Mellanox Delivers Record Fourth Quarter and Annual 2018 Results, Exceeded $1 Billion in Annual Revenue in 2018

January 30, 2019 4:05 PM

Achieved Annual Revenue Growth of 26% While Maintaining Flat Operating Expenses Year-Over-Year

SUNNYVALE, Calif. & YOKNEAM, ISRAEL--(BUSINESS WIRE)-- Mellanox® Technologies, Ltd. (NASDAQ: MLNX), a leading supplier of high-performance, end-to-end interconnect solutions for data center servers and storage systems, today announced preliminary financial results for its fourth quarter and fiscal year 2018.

“Mellanox had an outstanding 2018, delivering 26% annual revenue growth and achieving $1.09 billion in revenue for the first time in our history. We leveraged top line growth and strong expense discipline to accelerate profitability. We expect to carry this momentum into 2019 and deliver another year of healthy, double-digit revenue growth to drive operating margins even higher,”said Eyal Waldman, President and CEO of Mellanox Technologies.

“We achieved record quarterly revenue in our Ethernet switch business, capitalizing on design wins for our high-performance, feature-rich solutions, which support continued growth in 2019. We maintained our leadership in 25 gigabit and above Ethernet adapters and continue to benefit from the multi-year transition to higher speeds. Revenue for our 100 gigabit Ethernet adapters in 2018 was approximately 2.5 times that of 2017, an indication that the transition to 100 gigabit technology has begun, which will drive the next leg of growth. We are also gaining traction in a new growth vector for the next generation of intelligent interconnect with our BlueField SmartNICs and Storage Controllers.

We grew our InfiniBand business 8 percent year-over-year and see strong demand for our leading performance HDR 200 Gigabit per second InfiniBand solutions for high-performance computing, artificial intelligence, big data, cloud, storage, and additional applications. Our HDR InfiniBand solutions have begun to ramp with a healthy backlog for Q1 and beyond. We achieved record Q4 and 2018 revenue with our LinkX cables and transceivers and expect to continue seeing healthy growth of our LinkX product line in 2019. We continue to invest in research and development to maintain our leadership across all product lines to fuel our growth in 2019 and beyond,” Mr. Waldman concluded.

Fourth Quarter 2018 - Financial Results Summary

Fiscal Year 2018 - Financial Highlights

First Quarter 2019 Outlook

We currently project:

Recent Mellanox Press Release Highlights

January 22, 2019 CSC, the Finnish IT Center for Science, and the Finnish Meteorological Institute Select 200 Gigabit HDR InfiniBand to Accelerate Multi-Phase Supercomputer Program
January 7, 2019 Mellanox 200 Gigabit HDR InfiniBand to Accelerate a World-Leading Supercomputer at the High-Performance Computing Center of the University of Stuttgart (HLRS)
December 5, 2018 Mellanox Ethernet Adapter Facilitates High Performance Network Solutions at Alibaba
November 19, 2018 LINE Corporation Collaborates with Mellanox and Cumulus Networks to Power Advanced Messaging Platform
November 13, 2018 Mellanox Technologies Receives Nine HPCwire Readers’ and Editors’ Choice Awards at the Supercomputing Conference 2018
November 13, 2018 Mellanox and Los Alamos National Laboratory Join Forces to Develop Ultra-Large-Scale Mission-Centric Computing Infrastructure
November 12, 2018 Mellanox InfiniBand and Ethernet Solutions Accelerate the Majority of TOP500 Platforms on the November TOP500 Supercomputers List
November 12, 2018 Mellanox HDR InfiniBand Solutions Accelerate New Supercomputer for Advanced Research Computing at the University of Michigan
October 25, 2018 Mellanox Ships More Than 2.1 Million Ethernet Adapters in the First Three Quarters of 2018

Conference Call

Mellanox will hold its fourth quarter 2018 financial results conference call today, at 2:00 p.m. Pacific Time (5:00 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 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. A replay of the webcast will also be available on the Mellanox website after the call.

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, cable, 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.

Mellanox has achieved and maintained the highest ISS Quality Score possible beginning in May of 2017 and through the date of this release, January30, 2019.

