e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period
to
Commission File No. 001-33299
MELLANOX TECHNOLOGIES, LTD.
(Exact Name of Registrant as Specified in Its Charter)
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ISRAEL
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98-0233400 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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HERMON BUILDING, YOKNEAM, ISRAEL
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20692 |
(Address of Principal Executive Offices)
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(Zip Code) |
Registrants Telephone Number, Including Area Code: +972-4-909-7200
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act) Yes o No þ
The total number of outstanding shares of the registrants Ordinary Shares, nominal value of
NIS 0.0175 per share, as of April 30, 2010, was 33,545,257.
MELLANOX TECHNOLOGIES, LTD.
2
PART I. FINANCIAL INFORMATION
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ITEM 1 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
MELLANOX TECHNOLOGIES, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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March 31, |
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December 31, |
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2010 |
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2009 |
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(In thousands) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
51,945 |
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$ |
43,640 |
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Short-term investments |
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165,410 |
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166,357 |
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Restricted cash |
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3,206 |
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3,160 |
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Accounts receivable, net |
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22,122 |
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20,418 |
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Inventories |
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11,994 |
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9,328 |
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Deferred taxes |
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6,838 |
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8,605 |
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Prepaid expenses and other |
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3,318 |
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3,825 |
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Total current assets |
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264,833 |
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255,333 |
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Property and equipment, net |
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12,317 |
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9,734 |
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Severance assets |
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4,842 |
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4,629 |
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Intangible assets, net |
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430 |
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428 |
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Deferred taxes |
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812 |
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812 |
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Other long-term assets |
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4,387 |
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4,450 |
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Total assets |
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$ |
287,621 |
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$ |
275,386 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
9,672 |
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$ |
8,775 |
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Other accrued liabilities |
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14,205 |
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14,804 |
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Capital lease obligations, current |
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356 |
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528 |
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Total current liabilities |
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24,233 |
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24,107 |
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Accrued severance |
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6,080 |
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5,778 |
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Capital lease obligations |
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395 |
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474 |
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Other long-term obligations |
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2,149 |
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2,144 |
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Total liabilities |
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32,857 |
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32,503 |
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Shareholders equity: |
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Ordinary shares |
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137 |
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135 |
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Additional paid-in capital |
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247,510 |
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240,807 |
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Accumulated other comprehensive income |
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305 |
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367 |
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Retained earnings |
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6,812 |
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1,574 |
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Total shareholders equity |
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254,764 |
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242,883 |
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Total liabilities and shareholders equity |
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$ |
287,621 |
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$ |
275,386 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MELLANOX TECHNOLOGIES, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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(In thousands, except per |
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share data) |
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Total revenues |
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$ |
36,210 |
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$ |
22,558 |
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Cost of revenues |
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(9,023 |
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(5,352 |
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Gross profit |
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27,187 |
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17,206 |
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Operating expenses: |
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Research and development |
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12,277 |
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8,622 |
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Sales and marketing |
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5,013 |
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3,702 |
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General and administrative |
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2,636 |
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2,202 |
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Total operating expenses |
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19,926 |
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14,526 |
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Income from operations |
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7,261 |
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2,680 |
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Other income, net |
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113 |
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541 |
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Income before taxes on income |
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7,374 |
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3,221 |
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Provision for taxes on income |
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(2,136 |
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(1,105 |
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Net income |
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$ |
5,238 |
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$ |
2,116 |
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Net income per share basic |
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$ |
0.16 |
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$ |
0.07 |
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Net income per share diluted |
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$ |
0.15 |
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$ |
0.06 |
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Shares used in computing net income per share: |
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Basic |
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32,960 |
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31,823 |
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Diluted |
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34,759 |
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32,835 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MELLANOX TECHNOLOGIES, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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(In thousands) |
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Cash flows from operating activities: |
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Net income |
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$ |
5,238 |
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$ |
2,116 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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1,089 |
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1,075 |
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Deferred income taxes |
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1,767 |
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783 |
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Share-based compensation expense |
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3,388 |
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2,324 |
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Gain on sale of investments |
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(153 |
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(135 |
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Changes in assets and liabilities: |
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Accounts receivable, net |
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(1,704 |
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6,676 |
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Inventories |
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(3,228 |
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817 |
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Prepaid expenses and other assets |
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1,092 |
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1,211 |
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Accounts payable |
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897 |
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(4,656 |
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Accrued liabilities and other payables |
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(292 |
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(6,118 |
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Net cash provided by operating activities |
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8,094 |
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4,093 |
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Cash flows from investing activities: |
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Purchase of severance-related insurance policies |
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(185 |
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(331 |
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Purchases of short-term investments |
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(74,250 |
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(74,902 |
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Proceeds from sales of short-term investments |
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56,567 |
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32,338 |
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Proceeds from maturities of short-term investments |
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18,687 |
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3,500 |
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Increase in restricted cash deposits |
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(1,547 |
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Purchase of property and equipment |
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(3,674 |
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(605 |
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Net cash used in investing activities |
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(2,855 |
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(41,547 |
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Cash flows from financing activities: |
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Principal payments on capital lease obligations |
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(251 |
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(206 |
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Proceeds from issuance of ordinary shares to employees |
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3,046 |
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837 |
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Excess tax benefit from share-based compensation |
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271 |
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Net cash provided by financing activities |
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3,066 |
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631 |
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Net increase (decrease) in cash and cash equivalents |
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8,305 |
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(36,823 |
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Cash and cash equivalents at beginning of period |
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43,640 |
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110,153 |
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Cash and cash equivalents at end of period |
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$ |
51,945 |
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$ |
73,330 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
MELLANOX TECHNOLOGIES, LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Company
Mellanox Technologies, Ltd. (the Company or Mellanox) was incorporated in Israel and
commenced operations in March 1999. Mellanox is a leading supplier of end-to-end connectivity
solutions for data center servers and storage.
Principles of presentation
The condensed consolidated financial statements included in this quarterly report on Form 10-Q
have been prepared by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC). The year-end condensed balance sheet data was
derived from audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in accordance with U.S.
generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such
rules and regulations. However, the Company believes that the disclosures contained in this
quarterly report comply with the requirements of Section 13(a) of the Securities Exchange Act of
1934, as amended, for a quarterly report on Form 10-Q and are adequate to make the information
presented not misleading. The condensed consolidated financial statements included herein reflect
all adjustments (consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of the financial position, results of operations and
cash flows for the interim periods presented. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and notes thereto
contained in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009,
filed with the SEC on March 5, 2010. The results of operations for the three months ended March 31,
2010 are not necessarily indicative of the results to be anticipated for the entire year ending
December 31, 2010 or thereafter.
Risks and uncertainties
The Company is subject to all of the risks inherent in a company which operates in the dynamic
and competitive semiconductor industry. Significant changes in any of the following areas could
have a material adverse impact on the Companys financial position and results of operations:
unpredictable volume or timing of customer orders; the sales outlook and purchasing patterns of the
Companys customers, based on consumer demands and general economic conditions; loss of one or more
of the Companys customers; decreases in the average selling prices of products or increases in the
average cost of finished goods; the availability, pricing and timeliness of delivery of components
used in the Companys products; reliance on a limited number of subcontractors to manufacture,
assemble, package and production test the Companys products; the Companys ability to successfully
develop, introduce and sell new or enhanced products in a timely manner; product obsolescence and
the Companys ability to manage product transitions; and the timing of announcements or
introductions of new products by the Companys competitors.
Additionally, the Company has a significant presence in Israel, including research and
development activities, corporate facilities and sales support operations. Uncertainty surrounding
the political, economic and military conditions in Israel may directly impact the Companys
financial results.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of net revenues and expenses in the reporting
period. We regularly evaluate estimates and assumptions related to revenue recognition, allowances
for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves,
share-based compensation expense, long-term asset valuations, investments, deferred income tax
asset valuation allowances, uncertain tax positions, litigation and other loss contingencies. These
estimates and assumptions are based on current facts, historical experience and various other
factors that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities and the recording of
revenue, costs and expenses that are not readily apparent from other sources. The actual results we
experience may differ
6
materially and adversely from our original estimates. To the extent there are material
differences between the estimates and actual results, our future results of operations will be
affected.
