MLNX

Mellanox Technologies, Ltd. (MLNX)

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Mellanox Technologies, Ltd. (MLNX)

Q3 2012 Earnings Call

October 17, 2012 5:00 p.m. EDT

Executives

Gwyn Lauber – Director, IR

Eyal Waldman – Chairman, President and CEO

Michael Gray – CFO

Analysts

Daniel Amir – Lazard Capital

Glenn Hanus – Needham & Co.

Joseph Wolf – Barclays

Kevin Cassidy – Stifel Nicolaus

Dan Harverd – Deutsche Bank

Brent Bracelin – Pacific Crest

Brian Freed – Wunderlich Securities

John Pitzer – Credit Suisse

Harlan Sur – J.P. Morgan

Shebly Seyrafi – FBN Securities

Alex Gauna – JMP Securities

Presentation

Operator

Good afternoon and welcome to the Mellanox Technologies third quarter 2012 financial results conference call.

[Operator Instructions]. As a reminder this conference is being recorded.

I will now turn the call over to Gwyn Lauber, who will introduce today’s speakers. Please begin.

Gwyn Lauber

Good afternoon and welcome to Mellanox Technologies’ fiscal third quarter 2012 conference call. Leading the call today will be Eyal Waldman, Chairman, President and CEO of Mellanox Technologies, and Michael Gray, Chief Financial Officer.

By now you’ve seen our press release and associated financial information that we furnished to the SEC on Form 8-K this afternoon. In addition to reviewing our financial results, some of our comments today will include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended, based on our current expectations. These forward-looking comments entail various significant risks and uncertainties that could cause our actual results to differ materially from those expressed in such forward-looking statements.

Forward-looking statements in this conference are generally identified by words such as believes, anticipates, expects, intends, may, will, and other similar expressions. However, these words are not the only way we identify forward-looking statements. In addition, any statements that refer to expectations, projections, forecasts, predictions or other characterizations of future events or circumstances are forward-looking statements.

Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of today. We undertake no obligation to update any of the information contained in any forward-looking statements that we make. We have provided additional information about risk factors that could cause our actual results to differ materially from those in the forward-looking statements in today's conference call, in our press release, in our Form 10-Q filed with the SEC on August 3, 2012, or in our Form 10-K filed on February 28, 2012. If you do not have a copy of our 10-Q or 10-K, you can find it at ir.mellanox.com or we will be happy to provide you with one.

Now I'll turn the call over to Eyal for his opening remarks. Eyal?

Eyal Waldman

Thank you, Gywn. Good afternoon, everyone, and thank you for joining us. On today's call I will highlight our third quarter 2012 results and achievements. I will then turn the call over to Michael Gray, our Chief Financial Officer, who will discuss the financial results in more detail and provide our fiscal fourth quarter guidance. After that we will be happy to take your questions.

For the third quarter of 2012 Mellanox reported quarter revenue of $156.5 million, up 17.2% from $133.5 million in the second quarter of 2012 and up 129.6% from $68.2 million in the third quarter of 2011. The third quarter non-GAAP gross margins were 70.5%; non-GAAP operating income was record of $60.9 million or 38.9% of revenues; and non-GAAP diluted earnings per share was a record of $1.37, representing 38.4% growth quarter over quarter from $0.99 in the second quarter. Sequential growth in non-GAAP operating income was 42.5% while sequential growth in revenue was 17.2%.

Our cash and investments increased $77.6 million during the third quarter. We generated cash from operations of $74.4 million, ending the quarter with $405.4 million in cash and investments.

During the quarter we continued to benefit from our growth in FDR InfiniBand products which represented 57% of revenues compared to 54% in the second quarter of 2012 and 31% in the first quarter of 2012. Revenue from our 10 and 40-gigabit Ethernet products increased during the third quarter, and we continue to provide the industry's only comprehensive end-to-end 40-gigabit-per-second Ethernet solution.

On Monday we announced our sixth generation switch IC, SwitchX-2, which enables the world's highest performing software-defined networking infrastructures over InfiniBand or Ethernet. SwitchX-2's advanced feature set enables the creation of larger flat software-defined networks with lower cost and higher performance. Mellanox's SwitchX-2 virtual protocol interconnect switch leads the industry with the highest throughput capacity, lowest latency with nearly zero jitter, as well as advanced software-defined network interfaces for control and management. Our fast RDMA-based interconnect technology leads the competition in terms of performance, software-defined network technology, and return on investment, advantages it brings to IT application managers.

Last month Microsoft officially released Windows Server 2012 with our InfiniBand and Ethernet RDMA interconnect drivers in-box. Mellanox's RDMA interconnect solutions accelerate and improve performance of Windows Server 2012 based storage, cloud, Web 2.0 and high-performance applications. Our collaboration with Microsoft has resulted in new capabilities and performance records with Windows Server 2012 and will enable the creation of efficient cloud and database infrastructures based on Hyper-V and SQL. Using the Microsoft Mellanox solution with help IT managers to simplify deployment and to meet their performance goals at a much lower total cost of ownership.

Through our continued innovation, Mellanox has become the first company to provide an end-to-end InfiniBand and Ethernet interconnect solution with SRIOV over VMware ESXi 5.1. Our 40-gigabit Ethernet interconnect products have demonstrated record virtualization performance over VMware ESXi 5.1, maximizing the number of virtual machines running on its server.

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