GAAP to Non-GAAP Reconciliation

To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), Mellanoxuses non-GAAP measures of net income which are adjusted from results based on GAAP to exclude share-based compensation expense, amortization expense of acquired intangible assets, settlement costs, acquisition and other charges, restructuring and impairment charges, and income tax effects and adjustments. Settlement costs represent the charges related to the settlement of a contingent royalty obligation. Acquisition and other charges include expenses related to acquisitions of other companies and expenses related to the proxy contest. Restructuring and impairment charges include impairment charges related to our investment in privately-held companies, as well as costs that are the result of restructuring, consisting of employee termination and severance costs, facilities related costs, contract cancellation charges, and impairment of long-lived assets. The purpose of income tax effects and adjustments is to exclude tax consequences associated with the above excluded expense 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 inIsrael. 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, settlement costs, acquisition and other charges, restructuring and impairment charges, 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, impairment charges, 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.

The company has not reconciled its non-GAAP gross margins or non-GAAP operating expenses to GAAP gross margins or GAAP operating expenses, respectively, in the outlook section of this press release, because it does not provide an outlook for GAAP gross margins or GAAP operating expenses due to uncertainty and variability of acquired intangibles, acquisition and other charges, and restructuring charges, which are reconciling items between non-GAAP gross margins and non-GAAP operating expenses, and GAAP gross margins and GAAP operating expenses, respectively. The company has not reconciled its non-GAAP diluted share count to GAAP diluted share count in this press release because it does not provide an outlook for GAAP diluted share count due to the uncertainty in its GAAP net income (loss) due to variability of GAAP gross margins and operating expenses described above. Because such items cannot be reasonably predicted and could have a significant impact on the calculation of GAAP gross margins, GAAP operating expenses and GAAP diluted share count, a reconciliation of our outlook of these non-GAAP financial measures to the corresponding GAAP measures is not available without unreasonable effort.

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 outlook for the three months endingMarch31, 2019, statements related to trends in the market for our solutions and services, opportunities for our company in 2019 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 revenue 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 theSecurities 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 theSEConFebruary16, 2018. All forward-looking statements in this press release, including the outlook for the three months ending March31, 2019, are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements. Amounts reported in this release are preliminary and subject to finalization prior to the filing of our next Annual Report on Form 10-K.

Mellanoxis a registered trademark ofMellanox 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 December 31, Year ended December 31,
2018 2017 2018 2017
Total revenues $ 290,070 $ 237,581 $ 1,088,743 $ 863,893
Cost of revenues 100,345 85,238 388,573 300,450
Gross profit 189,725 152,343 700,170 563,443
Operating expenses: 0
Research and development 93,836 94,123 360,344 365,878
Sales and marketing 37,042 38,761 148,553 150,457
General and administrative 14,824 14,136 68,870 52,170
Restructuring and impairment charges 21 12,019 10,329 12,019
Total operating expenses 145,723 159,039 588,096 580,524
Income (loss) from operations 44,002 (6,696 ) 112,074 (17,081 )
Interest expense (77 ) (1,932 ) (2,185 ) (7,937 )
Other income, net 39 649 2,322 3,115
Interest and other, net (38 ) (1,283 ) 137 (4,822 )
Income (loss) before taxes on income 43,964 (7,979 ) 112,211 (21,903 )
Provision for (benefit from) taxes on income 1,132 (5,386 ) (22,047 ) (2,478 )
Net income (loss) $ 42,832 $ (2,593 ) $ 134,258 $ (19,425 )
Net income (loss) per share — basic $ 0.80 $ (0.05 ) $ 2.54 $ (0.39 )
Net income (loss) per share — diluted $ 0.78 $ (0.05 ) $ 2.46 $ (0.39 )
Shares used in computing net income (loss) per share:
Basic 53,761 51,234 52,863 50,310
Diluted 55,147 51,234 54,646 50,310
Mellanox Technologies, Ltd.
Reconciliation of Non-GAAP Adjustments
(in thousands, except percentages, unaudited)
Three Months Ended December 31, Year ended December 31,
2018 2017 2018 2017

