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Mellanox Technologies, Ltd. (NASDAQ:MLNX)

Q2 2008 Earnings Call Transcript

July 23, 2008 5:00 pm ET

Executives

Lee-Ann Stewart – IR

Eyal Waldman – Chairman, President and CEO

Michael Gray – CFO

Analysts

Adam Benjamin – Jefferies

Armand Pagosi [ph] – Credit Suisse

Brent Bracelin – Pacific Crest Securities

Kevin Cassidy – Thomas Weisel Partners

Irit Jakoby – Susquehanna

Quince Slattery – Symmetry Peak Management

Operator

Good day, everyone, and welcome to today's Mellanox Technologies second quarter 2008 earnings conference call. Today's call is being recorded. (Operator instructions) At this time, I would like to turn the call over Lee-Ann Stewart. Please go ahead.

Lee-Ann Stewart

Thank you. Good afternoon, and welcome to Mellanox Technologies second quarter 2008 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 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 looking-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 the forward-looking statement that we make today. We have provided additional information in today's press release and in our Form 10-K filed on March 24, 2008 and 10-K filed on May 5, 2008 about some risk factors that could cause our actual results to differ materially from those in the forward-looking statements.

If you do not have copies of our 10-K or 10-Q, you can find it on our Web site www.mellanox.com or we will be happy to provide them to you.

Now I will turn the call over to Eyal for his opening remarks. Eyal.

Eyal Waldman

Thank you, Lee-Ann. Good afternoon, everyone, and thank you for joining us for our Second Quarter 2008 Earning Conference Call.

On the call today I will highlight the results and achievements of the second quarter and then I will turn the call over to Michael Gray, our Chief Financial Officer, who will discuss the financial results in more details and give our third quarter guidance. After that, I will discuss our business and plans for the future and then we will be happy to take your questions.

The second quarter marks our eighth consecutive quarter of record revenue for Mellanox. Our second quarter revenue increased 12% sequentially to $28.2 million. Operating income was $6.4 million, or 23% of sales.

Non-GAAP net income increased to $9.6 million or $0.28 per diluted share. Gross margins were 79.8% and we generated record cash from operations of $10.1 million while ending the quarter with more than $165 million in cash.

In the second quarter we increased shipments of our flagship ConnectX Adapter by 21% as compared to Q1 of 2008. 84% of our second quarter revenue was based on our 20-gigabit per second products consistent with the first quarter.

We started shipping our 40-gigabit per second products in the second quarter and expect this technology to ramp in the coming years. Our 40-gigabit per second products include ConnectX Adapter silicon in cards, and our 40-gigabit per second InfiniScale IV Switch Silicon and Platforms.

During the second quarter, our core InfiniBand products continued to expand into mainstream enterprise business applications. HP and SGI announced data warehousing solutions that integrate our 20-gigabit per second InfiniBand adapters and switch products together with Oracle 11g database solution.

These systems use InfiniBand to efficiently connect servers and storage resources together and provide organizations demanding the best cost performance with turnkey easy to deploy low power solutions.

Cloud computing allows IT managers to access vast computing storage and application resources across the Internet. IBM introduced their power optimized iDataPlex server rack platform that specifically targets cloud computing and Web 2.0 service providers utilizing our 20-gigabit per second InfiniBand adapters and switches based on our silicon.

Virtualization is increasing the demand for efficient data center interconnect and remains a key market driver for our products. During the quarter, SoftBank Telecom, one of Japan's largest telecommunication firms deploy load balancing and disaster recovery applications between VMware virtualized servers, using our InfiniBand adapters in two CPUs, 500 kilometers apart. InfiniBand wider in network equipment provides a direct link between remote data centers, which optimizes system up time and load balancing.

IT departments in capital markets must analyze ever increasing amounts of market data with decreasing tolerance for transaction latency. We announced that our 20-gigabit per second InfiniBand adapters provide the low latency and highest group of interconnect demanded by market data distribution and automated trading system, and we now – and we are now deployed at major North American equity exchanges.

Our InfiniBand adapters and switch silicon provide the foundation for the world's fastest computer, which is the first system to exceed the one petaflop performance benchmark. This accomplishment demonstrates our technical proficiency, reliability, scalability and performance leadership. We expect to see more petaflop computers deployed based on our technology in the coming quarters.

The latest top 500 list of the world's most powerful supercomputers shows InfiniBand continued to be the highest performing interconnect for large clusters deployment. 49 of the top 100 supercomputers use InfiniBand, which is up from 38 six months ago. We expect this trend to continue as more powerful multi course CPUs are deployed, driving the demand for our high speed interconnect products.

