Mellanox Achieves Record Quarterly and Annual Revenue

Annual revenue growth of 41.9 percent to $658 million

Annual Non-GAAP net income grew 2.4X to $138 million

Record annual revenues in InfiniBand and Ethernet products

SUNNYVALE, Calif. & YOKNEAM, Israel--(BUSINESS WIRE)--Mellanox® Technologies, Ltd. (NASDAQ: MLNX) today announced financial results for its fourth quarter and fiscal year ended December 31, 2015.

“We are pleased to achieve record quarterly and annual revenues. Our profitability grew 2.4 times year-over-year with operating income representing 21.3% of revenues. We are proud to grow our annual net income to $138.5 million and generate $150.5 million in cash from operations in 2015 - while we continued to invest in our technology and businesses,” said Eyal Waldman, president and CEO of Mellanox Technologies. “We saw strong growth in our Ethernet business in 2015, and expect it to accelerate in 2016 and beyond. We are pleased to see our InfiniBand business continue to grow across multiple markets and technology generations, with strong adoption of our EDR 100 Gigabit InfiniBand products. We look forward to closing the EZChip merger in the second half of February 2016. This merger is important to Mellanox and adds processing capabilities to our networking technologies. We believe the combination of these technologies will lead to a superior position in the data center interconnect market. We expect this transaction to be accretive from day one.”

Fourth Quarter and 2015 Fiscal Year Highlights

• Revenues were $176.9 million in the fourth quarter, and $658.1 million in fiscal year 2015.
• GAAP gross margins were 70.7 percent in the fourth quarter, and 71.3 percent in fiscal year 2015.
• Non-GAAP gross margins were 72.2 percent in the fourth quarter, and 72.8 percent in fiscal year 2015.
• GAAP operating income was $19.9 million, or 11.3 percent of revenue, in the fourth quarter, and operating income was $75.1 million, or 11.4 percent of revenue, in fiscal year 2015.
• Non-GAAP operating income was $36.6 million, or 20.7 percent of revenue, in the fourth quarter, and $139.9 million, or 21.3 percent of revenue, in fiscal year 2015.
• GAAP net income was $43.2 million in the fourth quarter and $92.9 million in fiscal year 2015 which included an income tax benefit from the release of a valuation allowance of $22.4 million in the fourth quarter.
• Non-GAAP net income was $37.5 million in the fourth quarter, and $138.5 million in fiscal year 2015.
• GAAP net income per diluted share was $0.90 in the fourth quarter, and $1.94 in fiscal year 2015.
• Non-GAAP net income per diluted share was $0.77 in the fourth quarter, and was $2.89 in fiscal year 2015.
• $34.7 million in cash was provided by operating activities during the fourth quarter.
• $150.5 million in cash was provided by operating activities during fiscal year 2015.
• Cash and investments totaled $510.5 million at December 31, 2015.

First Quarter 2016 Guidance

We currently project:

• Quarterly revenues of $180 million to $185 million
• Non-GAAP gross margins of 71 percent to 72 percent
• An increase in non-GAAP operating expenses of 2 percent to 4 percent
• Share-based compensation expense of $12.4 million to $12.9 million
• Non-GAAP diluted share count of 48.7 million to 49.2 million shares

Upon closing the EZchip transaction we will provide updated guidance for the combined entity.

Recent Mellanox Press Release Highlights

• Dec 14, 2015	Mellanox 10/40 Gigabit Ethernet Switches Approved for Use in U.S. Department of Defense Networks
• Nov 23, 2015	Mellanox and Oak Ridge National Laboratory Recognized by R&D 100 Awards
• Nov 17, 2015	Mellanox Announces "HPC Centers of Excellence" to Drive Advancement Toward Exascale Computing
• Nov 16, 2015	EDR 100Gb/s and FDR 56Gb/s InfiniBand Continues Growth and Interconnect Leadership on the TOP500
• Nov 16, 2015	Mellanox Announces ConnectX-4 Lx Programmable Adapter with Onboard Xilinx FPGA Acceleration
• Nov 16, 2015	TACC Selects Mellanox's End-to-End EDR 100Gb/s InfiniBand Solution to Further Cutting-Edge Medical and Science Research
• Nov 16, 2015	Centre for High-Performance Computing South Africa Selects Mellanox InfiniBand Solutions to Accelerate New Petaflop-Capable System
• Nov 12, 2015	Mellanox Introduces the Switch-IB 2, World's First 100Gb/s Smart Switch
• Nov 4, 2015	IBM Teams with Mellanox to Help Maximize Performance of Power Systems LC Line Servers for Cloud and Cluster Deployments
• Nov 2, 2015	Mellanox Open Ethernet Switches Accepted By Open Compute Project