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

GAAP net income (loss) $ 42,832 $ (2,593 ) $ 134,258 $ (19,425 )
Adjustments:
Share-based compensation expense:
Cost of revenues 609 470 1,950 2,000
Research and development 12,013 10,479 38,922 40,278
Sales and marketing 5,152 4,009 17,042 15,693
General and administrative 4,522 2,913 13,428 10,893
Total share-based compensation expense 22,296 17,871 71,342 68,864
Amortization of acquired intangibles:
Cost of revenues 9,764 10,641 41,978 42,482
Research and development 196 196 778 779
Sales and marketing 2,033 2,230 8,330 8,919
Total amortization of acquired intangibles 11,993 13,067 51,086 52,180
Settlement costs:
Cost of revenues 9,161
Total settlement costs 9,161
Acquisition and other charges (1):
Research and development 92 193 558 734
Sales and marketing 30 48 268 141
General and administrative 223 1,507 15,423 1,794
Total acquisition and other charges 345 1,748 16,249 2,669
Restructuring and impairment charges
Operating expense 21 12,019 10,329 12,019
Other loss 1,494 1,494
Total restructuring and impairment charges 1,515 12,019 11,823 12,019
Tax effects and adjustments (1,878 ) 799 (27,442 ) 250
Non-GAAP net income $ 77,103 $ 42,911 $ 266,477 $ 116,557

Reconciliation of GAAP gross profit to non-GAAP:

Revenues $ 290,070 $ 237,581 $ 1,088,743 $ 863,893
GAAP gross profit 189,725 152,343 700,170 563,443
GAAP gross margin 65.4 % 64.1 % 64.3 % 65.2 %
Share-based compensation expense 609 470 1,950 2,000
Amortization of acquired intangibles 9,764 10,641 41,978 42,482
Settlement costs 9,161
Non-GAAP gross profit $ 200,098 $ 163,454 $ 753,259 $ 607,925
Non-GAAP gross margin 69.0 % 68.8 % 69.2 % 70.4 %

Reconciliation of GAAP operating expenses to non-GAAP:

GAAP operating expenses $ 145,723 $ 159,039 $ 588,096 $ 580,524
Share-based compensation expense (21,687 ) (17,401 ) (69,392 ) (66,864 )
Amortization of acquired intangibles (2,229 ) (2,426 ) (9,108 ) (9,698 )
Acquisition and other charges (1) (345 ) (1,748 ) (16,249 ) (2,669 )
Restructuring charges (21 ) (12,019 ) (10,329 ) (12,019 )
Non-GAAP operating expenses $ 121,441 $ 125,445 $ 483,018 $ 489,274
Mellanox Technologies, Ltd.
Reconciliation of Non-GAAP Adjustments
(in thousands, except per share data, unaudited)
Three Months Ended December 31, Year ended December 31,
2018 2017 2018 2017

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

GAAP income (loss) from operations $ 44,002 $ (6,696 ) $ 112,074 $ (17,081 )
GAAP income (loss) from operations % 15.2 % (2.8 )% 10.3 % (2.0 )%
Share-based compensation expense 22,296 17,871 71,342 68,864
Settlement costs 9,161
Amortization of acquired intangibles 11,993 13,067 51,086 52,180
Acquisition and other charges (1) 345 1,748 16,249 2,669
Restructuring charges 21 12,019 10,329 12,019
Non-GAAP income from operations $ 78,657 $ 38,009 $ 270,241 $ 118,651
Non-GAAP income from operations % 27.1 % 16.0 % 24.8 % 13.7 %
Shares used in computing GAAP diluted earnings per share 55,147 51,234 54,646 50,310
Adjustments:
Effect of dilutive securities under GAAP (1,386 ) (1,783 )
Total options vested and exercisable 360 835 360 835
Shares used in computing non-GAAP diluted earnings per share 54,121 52,069 53,223 51,145
GAAP diluted net income (loss) per share $ 0.78 $ (0.05 ) $ 2.46 $ (0.39 )
Adjustments:
Share-based compensation expense 0.39 0.34 1.30 1.38
Amortization of acquired intangibles 0.21 0.26 0.93 1.04
Settlement costs 0.17
Acquisition and other charges (1) 0.01 0.03 0.30 0.05
Restructuring and impairment charges 0.03 0.23 0.22 0.24
Tax effects and adjustments (0.03 ) 0.02 (0.50 )
Effect of dilutive securities under GAAP 0.04 0.16
Total options vested and exercisable (0.01 ) (0.01 ) (0.03 ) (0.04 )
Non-GAAP diluted net income per share $ 1.42 $ 0.82 $ 5.01 $ 2.28

(1) Acquisition and other charges include $14.3 million of expenses related to the proxy contest for the year ended December31, 2018.