Microsoft announced the Windows High-Performance Computing Server 2008 platform that includes a new high speed protocol optimized on our InfiniBand adapters to deliver a superior performance. With Microsoft support and familiar interface, we expect our interconnect products will further proliferate into volume commercial computing applications.

We continue to gain momentum with our 10-gigabit Ethernet adapter products and virtual protocol interconnect or VPI, which provide I/O infrastructure flexibility and future proofing. VPI supports port auto sensing for the fabric, whether it is InfiniBand, Ethernet, or data center Ethernet, and configures the adapter in the appropriate mode, simplifying deployment in rack and blade environments.

VPI also supports Fibre Channel over InfiniBand and Fibre Channel over Ethernet. During interrupt, we have demonstrated VPI by connecting our dual port ConnectX Adapter to both InfiniBand and Ethernet simultaneously. This technology is available today and is in evaluation stages with OEMs and end users.

We announced the availability of our industry leading 36-port 40-gigabit per second InfiniBand – InfiniScale IV switch silicon. Together with OPRA (inaudible), HP, Intel, Sun, and Voltaire, we demonstrated the world's first 40-gigabit per second clusters running live applications at the International Supercomputing Conference. Virginia Tech announced a 324 node cluster based on our 40-gigabit per second technology.

I am proud of our execution capabilities. In the second quarter, we taped out a complex high-port count 40-gigabit per second switch device, validated the silicon, and shipped three products for revenue, including the switch device, switch reference device, and an OEM switch blade.

In summary, the second quarter marked the increasing adoption of our flagship InfiniBand products in both enterprise and high performance computing applications, continued momentum of our ConnectX VPI and 10-gigabit Ethernet with Fibre Channel over Ethernet strategy and the introduction of 40-gigabit per second InfiniBand technology into the market.

Before I discuss our outlook, I will turn the call over to Michael for our review of our Q2

financial results and our guidance to Q3. Michael.

Michael Gray

Thank you, Eyal. Good afternoon, everyone. I'm happy to take you through the financial details of our second quarter of 2008. Total revenues in the second quarter of 2008 were $28.2 million, up 12% from $25.2 million reported in the first quarter of 2008 and up 43% over the $19.8 million reported in the second quarter of 2007.

Second quarter 2008 represented the eighth consecutive quarter of record revenues for the company.

Our gross margins were 79.8% of revenues and operating income was $6.4 million or 23% of revenues. A few selected second quarter revenue metrics for you. The percent of revenues attributable to ICs increased significantly from the first quarter.

Combined, our IC and board revenues represented approximately 99% of second quarter revenues. Double data rate based products again represented approximately 84% of our second quarter revenues. Quad data rate based products represented 4% of revenues in the second quarter.

Our top four customers represented approximately 55% of our second quarter revenues, compared with 45% in the first quarter of 2008. Customers accounting for greater than 10% of our revenues in the current quarter were Sun at 18%, QLogic at 14%, Hewlett Packard at 12% and Super Micro at 11%.

In terms of revenue split by geography, North America represented 56% of our second quarter revenues, Europe 19%, and Asia 25%.

Gross margins in the second quarter were 79.8%, up from 76.4% in the prior quarter, and 75.1% in the comparable period last year. The increase was due to a higher mix of ICs versus boards, lower manufacturing costs, lower royalties, and the introduction of QDR-40 gigabit per second products.

Second quarter operating expenses increased to $16.1 million or 19.7% and represented 57% of revenues compared with $13.4 million or 53.4% in the first quarter of 2008. Approximately $1 million or 37% of the sequential increase in operating expenses was related to our new product tape out.

Moving down our income statement, research and development expenses were $10 million in the second quarter, compared with $8.3 million in the first quarter representing a sequential increase of 21%. The net increase consisted primarily of higher employer related expenses, share-based compensation, and tape out costs.

Sales and marketing expenses were $4 million in the second quarter compared with $3.4 million in the first quarter, representing an increase of 20% that consisted primarily of an increase in employee related expenses, share-based compensation, commissions, and trade show related costs.

Second quarter G&A expenses were $2.1 million compared with $1.8 million in the first quarter, representing a 13% increase that consisted mostly of increased employee related expenses, higher accounting, and professional fees, which were slightly offset by lower legal fees.

Our Q2 share based compensation expense was $2 million during the quarter and was distributed amongst R&D in the amount of $1.259 million, sales and marketing $456,000, G&A $272,000, and COGS $49,000.

