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 September 30, 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
(State or Other Jurisdiction of
Incorporation or Organization)
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98-0233400
(I.R.S. Employer
Identification No.) |
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HERMON BUILDING, YOKNEAM, ISRAEL
(Address of Principal Executive Offices)
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20692
(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 October 29, 2010, was 33,961,865.
MELLANOX TECHNOLOGIES, LTD.
2
PART I. FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MELLANOX TECHNOLOGIES, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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September 30, |
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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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$ |
52,155 |
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$ |
43,640 |
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Short-term investments |
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187,392 |
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166,357 |
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Restricted cash |
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3,258 |
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3,160 |
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Accounts receivable, net |
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22,513 |
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20,418 |
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Inventories |
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12,215 |
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9,328 |
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Deferred taxes |
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4,452 |
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8,605 |
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Prepaid expenses and other |
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3,448 |
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3,825 |
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Total current assets |
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285,433 |
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255,333 |
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Property and equipment, net |
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15,063 |
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9,734 |
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Severance assets |
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5,348 |
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4,629 |
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Intangible assets, net |
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321 |
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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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4,240 |
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4,450 |
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Total assets |
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$ |
311,217 |
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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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$ |
10,297 |
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$ |
8,775 |
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Other accrued liabilities |
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14,615 |
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14,804 |
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Capital lease obligations, current |
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316 |
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528 |
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Total current liabilities |
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25,228 |
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24,107 |
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Accrued severance |
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6,822 |
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5,778 |
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Capital lease obligations |
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237 |
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474 |
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Other long-term obligations |
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2,813 |
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2,144 |
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Total liabilities |
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35,100 |
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32,503 |
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Commitments and contingencies (Note 5) |
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Shareholders equity: |
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Ordinary shares |
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139 |
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135 |
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Additional paid-in capital |
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259,646 |
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240,807 |
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Accumulated other comprehensive income |
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701 |
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367 |
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Retained earnings |
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15,631 |
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1,574 |
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Total shareholders equity |
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276,117 |
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242,883 |
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Total liabilities and shareholders equity |
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$ |
311,217 |
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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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Nine Months Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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(In thousands, except per share data) |
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Total revenues |
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$ |
37,779 |
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$ |
32,671 |
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$ |
113,947 |
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$ |
80,515 |
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Cost of revenues |
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(9,861 |
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(8,092 |
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(29,073 |
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(19,996 |
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Gross profit |
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27,918 |
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24,579 |
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84,874 |
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60,519 |
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Operating expenses: |
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Research and development |
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14,973 |
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10,944 |
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41,245 |
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29,686 |
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Sales and marketing |
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5,445 |
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4,273 |
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15,867 |
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12,011 |
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General and administrative |
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2,675 |
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2,633 |
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8,060 |
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6,800 |
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Total operating expenses |
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23,093 |
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17,850 |
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65,172 |
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48,497 |
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Income from operations |
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4,825 |
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6,729 |
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19,702 |
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12,022 |
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Other income, net |
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55 |
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126 |
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217 |
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864 |
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Income before taxes on income |
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4,880 |
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6,855 |
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19,919 |
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12,886 |
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Provision for taxes on income |
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(1,377 |
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(2,082 |
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(5,862 |
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(4,253 |
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Net income |
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$ |
3,503 |
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$ |
4,773 |
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$ |
14,057 |
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$ |
8,633 |
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Net income per share basic |
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$ |
0.10 |
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$ |
0.15 |
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$ |
0.42 |
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$ |
0.27 |
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Net income per share diluted |
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$ |
0.10 |
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$ |
0.14 |
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$ |
0.40 |
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$ |
0.26 |
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Shares used in computing income per share: |
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Basic |
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33,787 |
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32,113 |
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33,438 |
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31,969 |
