DS: Mellanox guidance catastrophic

Analyst Eran Jacobi: There is no question that rebuilding capital market confidence will be protracted and arduous.

24 January 13 11:12, Kobi Yeshayahou

"We thought we'd seen everything, but apparently we hadn’t. The fourth quarter financial report is in line with the revenue warning published earlier this month," said DS Brokerage analyst Eran Jacobi today in response to the fourth quarter and full-year financial report and guidance published by Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX). "The guidance for the first quarter of 2013 is catastrophic - $78-83 million. The company says that at a large OEM customer (we assume it's HP) built up a $30 million inventory."

Jacobi did not go into the details of Mellanox's explanations, saying only, "In general, we're talking about a customer which built up inventory and failed to sell to end customers, so there will not be $30 million revenue for the first quarter. Although the company expects to grow in 2013 over 2012, it's clear to us that even if that is the case, it will be single-digit growth at best."

Jacobi adds, "The company says that it is not losing market share and that its lowered guidance is a one-off even combined with a somewhat more challenging business environment. Management's argues that it will perform better and improve its oversight mechanisms to understand inventory build-up at its customers in line with demand by end customers. Despite these efforts, the company has almost no control over demand or influence on OEM customers to buy from it. Visibility therefore remains low at no more than one quarter, and we've seen that problems can crop up even at this horizon."

Jacobi concludes, "There is no question that rebuilding capital market confidence will be protracted and arduous. The company will have to work hard in the coming quarters to rebuild confidence and reduce volatility. Secondly, even if the second half is stronger, we still don’t see double-digit growth in 2013 over 2012. Higher operating expenses to prepare for 2014 are also liable to result in a lower net profit and earnings per share in 2013 compared with 2012."

Jacobi predicts Mellanox's earnings per share at $3-3.20 in 2013, down from $3.60 in 2012. Assuming a multiple of 10, and the company's cash reserves of $9.60 per share, he gives Mellanox a target price of $41.60 ($32 excluding the cash), and assuming a multiple of 12, he gives a target price of $48.

Published by Globes [online], Israel business news - www.globes-online.com - on January 24, 2013

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