Operating income was $6.4 million in the second quarter compared with $5.8 million in the first quarter and represented approximately 23% of revenues. Other income net in the second quarter was $941,000 compared with $1.43 million in the preceding quarter. The decrease was primarily due to lower interest income associated with declining interest rates.

Income before tax was $7.3 million or 26% of revenues in the second quarter of 2008 compared with $6.8 million in the first quarter of 2008. The second quarter tax provision of $2.8 million consists of $3 million of tax expense from the realization of deferred tax assets, approximately $500,000 of current quarter tax expense, partially offset by the reversal of approximately $700,000 of prior liabilities as a result of a new Israeli tax ruling.

Our second quarter GAAP net income was $4.6 million; our second quarter non-GAAP net income was $9.6 million or $0.28 per diluted share and includes adjustments of $2 million of share-based compensation and $3 million of deferred tax assets on NOLs in Israel. This compares with $8.6 million or $0.25 per diluted share in the first quarter of 2008.

Our GAAP diluted share count for the second quarter was $32.97 million compared with $32.79 million in the first quarter of 2008. GAAP basic share count using computing income per share was $31.33 million for the second quarter compared with $31.09 million in the first quarter.

Moving on to our cash flow statement, operating activities provided $10.1 million of cash during the second quarter of 2008. Net cash provided by investing activities was $1.8 million and consisted of net sales of short-term investments of approximately $3.2 million, partially offset by capital equipment purchases of roughly $900,000 and purchases of severance related policies of approximately $500,000.

Net cash provided by financing activities during the second quarter was $456,000 and consisted primarily of proceeds from option exercises of $966,000, offset by principle payments on capital lease obligations of $510,000.

Turning to the balance sheet, our cash and investment holdings increased by approximately $10 million during the quarter and totaled $165 million at June 30th. Our accounts receivable increased $2.9 million to $21.8 million during the quarter. Our days sales outstanding were comparable to the prior quarters at 66 days.

Our second quarter ending inventory increased $600,000 to $6 million, compared to $5.4 million in the first quarter. Our turns were 3.6 times during the second quarter. Total liabilities were $25 million at quarter-end, of which $17.8 million were current, and $7.2 million were long-term.

In regards to our third quarter 2008 business outlook, we currently expect quarterly revenues between $28.5 million and $29 million. We believe our gross margins will be between 75% and 78%. On a GAAP basis, we expect a sequential growth in operating expenses of approximately 6% to 8%.

We estimate our Q3 stock comp expense to be between $2.1 million and $2.5 million. GAAP basic share count guidance for the third quarter is 31.5 million to 32 million shares. Non-GAAP basic share count guidance for the third quarter is 31.7 million to 32.2 million shares. GAAP diluted share count guidance for the third quarter is 33 million to 33.5 million shares.

Non-GAAP diluted share count guidance for the third quarter is 34.7 million to 35.2 million shares. The increase is primarily due to the inclusion of all vested share options that potentially could be exercisable during the period.

With that, I'll turn things back over to Eyal. Eyal?

Eyal Waldman

Thank you, Michael. The demand for more bandwidth will continue to grow as organizations process more data with finer granularity and less time, effectively doing more faster and better. We believe our 40-gigabit per second InfiniBand, InfiniScale IV based switch systems, and ConnectX Adapters will be the IO fabrics of choice for Fortune 500 data centers and the world's most powerful supercomputers.

We expect InfiniBand will farther proliferate into mainstream data center applications as more OEMs and software vendors come to market with easy to deploy turnkey servers and storage solutions that deliver unmatched cost performance, scalability, and reliability.

We have numerous design wins, proof of concept, and benchmarking activities with our 10-gigabit Ethernet and VPI products at both OEMs and end users. We expect to generate revenues over the next number of quarters from these products. We believe our VPI technology is destructive in the interconnect marketplace.

Only Mellanox offers the flexibility to auto sense InfiniBand, Ethernet, and data center Ethernet connections with the same device using a unified software solution, while supporting Fibre Channel over any of the three fabrics.

We have started interoperability testing of our Fibre Channel over Ethernet capabilities with infrastructure equipment and enterprise storage systems. The consolidation of multiple gigabit Ethernet and Fibre Channel adapters into a single efficient Mellanox VPI based adapter produces total cost of ownership and power consumption, eases deployment and optimizes data center manageability. We expect to take out another device in the second half of this year that will expand our OEM customer base.