Significant accounting policies
There have been no changes in our significant accounting policies that were disclosed in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Concentration of credit risk
The following table summarizes the revenues from customers (including original equipment
manufacturers) in excess of 10% of the total revenues:
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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Hewlett-Packard |
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16 |
% |
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13 |
% |
Voltaire |
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12 |
% |
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* |
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Super Micro Computer Inc. |
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* |
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16 |
% |
Sun Microsystems |
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* |
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11 |
% |
At March 31, 2010, Voltaire and Hewlett Packard accounted for 17% and 11%, respectively, of
the Companys total accounts receivable. At December 31, 2009, IBM and Hewlett-Packard accounted
for 21% and 13%, respectively, of the Companys total accounts receivable.
Product warranty
Changes in the Companys liability for product warranty during the three months ended March
31, 2010 and 2009 are as follows:
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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(In thousands) |
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Balance, beginning of the period |
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$ |
902 |
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$ |
997 |
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Warranties issued during the period, net |
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139 |
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123 |
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Reversal of warranty reserves |
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(91 |
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(122 |
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Settlements during the period |
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(74 |
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(52 |
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Balance, end of the period |
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$ |
876 |
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$ |
946 |
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Net income per share
The following table sets forth the computation of basic and diluted net income per share for
the periods indicated:
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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(In thousands, except per |
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share data) |
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Net income |
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$ |
5,238 |
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$ |
2,116 |
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Basic and diluted shares: |
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Weighted average ordinary shares outstanding |
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32,960 |
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31,823 |
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Shares used to compute basic net income per share |
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32,960 |
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31,823 |
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Effect of dilutive securities ordinary share options |
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1,799 |
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1,012 |
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Shares used to compute diluted net income per share |
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34,759 |
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32,835 |
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Net income per share attributable to ordinary shareholders basic |
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$ |
0.16 |
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$ |
0.07 |
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Net income per share attributable to ordinary shareholders diluted |
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$ |
0.15 |
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$ |
0.06 |
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7
Recent accounting pronouncements
With the exception of those stated below, there have been no recent accounting pronouncements
or changes in accounting pronouncements during the three months ended March 31, 2010, as compared
to the recent accounting pronouncements described in the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2009, that are of material significance, or have potential
material significance, to the Company.
Effective April 1, 2009, the Company adopted the updated guidance related to subsequent
events, which establishes general standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are available to be
issued. The updated guidance initially required the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date that is, whether that date
represents the date the financial statements were issued or were available to be issued. However,
in February 2010, the FASB amended the guidance to remove the requirement to disclose the date
through which subsequent events were evaluated. Adoption of the updated guidance did not have a
material impact on the Companys consolidated results of operations or financial condition.
Effective January 1, 2010, the Company adopted the FASBs updated guidance related to fair
value measurements and disclosures, which requires a reporting entity to disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to
describe the reasons for the transfers. In addition, in the reconciliation for fair value
measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose
separately information about purchases, sales, issuances and settlements (that is, on a gross basis
rather than one net number). The updated guidance also requires that an entity should provide fair
value measurement disclosures for each class of assets and liabilities and disclosures about the
valuation techniques and inputs used to measure fair value for both recurring and non-recurring
fair value measurements for Level 2 and Level 3 fair value measurements. The guidance is effective
for interim or annual financial reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level
3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010
and for interim periods within those fiscal years. The Company has updated its disclosures to
comply with the updated guidance; however, adoption of the updated guidance did not have an impact
on the Companys consolidated results of operations or financial condition.
NOTE 2 BALANCE SHEET COMPONENTS:
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March 31, |
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December 31, |
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2010 |
|
|
2009 |
|
|
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(In thousands) |
|
Cash and cash equivalents: |
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|
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|
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Cash |
|
$ |
38,041 |
|
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$ |
14,359 |
|
Money market funds |
|
|
13,904 |
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|
29,281 |
|
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|
|
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|
|
$ |
51,945 |
|
|
$ |
43,640 |
|
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Accounts receivable, net: |
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|
|
Accounts receivable |
|
$ |
22,508 |
|
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$ |
20,708 |
|
Less: Allowance for doubtful accounts |
|
|
(386 |
) |
|
|
(290 |
) |
|
|
|
|
|
|
|
|
|
$ |
22,122 |
|
|
$ |
20,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
844 |
|
|
$ |
941 |
|
Work-in-process |
|
|
1,604 |
|
|
|
1,497 |
|
Finished goods |
|
|
9,546 |
|
|
|
6,890 |
|
|
|
|
|
|
|
|
|
|
$ |
11,994 |
|
|
$ |
9,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense and other: |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
$ |
1,993 |
|
|
$ |
1,648 |
|
Income tax and VAT recoverable |
|
|
751 |
|
|
|
949 |
|
Other receivable |
|
|
291 |
|
|
|
949 |
|
Forward contracts |
|
|
218 |
|
|
|
183 |
|
Other |
|
|
65 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
$ |
3,318 |
|
|
$ |
3,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
Computer equipment and software |
|
$ |
30,819 |
|
|
$ |
28,175 |
|
Furniture and fixtures |
|
|
1,886 |
|
|
|
1,809 |
|
Leasehold improvements |
|
|
3,080 |
|
|
|
2,184 |
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
|
|
|
35,785 |
|
|
|
32,168 |
|
Less: Accumulated depreciation and amortization |
|
|
(23,468 |
) |
|
|
(22,434 |
) |
|
|
|
|
|
|
|
|
|
$ |
12,317 |
|
|
$ |
9,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term assets: |
|
|
|
|
|
|
|
|
Equity investments in private companies |
|
$ |
4,000 |
|
|
$ |
4,000 |
|
Prepaid expenses |
|
|
324 |
|
|
|
387 |
|
Long term deposits |
|
|
63 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
$ |
4,387 |
|
|
$ |
4,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities: |
|
|
|
|
|
|
|
|
Payroll and related expenses |
|
$ |
7,237 |
|
|
$ |
8,170 |
|
Professional services |
|
|
4,354 |
|
|
|
3,169 |
|
Warranty |
|
|
876 |
|
|
|
902 |
|
Income tax payable |
|
|
|
|
|
|
683 |
|
Sales commissions |
|
|
533 |
|
|
|
548 |
|
Other |
|
|
1,205 |
|
|
|
1,332 |
|
|
|
|
|
|
|
|
|
|
$ |
14,205 |
|
|
$ |
14,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations: |
|
|
|
|
|
|
|
|
Income tax payable |
|
$ |
1,557 |
|
|
$ |
1,510 |
|
Other |
|
|
592 |
|
|
|
634 |
|
|
|
|
|
|
|
|
|
|
$ |
2,149 |
|
|
$ |
2,144 |
|
|
|
|
|
|
|
|
NOTE 3 INVESTMENTS AND FAIR VALUE MEASUREMENTS:
Fair value hierarchy
The following table represents the fair value hierarchy of the Companys financial assets
measured at fair value as of March 31, 2010. There were no financial liabilities as of March 31,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
Money market funds |
|
$ |
13,904 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
13,904 |
|
US Government bonds |
|
|
|
|
|
|
5,001 |
|
|
|
|
|
|
|
5,001 |
|
US agency fixed rate |
|
|
|
|
|
|
29,232 |
|
|
|
|
|
|
|
29,232 |
|
Agency discount notes |
|
|
|
|
|
|
62,261 |
|
|
|
|
|
|
|
62,261 |
|
US Treasury securities |
|
|
|
|
|
|
68,916 |
|
|
|
|
|
|
|
68,916 |
|
Forward contracts |
|
|
|
|
|
|
217 |
|
|
|
|
|
|
|
217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets |
|
$ |
13,904 |
|
|
$ |
165,627 |
|
|
$ |
|
|
|
$ |
179,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents the fair value hierarchy of the Companys financial assets
measured at fair value as of December 31, 2009. There were no financial liabilities as of December
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Money market funds |
|
$ |
29,281 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
29,281 |
|
US Government bonds |
|
|
|
|
|
|
5,746 |
|
|
|
|
|
|
|
5,746 |
|
US agency fixed rate |
|
|
|
|
|
|
34,310 |
|
|
|
|
|
|
|
34,310 |
|
US agency discount notes |
|
|
|
|
|
|
61,781 |
|
|
|
|
|
|
|
61,781 |
|
US Treasury securities |
|
|
|
|
|
|
64,520 |
|
|
|
|
|
|
|
64,520 |
|
Forward contracts |
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets |
|
$ |
29,281 |
|
|
$ |
166,540 |
|
|
$ |
|
|
|
$ |
195,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Short-term investments
At March 31, 2010 and December 31, 2009, the Company held short-term investments classified as
available-for-sale securities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Money market funds |
|
$ |
13,904 |
|
|
$ |
|
|
|
$ |
13,904 |
|
U.S. Treasury and agency securities |
|
|
165,322 |
|
|
|
88 |
|
|
|
165,410 |
|
|
|
|
|
|
|
|
|
|
|
Total investments in marketable securities |
|
|
179,226 |
|
|
|
88 |
|
|
|
179,314 |
|
Less amounts classified as cash equivalents |
|
|
(13,904 |
) |
|
|
|
|
|
|
(13,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
165,322 |
|
|
$ |
88 |
|
|
$ |
165,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Money market funds |
|
$ |
29,281 |
|
|
$ |
|
|
|
$ |
29,281 |
|
U.S. Treasury and agency securities |
|
|
166,173 |
|
|
|
184 |
|
|
|
166,357 |
|
|
|
|
|
|
|
|
|
|
|
Total investments in marketable securities |
|
|
195,454 |
|
|
|
184 |
|
|
|
195,638 |
|
Less amounts classified as cash equivalents |
|
|
(29,281 |
) |
|
|
|
|
|
|
(29,281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
166,173 |
|
|
$ |
184 |
|
|
$ |
166,357 |
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of available-for-sale securities at March 31, 2010 are presented in
the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Amortized |
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Due in one year or less |
|
$ |
159,505 |
|
|
$ |
159,565 |
|
Due between one and two years |
|
|
5,817 |
|
|
|
5,845 |
|
|
|
|
|
|
|
|
Total investments in available-for-sale securities |
|
$ |
165,322 |
|
|
$ |
165,410 |
|
|
|
|
|
|
|
|
The contractual maturities of available-for-sale securities at December 31, 2009 were due in one
year or less.