Conference Call

Mellanox will hold its fourth quarter and fiscal year 2015 financial results conference call today at 2 p.m. Pacific Time to discuss the company’s financial results. To listen to the call, dial [phone] 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. Access the webcast 15 minutes prior to the start of the call to download and install any necessary audio software. Replay of the webcast will also be available on the Mellanox website.

About Mellanox

Mellanox Technologies is a leading supplier of end-to-end InfiniBand and Ethernet interconnect solutions and services for servers and storage. Mellanox interconnect solutions increase data center efficiency by providing the highest throughput and lowest latency, delivering data faster to applications and unlocking system performance capability. Mellanox offers a choice of fast interconnect products: adapters, switches, software, cables 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 and financial services. More information is available at www.mellanox.com.

GAAP to Non-GAAP Reconciliation

To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), Mellanox uses 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, acquisition related expense, settlement costs, changes related to recognition of deferred tax valuation allowance and gains (impairment losses) on equity investments. 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, acquisition related expense, settlement costs, changes related to recognition of deferred tax valuation allowance, and gains (impairment losses) on equity investments 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 and changes related to recognition of deferred tax valuation allowance 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.

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 guidance for the three months ended March 31, 2016, statements related to our expectations for achievement of continued revenue growth and record revenue for the fiscal year 2016, statements related to trends in the market for our solutions and services, opportunities for our company in 2016 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, and our ability to protect our intellectual property rights. Furthermore, the majority of our quarterly revenues 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 the Securities and Exchange Commission.

More information about the risks, uncertainties and assumptions that may impact our business is set forth in our Form 10-Q filed with the SEC on October 30, 2015, and our annual report on Form 10-K filed with the SEC on March 2, 2015. All forward-looking statements in this press release, including the guidance for the three months ended March 31, 2016, are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

Mellanox is a registered trademark of Mellanox 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,					Twelve Months Ended December 31,
	2015		2014			2015			2014
Total revenues	$	176,940	$	141,116		$	658,140		$	463,649
Cost of revenues		51,815		41,131			189,209			148,672
Gross profit		125,125		99,985			468,931			314,977
Operating expenses:
Research and development		65,620		56,814			252,175			208,877
Sales and marketing		26,698		19,995			97,438			76,860
General and administrative		12,897		9,570			44,212			36,431
Total operating expenses		105,215		86,379			393,825			322,168
Income (loss) from operations		19,910		13,606			75,106			(7,191	)
Other income (loss), net		592		497			(524	)		1,449
Income (loss) before taxes		20,502		14,103			74,582			(5,742	)
Benefit from (provision for) taxes on income		22,696		(18,856	)		18,312			(18,267	)
Net income (loss)	$	43,198	$	(4,753	)	$	92,894		$	(24,009	)
Net income (loss) per share — basic	$	0.92	$	(0.10	)	$	2.00		$	(0.54	)
Net income (loss) per share — diluted	$	0.90	$	(0.10	)	$	1.94		$	(0.54	)
Shares used in per share calculation:
Basic		46,978		45,380			46,365			44,831
Diluted		48,221		45,380			47,778			44,831