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Diluted |
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35,279 |
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33,611 |
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35,231 |
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33,166 |
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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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Nine Months Ended |
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September 30, |
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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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$ |
14,057 |
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$ |
8,633 |
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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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4,073 |
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3,117 |
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Deferred income taxes |
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4,153 |
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3,174 |
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Share-based compensation expense |
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10,363 |
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6,936 |
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Gain on sale of investments |
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(485 |
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(631 |
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Excess tax benefit from share based compensation |
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(1,217 |
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Impairment of investments |
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250 |
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Changes in assets and liabilities: |
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Accounts receivable, net |
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(2,095 |
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4,392 |
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Inventories |
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(3,449 |
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141 |
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Prepaid expenses and other assets |
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1,140 |
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441 |
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Accounts payable |
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1,522 |
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1,284 |
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Accrued liabilities and other payables |
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2,814 |
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(2,044 |
) |
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Net cash provided by operating activities |
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31,126 |
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25,443 |
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Cash flows from investing activities: |
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Purchase of severance-related insurance policies |
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(588 |
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(646 |
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Purchases of short-term investments |
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(182,615 |
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(180,160 |
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Proceeds from sales of short-term investments |
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122,726 |
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100,997 |
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Proceeds from maturities of short-term investments |
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39,265 |
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9,580 |
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Increase in restricted cash deposits |
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(884 |
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Purchase of property and equipment |
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(9,295 |
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(2,181 |
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Purchase of equity investment in a private company |
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(135 |
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Net cash used in investing activities |
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(30,642 |
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(73,294 |
) |
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Cash flows from financing activities: |
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Principal payments on capital lease obligations |
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(449 |
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(447 |
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Proceeds from issuance of ordinary shares to employees |
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7,263 |
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2,093 |
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Excess tax benefit from share-based compensation |
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1,217 |
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Net cash provided by financing activities |
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8,031 |
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1,646 |
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Net increase (decrease) in cash and cash equivalents |
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8,515 |
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(46,205 |
) |
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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$ |
52,155 |
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$ |
63,948 |
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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 nine months ended September
30, 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; ordered product mix; 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. The Company regularly evaluates 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 the Company believes 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 the
6
Company experiences may differ materially and adversely from its original estimates. To the
extent there are material differences between the estimates and actual results, the Companys
future results of operations will be affected.
Significant accounting policies
There have been no changes in the Companys significant accounting policies that were
disclosed in its 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 September 30, |
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Nine Months Ended September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
Hewlett Packard |
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14 |
% |
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15 |
% |
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16 |
% |
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16 |
% |
Dell |
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12 |
% |
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* |
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11 |
% |
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* |
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Supermicro Computer Inc. |
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12 |
% |
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* |
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* |
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11 |
% |
IBM |
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* |
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14 |
% |
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* |
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10 |
% |
Sun Microsystems |
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* |
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13 |
% |
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* |
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10 |
% |
Fujitsu |
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* |
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11 |
% |
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* |
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* |
|
At September 30, 2010, Dell and Voltaire accounted for 13% 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 nine months ended September
30, 2010 and 2009 are included in Other accrued liabilities and are as follows:
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Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Balance, beginning of the period |
|
$ |
902 |
|
|
$ |
997 |
|
Warranties issued during the period |
|
|
392 |
|
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|
420 |
|
Reversal of warranty reserves |
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(217 |
) |
|
|
(296 |
) |
Settlements during the period |
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(268 |
) |
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(236 |
) |
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Balance, end of the period |
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$ |
809 |
|
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$ |
885 |
|
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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 |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
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September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands, except per share data) |
|
Net income |
|
$ |
3,503 |
|
|
$ |
4,773 |
|
|
$ |
14,057 |
|
|
$ |
8,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used to compute
basic net income per share |
|
|
33,787 |
|
|
|
32,113 |
|
|
|
33,438 |
|
|
|
31,969 |
|
Effect of dilutive securities: stock awards |
|
|
1,492 |
|
|
|
1,498 |
|
|
|
1,793 |
|
|
|
1,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute diluted net income per share |
|
|
35,279 |
|
|
|
33,611 |
|
|
|
35,231 |
|
|
|
33,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary shareholders basic |
|
$ |
0.10 |
|
|
$ |
0.15 |
|
|
$ |
0.42 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary shareholders diluted |
|
$ |
0.10 |
|
|
$ |
0.14 |
|
|
$ |
0.40 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
The Company excluded outstanding options of 621,346 and 442,132, for the three months and nine
months ended September 30, 2010, respectively, from the computation of diluted net income per
common share, because including them would have had an anti-dilutive effect. The Company excluded
outstanding options of 2.5 million and 3.9 million for the three and nine months ended September
30, 2009, respectively, from the computation of diluted net income per common share, because
including them would have had an anti-dilutive effect. There were no anti-dilutive restricted stock
units for the three and nine months ended September 30, 2010 and 2009, respectively.