NOTE 4 DERIVATIVES AND HEDGING ACTIVITIES:
The Company uses derivative instruments primarily to manage exposures to foreign currency. The
Company enters into forward contracts to manage its exposure to changes in the exchange rate of the
New Israeli Shekel (NIS) against the U.S. dollar. The Companys primary objective in entering
into these arrangements is to reduce the volatility of earnings and cash flows associated with
changes in foreign currency exchange rates. The program is not designated for trading or
speculative purposes. The Companys forward contracts expose the Company to credit risk to the
extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks
to mitigate such risk by limiting its counterparties to major financial institutions and by
spreading the risk across a number of major financial institutions. In addition, the potential risk
of loss with any one counterparty resulting from this type of credit risk is monitored on an
ongoing basis.
The Company uses forward contracts designated as cash flow hedges to hedge a substantial
portion of future forecasted operating expenses in NIS. The gain or loss on the effective portion
of a cash flow hedge is initially reported as a component of accumulated other comprehensive income
(loss) (OCI) and subsequently reclassified into operating expenses in the same period in which
the hedged operating expenses are recognized, or reclassified into other income, net, if the hedged
transaction becomes probable of not occurring. Any gain or loss after a hedge is de-designated
because it is no longer probable of occurring or related to an ineffective portion of a hedge, as
well as any amount excluded from the Companys hedge effectiveness, is recognized as other income
(expense) immediately. The net gains or losses relating to ineffectiveness were not material in the
three months ended March 31, 2010 and 2009. As of March 31, 2010, the Company had forward contracts
in place that hedged future operating expenses of approximately 52.6
million NIS, or approximately $14.2 million based upon the exchange rate as of March 31, 2010.
The forward contracts cover future NIS denominated operating expenses expected to occur over the
next twelve months.
10
The Company does not use derivative financial instruments for purposes other than cash flow
hedges.
Fair value of derivative contracts
Fair value of derivative contracts as of March 31, 2010 and December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets Reported in |
|
|
Derivative Liabilities Reported in |
|
|
|
Other Current Assets |
|
|
Other Current Liabilities |
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Foreign exchange contracts designated as cash flow hedges |
|
$ |
217 |
|
|
$ |
183 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
217 |
|
|
$ |
183 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of designated derivative contracts on accumulated other comprehensive income
The following table represents the balance of designated derivative contracts as cash flow
hedges as of March 31, 2010 and December 31, 2009, and their impact on OCI for the three months
ended March 31, 2010 (in thousands):
|
|
|
|
|
December 31, 2009 |
|
$ |
183 |
|
Amount of gain recognized in OCI (effective portion) |
|
|
281 |
|
Amount of gain reclassified from OCI to income (effective portion) |
|
|
(247 |
) |
|
|
|
|
March 31, 2010 |
|
$ |
217 |
|
|
|
|
|
Foreign exchange contracts designated as cash flow hedges relate primarily to operating
expenses and the associated gains and losses are expected to be recorded in operating expenses when
reclassed out of OCI. The Company expects to realize the accumulated OCI balance related to foreign
exchange contracts within the next twelve months.
Effect of derivative contracts on the condensed consolidated statement of operations
The impact of derivative contracts on total operating expenses in the three months ended March
31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2010 |
|
2009 |
|
|
(In thousands) |
Gain (loss) on foreign exchange contracts designated as cash flow hedges |
|
$ |
247 |
|
|
$ |
(527 |
) |
NOTE 5 COMMITMENTS AND CONTINGENCIES:
Leases
As of March 31, 2010, future minimum lease payments under non-cancelable operating and capital
leases, and future minimum sublease rental receipts under non-cancelable operating leases are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
Year Ended December 31, |
|
Leases |
|
|
Leases |
|
|
|
(In thousands) |
|
2010 |
|
$ |
284 |
|
|
$ |
3,339 |
|
2011 |
|
|
316 |
|
|
|
3,837 |
|
2012 |
|
|
158 |
|
|
|
2,301 |
|
2013 |
|
|
|
|
|
|
744 |
|
2014 and beyond |
|
|
|
|
|
|
312 |
|
|
|
|
|
|
|
|
Total minimum lease payments and sublease income |
|
$ |
758 |
|
|
$ |
10,533 |
|
|
|
|
|
|
|
|
|
Less: Amount representing interest |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of capital lease obligations |
|
|
751 |
|
|
|
|
|
Less: Current portion |
|
|
(356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations |
|
$ |
395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Service commitments
At March 31, 2010, the Company had non-cancelable service commitments of $1.4 million, $1.3
million of which is expected to be paid within 2010 and $0.1 million in 2011 and beyond.
Purchase commitments
At March 31, 2010, the Company had non-cancelable purchase commitments of $13.6 million
expected to be paid within one year. As of March 31, 2010, the Company had no non-cancelable
purchase commitments with suppliers beyond one year.
NOTE 6 SHAREHOLDERS EQUITY:
Comprehensive income
The components of comprehensive income, net of taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
5,238 |
|
|
$ |
2,116 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Change in unrealized gain or loss on available-for-sale securities |
|
|
(96 |
) |
|
|
(85 |
) |
Change in unrealized gain or loss on derivative contracts |
|
|
34 |
|
|
|
(821 |
) |
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
5,176 |
|
|
$ |
1,210 |
|
|
|
|
|
|
|
|
NOTE 7 SHARE INCENTIVE PLANS:
Stock option and restricted stock units activity
The following tables summarize the activities under all equity incentive plans during the
three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Number |
|
|
Average |
|
|
Weighted |
|
|
|
of |
|
|
Exercise |
|
|
Average |
|
|
|
Shares |
|
|
Price |
|
|
Fair Value |
|
Outstanding at December 31, 2009 |
|
|
6,403,679 |
|
|
$ |
8.38 |
|
|
$ |
7.73 |
|
Options granted |
|
|
166,350 |
|
|
$ |
19.63 |
|
|
$ |
11.51 |
|
Options exercised |
|
|
(505,302 |
) |
|
$ |
3.86 |
|
|
$ |
1.51 |
|
Options canceled |
|
|
(116,841 |
) |
|
$ |
10.26 |
|
|
$ |
4.56 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010 |
|
|
5,947,886 |
|
|
$ |
9.06 |
|
|
$ |
5.87 |
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted was $11.51 and $5.37 for the three months
ended March 31, 2010 and 2009, respectively.
The total pretax intrinsic value of options exercised in the three months ended March 31, 2010
and 2009 was $7.8 million and $0.2 million, respectively. This intrinsic value represents the
difference between the fair market value of our ordinary shares on the date of exercise and the
exercise price of each option. Based on the closing price of our ordinary shares of $23.57 on March
31, 2010, the total pretax intrinsic value of all outstanding options was $86.3 million. As of
March 31, 2010, 2,319,259 options were exercisable, out of which 2,291,914 options were fully
vested and 27,345 options were unvested but exercisable. The total pretax intrinsic value of
exercisable options at March 31, 2010 was $39.4 million.
