SanDisk still has its doubters, but the only thing to fear at Mellanox is a "sell on news" reaction. Meanwhile, OTI investors are causing headaches.

15 October 12 18:38, Shlomi Cohen

Among the technology companies that I hold in my portfolio here, two will report this week: Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX) after the close tomorrow, and SanDisk Corporation (Nasdaq:SNDK) after the close on Thursday. I expect a third quarter better than the estimates for both of them, and also guidance better than the estimates for the fourth quarter. For Mellanox, this is fairly predictable, as the continuation of a wonderful year, but as far as SanDisk is concerned there are still those who doubt to what it extent it has really emerged from the difficult crisis of the first half of the year.

With Mellanox, although it will not disappoint, I fear a classic "sell on good news" reaction in the short term. This is because there is no chance of it beating the estimates by a long way as happened in the first two quarters of this year. Then, the company's share price jumped by tens of percentage points twice, on the April and July results releases.

It seems that Mellanox's management is also aware that overly high expectations are problematic, and so it has called a special analysts day for this Friday, at which it will amplify on the high demand for its solutions in the Big Data market, for HPC (high performance computing) and cloud computing environments.

In my view, for the first time in many years, SanDisk approaches its results and guidance day with the potential for a "perfect storm", but a positive one this time. This will be the first holiday season in which it has a presence in the best-selling product, the iPhone 5, of the highest flying company, Apple (AAPL), and perhaps also in the iPad Mini to be launched this month.

SanDisk also gains from the success of its own and Apple's rival Samsung, because it collects royalties on the NAND chips that Samsung manufactures, and in addition Samsung sells its storage solutions.

If early in the year SanDisk crashed together with Nokia, HTC, Motorola, and others, which were hit by the success of Apple, now, not only is it in Apple's court, but those other customers are also launching a great many new products for the holiday season. A very important element of the "perfect storm" is the recent turnaround in prices of NAND chips as a result of a freeze on new investment and/or reduction in production capacity on the NAND lines at all the producers.

NAND prices have been on the rise for several weeks, after a very long period of decline, something that will make a significant contribution to gross profit margins at SanDisk, which is known for its advanced production capabilities at the lines it owns jointly with Toshiba in Japan. The larger effect of this price rise will be on the guidance for gross profit in the fourth quarter.

Headaches for OTI founder

Boardroom battles are routine in the US, but a fascinating struggle is currently taking place at an Israeli company I hold here, OTI - On Track Innovations Ltd. (Nasdaq: OTIV; DAX: OT5). Owners of Israeli companies generally aspire to high levels of holdings by US institutions, but OTI founder and CEO Oded Bashan has a big headache these day precisely from the US institutions that hold more than a quarter of the company, compared with less than 10% held by the Bashan family.

The Americans are fed up with the heavy losses on their holdings, which they see as resulting from incompetent management of the company, and they are demanding deeds, not words. Two of the US institutions have reported on a form 13D that they intend to influence the management and control of the company, and one of them, Jerry Ivy, with a holding of nearly 10%, started an open war last week on the makeup of the company's next board, which in the long run may lead to new management, or even the sale of the company.

In a special report, Ivy writes that after six years as a shareholder he has reached the conclusion that OTI's current board is unable or unwilling to carry out the changes that will lead to the potential being realized, and so he has decided to act. OTI's shareholders meeting will take place on November 9, and shareholders will be asked to approve the appointments of three external directors recommended by Bashan: consultant Dr. Ora Setter, former IBM Israel general manager Meir Nissensohn, and Gen. (res.) Yossi Peled.

Ivy is unimpressed by this threesome, who are undoubtedly very worthy people, and he will recommend in their stead three Americans, each of whom he regards as an excellent professional, capable of getting OTI on the right track.

If I read the holdings and the determination of the institutions correctly, Bashan stands no chance of passing the appointment of the Israelis he wants, unless before the vote a compromise formula is reached with the American investors on the management of the company.

Published by Globes [online], Israel business news - www.globes-online.com - on October 15, 2012

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