Recent accounting pronouncements
With the exception of those stated below, there have been no recent accounting pronouncements
or changes in accounting pronouncements during the nine months ended September 30, 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:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
35,356 |
|
|
$ |
14,359 |
|
Money market funds |
|
|
16,799 |
|
|
|
29,281 |
|
|
|
|
|
|
|
|
|
|
$ |
52,155 |
|
|
$ |
43,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
22,899 |
|
|
$ |
20,708 |
|
Less: Allowance for doubtful accounts |
|
|
(386 |
) |
|
|
(290 |
) |
|
|
|
|
|
|
|
|
|
$ |
22,513 |
|
|
$ |
20,418 |
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
1,005 |
|
|
$ |
941 |
|
Work-in-process |
|
|
2,019 |
|
|
|
1,497 |
|
Finished goods |
|
|
9,191 |
|
|
|
6,890 |
|
|
|
|
|
|
|
|
|
|
$ |
12,215 |
|
|
$ |
9,328 |
|
|
|
|
|
|
|
|
Prepaid expense and other: |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
$ |
1,590 |
|
|
$ |
1,648 |
|
Income tax and VAT receivable |
|
|
621 |
|
|
|
949 |
|
Other receivable |
|
|
581 |
|
|
|
949 |
|
Forward contracts |
|
|
591 |
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Other |
|
|
65 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
$ |
3,448 |
|
|
$ |
3,825 |
|
|
|
|
|
|
|
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
Computer equipment and software |
|
$ |
36,210 |
|
|
$ |
28,175 |
|
Furniture and fixtures |
|
|
1,902 |
|
|
|
1,809 |
|
Leasehold improvements |
|
|
3,292 |
|
|
|
2,184 |
|
|
|
|
|
|
|
|
|
|
|
41,404 |
|
|
|
32,168 |
|
Less:
Accumulated depreciation and amortization |
|
|
(26,341 |
) |
|
|
(22,434 |
) |
|
|
|
|
|
|
|
|
|
$ |
15,063 |
|
|
$ |
9,734 |
|
|
|
|
|
|
|
|
Other long-term assets: |
|
|
|
|
|
|
|
|
Equity investments in private companies |
|
$ |
3,885 |
|
|
$ |
4,000 |
|
Prepaid expenses |
|
|
241 |
|
|
|
387 |
|
Long term deposits |
|
|
114 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
$ |
4,240 |
|
|
$ |
4,450 |
|
|
|
|
|
|
|
|
Other accrued liabilities: |
|
|
|
|
|
|
|
|
Payroll and related expenses |
|
$ |
8,092 |
|
|
$ |
8,170 |
|
Professional services |
|
|
3,148 |
|
|
|
3,169 |
|
Warranty |
|
|
809 |
|
|
|
902 |
|
Income tax payable |
|
|
27 |
|
|
|
683 |
|
Sales commissions |
|
|
394 |
|
|
|
548 |
|
Deferred revenue |
|
|
1,073 |
|
|
|
486 |
|
Other |
|
|
1,072 |
|
|
|
846 |
|
|
|
|
|
|
|
|
|
|
$ |
14,615 |
|
|
$ |
14,804 |
|
|
|
|
|
|
|
|
Other long-term obligations: |
|
|
|
|
|
|
|
|
Income tax payable |
|
$ |
1,761 |
|
|
$ |
1,510 |
|
Deferred revenue |
|
|
549 |
|
|
|
|
|
Other |
|
|
503 |
|
|
|
634 |
|
|
|
|
|
|
|
|
|
|
$ |
2,813 |
|
|
$ |
2,144 |
|
|
|
|
|
|
|
|
NOTE 3 INVESTMENTS AND FAIR VALUE MEASUREMENTS:
Fair value hierarchy
The Company measures its cash equivalents and marketable securities at fair value. The
Companys cash equivalents are classified within Level 1. Cash equivalents are valued primarily
using quoted market prices utilizing market observable inputs. The Companys investments in debt
securities and certificates of deposits are classified within Level 2 as the market inputs to value
these instruments consist of market yields, reported trades and broker/dealer quotes. In addition,
foreign currency contracts are classified within Level 2 as the valuation inputs are based on
quoted prices and market observable data of similar instruments.
