP net loss was $7.3 million in the fourth quarter, and $22.9 million in fiscal year 2013.
  • Non-GAAP net income was $9.7 million in the fourth quarter, and $40.9 million in fiscal year 2013.
  • GAAP net loss per diluted share was $0.17 in the fourth quarter, and $0.53 in fiscal year 2013.
  • Non-GAAP net income per diluted share was $0.21 in the fourth quarter, and was $0.90 in fiscal year 2013.
  • $30.7 million in cash was provided by operating activities during the fourth quarter.
  • $52.0 million in cash was provided by operating activities during fiscal year 2013.
  • Cash and investments totaled $330.2 million at December 31, 2013.

Financial Results

In accordance with U.S. generally accepted accounting principles (GAAP), the company reported revenue of $105.5 million for the fourth quarter, up 1.4 percent from $104.1 million in the third quarter of 2013, and down 13.6 percent from $122.1 million in the fourth quarter of 2012. For the year ended December 31, 2013, revenue was $390.9 million, a decrease of 22.0 percent from revenue of $500.8 million reported in 2012.

GAAP gross margins in the fourth quarter of 2013 were 64.9 percent, compared with 64.4 percent in the third quarter of 2013 and 68.1 percent in the fourth quarter of 2012. GAAP gross margins in 2013 were 65.4 percent, compared with 68.5 percent in 2012.

Non-GAAP gross margins in the fourth quarter of 2013 were 68.5 percent, compared with 69.0 percent in the third quarter of 2013 and 70.0 percent in the fourth quarter of 2012. Non-GAAP gross margins in 2013 were 68.8 percent, compared with 70.3 percent in 2012.

GAAP net loss in the fourth quarter of 2013 was $7.3 million, or $0.17 per diluted share, compared with GAAP net loss of $5.4 million, or $0.12 per diluted share in the third quarter of 2013 and net income of $18.4 million or $0.41 per diluted share in the fourth quarter of 2012.

Non-GAAP net income in the fourth quarter of 2013 was $9.7 million, or $0.21 per diluted share, compared with $13.1 million, or $0.29 per diluted share in the third quarter of 2013, and $30.7 million, or $0.69 per diluted share in the fourth quarter of 2012. The fourth quarter 2013 non-GAAP net income excludes $11.7 million of share-based compensation expense compared to $11.9 million in the third quarter of 2013, and $10.0 million in the fourth quarter of 2012. The fourth quarter 2013 non-GAAP net income also excludes amortization expenses of acquired intangible assets of $4.4 million, and $0.9 million of acquisition related charges associated with the acquisition of Kotura, Inc. and IPtronics A/S, compared to amortization expenses of acquired intangible assets of $4.6 million and acquisition related charges of $2.0 million in the third quarter of 2013, and compared to $2.3 million of amortization expense of acquired intangibles assets in the fourth quarter of 2012.

GAAP net loss in 2013 was $22.9 million, or $0.53 per diluted share, compared to $111.4 million of GAAP net income, or $2.54 per diluted share in 2012.

Non-GAAP net income in 2013 was $40.9 million, or $0.90 per diluted share, compared to $155.7 million or $3.60 per diluted share in 2012. 2013 non-GAAP net income excludes $45.1 million of share-based compensation expense, $13.9 million of amortization expense of acquired intangible assets and $4.7 million of acquisition related charges. 2012 non-GAAP net income excludes $35.0 million of share-based compensation expense and amortization expense of acquired intangible assets of $9.3 million.

Total cash and investments at December 31, 2013 were $330.2 million compared to $426.3 million at December 31, 2012. The company generated $30.7 million in cash from operating activities in the fourth quarter of 2013, and $52.0 million for fiscal year 2013.

