3Q14 Conference Call Mellanox
23. October 2014
CC with Eyal Waldman, Chairman and CEO, and Yakov Shulman, CFO
Summary:
The main growth element that was seen in 3Q was related to the refreshment cycle in the HPC (High Performance Computing) market. The CPU refreshment cycle should continue for 4-6 quarters and is likely to show significant growth for the company. The new CPU enables a more powerful system and enhances Mellanox's unique position within the market.
The cloud segment has seen significant upside with the CloudX solutions that should be enhanced in the near future with applications in the e-Commerce and Big Data segments.
Mellanox reported that it has seen considerable traction as well in the storage market and this market is obviously seeing the advantages of using Mellanox's solutions. Web 2.0 providers should continue to grow in the future.
Mellanox continues to invest in the Ethernet market and invest in the cable business (acquisitions were made in the cable business in FY13)
IC and Boards made up 51% of revenues. InfiniBand made up 61% of revenues an increase from 50% of revenues. Ethernet revenues made up 16% of revenues.
In total, Mellanox reported that 37% of its quarterly revenues stemmed from more than 10% customers (HP 15%, IBM 11%, and Dell 11%).
The company sees increased transitioning from 10Gbps Ethernet solutions to 40Gbps Ethernet solutions that should be able to deal with the exponential growth of data. This trend should continue towards 2015 and beyond.
Mellanox expects 2015 to be growth year.
The company isn't able to fully relate the Grantley refreshment cycle to the Romley refreshment cycle. However, this cycle is likely to be more stretched out than the Romley cycle that was delayed, creating a heavy quarterly demand for a certain amount of products.
Mellanox didn't give any details when the 100Gbps solutions will start shipping.
The company affirmed that the HPC business continues to be the strongest growth engine for the stock.
OpEx continues to grow due to acquired IPtronics and Kotura acquisitions in 2013.
Comments:
This was a very strong quarter for the company. The bottom-line was a real surprise and the forward looking guidance seems to be stronger than expected. Thus, short sighted investor might see this as a buying opportunity.
Mellanox's 3Q gross margins are likely to have been reported higher due to the increased InfiniBand revenue share that increased 11 percentage points from last quarter.
The InfiniBand exposure should stay similar or even larger in the refreshment cycle and the strong growth segment should be the 40Gbps Ethernet solutions when looking at the overall market (MLNX's Ethernet share is only 16% in this quarter).
The problem with Ethernet is that the competition is much larger and the amount of profitability in this segment is much lower (except plain 40Gbps).
Further, the only real growth engine for Mellanox seems to be the HPC market that continues to maintain a 50% revenue share.
The Grantley growth, as we've stated in the past, is likely to continue to stay at a rather low level when compared to the Romley refreshment cycle (due to the prolonged cycle).
What happens after the refreshment cycle? We believe that this would be a continuation of the slow-mid growth cycle and at the same time the increased costs of the integration of the two new acquisitions (IPtronics and Kotura) should be rather less beneficial for the shareholder. This puts pressure on the FY16 and FY17 estimates.
We believe that this turns Mellanox from a high growth stock to a mid-low growth stock. Does this justify a P/E of 49.55 for FY14 according to Bloomberg consensus estimates? We believe that this isn't the case.
Investors should be seeking to exit the stock in our opinion. This is definitely not the growth story that we would expect.