Mellanox Technologies, Ltd.

Condensed Consolidated Balance Sheets

(in thousands, unaudited)

December 31,
2018 2017
ASSETS
Current assets:
Cash and cash equivalents $ 56,766 $ 62,473
Short-term investments 381,724 211,281
Accounts receivable, net 150,625 154,213
Inventories 104,381 64,657
Other current assets 16,942 14,295
Total current assets 710,438 506,919
Property and equipment, net 105,334 109,919
Severance assets 17,043 18,302
Intangible assets, net 179,328 228,195
Goodwill 473,916 472,437
Deferred taxes and other long-term assets 101,139 66,162
Total assets $ 1,587,198 $ 1,401,934
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,336 $ 59,090
Accrued liabilities 121,878 114,058
Deferred revenue 20,558 23,485
Total current liabilities 212,772 196,633
Accrued severance 21,645 23,205
Deferred revenue 18,665 17,820
Term debt 72,761
Other long-term liabilities 32,468 34,067
Total liabilities 285,550 344,486
Shareholders’ equity
Ordinary shares 233 221
Additional paid-in capital 982,677 873,979
Accumulated other comprehensive income (loss) (1,051 ) 1,618
Retained earnings 319,789 181,630
Total shareholders’ equity 1,301,648 1,057,448
Total liabilities and shareholders' equity $ 1,587,198 $ 1,401,934

Mellanox Technologies, Ltd.

Condensed Consolidated Statement of Cash Flows

(in thousands, unaudited)

Year ended December 31,
2018 2017
Cash flows from operating activities:
Net income (loss) $ 134,258 $ (19,425 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 101,590 103,821
Deferred income taxes (26,697 ) (2,150 )
Share-based compensation 71,342 68,864
Gains on short-term investments, net (5,278 ) (3,460 )
Impairment charges and loss on disposal of PPE 4,754 12,019
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net 3,588 (12,175 )
Inventories (43,301 ) (887 )
Prepaid expenses and other assets (2,650 ) (681 )
Accounts payable 10,486 170
Accrued liabilities and other liabilities 16,765 15,216
Net cash provided by operating activities 264,857 161,312
Cash flows from investing activities:
Purchase of severance-related insurance policies (1,203 ) (1,312 )
Purchase of short-term investments (395,560 ) (188,745 )
Proceeds from sales of short-term investments 87,542 193,082
Proceeds from maturities of short-term investments 143,087 59,129
Proceeds from sales of property and equipment 3,239
Purchase of property and equipment (36,338 ) (41,376 )
Purchase of intangible assets (6,535 ) (2,843 )
Purchase of investments in privately-held companies (12,500 ) (15,021 )
Acquisitions, net of cash acquired (7,379 ) (872 )
Net cash provided by (used in) investing activities (225,647 ) 2,042
Cash flows from financing activities:
Principal payments on term debt (74,000 ) (172,000 )
Principal payments on capital lease and intangible assets obligations (8,426 ) (7,369 )
Proceeds from issuances of ordinary shares through employee equity incentive plans 37,368 29,733
Net cash provided by (used in) financing activities (45,058 ) (149,636 )
Net increase (decrease) in cash, cash equivalents, and restricted cash (5,848 ) 13,718
Cash, cash equivalents, and restricted cash at beginning of period 70,498 56,780
Cash, cash equivalents, and restricted cash at end of period $ 64,650 $ 70,498

Mellanox Technologies, Ltd.

Press/Media Contact

Greg Cross

Zonic Public Relations

+1-925-413-5327

gcross@zonicgroup.com

Investor Contact

Shanye Hudson

VP, Investor Relations

+1-408-916-0041

shanye@mellanox.com

Israel PR Contact

Jonathan Wolf

JWPR Public Relations and Communications

+972-54-22-094-22

yoni@jwpr.co.il

Israel IR Contact

Emanuel Kahana

Gelbart Kahana Investor Relations

+972-3-607-47-17

mano@gk-biz.com

Source: Mellanox Technologies, Ltd.

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