Sharks circle bleeding Mellanox

Shlomi Cohen

What halted Mellanox's slide on Thursday? It may well be that Oracle's Larry Ellison realized he had to act.

The reaction by investors to the opening of the reporting season for Israeli companies last week was no less surprising than the results themselves, Check Point Software Technologies Ltd. (Nasdaq: CHKP) missed on its sales line and guided below estimates for the current year, and the stock responded with a slight rise. Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX) astonished with its terrible guidance, and the market's response was just as astonishing, with the share price closing unchanged.

Check Point has finally joined the club of technology companies that lead their sectors but are no longer growing, and have billions of dollars parked with them that are crying out for action of some sort. In exactly the same category, although of a different order of size, are Cisco (CSCO), Microsoft (MSFT), and Intel (INTC). All three pay respectable dividends of 2.6% to 4.3% a year, and in my view Check Point founder and CEO Gil Shwed will again activate the cash mountain he has at his disposal to make a large acquisition or to distribute a decent-sized dividend.

Investors in Tel Aviv sold Mellanox on a 19% fall on Thursday, only to buy it on a 17% rise yesterday. This crazy scenario was written in Thursday's session in New York. In the coming weeks, we will know what happened there the day after the financials, when more than eleven million shares were traded a quarter of the company, fully diluted and large blocks of hundreds of thousands of shares changed hands.

The last time there was a similar volume in the share was in July 2010, when the company missed with its guidance, and investors slashed it from $23 to $15. Whoever sold then had to watch it soar afterwards to $120. In contrast to that miss, this time it seems to me that Mellanox's problem, which has caused it to issue two warnings in a single month is a lack of a management infrastructure to match the scale of sales to which the company has shot up in a very short time. Things of this kind are easy to remedy, and I have no doubt that, thanks to the technology it has and the needs of the IT market, the stock will turn northwards again, big time.

Meanwhile, fairly justly, it is copping a negative press from every direction, but to write that it yielded no return in 2012 except to its managers and staff through options, as one business newspaper said yesterday, is completely off the wall. You go to the bank with the share price, not with learned accounting analyses, and after all the twists and turns, the share returned 83% in 2012, following on from returns of hundreds of percentage points over the past few years. Yes, in this period it also made its managers and workers much richer, and rightly so.

The possibility that Oracle (ORCL) was among the buyers on Thursday makes a great deal of sense. When Oracle made its initial investment in Mellanox, in November 2010, they wrote that this was a strategic investment on the basis of many years of collaboration; that they were building their unique hardware systems on the basis of Mellanox's InfiniBand, and that the strong, friendly connection with Mellanox was very important to them. Who if not Oracle founder and CEO Larry Ellison knows that when a partner that is so important to you hemorrhages from a price of $120 to $40, the danger that other sharks will sniff around means that you have to act?

On the financials front this week, we have Radware Ltd. (Nasdaq: RDWR), which will report tomorrow, and which in my opinion will at least meet the estimates, and AudioCodes Ltd. (Nasdaq: AUDC; TASE: AUDC) and Attunity Inc. (Bulletin Board: ATTUF) later on.

AudioCodes probably swung to profit in the fourth quarter, after implementing an aggressive cost-cutting program last summer. The share price has risen substantially in the past few months, apparently because of good business with Microsoft, which buys from it complementary software and hardware for its highly successful Lync platform.

Attunity reports on Wednesday, and on Thursday, it is due to hold an analysts' conference in New York, which I think will be the first that this veteran company will ever have held in the city. You don't hold a conference like that the day after bad results, so I presume that the company will at least meet the general guidance it gave, which was that the fourth quarter would be the strongest of 2012, meaning sales of over $6.5 million.

Among the speakers at the New York conference will be managers from Amazon (AMZN) and EMC, which are Attunity's strategic and technology partners in Big Data and cloud computing, and I suppose that there will also be new announcements. Up to now, Attunity has not been wont to provide forward guidance with its results, but the agenda for the New York event perhaps indicates that its wonderful recovery process, led in the past few years by CEO Shimon Alon, is moving on to another stage, and that Alon will guide to the sales range he aspires to reach this year.

Published by Globes [online], Israel business news - www.globes-online.com - on January 28, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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