Effective January 2010, the Company began granting restricted stock units under the Global
Share Incentive Plan. Restricted stock units represent a right to receive ordinary shares of the
Company at a future vesting date with no cash payment from the holder. In general, restricted stock
units vest over four years from the grant date.
12
Restricted stock units activity in the three months ended March 31, 2010 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units Outstanding |
|
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
Average |
|
|
|
of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Non vested restricted stock units at December 31, 2009 |
|
|
|
|
|
|
|
|
Restricted stock units granted |
|
|
417,008 |
|
|
$ |
19.81 |
|
Restricted stock units vested |
|
|
|
|
|
|
|
|
Restricted stock units canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non vested restricted stock units at March 31, 2010 |
|
|
417,008 |
|
|
$ |
19.81 |
|
|
|
|
|
|
|
|
The total intrinsic value of all outstanding restricted stock units was $9.8 million as of
March 31, 2010.
The company had the following ordinary shares reserved for future issuance under its
equity incentive plans as of March 31, 2010:
|
|
|
|
|
|
|
Number |
|
|
of |
|
|
Shares |
Stock options outstanding |
|
|
5,947,886 |
|
Restricted share units |
|
|
417,008 |
|
Shares authorized for future issuance |
|
|
1,447,439 |
|
ESPP shares available for future issuance |
|
|
220,216 |
|
|
|
|
|
|
Total shares reserved for future issuance as of March 31, 2010 |
|
|
8,032,549 |
|
|
|
|
|
|
Share-based compensation
The following weighted average assumptions are used to value share options and ESPP shares
granted in connection with the Companys equity incentive plans for the three months ended March
31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Share |
|
Employee Share |
|
|
Options |
|
Purchase Plan |
|
|
Three Months Ended March 31, |
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Dividend yield, % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility, % |
|
|
60.7 |
|
|
|
65.0 |
|
|
|
38.3 |
|
|
|
60.7 |
|
Risk free interest rate, % |
|
|
2.78 |
|
|
|
2.00 |
|
|
|
0.10 |
|
|
|
0.10 |
|
Expected life, years |
|
|
6.25 |
|
|
|
6.25 |
|
|
|
0.53 |
|
|
|
0.50 |
|
Estimated forfeiture rate, % |
|
|
8.66 |
|
|
|
8.46 |
|
|
|
|
|
|
|
|
|
The following table summarizes the distribution of total share-based compensation expense in
the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Cost of goods sold |
|
$ |
90 |
|
|
$ |
70 |
|
Research and development |
|
|
1,893 |
|
|
|
1,357 |
|
Sales and marketing |
|
|
643 |
|
|
|
470 |
|
General and administrative |
|
|
762 |
|
|
|
427 |
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
3,388 |
|
|
$ |
2,324 |
|
|
|
|
|
|
|
|
At March 31, 2010, there was $29.5 million of total unrecognized share-based compensation
costs related to non-vested share-based compensation arrangements. The costs are expected to be
recognized over a weighted average period of 2.51 years.
13
NOTE 8 INCOME TAXES:
As of March 31, 2010 and December 31, 2009, the Company had unrecognized tax benefits of
$1,489,000 and $1,442,000, respectively. It is the Companys policy to classify accrued interest
and penalties as part of the unrecognized tax benefits, or tax contingencies, and record the
expense in the provision for income taxes. As of March 31, 2010, the amount of accrued interest and
penalties totaled $79,000. As of March 31, 2010, calendar years 2004 through 2009 were open and
subject to potential examination in one or more jurisdictions. The Company is not currently under
federal, state or foreign income tax examination.
The Companys effective tax rate is highly dependent upon the geographic distribution of our
worldwide earnings or losses, the tax regulations and tax holiday benefits in Israel, and the
effectiveness of the Companys tax planning strategies. The Companys effective tax rates were
29.0% for the three months ended March 31, 2010 and 34.3% for the three months ended March 31,
2009. The difference between the Companys effective tax rates and the 35% federal statutory rate
resulted primarily from non-tax-deductible expenses such as share-based compensation expense and
the accrual of unrecognized tax benefits, interest and penalties associated with unrecognized tax
positions, offset by foreign earnings taxed at rates lower than the federal statutory rate. The
application of income tax law is inherently complex. Laws and regulations in this area are
voluminous and are often ambiguous and the Company is required to make many subjective assumptions
and judgments regarding its income tax exposures. In addition, interpretations of and guidance
surrounding income tax laws and regulations are subject to change over time. Any changes in the
Companys subjective assumptions and judgments could materially affect amounts recognized in its
consolidated balance sheets and statements of income.
|
|
|
ITEM 2 |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition as of March 31, 2010 and
results of operations for the three months ended March 31, 2010 and March 31, 2009 should be read
together with our financial statements and related notes included elsewhere in this report. This
discussion and analysis contains forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of many factors, including but not limited to those set
forth under the section entitled Risk Factors in Part II, Item 1A of this report. We urge you not
to place undue reliance on these forward-looking statements, which speak only as of the date of
this report. All forward-looking statements included in this report are based on information
available to us on the date of this report, and we assume no obligation to update any
forward-looking statements contained in this report. Quarterly financial results may not be
indicative of the financial results of future periods.
Overview
General
We are a leading supplier of semiconductor-based, high-performance connectivity products that
facilitate efficient data transmission between servers, communications infrastructure equipment and
storage systems. Our products are an integral part of a total solution focused on computing,
storage and communication applications used in enterprise data centers, high-performance computing
and embedded systems. We are one of the pioneers of InfiniBand; an industry standard architecture
that provides specifications for high-performance interconnects. We believe we are the leading
supplier of field-proven InfiniBand-compliant semiconductor products that deliver industry-leading
performance and capabilities, which is demonstrated by the performance, efficiency and scalability
of clustered computing and storage systems that incorporate our products. In addition to supporting
InfiniBand, our products also support the industry standard Ethernet interconnect specification and
provide unique product differentiation and connectivity flexibility.
We are a fabless semiconductor company that provides high-performance interconnect products
based on semiconductor integrated circuits, or ICs. We design, develop and market adapter, gateway
and switch ICs, all of which are silicon devices that provide high performance connectivity. We
also offer adapter cards that incorporate our adapter ICs and switch and gateway systems that
incorporate our switch and gateway ICs. These ICs are added to servers, storage and communication
infrastructure equipment and embedded systems by either integrating them directly on circuit boards
or inserting adapter cards into slots on the circuit board. Our boards provide bandwidth up to
10Gb/s (Single Data Rate or SDR) Ethernet or InfiniBand, 20Gb/s (Double Data Rate or DDR)
InfiniBand and 40Gb/s (Quad Data Rate or QDR) InfiniBand and our switch ICs provide bandwidth
up to 120Gb/s per interface. We have been shipping our InfiniBand products since 2001 and our
Ethernet products since 2007. During 2008 we introduced Virtual Protocol Interconnect, or VPI,
into our adapter ICs and cards. VPI provides the ability for an adapter to automatically sense
whether a
14
communications port is connected to an Ethernet fabric or an InfiniBand fabric. Data centers
which use VPI adapters in their servers have the ability to dynamically select the connectivity
protocol for use by those servers.
We have established significant expertise with high-performance interconnect solutions from
successfully developing and implementing multiple generations of our products. Our expertise
enables us to develop and deliver products that serve as building blocks for creating reliable and
scalable InfiniBand and Ethernet solutions with leading performance at significantly lower cost
than products based on alternative interconnect solutions.
It is difficult for us to forecast the demand for our products, in part because of the highly
complex supply chain between us and the end-user markets that incorporate our products. Demand for
new features changes rapidly. Due to our lengthy product development cycle, it is critical for us
to anticipate changes in demand for our various product features and the applications they serve to
allow sufficient time for product design. Our failure to accurately forecast demand can lead to
product shortages that can harm our relationships with our customers. Conversely, our failure to
forecast declining demand or shifts in product mix can result in excess or obsolete inventory.
Revenues. We derive revenues from sales of our ICs, cards, switch systems and accessories.
Revenues were approximately $36.2 million for the three months ended March 31, 2010, compared to
approximately $22.6 million for the three months ended March 31, 2009, representing an increase of
approximately 60.5%. To date, we have derived a substantial portion of our revenues from a
relatively small number of customers. Total sales to customers representing more than 10% of
revenues accounted for 28% and 40% of our total revenues for the three months ended March 31, 2010
and 2009, respectively. The loss of one or more of our principal customers or the reduction or
deferral of purchases of our products by any one of these customers could cause our revenues to
decline materially if we are unable to increase our revenues from other customers.