To summarize, we have had a record Q2 results in all financial parameters. We have executed on our 40-gigabit per second plan and are now shipping 40-gigabit per second InfiniBand products into the market. We're expecting to get more 10-gigabit Ethernet market share once 10-gigabit Ethernet starts deployment. And we are seeing more design win activity in the storage market. We believe that all of this activity will drive our future growth.

Operator, we will now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We'll go first to Adam Benjamin with Jefferies.

Adam Benjamin – Jefferies

Hey, thanks. Guys, nice job on the quarter. A couple of questions. First, on gross margin, I think I ask this every quarter. You guys continue to outperform. Obviously had some benefits with some mix to ICs and QDR starting shipments. But do you care to take a look at that now? I mean you guys have outperformed well above where you originally thought. I mean over at least the next year period, I mean should we be expecting mid-70s to continue on this pace?

Eyal Waldman

The only thing – we give guidance for this year that will be in the 70s. We don't give guidance for the next year. What we can say is we feel comfortable with the gross margins that we are now for 2007. Long-term, when we ship millions of parts, we still expect to be in the mid-to-high-60s, but for the near-term, we still feel comfortable staying at the 70s percent gross margin.

Adam Benjamin – Jefferies

Any – I mean when you get to the millions of units, I mean what makes you think that the margins would have to come down into the high-60s?

Eyal Waldman

Well, that's just being on the conservative side, number one. And number two is when you ship in this kind of volumes it's pretty hard to expect those levels of gross margins.

Adam Benjamin – Jefferies

Right, but given some price concessions, you would give – given those volumes, I mean you would also have some cost measures to offset those ASP declines. Is that correct?

Eyal Waldman

That could be true, but I think you need to find the elasticity in the market and when you find that I think you do drive your gross margins down. And another thing, the – moving forward, when you go into those mass markets, our customers will also expect us to go in that direction.

Adam Benjamin – Jefferies

Okay. And moving on to ConnectX, Eyal, you had a bunch of comments to the end, I may have missed it, but obviously people are anxiously awaiting for an announcement or timing of first shipment to a tier-one from ConnectX on the Ethernet side. What's the timing there that we should be thinking about?

Eyal Waldman

Well, the only thing I can tell you is that today we do not have a tier-one server design win for our Ethernet products. We're working with a number of them, and it may happen late this year, sometime in '09. We can't forecast that for now.

Adam Benjamin – Jefferies

Got you. And then lastly, on the tape out, I think you mentioned there at the end, previously you guys had kind of talked about it in the Q4 time frame I think. Now you said kind of second half. Is the guidance that you're giving on OpEx for the September quarter including the costs associated with the tape out?

Michael Gray

Adam, I think that we do, as you mentioned, intend to have another tape out before the end of the year. You may see some of those costs into Q3, but the bulk of them will be in Q4.

Adam Benjamin – Jefferies

Got you. All right, guys. That's all I have. Thanks. A nice job.

Michael Gray

Thank you.

Operator

And we'll go next to John Pitzer with Credit Suisse.

Armand Pagosi – Credit Suisse

Yes, hi. It's Armand Pagosi [ph] for John here. Hi, Eyal and Mike, congrats on the quarter. A couple quick questions. Can you hear me well?

Eyal Waldman

Yes. Thank you.

Armand Pagosi – Credit Suisse

Okay, great. Could we – could I ask you a little bit about the gross margin above the guidance? Could you elaborate a little more? You gave the reasons behind it. Could you expand a little more in terms of which ones drove over? Were they equally driving the gross margin on performance? You mentioned lower product costs and some of the other factors, and I have another follow-up please.

Michael Gray

I think the biggest contributor to exceeding the gross margin guidance that was given was the increase sequentially from the first quarter of the percent of our overall revenues represented by ICs. As you know, one of the key contributors to our overall margins is the mix between ICs and boards. And we did see a pretty significant increase in the percentage of the Q2 revenues attributable to ICs. And while we haven't historically given you percentages between ICs specifically in boards, I can tell you that the percentage of the Q2 business attributable to ICs was north of 50% in the quarter. So I'd say that by far the mix was the largest item. As you know in the first quarter we completed our obligation to the chief scientist and so this was really the first complete quarter where we had no obligation to the chief scientist, so that also helped us from a margin perspective.

Armand Pagosi – Credit Suisse

Got it. Thanks a lot. So a couple more. So the mix with ICs, would you expect that to stay as it is in the coming quarter? And I also wanted to probe real quick about inventories, what drove the upside there?

