Mellanox IPO: Highlights from the InfiniBand Chip Developer's S-1 Filing

by: Evelyn Rubin

Mellanox Technologies, an Israeli fabless IC developer in the InfiniBand market filed for a Nasdaq IPO with the SEC earlier today. Highlights and excerpts from the company's S-1 filing:

Proposed Ticker:

Maximum Offering: $86.25 million. The funds are being raised for R&D and general corporate purposes, as well as potential acquisitions.

Credit Suisse, JP Morgan, Thomas Weisel, Jeffries

Business Overview
(from S-1):

We are a leading supplier of semiconductor-based, high-performance interconnect products that facilitate data transmission between servers and storage systems through communications infrastructure equipment. Our products are an integral part of a total solution focused on computing, storage and communication applications used in enterprise data centers, high-performance computing and embedded systems. We are one of the pioneers of InfiniBand, an industry standard architecture that provides specifications for high-performance interconnects. We are the leading merchant supplier of field-proven InfiniBand semiconductor products that deliver industry-leading performance and capabilities.

We are a fabless semiconductor company that provides high-performance interconnect solutions. We design, develop and market InfiniBand adapter and switch integrated circuits, or ICs, as well as adapter cards incorporating our ICs. These ICs are added to servers, storage, communications infrastructure equipment and embedded systems by either integrating them directly on circuit boards or inserting adapter cards into slots on the circuit board. We have established significant expertise with high-performance interconnect solutions from successfully developing and implementing multiple generations of our products. Our expertise enables us to develop and deliver products that serve as building blocks for creating reliable and scalable interconnect solutions with leading performance at significantly lower cost than products based on alternative interconnect technologies.

Financial Highlights: Revenues are from sales of ICs and cards. 10% or more customers comprise a growing percent of revenues, increasing from 36% to 52% and 56% of total revenues for the years 2003-2005. For the first six months of the year, revenues grew from $17.7 million in 2005 to $19.3 million in 2006 resulting from increased unit sales offset by an average sales price decline of 14%. Revenues almost doubled between 2004 and 2005, growing from $20.3 million to $42.1 million. Unit sales grew by 103% in the period, and average sales prices increased by 2%.

TSMC manufactures the company's chips, and is the main recipient of cost of revenue. Gross margins have been steadily improving, from 57% to 64% between 2004 and 2005, and from 59% to 69% between H1 05 and H1 2006.

R&D is the main OPEX item for Mellanox, with R&D expenses having increased from $6.1 million (34% of sales) in H1 05 to $7.2 million (37%) H1 06. S&M expenses grew from 19% to 21% of sales in this period, and G&A expenses increased from 7% to 8% of sales.

The company recorded net income of $3.159 million in 2005, compared to a net loss of $8.888 million in 2004 and $15.563 million in 2003. For the first half of 2006, net income was $558k, compared to a net loss of $257k in H1 05.

The company raised $89.3 million since its inception in 1999. At the end of June, the company had cash and equivalents of approximately $13 million. A line of credit up to $5 million was issued in 2005, upon which the company has not drawn down to date.

The company sold product to more than 100 customers in 2005, however most of these were evaluation products. Cisco (NASDAQ:CSCO) accounted for 44% of 2005 sales and 10% of H1 06 sales; other key customers include privately held startups SilverStorm (9% 05; 11% H1 06) and Voltaire (12% 05; 15% in H1 06), as well as Network Appliance ((NASDAQ:NTAP) 7% 05; 11% H1 06).

The company's main competitor in infiniband products is QLogic (NASDAQ:QLGC). For enterprise data centers, Infiniband competes with two interconnect standards: ethernet and fibre channel. Leading IC vendors in this ethernet category include Marvell (NASDAQ:MRVL) and Broadcom (BRCM); fibre channel leaders include Emulex (NYSE:ELX) and QLogic. For the high performance computing category, an additional competitor is privately held Myricom. The company also competes with in-house solutions developed by OEMs.

Employees and Management:
At the end of June, MLNX had 148 employees, of which 118 were in Israel. Eyal Waldman, co-founder, CEO, Chairman and President was a co-founder of Galileo which was acquired by Marvell in 2001. A notable director is S. Atiq Raza, former president and COO of AMD.

Current Ownership:
The CEO is the largest shareholder with 18.53% of the company. Two VC funds --Sequoia and USVP--hold 13.58% of the company each. Intel holds 5.5%. The company's website lists a slew of additional investors including Dell (NASDAQ:DELL), IBM (NYSE:IBM), Quanta Computers, Vitesse (NASDAQ:VTSS) and Sun (NASDAQ:SUNW), as well as VCs including Bessemer, Bank of America, China Development Industrial Bank, Gemini, Walden Israel and Jerusalem Global Ventures.

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