Mellanox Technologies, Ltd. Reconciliation of Non-GAAP Adjustments (in thousands, percentages, unaudited)
	Three Months Ended December 31,						Twelve Months Ended December 31,
	2015			2014			2015			2014
Reconciliation of GAAP net income (loss) to non-GAAP:
GAAP net income (loss)	$	43,198		$	(4,753	)	$	92,894		$	(24,009	)
Adjustments:
Share-based compensation expense:
Cost of revenues	617			576			2,366			2,162
Research and development	7,317			6,792			28,821			26,979
Sales and marketing	2,544			2,370			10,309			9,755
General and administrative	2,452			2,063			9,268			8,339
Total share-based compensation expense	12,930			11,801			50,764			47,235
Amortization of acquired intangibles:
Cost of revenues	2,073			1,474			7,694			7,173
Research and development	195			195			779			781
Sales and marketing	196			1,039			1,173			4,156
Total amortization of acquired intangibles	2,464			2,708			9,646			12,110
Settlement costs:
Cost of revenues	—			—			—			1,250
Total settlement costs	—			—			—			1,250
Acquisition related charges:
Cost of revenues	—			—			—			849
Research and development	225			744			2,118			2,693
Sales and marketing	—			226			450			863
General and administrative	1,078			—			1,820			—
Total acquisition related charges	1,303			970			4,388			4,405
Other (income) loss, net:
Impairment loss on equity investment in a private company	—			—			3,189			—
	—			—			3,189			—
(Benefit from) provision for income taxes - valuation allowance adjustment	(22,410		)	17,231			(22,410		)	17,231
Non-GAAP net income	$	37,485		$	27,957		$	138,471		$	58,222
Reconciliation of GAAP gross profit to non-GAAP:
Revenues	$	176,940		$	141,116		$	658,140		$	463,649
GAAP gross profit	125,125			99,985			468,931			314,977
GAAP gross margin	70.7		%	70.9		%	71.3		%	67.9		%
Share-based compensation expense	617			576			2,366			2,162
Amortization of acquired intangibles	2,073			1,474			7,694			7,173
Settlement costs	—			—			—			1,250
Acquisition related charges	—			—			—			849
Non-GAAP gross profit	$	127,815		$	102,035		$	478,991		$	326,411
Non-GAAP gross margin	72.2		%	72.3		%	72.8		%	70.4		%
Reconciliation of GAAP operating expenses to non-GAAP:
GAAP operating expenses	$	105,215		$	86,379		$	393,825		$	322,168
Share-based compensation expense	(12,313		)	(11,225		)	(48,398		)	(45,073		)
Amortization of acquired intangibles	(391		)	(1,234		)	(1,952		)	(4,937		)
Acquisition related charges	(1,303		)	(970		)	(4,388		)	(3,556		)
Non-GAAP operating expenses	$	91,208		$	72,950		$	339,087		$	268,602

Mellanox Technologies, Ltd. Reconciliation of Non-GAAP Adjustments (in thousands, except per share data, unaudited)
	Three Months Ended December 31,						Twelve Months Ended December 31,
	2015			2014			2015			2014
Reconciliation of GAAP income (loss) from operations to non-GAAP:
GAAP income (loss) from operations	19,910			13,606			75,106			(7,191		)
Share-based compensation expense	12,930			11,801			50,764			47,235
Settlement costs	—			—			—			1,250
Amortization of acquired intangibles	2,464			2,708			9,646			12,110
Acquisition related charges	1,303			970			4,388			4,405
Non-GAAP income from operations	36,607			29,085			139,904			57,809
Shares used in computing GAAP diluted earnings per share	48,221			45,380			47,778			44,831
Adjustments:
Effect of dilutive securities under GAAP*	(1,242		)	—			(1,413		)	—
Total options vested and exercisable	1,546			1,837			1,546			1,837
Shares used in computing non-GAAP diluted earnings per share	48,525			47,217			47,911			46,668
GAAP diluted net income (loss) per share	$	0.90		$	(0.10	)	$	1.94		$	(0.54	)
Adjustments:
Share-based compensation expense	0.27			0.26			1.06			1.05
Amortization of acquired intangibles	0.04			0.06			0.20			0.27
Settlement costs	—			—			—			0.03
Acquisition related charges	0.02			0.02			0.09			0.10
Impairment loss on equity investment in a private company	—			—			0.07			—
(Benefit from) provision for income taxes - valuation allowance adjustment	(0.46		)	0.38			(0.47		)	0.38
Effect of dilutive securities under GAAP*	0.02			—			0.09			—
Total options vested and exercisable	(0.02		)	(0.03		)	(0.09		)	(0.04		)
Non-GAAP diluted income per share	$	0.77		$	0.59		$	2.89		$	1.25

* This adjustment adds back the GAAP effect of additional ordinary shares that would have been outstanding if the dilutive potential ordinary shares from stock options had been issued under the Treasury method.

