Mellanox joins the billion dollar club

Shlomi Cohen

It took courage as well as hard work for Mellanox to reach the value it has today.

Ten weeks ago, I estimated that four Israel companies stood a good chance of crossing the $1 billion market cap threshold this year. On Friday, two days after releasing its first quarter financials, Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX), one of the four companies in question, hit a $30 all-time high share price, and reached the sought-after status for the first time since it was floated in 1997.

In my view, there is a reasonable chance that another two companies, Radware Ltd. (Nasdaq: RDWR), the only one of the four that has already been there, for a short period during the heady days of the high-tech bubble, and EZchip, will get there in the second half of the year. The fourth, Protalix Biotherapeutics Inc. (AMEX:PLX; TASE: PLX), is dependent on an FDA approval that did not materialize at the beginning of the year as expected, and so it seems that it will have to wait for billion dollar status until next year.

Mellanox would not have reached the goal this year were it not for a brave decision by its management, headed by CEO and co-founder Eyal Waldman, to buy its smaller Israeli customer/competitor Voltaire at the end of 2010 for $180 million net in cash. This was a brave decision, not just because of the business/technology risk in any large acquisition, but also because of the decision to pay the entire price in cash and not to dilute the shareholders, which meant that the company remained with the same number of shares and reached the $1 billion mark faster.

Optimum use of cash

Investors love to criticize CEOs when they hold too much cash see under Check Point Software Technologies Ltd. (Nasdaq: CHKP) but they also love to criticize CEOs when they decide to spend most of their cash on one acquisition. In Mellanox's case, it should also be recalled that in July 2010, the investors punished it harshly for a shortfall of just $4 million in its third quarter guidance, sending the share price tumbling to $15, giving a market cap of only half a billion dollars.

When the share price crashed 35% in a day last July, I asked Waldman why he didn't take advantage of the low and declare a large share buyback, since the company had $234 million cash. He replied that if the investors went crazy and reacted as they did to a slight hitch, that didn't mean that he should also go crazy and change the company's strategy, pointing out that he had other plans for the cash. He apparently already knew that the money was waiting patiently for Voltaire's agreement to be bought at a reasonable price for both sides, and it happened a few months later.

Now, less than a year after that share price collapse, the stock has completed a 100% rise. Even after the Voltaire acquisition, Mellanox still has $93 million cash, after tens of millions of dollars in positive cash flow from its operations in the three quarters since last July, $14 million of them in the first quarter of this year, on which the company reported last Wednesday. The report also showed that Oracle (ORCL), which owns 10% of Mellanox, became a customer accounting for 13% of quarterly sales. According to analysts covering Oracle, its hardware solutions, based on Mellanox, are doing well, and are only at the beginning of their market penetration.

From a situation of excessive punishment, the investors have switched to over generosity, with Mellanox receiving a p/e ratio of 30 on its projected profit for the current year. This is high, the kind of ratio given to companies expected to grow rapidly in the coming years. Mellanox is a leading provider of solutions for fast connectivity in large computing and storage centers, and investors know that in the new era that is just beginning, the era of cloud computing (a market that Apple (AAPL) is also joining with its iCloud brand), the good infrastructure vendors such as Mellanox will enjoy rising demand over many years.

Peaks for Ceva and ClickSoftware

Besides Mellanox, two other companies in my portfolio reached peak prices last week following the release of strong results. The companies are Ceva Inc. (Nasdaq:CEVA); LSE:CVA) and ClickSoftware Technologies Ltd. (Nasdaq: CKSW). The first is in chip design, the second in software, but they both reached their peaks for the same reason: huge demand for portable fixed-line handsets, a market of 2 billion handsets a year that will grow to 10 billion handsets in 2020, according to the research companies.

ClickSoftware provides software solution for optimizing management of service teams, mainly for companies with many technicians on the road, such as telecommunications companies and power companies. In an interview with "Globes" this week, CEO Moshe Benbassat explained that the huge popularity of iPhones and iPads and their like was starting to reach the enterprise market, which he said would greatly help ClickSoftware to sell its solutions.

ClickSoftware went the way of another Israeli software company in a special niche that I hold, Fundtech Ltd. (Nasdaq: FNDT; TASE: FNDT), and declared a dividend for the first time in its history, $0.32 per share, giving a 3.2% dividend yield on the current share price of $9.75.

Published by Globes [online], Israel business news - - on May 3, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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