“Our fourth quarter and fiscal year 2013 results were solid, and we made progress on many of the goals that we outlined for you when we started the year. We believe that approximately $50 million of revenue that was shipped in 2012 was actually deployed in 2013. We acquired two companies in 2013 and believe that these technologies will be important building blocks for our future solutions,” said Eyal Waldman, president and CEO of Mellanox Technologies. “Throughout the year, we worked with many new and existing partners on programs for our InfiniBand and Ethernet interconnect technologies, and in particular, we saw increased adoption of our Ethernet products. We believe that the trends that we see in the market today will result in multiple opportunities for Mellanox in the future.”

Recent Mellanox Press Release Highlights

  • Jan. 27, 2014 - Mellanox Releases World’s First 40 Gigabit Ethernet NIC Based on Open Compute Project (OCP) Designs
  • Jan. 8, 2014 - Mellanox Interconnect Solutions Now Available Through SYNNEX Corporation’s GSA Schedule
  • Jan 6, 2014 - Zenovia Digital Exchange Selects Mellanox FDR InfiniBand to Improve Digital Ad Transaction Quality and Speed
  • Dec. 16, 2013 - Mellanox Collaborates with Dell to Deliver 10/40GbE Solution for Mainstream Servers and Networking Solutions
  • Dec. 10, 2013 - The University of Cambridge Chooses Mellanox FDR InfiniBand to Accelerate UK’s Fastest Academic Cluster and Further Space Research
  • Nov. 20, 2013 - Mellanox FDR InfiniBand Demonstrates 3X Annual Growth for Petascale-Capable Systems on the TOP500
  • Nov. 18, 2013 - Mellanox Connect-IB FDR InfiniBand Adapters with NVIDIA GPUDirect RDMA Technology Provides Superior GPU-based Cluster Performance
  • Nov. 18, 2013 - Mellanox Connect-IB FDR InfiniBand Adapters Accelerate Purdue University’s Supercomputer to Petascale-Class Performance
  • Nov. 11, 2013 - Mellanox Proposes Contribution of 10 Gigabit Ethernet Switch Specification to the Open Compute Project to Enable Cost and Energy-Efficient, Scalable Data Centers
  • Oct. 30, 2013 - Mellanox Delivers InfiniBand and Ethernet OpenStack Interconnect Cloud Solution with Broad Ecosystem Support

Conference Calls

Mellanox will broadcast its fourth quarter and fiscal year 2013 financial results conference call today at 2 p.m. Pacific Time to discuss the company’s financial results. To listen to the call, dial +1-785-424-1825 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. 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 and acquisition related expense. 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 intangibles and acquisition related expense 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 amortization of acquired intangibles 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 “Investors” 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 statements related to the technologies we acquired in 2013, trends in the market for our solutions and services and opportunities for our company in 2014 and beyond. 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, and our ability to protect our intellectual property rights. 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 form 10-Q filed with the SEC on November 1, 2013, and our form 10-K filed with the SEC on February 25, 2013. 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 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 Twelve Months Ended
December 31, December 31,
2013   2012 2013   2012
 
Total revenues $ 105,544 $ 122,118 $ 390,859 $ 500,799
Cost of revenues   37,096     38,973     135,239     157,936  
Gross profit 68,448 83,145 255,620 342,863
Operating expenses:
Research and development 47,518 36,101 168,721 138,946
Sales and marketing 19,036 16,002 70,318 61,068
General and administrative   9,786     7,136     36,918     24,541  
Total operating expenses 76,340 59,239 275,957 224,555
Income (loss) from operations (7,892 ) 23,906 (20,337 ) 118,308
Other income, net   301     269     1,228     1,259  
Income (loss) before taxes (7,591 ) 24,175 (19,109 ) 119,567
(Provision) benefit for taxes on income   340     (5,733 )   (3,752 )   (8,187 )
Net income (loss) $ (7,251 ) $ 18,442   $ (22,861 ) $ 111,380  
Net income (loss) per share — basic $ (0.17 ) $ 0.43   $ (0.53 ) $ 2.70  
Net income (loss) per share — diluted $ (0.17 ) $ 0.41   $ (0.53 ) $ 2.54  
Shares used in computing income (loss) per share:

Basic

43,907 42,451 43,421 41,308
Diluted 43,907 44,614 43,421 43,901
 

Mellanox Technologies, Ltd.