Mellanox Technologies, Ltd. Condensed Consolidated Balance Sheets (in thousands, unaudited)
	December 31, 2015			December 31, 2014 (*)
ASSETS
Current assets:
Cash and cash equivalents	$	263,199		$	51,326
Short-term investments	247,314			334,038
Restricted cash	—			3,604
Accounts receivable, net	84,273			64,922
Inventories	62,473			44,470
Other current assets	19,979			15,876
Total current assets	677,238			514,236
Property and equipment, net	100,018			78,827
Severance assets	9,514			9,474
Intangible assets, net	32,154			42,067
Goodwill	200,743			200,743
Deferred taxes and other long-term assets	33,715			17,871
Total assets	$	1,053,382		$	863,218
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	44,600		$	39,811
Accrued liabilities	74,296			61,974
Deferred revenue	17,743			14,758
Capital lease liabilities, current	491			1,102
Total current liabilities	137,130			117,645
Accrued severance	12,464			11,850
Deferred revenue	12,439			8,942
Capital lease liabilities	—			494
Other long-term liabilities	24,668			22,535
Total liabilities	186,701			161,466
Shareholders’ equity:
Ordinary shares	200			192
Additional paid-in capital	684,824			615,148
Accumulated other comprehensive loss	(1,669		)	(4,020		)
Retained earnings	183,326			90,432
Total shareholders’ equity	866,681			701,752
Total liabilities and shareholders’ equity	$	1,053,382		$	863,218

(*) Certain prior year amounts have been reclassified to conform to 2015 presentation.

Mellanox Technologies, Ltd. Condensed Consolidated Statement of Cash Flows (in thousands, unaudited)
	Year ended December 31,
	2015			2014
Cash flows from operating activities:
Net income (loss)	$	92,894		$	(24,009	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	41,372			38,671
Deferred income taxes	(22,607		)	13,832
Share-based compensation expense	50,764			47,235
(Gain) loss on investments	(3,000		)	425
Excess tax benefit from share-based compensation	(53		)	(342		)
Impairment of equity investment in a private company	3,189			—
Changes in assets and liabilities:
Accounts receivable, net	(19,351		)	5,421
Inventory	(24,735		)	(9,624		)
Prepaid expenses and other assets	(2,619		)	(7,687		)
Accounts payable	3,750			9,659
Accrued liabilities and other payables	30,884			6,549
Net cash provided by operating activities	150,488			80,130
Cash flows from investing activities:
Acquisitions, net of cash acquired of $2,464	—			(2,253		)
Purchase of severance-related insurance policies	(743		)	(777		)
Purchase of short term investments	(219,459		)	(307,924		)
Proceeds from sale of short term investments	179,700			158,054
Proceeds from maturities of short term investments	129,279			78,567
Purchase of property and equipment	(48,601		)	(29,924		)
Restricted cash	3,604			—
Purchase of intangible finite-lived assets	(210		)	—
Purchase of equity investment in a private company	—			(3,455		)
Net cash provided by (used in) investing activities	43,570			(107,712		)
Cash flows from financing activities:
Principal payments on capital lease obligations	(1,105		)	(1,381		)
Proceeds from exercise of share awards	18,867			16,783
Excess tax benefit from share-based compensation	53			342
Net cash provided by financing activities	17,815			15,744
Net increase (decrease) in cash and cash equivalents	211,873			(11,838		)
Cash and cash equivalents at beginning of period	51,326			63,164
Cash and cash equivalents at end of period	$	263,199		$	51,326