Cost of revenues and gross profit. The cost of revenues consists primarily of the cost of
silicon wafers purchased from our foundry supplier, Taiwan Semiconductor Manufacturing Company, or
TSMC, costs associated with the assembly, packaging and production testing of our products by
Advanced Semiconductor Engineering, or ASE, outside processing costs associated with the
manufacture of our host channel adapters, or HCA cards, and switch systems by Flextronics,
royalties due to third parties, warranty costs, excess and obsolete inventory costs and costs of
personnel associated with production management and quality assurance. In addition, after we
purchase wafers from our foundries, we also face yield risk related to manufacturing these wafers
into semiconductor devices. Manufacturing yield is the percentage of acceptable product resulting
from the manufacturing process, as identified when the product is tested as a finished IC. If our
manufacturing yields decrease, our cost per unit increases, which could have a significant adverse
impact on our cost of revenues. We do not have long-term pricing agreements with TSMC and ASE.
Accordingly, our costs are subject to price fluctuations based on the overall cyclical demand for
semiconductors.
We purchase our inventory pursuant to standard purchase orders. We estimate that lead times
for delivery of our finished semiconductors from our foundry supplier and assembly, packaging and
production testing subcontractor are approximately three to four months, lead times for delivery
from our HCA card manufacturing subcontractor are approximately eight to ten weeks, and lead times
for delivery from our switch systems manufacturing subcontractors are approximately twelve weeks.
We build inventory based on forecasts of customer orders rather than the actual orders themselves.
In addition, our customers are seeking opportunities to minimize their inventory on hand while
demanding shorter lead times for orders placed. As a result, we have increased our inventory
levels to meet this demand.
We expect our cost of revenues to increase over time as a result of the expected increase in
our sales volume. We expect our cost of revenues as a percentage of sales to increase in the future
as a result of a reduction in the average sale price of our products and a higher percentage of
revenue deriving from sales of HCA cards and switch systems, which generally yield lower gross
margins. This trend will depend on overall customer demand for our products, our product mix,
competitive product offerings and related pricing and on our ability to reduce manufacturing costs.
Operational expenses
Research and development expenses. Our research and development expenses consist primarily of
salaries, share-based compensation and associated costs for employees engaged in research and
development, costs associated with computer aided design software tools, depreciation expense,
outsourcing expenses, tape out costs and qualification expense. Tape out costs are expenses related
to the manufacture of new products, including charges for mask sets, prototype wafers, mask set
revisions and testing incurred before releasing new products to the market. We anticipate our
research and development expenses will increase in future periods
15
based on an increase in personnel to support our product development activities and the
introduction of new products. These expenses may fluctuate over the course of a year based on the
timing of our scheduled product tape outs.
Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries,
share-based compensation and associated costs for employees engaged in sales, marketing and
customer support, commission payments to external, third party sales representatives, advertising,
and charges for trade shows, promotions and travel. We expect these expenses will increase in
absolute dollars in future periods based on an increase in sales and marketing personnel and
increased commission payments related to increased revenues.
General and administrative expenses. General and administrative expenses consist primarily of
salaries, share-based compensation and associated costs for employees engaged in finance, human
resources and administrative activities, and other professional services expense charges for
accounting and corporate legal fees. We expect these expenses will increase in absolute dollars in
future periods based on an increase in personnel to support our business activities.
Taxes on Income. Our operations in Israel have been granted Approved Enterprise status by
the Investment Center of the Israeli Ministry of Industry, Trade and Labor, which makes us eligible
for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. Under the
terms of the Approved Enterprise program, income that is attributable to our operations in Yokneam,
Israel will be exempt from income tax for a period of ten years commencing when we first generate
taxable income after setting off our losses from prior years. Income that is attributable to our
operations in Tel Aviv, Israel will be exempt from income tax for a period of two years commencing
when we first generate taxable income and will be subject to a reduced income tax rate (generally
10-25%, depending on the percentage of foreign investment in the Company) for the following five to
eight years. We expect the Approved Enterprise Tax Holiday associated with our Yokneam and Tel Aviv
operations to begin in 2011. The Yokneam Tax Holiday is expected to expire in 2020 and the Tel Aviv
Tax Holiday is expected to expire between 2015 and 2018.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted
accounting principles in the United States. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and
assumptions on an ongoing basis. Our estimates are based on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Our actual results could
differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition, allowance
for doubtful accounts, inventory valuation, warranty provision, income taxes and share-based
compensation have the greatest potential impact on our consolidated financial statements.
Therefore, we consider these to be our critical accounting policies and estimates. For further
information on all of our significant accounting policies, please see Note 1 of the accompanying
notes to our consolidated financial statements.
See our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on
March 5, 2010, for a discussion of additional critical accounting policies and estimates. We
believe there have been no significant changes in our critical accounting policies as compared to
what was previously disclosed in the Form 10-K for the year ended December 31, 2009.
Results of Operations
The following table sets forth our consolidated statements of operations as a percentage of
revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2010 |
|
2009 |
Total revenues |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenues |
|
|
(25 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
75 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
34 |
|
|
|
38 |
|
Sales and marketing |
|
|
14 |
|
|
|
16 |
|
General and administrative |
|
|
7 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
55 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
20 |
|
|
|
12 |
|
Other income, net |
|
|
|
|
|
|
2 |
|
Provision for taxes on income |
|
|
(6 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
Net income |
|
|
14 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
16
Comparison of the Three Months Ended March 31, 2010 to the Three Months Ended March 31, 2009
Revenues.
The following table represents our total revenues for the three months ended March 31, 2010
and 2009 by data rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
|
(In thousands) |
|
|
|
|
|
Quad data rate (QDR) |
|
$ |
22,872 |
|
|
$ |
7,808 |
|
|
|
193 |
|
Double data rate (DDR) |
|
|
6,729 |
|
|
|
12,913 |
|
|
|
(48 |
) |
Single data rate (SDR) and other |
|
|
6,609 |
|
|
|
1,837 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
36,210 |
|
|
$ |
22,558 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
Revenues were $36.2 million for the three months ended March 31, 2010 compared to $22.6
million for the three months ended March 31, 2009, representing an increase of approximately 61%.
The increase in revenues resulted from increased unit sales of approximately 63% offset by a slight
decrease in average sales prices of approximately 2%. The increase in unit sales was primarily due
to increases in sales to some of our tier one customers. The decline in average selling prices was
primarily due to a decrease in average selling prices of our boards. Revenues for the three months
ended March 31, 2010 are not necessarily indicative of future results.
Gross profit and margin. Gross profit was $27.2 million for the three months ended March 31,
2010 compared to $17.2 million for the three months ended March 31, 2009, representing an increase
of 58%. As a percentage of revenues, gross margin decreased to 75.1% in the three months ended
March 31, 2010 from 76.3% in the three months ended March 31, 2009. The decline in gross margins
was primarily due to changes in our product mix and lower average selling prices of our boards. We
typically earn lower gross margins on our switch systems, cables and accessories revenues in
comparison to ICs and board revenues. Gross margin for the three months ended March 31, 2010 is not
necessarily indicative of future results.
Research and development. Research and development expenses were $12.3 million in the three
months ended March 31, 2010 compared to $8.6 million in the three months ended March 31, 2009,
representing an increase of approximately 42%. The increase consisted of $2 million in employee
related expenses primarily due to headcount additions and employee bonus expenses, $536,000 in
share-based compensation primarily due to new option grants, $325,000 in software maintenance
expenses and $296,000 in outsourcing expenses. We expect that research and development expense will
increase in absolute dollars in future periods as we continue to devote resources to develop new
products, meet the changing requirements of our customers, expand into new markets and technologies
and hire additional personnel.
For a further discussion of share-based compensation included in research and development
expense, see Share-based compensation expense below.
Sales and marketing. Sales and marketing expenses were $5.0 million for the three months ended
March 31, 2010 compared to $3.7 million for the three months ended March 31, 2009, representing an
increase of approximately 35%. The increase was attributable to higher employee related expenses of
$822,000 primarily due to headcount additions and bonus expenses, an increase of $173,000 in
share-based compensation expense, higher equipment related expenses of $139,000 associated with
evaluation equipment and higher travel related expenses of $99,000.
For a further discussion of share-based compensation included in sales and marketing expense
see Share-based compensation expense below.