Reconciliation of Non-GAAP Adjustments

(in thousands, percentages, unaudited)

 
  Three Months Ended   Twelve Months Ended
December 31, December 31,
2013     2012 2013   2012
 

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

GAAP net income (loss) $ (7,251 ) $ 18,442 $ (22,861 ) $ 111,380
Adjustments:
Share-based compensation expense:
Cost of revenues 469 445 1,828 1,621
Research and development 6,808 5,773 25,956 19,356
Sales and marketing 2,325 1,876 9,198 8,055
General and administrative   2,064     1,869     8,156     5,987  
Total share-based compensation expense 11,666 9,963 45,138 35,019
Amortization expense of acquired intangibles:
Cost of revenues 3,194 1,849 10,424 7,520
Research and development 168 507
Sales and marketing   1,039     440     2,951     1,757  
Total amortization expense of acquired intangibles 4,401 2,289 13,882 9,277
Acquisition related charges:
Cost of revenues 208 907
Research and development 219 552
Sales and marketing 219 480
General and administrative   274         2,774      
Total acquisition related charges   920         4,713      
Non-GAAP net income $ 9,736   $ 30,694   $ 40,872   $ 155,676  
 
 

Reconciliation of GAAP gross profit to non-GAAP:

Revenues $ 105,544 $ 122,118 $ 390,859 $ 500,799
GAAP gross profit 68,448 83,145 255,620 342,863
GAAP gross margin 64.9 % 68.1 % 65.4 % 68.5 %
Share-based compensation expense 469 445 1,828 1,621
Amortization expense of acquired intangibles 3,194 1,849 10,424 7,520
Acquisition related charges   208         907      
Non-GAAP gross profit $ 72,319   $ 85,439   $ 268,779   $ 352,004  
Non-GAAP gross margin 68.5 % 70.0 % 68.8 % 70.3 %
 
 

Reconciliation of GAAP operating expenses to non-GAAP:

GAAP operating expenses $ 76,340 $ 59,239 $ 275,957 $ 224,555
Share-based compensation expense (11,197 ) (9,518 ) (43,310 ) (33,398 )
Amortization expense of acquired intangibles (1,207 ) (440 ) (3,458 ) (1,757 )
Acquisition related charges   (712 )       (3,806 )    
Non-GAAP operating expenses $ 63,224   $ 49,281   $ 225,383   $ 189,400  
 
 

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

GAAP income (loss) from operations $ (7,892 ) $ 23,906 $ (20,337 ) $ 118,308
Share-based compensation expense 11,666 9,963 45,138 35,019
Amortization expense of acquired intangibles 4,401 2,289 13,882 9,277
Acquisition related charges   920         4,713      
Non-GAAP income from operations $ 9,095   $ 36,158   $ 43,396   $ 162,604  
 

Mellanox Technologies, Ltd.

Reconciliation of Non-GAAP Adjustments

(in thousands, except per share data, unaudited)

   
Three Months Ended Twelve Months Ended
December 31, December 31,
2013   2012 2013   2012
 
Shares used in computing GAAP diluted earnings per share 43,907 44,614 43,421 43,901
Adjustments:
Effect of dilutive securities under GAAP* (2,163 ) (2,593 )
Total options vested and exercisable   1,913     1,888     1,913     1,888  
Shares used in computing non-GAAP diluted earnings per share   45,820     44,339     45,334     43,196  
 