Michael Gray

I think in terms of mix, going forward again it's hard to tell because our visibility is typically out 90 days. And I would expect sequentially that boards would increase and ICs would decrease in terms of percentages, and I think that's consistent. If you look at the guidance, we gave a gross margin of 75% to 78% relative to the 79.8% we did in the quarter. So at least for the upcoming quarter at this time, we would – we are expecting the business attributable to ICs to increase from Q2 and the highs to decrease somewhat from Q2. And then your second question? I'm sorry.

Armand Pagosi – Credit Suisse

I just want to check what was behind the inventories going up?

Michael Gray

Inventories – most of the increase was in the area of both finished goods as well as work in process. I think as we've alluded to in the past, dealing with the – a number of the tier-one vendors now, their demands in terms of us being able to respond quicker, a lot of that obligation now falls on us. So we do expect, and it's evidenced in the results, to probably carry more inventory to better match and meet the demands of our major customers.

Armand Pagosi – Credit Suisse

Got it. Thanks so much. Thank you.

Michael Gray

You're welcome.

Operator

We'll go next to Brent Bracelin with Pacific Crest Securities.

Brent Bracelin – Pacific Crest Securities

Thank you. A couple questions here if I could. One on the revenue guidance, looks like you're guiding into 1% to 3% sequential growth. Obviously, a little bit slower than what we saw last year in Q3. How much of that's tied to kind of just the macro environment? Were you being a bit cautious? Are there any sort of large end services opportunities that you've seen stalled? And then is that tied to any one or two OEMs that you're nervous about?

Eyal Waldman

It's mainly tied to lower visibility and us being more cautious, moving forward. There's nothing alarming that we're seeing, or nothing that we can forecast, but we want to be more on the cautious side.

Brent Bracelin – Pacific Crest Securities

Okay. That's helpful. And then looking at the OEM trends, it looks like Sun has popped up from time to time as has a large customer. They clearly popped up as has a large customer this quarter. But in the past when they were, I think north of 15%, they were – fell below 10% of revenue for two or three quarters. Is there something unique occurring at Sun that could sustain them as large customers here, north of 10% or do you think their purchasing patterns here are going to continue to be what looks like very lumpy?

Eyal Waldman

We think Sun is definitely a strong supporter and driving InfiniBand into a large portion of their products. And we see this – I think this will be an ongoing basis moving forward. Regarding the lumpiness that has – question has to go to Sun, but we believe that Sun will stay a large customer for Mellanox for the coming future.

Brent Bracelin – Pacific Crest Securities

Okay. Fair enough. And then my last question's really tied to some comments around the tape out. You indicated that was aimed at expanding your OEM customer base. Could you just kind of expand on what you mean by that? Is it driven by a specific OEM customer need? Are you working with an OEM on the specs on this new product? And any color you could provide on the target market for that new product that you're taping out later this year.

Eyal Waldman

Okay. So obviously we are working with multiple OEMs. It's going to be an interconnect product and we'll announce it once we'll be ready to talk more specifics about it.

Brent Bracelin – Pacific Crest Securities

Okay. Fair enough. Well, thank you.

Eyal Waldman

Thank you, Brent.

Operator

And we'll go next to Kevin Cassidy with Thomas Weisel Partners.

Kevin Cassidy – Thomas Weisel Partners

Thanks for taking my question. In reference to your guidance, can you say what percentage that is you already have covered on backlog?

Michael Gray

We really don't share what percentage of the guidance is covered in terms of what's already in the backlog. So I mean I really can't elaborate more than – I just can't elaborate more on that right now.

Kevin Cassidy – Thomas Weisel Partners

Okay. Maybe if we could talk a little bit about QLogic. They introduced a 20-gigabit per second chipset. I just want to know if you have – maybe have some comments on that.

Eyal Waldman

Yes. So we've seen QLogic introduce their 20-gigabit per second host channel adapter. We're seeing some of that in the field. We still think that the vast majority of the host channel adapters that will be shipped in the future will be Mellanox-based. We're now moving into 40-gigabit per second. Their adapter is mainly focused only on high performance computing while ours is also into the enterprise data center like data based financials and more applications – storage applications, and we expect to continue having the larger market share.

Kevin Cassidy – Thomas Weisel Partners

Okay. Thank you. One other question about looking out into the third and maybe just second half of '08, how do you see QDR growing versus DDR? Do you see it being 30% of your business or – ?