General and administrative. General and administrative expenses were $2.6 million for the
three months ended March 31, 2010 compared to $2.2 million for the three months ended March 31,
2009, representing an increase of approximately 20%. The increase was due to higher share-based
compensation of $335,000 and an increase in bad debt expense of $96,000, partially offset by a
decrease in facilities and maintenance expenses of $155,000 and a decrease in legal expenses of
$146,000.
17
For a further discussion of share-based compensation included in general and administrative
expense see Share-based compensation expense below.
Share-based compensation expense. The following table presents details of total share-based
compensation expense that is included in each functional line item in our consolidated statements
of operations:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Cost of goods sold |
|
$ |
90 |
|
|
$ |
70 |
|
Research and development |
|
|
1,893 |
|
|
|
1,357 |
|
Sales and marketing |
|
|
643 |
|
|
|
470 |
|
General and administrative |
|
|
762 |
|
|
|
427 |
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
3,388 |
|
|
$ |
2,324 |
|
|
|
|
|
|
|
|
At March 31, 2010, there was $29.5 million of total unrecognized share-based compensation
costs related to non-vested share-based compensation arrangements. These costs are expected to be
recognized over a weighted average period of 2.51 years.
Other income, net. Other income, net consists of interest earned on cash and cash equivalents
and short-term investments, and foreign currency exchange gains and losses. Other income, net was
$113,000 for the three months ended March 31, 2010 compared to $541,000 for the three months ended
March 31, 2009. The decrease consisted of $166,000 of lower interest income associated with lower
average interest rates paid on investments and foreign currency exchange losses of $106,000 in the
three months ended March 31, 2010 as compared to foreign currency exchange gains of $145,000 in the
same period last year.
Provision for Taxes on Income. Provision for taxes on income was $2.1 million for the three
months ended March 31, 2010 compared to $1.1 million for the three months ended March 31, 2009. The
higher tax expense was primarily due to increased taxes related to the utilization of deferred
taxes associated with carryforward losses and research and development costs in Israel. The
effective tax rate was 29.0% and 34.3% for the three months ended March 31, 2010 and 2009,
respectively. Our effective tax rate differs from the U.S statutory rate primarily due to profits
earned in Israel where the tax rate is lower than the U.S. tax rate.
Liquidity and Capital Resources
Since our inception, we have financed our operations through a combination of sales of equity
securities and cash generated by operations. As of March 31, 2010, our principal source of
liquidity consisted of cash and cash equivalents of approximately $51.9 million and short-term
investments of approximately $165.4 million. We expect that our current cash and cash equivalents
and short-term investments and our cash flows from operating activities will be sufficient to fund
our operations over the next twelve months after taking into account potential business and
technology acquisitions, if any, and expected increases in research and development expenses,
including tape out costs, higher sales and marketing expenses, general and administrative expenses
and capital expenditures to support our infrastructure and growth.
Operating activities
Net cash provided by our operating activities amounted to $8.1 million in the three months
ended March 31, 2010. Net cash provided by operating activities in the three months ended March 31,
2010 was primarily attributable to net income of $5.2 million adjusted for non-cash items of
approximately $3.4 million for share-based compensation, $1.8 million for the utilization of
deferred taxes and $1.1 million for depreciation and amortization, and was partially offset by
gains on sale of investments of approximately $0.2 million. Furthermore, net cash provided by
operating activities increased due to a reduction in prepaid expenses of approximately $1.1 million
and an increase in accounts payable of approximately $0.9 million due to the timing of payments to
our vendors, and was partially offset by an increase in inventory of approximately $3.2 million due
to higher safety stock levels and an increase in accounts receivable, net of approximately $1.7
million due to the timing of sales during the quarter.
Net cash provided by our operating activities amounted to $4.1 million in the three months
ended March 31, 2009. Net cash provided by operating activities in the three months ended March 31,
2009 was primarily attributable to net income of $2.1 million adjusted for non-cash items of
approximately $2.3 million for share-based compensation, $1.1 million for depreciation and
amortization, and $0.8 million for the realization of deferred taxes, and was partially offset by
gains on sale of investments of
18
approximately $0.1 million. Furthermore, net cash provided by
operating activities increased due to a reduction in accounts receivables, net of approximately
$6.7 million as a result of lower sales volumes and improved collections, a decrease in prepaid
expenses of approximately $1.2 million, and a decrease of approximately $0.8 million in
inventories, partially offset by a decrease of
approximately $6.1 million in accrued liabilities associated with payroll and other payables
and a decrease in accounts payables of approximately $4.7 million due to payments to our vendors.
Investing activities
Net cash used in investment activities amount to $2.9 million in the three months ended March
31, 2010. Net cash used in investment activities was primarily attributable to purchases of
property and equipment of $3.7 million offset by net proceeds from the sales of short term
investments of $1.0 million.
Net cash used in investment activities amounted to $41.5 million in the three months ended
March 31, 2009. Net cash used in investment activities was primarily attributable to net purchases
of short term investments of $39.1 million, and an increase in restricted cash deposits of $1.5
million.
Financing activities
Our financing activities generated $3.1 million in the three months ended March 31, 2010, and
were primarily due to proceeds from stock option exercises and purchases pursuant to our employee
stock purchase plan of $3.0 million, and excess tax benefits from share-based compensation of
$271,000, partially offset by principal payments on capital lease obligations of $251,000. Our
financing activities generated $631,000 in the three months ended March 31, 2009, and were
primarily due to proceeds from stock option exercises and our employee stock purchase program of
$837,000, partially offset by principal payments on capital lease obligations of $206,000.
Off-Balance Sheet Arrangements
As of March 31, 2010, we did not have any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our contractual obligations at March 31, 2010, and the effect
those obligations are expected to have on our liquidity and cash flows in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
Beyond |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3 Years |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Commitments under capital lease |
|
$ |
758 |
|
|
$ |
363 |
|
|
$ |
395 |
|
|
$ |
|
|
Non-cancelable operating lease commitments |
|
|
10,533 |
|
|
|
4,337 |
|
|
|
5,323 |
|
|
|
873 |
|
Service commitments |
|
|
1,356 |
|
|
|
1,233 |
|
|
|
123 |
|
|
|
|
|
Purchase commitments |
|
|
13,591 |
|
|
|
13,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26,238 |
|
|
$ |
19,524 |
|
|
$ |
5,841 |
|
|
$ |
873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For purposes of this table, purchase obligations for the purchase of goods or services are
defined as agreements that are enforceable and legally binding and that specify all significant
terms including: fixed or minimum purchase quantities; fixed, minimum or variable price provisions;
and the approximate timing of the transaction. Our purchase orders are based on our current
manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, we
have purchase orders that represent authorizations to purchase rather than binding agreements. We
do not have significant agreements for the purchase of raw materials or other goods specifying
minimum quantities or set prices that exceed our expected requirements.
Contingencies
As of March 31, 2010, our unrecognized tax benefits totaled approximately $1.6 million, which
would reduce our income tax expense and effective tax rate, if recognized. Due to the uncertainty
with respect to the timing of future cash flows associated with our
19
unrecognized tax benefits as of
March 31, 2010, we are unable to make any reasonably reliable estimates of the periods of cash
settlements with the relevant taxing authorities.
Recent Accounting Standards
With the exception of those stated below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the three months ended March 31,
2010, as compared to the recent accounting pronouncements described in our Annual Report on Form
10-K for the fiscal year ended December 31, 2009, that are of material significance, or have
potential material significance, to us.
Effective April 1, 2009, we adopted the updated guidance related to subsequent events, which
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. The
updated guidance initially required the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date that is, whether that date represents
the date the financial statements were issued or were available to be issued. However, in February
2010, the FASB amended the guidance to remove the requirement to disclose the date through which
subsequent events were evaluated. Adoption of the updated guidance did not have a material impact
on our consolidated results of operations or financial condition.
Effective January 1, 2010, we adopted the FASBs updated guidance related to fair value
measurements and disclosures, which requires a reporting entity to disclose separately the amounts
of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe
the reasons for the transfers. In addition, in the reconciliation for fair value measurements using
significant unobservable inputs, or Level 3, a reporting entity should disclose separately
information about purchases, sales, issuances and settlements (that is, on a gross basis rather
than one net number). The updated guidance also requires that an entity should provide fair value
measurement disclosures for each class of assets and liabilities and disclosures about the
valuation techniques and inputs used to measure fair value for both recurring and non-recurring
fair value measurements for Level 2 and Level 3 fair value measurements. The guidance is effective
for interim or annual financial reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level
3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010
and for interim periods within those fiscal years. Therefore, we have not yet adopted the guidance
with respect to the roll forward activity in Level 3 fair value measurements. We updated our
disclosures to comply with the updated guidance; however, adoption of the updated guidance did not
have an impact on our consolidated results of operations or financial condition.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Fluctuation Risk
We do not have any long-term borrowings. Our investments consist of cash and cash equivalents,
short-term deposits, money market funds and interest bearing investments in U.S. government debt
securities with an average maturity of less than one year. The primary objective of our investment
activities is to preserve principal while maximizing income without significantly increasing risk.