GAAP diluted net income (loss) per share $ (0.17 ) $ 0.41 $ (0.53 ) $ 2.54
Adjustments:
Share-based compensation expense 0.27 0.22 1.04 0.79
Amortization expense of acquired intangibles 0.10 0.05 0.32 0.21
Acquisition related charges 0.02 0.00 0.11 0.00
Effect of dilutive securities under GAAP* 0.00 0.04 0.00 0.22
Total options vested and exercisable   (0.01 )   (0.03 )   (0.04 )   (0.16 )
Non-GAAP diluted income per share $ 0.21   $ 0.69   $ 0.90   $ 3.60  
 

* 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)

   
December 31, December 31,
2013 2012
ASSETS
Current assets:
Cash and cash equivalents $ 63,164 $ 117,054
Short-term investments 263,528 302,593
Restricted cash 3,229
Accounts receivable, net 70,566 58,516
Inventories 35,963 43,318
Deferred taxes and other current assets   17,581   15,616
Total current assets 450,802 540,326
Property and equipment, net 70,815 62,375
Severance assets 10,630 8,907
Intangible assets, net 54,362 16,134
Goodwill 199,558 132,885
Deferred taxes and other long-term assets   20,613   10,419
Total assets $ 806,780 $ 771,046
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 29,964 $ 37,431
Accrued liabilities 52,588 57,879
Deferred revenue 15,849 12,018
Capital lease liabilities, current   1,245   1,253
Total current liabilities 99,646 108,581
Accrued severance 13,418 11,821
Deferred revenue 9,045 8,366
Capital lease liabilities 1,600 2,835
Other long-term liabilities   17,091   11,635
Total liabilities 140,800 143,238
Shareholders’ equity:
Ordinary shares 185 178
Additional paid-in capital 550,795 488,365
Accumulated other comprehensive income 1,390 2,794
Retained earnings   113,610   136,471
Total shareholders’ equity   665,980   627,808
Total liabilities and shareholders’ equity $ 806,780 $ 771,046
 

Mellanox Technologies, Ltd.

Condensed Consolidated Statement of Cash Flows

(in thousands, unaudited)

 
  Twelve Months Ended December 31,
2013   2012
Cash flows from operating activities:
Net income (loss) $ (22,861 ) $ 111,380
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 35,886 23,868
Deferred income taxes (1,240 ) (3,454 )
Share-based compensation 45,138 35,019
Gain on investments (1,219 ) (896 )
Excess tax benefit from share-based compensation (2,662 ) (5,141 )
Changes in assets and liabilities:
Accounts receivable, net (8,870 ) (10,301 )
Inventories 9,264 (19,436 )
Prepaid expenses and other assets 1,414 (3,239 )
Accounts payable (4,447 ) 3,430
Accrued liabilities and other payables   1,599     51,259  
Net cash provided by operating activities   52,002     182,489  
 
Cash flows from investing activities:
Acquisition of Kotura, net of cash acquired of $101 (80,671 )
Acquisition of IPtronics A/S, net of cash acquired of $2,077 (42,848 )
Purchase of severance-related insurance policies (849 ) (783 )
Purchases of short-term investments (200,377 ) (328,998 )
Proceeds from sale of short-term investments 122,997 14,860
Proceeds from maturities of short-term investments 117,806 64,683
Decrease in restricted cash deposits 3,468 1,327
Purchase of property and equipment (30,911 ) (30,544 )
Purchase of intangibles (7,440 )
Purchase of equity investment in a private companies   (3,123 )   (1,424 )
Net cash used in investing activities   (121,948 )   (280,879 )
 
Cash flows from financing activities:
Principal payments on capital lease obligations (1,243 ) (918 )
Proceeds from issuance of ordinary shares to employees 14,637 29,963
Excess tax benefit from share-based compensation   2,662     5,141  
Net cash provided by financing activities   16,056     34,186  
 
Net decrease in cash and cash equivalents (53,890 ) (64,204 )
Cash and cash equivalents at beginning of period   117,054     181,258  
Cash and cash equivalents at end of period $ 63,164   $ 117,054  

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