Eyal Waldman

It's hard for us to forecast. We do expect that the transition from 20-gigabit per second to 40-gigabit per second will be slower than the transition from 10 to 20, just again to be on the cautious side. But we are ready to go to production with 40-gigabit per second. I'm very impressed by the execution of the company, both the technical side getting the silicon, the platforms, cabling the ecosystem support for that. And then also the marketing and sales side to be able to generate all of the collaterals, information, pricing, and then also generating revenues in the same quarter we had for silicon. So 4% of our revenues in Q2 came from 40-gigabit per second. Obviously, we expect that to grow, but we don't see a huge job in Q3 of 2008.

Kevin Cassidy – Thomas Weisel Partners

Okay. Thank you very much.

Eyal Waldman

Thank you.

Operator

We'll go next to Irit Jakoby with Susquehanna.

Irit Jakoby – Susquehanna

Hi. Thank you. So one question regarding the operating expense guidance that you provided. I think you mentioned that you will be up between 6% and 8% quarter over quarter and if we take out the tape out expense that was incurred in this quarter, this means a net $2 million increase in operating expenses, so I wanted to ask if that's going – what that's going into. Is that mostly selling and marketing, R&D?

Michael Gray

I mean if you look historically over the distribution of our operating expenses, I think it would be prudent to say that most of it would be within R&D followed by sales and marketing and then G&A. We remember – every quarter we are dealing with a higher stock comp expense number, so part of that increase is stock comp related. We also have some continuing activities with the 40-gigabit per second device that we taped out in the second quarter that will be continuing into Q3. And as I alluded to earlier, you may start to see some expenses related to the tape out that we expect in the second half of the year.

Irit Jakoby – Susquehanna

Okay. And then with respect to the revenue guidance, is there a particular vertical that you are more cautious about than others? Because looking at the past seasonality Q3, there was a bigger jump Q3 over Q2 than Q4 over Q3.

Eyal Waldman

There's no particular segment we're more cautious about. We just – I think the visibility is lower going into Q3. But that has multiple reasons. One of them, shipping to the tier-one server company and having them being the largest customer obviously has some visibility aspects to that. And again, we may see that jump, but for now the – we'd like to guide to the more conservative $28.5 million to $29 million for Q3.

Irit Jakoby – Susquehanna

Okay. Thank you.

Eyal Waldman

Thank you.

Operator

(Operator instructions). We'll go next to Quince Slattery with Symmetry Peak Management.

Quince Slattery – Symmetry Peak Management

Hey guys. Thanks for taking my question. Just if you guys could elaborate a little bit more just in terms of guidance. Have you seen a shift at all, Eyal, in terms of visibility and customer orders at all sequentially? And then additionally, just on the cash balance is getting very high. Is there any shot that you guys might initiate a stock buyback?

Eyal Waldman

So, we're not seeing in terms of order coming in, we're not seeing any meaningful or significant trend that we can point out to. And in terms of cash in the bank, we first like to have a strong balance sheet and we're generating a record cash flow into our bank accounts. We are discussing this within the management team and the board. There's no conclusions yet in whether we're going to do that or not. I think more effective use or efficient use of our funds will be to add more technologies into the company and we're looking for that as well.

Quince Slattery – Symmetry Peak Management

Okay.

Eyal Waldman

So for now, there is no decision to do a stock buyback. Maybe in the future there will be. And we are looking to more technologies.

Quince Slattery – Symmetry Peak Management

I was just thinking about the stock this low in terms of valuation so cheap. It's certainly got to be quite accretive.

Eyal Waldman

It's true and we had some discussion within the board. The board still doesn't think this is the right use for the funds today and that may change in the future.

Quince Slattery – Symmetry Peak Management

Okay. Thanks.

Eyal Waldman

Thank you.

Operator

And that concludes our question-and-answer session. I'd like to turn things back to our speakers for any closing remarks.

Eyal Waldman

Thank you. We will be speaking at the 10th Anniversary Pacific Crest Technology Leadership Forum in Vale, Colorado on August 4th and at the RBC Capital Markets 2008 Technology, Media, and Communications Conference in San Francisco on August 6th. If you're interested in arranging a separate call or meeting, please contact our IR consultant, Stapleton Communications at deb@stapleton.com. And for Israeli investors, please contact Gelbart Kahana at nava@gk-biz.com. Presentations from these conferences will also be available through our Web site.

Thanks to all our employees for their dedication and contributions to our world-class organization. Thank you to all of you for your interest in Mellanox. Thank you and have a good day.

Operator

Thanks, everyone. That does conclude today's conference. You may now disconnect.

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