By policy we limit the amount of our credit exposure through diversification and restricting its
investments to highly rated securities. Individual securities are limited to comprising no more
than 5% of the portfolio value at the time of purchase, except U.S Treasury or Agency securities.
Highly rated securities are defined as having a minimum Moody or Standard & Poors rating of A2 or
A respectively. We have not experienced any material losses on cash equivalents or short-term
investments. We do not enter into investments for trading or speculative purposes. Our investments
are exposed to market risk due to a fluctuation in interest rates, which may affect our interest
income and the fair market value of our investments. Due to the short-term nature of our investment
portfolio, we do not believe an immediate 2% change in interest rates would have a material effect
on the fair market value of our portfolio, and therefore we do not expect our operating results or
cash flows to be materially affected by a sudden change in market interest rates.
Foreign Currency Exchange Risk
We derive all of our revenues in U.S. dollars. The U.S. dollar is our functional and reporting
currency in all of our foreign locations. However, a significant portion of our headcount related
expenses, consisting principally of salaries and related personnel expenses, are denominated in new
Israeli shekels, or NIS. This foreign currency exposure gives rise to market risk associated with
exchange rate movements of the U.S. dollar against the NIS. Furthermore, we anticipate that a
material portion of our expenses will
20
continue to be denominated in NIS. To the extent the U.S.
dollar weakens against the NIS, we will experience a negative impact on our profit margins.
To protect against reductions in the value and the volatility of future cash flows caused by
changes in foreign currency exchange rates, we have established a balance sheet and anticipated
transaction risk management program. Currency forward contracts and
natural hedges are generally utilized in this hedging program. We do not enter into forward
contracts for trading or speculative purposes. Our hedging program reduces, but does not eliminate
the impact of currency exchange rate movements (see Part II, Item 1A, Risk Factors). If we were
to experience a 10% change in currency exchange rates, the impact on assets and liabilities
denominated in currencies other than the U.S. dollar, after taking into account hedges and
offsetting positions, would result in a loss before taxes of approximately $383,000 at March 31,
2010. There would also be an impact on future operating expenses denominated in currencies other
than the U.S. dollar. At March 31, 2010, approximately $2.8 million of our monthly operating
expenses were denominated in NIS. As of March 31, 2010, we had forward contracts in place that
hedged future operating expenses of approximately 52.6 million NIS, or approximately $14.2 million
based upon the exchange rate as of March 31, 2010. The forward contracts cover future NIS
denominated operating expenses expected to occur over the next twelve months. Our derivatives
expose us to credit risk to the extent that the counterparties may be unable to meet the terms of
the agreement. We seek to mitigate such risk by limiting our counterparties to major financial
institutions and by spreading the risk across a number of major financial institutions. However,
under current market conditions, failure of one or more of these financial institutions is possible
and could result in incurred losses.
ITEM 4 CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and that such information
is accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing,
our chief executive officer and chief financial officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance level.
There has been no change in our internal control over financial reporting during our most
recent quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
We are not currently party to any material legal proceedings.
ITEM 1A RISK FACTORS
Investing in our ordinary shares involves a high degree of risk. You should carefully consider
the following risk factors, in addition to the other information set forth in this report, before
purchasing our ordinary shares. Each of these risk factors could harm our business, financial
condition or operating results, as well as decrease the value of an investment in our ordinary
shares.
There have been no material changes from risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2009, except for the following:
Risks Related to Our Business
We depend on a small number of customers for a significant portion of our sales, and the loss of
any one of these customers will adversely affect our revenues.
21
A small number of customers account for a significant portion of our revenues. For the three
months ended March 31, 2010, sales to Hewlett-Packard and Voltaire accounted for 16% and 12%,
respectively, of our total revenues and sales to our top ten customers accounted for 77% of our
first fiscal quarter 2010 revenues. For the year ended December 31, 2009, sales to Hewlett-Packard,
IBM and Super Micro Computer Inc. accounted for 15%, 11% and 10%, respectively, of our total
revenues and sales to our top ten
customers accounted for 79% of the 2009 revenues. Because the majority of servers, storage,
communications infrastructure equipment and embedded systems are sold by a relatively small number
of vendors, we expect that we will continue to depend on a small number of customers to account for
a significant percentage of our revenues for the foreseeable future. Our customers, including our
most significant customers, are not obligated by long-term contracts to purchase our products and
may cancel orders with limited potential penalties. If any of our large customers reduces or
cancels its purchases from us for any reason, it could have an adverse effect on our revenues and
results of operations.
We may not obtain sufficient patent protection on the technology embodied in our products, which
could harm our competitive position and increase our expenses.
Our success and ability to compete in the future may depend to a significant degree upon
obtaining sufficient patent protection for our proprietary technology. As of March 31, 2010, we had
21 issued patents and 30 patent applications pending in the United States, 5 issued patents in
Taiwan, and 2 patent applications pending and 3 patents issued in Israel, each of which covers
aspects of the technology in our products. Patents that we currently own do not cover all of the
products that we presently sell. Our patent applications may not result in issued patents, and even
if they result in issued patents, the patents may not have claims of the scope we seek. Even in the
event that these patents are not issued, the applications may become publicly available and
proprietary information disclosed in the applications will become available to others. In addition,
any issued patents may be challenged, invalidated or declared unenforceable. The term of any issued
patent in the United States would be 20 years from its filing date, and if our applications are
pending for a long time period, we may have a correspondingly shorter term for any patent that may
be issued. Our present and future patents may provide only limited protection for our technology
and may not be sufficient to provide competitive advantages to us. For example, competitors could
be successful in challenging any issued patents or, alternatively, could develop similar or more
advantageous technologies on their own or design around our patents. Also, patent protection in
certain foreign countries may not be available or may be limited in scope and any patents obtained
may not be as readily enforceable as in the United States and Israel, making it difficult for us to
effectively protect our intellectual property from misuse or infringement by other companies in
these countries. Our inability to obtain and enforce our intellectual property rights in some
countries may harm our business. In addition, given the costs of obtaining patent protection, we
may choose not to protect certain innovations that later turn out to be important.
Risks Related to Operations in Israel and Other Foreign Countries
Regional instability in Israel may adversely affect business conditions and may disrupt our
operations and negatively affect our revenues and profitability.
We have engineering facilities and corporate and sales support operations and, as of March 31,
2010, we had 282 full-time and 52 part-time employees located in Israel. A significant amount of
our assets is located in Israel. Accordingly, political, economic and military conditions in Israel
may directly affect our business. Since the establishment of the State of Israel in 1948, a number
of armed conflicts have taken place between Israel and its Arab neighbors, as well as incidents of
civil unrest. During the winter of 2008 and the summer of 2006, Israel was engaged in armed
conflicts with Hamas and Hezbollah. These conflicts involved missile strikes against civilian
targets in southern and northern Israel, and negatively affected business conditions in Israel. In
addition, Israel and companies doing business with Israel have, in the past, been the subject of an
economic boycott. Although Israel has entered into various agreements with Egypt, Jordan and the
Palestinian Authority, Israel has been and is subject to civil unrest and terrorist activity, with
varying levels of severity, since September 2000. Any future armed conflicts or political
instability in the region may negatively affect business conditions and adversely affect our
results of operations. Parties with whom we do business have sometimes declined to travel to Israel
during periods of heightened unrest or tension, forcing us to make alternative arrangements when
necessary. In addition, the political and security situation in Israel may result in parties with
whom we have agreements involving performance in Israel claiming that they are not obligated to
perform their commitments under those agreements pursuant to force majeure provisions in the
agreements.
We can give no assurance that security and political conditions will have no impact on our
business in the future. Hostilities involving Israel or the interruption or curtailment of trade
between Israel and its present trading partners could adversely affect our operations and could
make it more difficult for us to raise capital. While we did not sustain damages from the recent
conflicts with Hamas and Hezbollah referred to above, a large portion of our Israeli operations,
which are located in northern Israel, are within range
22
of Hezbollah missiles and we or our
immediate surroundings may sustain damages in a missile attack, which could adversely affect our
operations.
In addition, our business insurance does not cover losses that may occur as a result of events
associated with the security situation in the Middle East. Although the Israeli government
currently covers the reinstatement value of direct damages that are caused by
terrorist attacks or acts of war, we cannot assure you that this government coverage will be
maintained. Any losses or damages incurred by us could have a material adverse effect on our
business.
We are susceptible to additional risks from our international operations.
We derived 63% and 65% of our revenues in the three months ended March 31, 2010 and 2009,
respectively, from sales outside of North America. As a result, we face additional risks from doing
business internationally, including:
|
|
|
reduced protection of intellectual property rights in some countries; |
|
|
|
|
difficulties in staffing and managing foreign operations; |
|
|
|
|
longer sales and payment cycles; |
|
|
|
|
greater difficulties in collecting accounts receivable; |
|
|
|
|
adverse economic conditions; |
|
|
|
|
seasonal reductions in business activity; |
|
|
|
|
potentially adverse tax consequences; |
|
|
|
|
laws and business practices favoring local competition; |
|
|
|
|
costs and difficulties of customizing products for foreign countries; |
|
|
|
|
compliance with a wide variety of complex foreign laws and treaties; |
|
|
|
|
licenses, tariffs, other trade barriers, transit restrictions and other regulatory or
contractual limitations on our ability to sell or develop our products in certain foreign
markets; |
|
|
|
|
foreign currency exchange risks; |
|
|
|
|
fluctuations in freight rates and transportation disruptions; |
|
|
|
|
political and economic instability; |
|
|
|
|
variance and unexpected changes in local laws and regulations; |
|
|
|
|
natural disasters and public health emergencies; and |
|
|
|
|
trade and travel restrictions. |
Our principal research and development facilities are located in Israel, and our directors,
executive officers and other key employees are located primarily in Israel and the United States.
In addition, we engage sales representatives in various countries throughout the world to market
and sell our products in those countries and surrounding regions. If we encounter any of the above
risks in our international operations, we could experience slower than expected revenue growth and
our business could be harmed.
23
|
|
Exchange rate fluctuations between the U.S. dollar and the NIS may negatively affect our
earnings. |
Although all of our revenues and a majority of our expenses are denominated in U.S. dollars, a
significant portion of our research and development expenses are incurred in new Israeli shekels,
or NIS. As a result, we are exposed to risk to the extent that the inflation rate in Israel exceeds
the rate of devaluation of the NIS in relation to the U.S. dollar or if the timing of these
devaluations lags behind inflation in Israel. In that event, the U.S. dollar cost of our research
and development operations in Israel will increase and our U.S. dollar-measured results of
operations will be adversely affected. To the extent that the value of the NIS increases against
the U.S. dollar, our expenses on a U.S. dollar cost basis increase. We cannot predict any future
trends in the rate of inflation in Israel or the rate
of appreciation of the NIS against the U.S. dollar. The Israeli rate of inflation (deflation)
amounted to 3.4%, 3.8% and 3.9% for the years ended December 31, 2007, 2008 and 2009, respectively
and to (0.9)% and (0.1)% in the three months ended March 31, 20010 and 2009, respectively. The
increase in value of the NIS against the U.S. dollar amounted to 8.9%, 1.1% and 0.7% in the years
ended December 31, 2007, 2008 and 2009, respectively. In the three months ended March 31, 2010 the
increase in the value of the NIS against the U.S. dollar amounted to 1.6% and in the three months
ended March 31, 2009 the decrease in the value of the NIS against the U.S. dollar amounted to
10.2%. If the U.S. dollar cost of our research and development operations in Israel increases our
dollar-measured results of operations will be adversely affected. Our operations also could be
adversely affected if we are unable to guard against currency fluctuations in the future. Further,
because all of our international revenues are denominated in U.S. dollars, a strengthening of the
dollar versus other currencies could make our products less competitive in foreign markets and
collection of receivables more difficult. To help manage this risk we have been engaged in foreign
currency hedging activities. These measures, however, may not adequately protect us from material
adverse effects due to the impact of inflation in Israel and changes in value of NIS against the
U.S. dollar.
Risks Related to Our Ordinary Shares
|
|
The ownership of our ordinary shares will continue to be highly concentrated, and your interests
may conflict with the interests of our existing shareholders. |
Our executive officers and directors and their affiliates, together with our current
significant shareholders, beneficially owned approximately 28% of our outstanding ordinary shares
as of March 31, 2010. Moreover, based on information filed with SEC, two of our shareholders,
Fidelity Management and Research and Fred Alger Management, combined beneficially owned
approximately 19% of our outstanding ordinary shares as of March 31, 2010. Accordingly, these
shareholders, acting as a group, have significant influence over the outcome of corporate actions
requiring shareholder approval, including the election of directors, any merger, consolidation or
sale of all or substantially all of our assets or any other significant corporate transaction.
These shareholders could delay or prevent a change of control of our company, even if such a change
of control would benefit our other shareholders. The significant concentration of share ownership
may adversely affect the trading price of our ordinary shares due to investors perception that
conflicts of interest may exist or arise.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS
|
|
|
3.1 (1)
|
|
Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 18, 2008). |
|
|
|
4.1 (2)
|
|
Amended and Restated Investor Rights Agreement dated as of October 9, 2001, by and among Mellanox Technologies,
Ltd., purchasers of Series A Preferred Shares, Series B Preferred Shares and Series D Redeemable Preferred
Shares who are signatories to such agreement and certain holders of Ordinary Shares who are signatories to such
agreement, and for purposes of certain sections thereof, the holder of Series C Preferred Shares issued or
issuable pursuant to the Series C Preferred Share Purchase Agreement dated November 5, 2000. |
24
|
|
|
4.2 (3)
|
|
Amendment to the Amended and Restated Investor Rights Agreement dated as of February 2, 2007, by and among
Mellanox Technologies, Ltd., purchasers of Series A Preferred Shares, Series B Preferred Shares and Series D
Redeemable Preferred Shares who are signatories to such agreement and certain holders of Ordinary Shares who are
signatories to such agreement, and for purposes of certain sections thereof, the holder of Series C Preferred
Shares issued or issuable pursuant to the Series C Preferred Share Purchase Agreement dated November 5, 2000. |
|
|
|
31.1
|
|
Certification of the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of the Companys Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of the Companys Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
(1) |
|
Incorporated by reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K (SEC File No. 001-33299) filed on March 12,
2009. |
|
(2) |
|
Incorporated by reference to Exhibit 4.4 to the Companys Registration Statement on Form S-1 (SEC File No. 333-137659) filed on
September 28, 2006. |
|
(3) |
|
Incorporated by reference to Exhibit 4.3 to the Companys Annual Report on Form 10-K (SEC File No. 001-33299) filed on March 26,
2007. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Date: May 5, 2010 |
Mellanox Technologies, Ltd.
|
|
|
/s/ Michael Gray
|
|
|
Michael Gray |
|
|
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) |
|
|
25
Exhibit Index
|
|
|
3.1 (1)
|
|
Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 18, 2008). |
|
|
|
4.1 (2)
|
|
Amended and Restated Investor Rights Agreement dated as of October 9, 2001, by and among Mellanox Technologies,
Ltd., purchasers of Series A Preferred Shares, Series B Preferred Shares and Series D Redeemable Preferred
Shares who are signatories to such agreement and certain holders of Ordinary Shares who are signatories to such
agreement, and for purposes of certain sections thereof, the holder of Series C Preferred Shares issued or
issuable pursuant to the Series C Preferred Share Purchase Agreement dated November 5, 2000. |
|
|
|
4.2 (3)
|
|
Amendment to the Amended and Restated Investor Rights Agreement dated as of February 2, 2007, by and among
Mellanox Technologies, Ltd., purchasers of Series A Preferred Shares, Series B Preferred Shares and Series D
Redeemable Preferred Shares who are signatories to such agreement and certain holders of Ordinary Shares who are
signatories to such agreement, and for purposes of certain sections thereof, the holder of Series C Preferred
Shares issued or issuable pursuant to the Series C Preferred Share Purchase Agreement dated November 5, 2000. |
|
|
|
31.1
|
|
Certification of the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of the Companys Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of the Companys Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
(1) |
|
Incorporated by reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K (SEC File No. 001-33299) filed on March 12,
2009. |
|
(2) |
|
Incorporated by reference to Exhibit 4.4 to the Companys Registration Statement on Form S-1 (SEC File No. 333-137659) filed on
September 28, 2006. |
|
(3) |
|
Incorporated by reference to Exhibit 4.3 to the Companys Annual Report on Form 10-K (SEC File No. 001-33299) filed on March 26,
2007. |
26