The following table represents the fair value hierarchy of the Companys financial assets
measured at fair value as of September 30, 2010. There were no financial liabilities as of
September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
Money market funds |
|
$ |
16,799 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,799 |
|
Certificates of deposit |
|
|
|
|
|
|
41,608 |
|
|
|
|
|
|
|
41,608 |
|
U.S. Government bonds |
|
|
|
|
|
|
7,033 |
|
|
|
|
|
|
|
7,033 |
|
Agency fixed rate securities |
|
|
|
|
|
|
30,234 |
|
|
|
|
|
|
|
30,234 |
|
Agency discount notes |
|
|
|
|
|
|
67,433 |
|
|
|
|
|
|
|
67,433 |
|
U.S. Treasury securities |
|
|
|
|
|
|
41,084 |
|
|
|
|
|
|
|
41,084 |
|
Forward contracts |
|
|
|
|
|
|
591 |
|
|
|
|
|
|
|
591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets |
|
$ |
16,799 |
|
|
$ |
187,983 |
|
|
$ |
|
|
|
$ |
204,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
Money market funds |
|
$ |
29,281 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
29,281 |
|
U.S. Government bonds |
|
|
|
|
|
|
5,746 |
|
|
|
|
|
|
|
5,746 |
|
Agency fixed rate securities |
|
|
|
|
|
|
34,310 |
|
|
|
|
|
|
|
34,310 |
|
Agency discount notes |
|
|
|
|
|
|
61,781 |
|
|
|
|
|
|
|
61,781 |
|
U.S. Treasury securities |
|
|
|
|
|
|
64,520 |
|
|
|
|
|
|
|
64,520 |
|
Forward contracts |
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets |
|
$ |
29,281 |
|
|
$ |
166,540 |
|
|
$ |
|
|
|
$ |
195,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Level 1 and Level 2 securities during the nine months ended
September 30, 2010.
Short-term investments
At September 30, 2010 and December 31, 2009, the Company held short-term investments
classified as available-for-sale securities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Money market funds |
|
$ |
16,799 |
|
|
$ |
|
|
|
$ |
16,799 |
|
Certificates of deposits |
|
|
41,608 |
|
|
|
|
|
|
|
41,608 |
|
U.S. Treasury and agency securities |
|
|
145,674 |
|
|
|
110 |
|
|
|
145,784 |
|
|
|
|
|
|
|
|
|
|
|
Total investments in marketable securities |
|
|
204,081 |
|
|
|
110 |
|
|
|
204,191 |
|
Less amounts classified as cash equivalents |
|
|
(16,799 |
) |
|
|
|
|
|
|
(16,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
187,282 |
|
|
$ |
110 |
|
|
$ |
187,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2010 are
presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
Amortized |
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Due in one year or less |
|
$ |
175,280 |
|
|
$ |
175,382 |
|
Due between one and two years |
|
|
12,002 |
|
|
|
12,010 |
|
|
|
|
|
|
|
|
Total investments in available-for-sale securities |
|
$ |
187,282 |
|
|
$ |
187,392 |
|
|
|
|
|
|
|
|
The contractual maturities of available-for-sale securities at December 31, 2009 were due in
one year or less.
Investments in privately-held companies:
As of September 30, 2010, the Companys investment portfolio included investments of $3.9
million in privately-held companies. The Company accounts for $3.5 million of these investments
under the cost method. To determine if impairment exists, the Company monitors each portfolio
companys revenue and earnings trends relative to pre-defined milestones and overall business
prospects, the
10
general market conditions in its industry and other factors related to its ability to remain
in business, such as liquidity and receipt of additional funding.
During the second quarter of 2010, the Company identified certain events and changes in
circumstances indicating that the fair value of the investments in one of the portfolio companies
had been negatively impacted and determined that the impairment of this investment was other than
temporary. In determining whether a decline in value of its investment has occurred and is other
than temporary, an assessment was made by considering available evidence, including the general
market conditions in the portfolio companys industry, its financial condition, near-term prospects
and latest round of financing. The valuation also takes into account the portfolio companys
capital structure, liquidation preferences for its capital and other economic variables as well as
other inputs that require management judgment. As a result of the assessment, the Company recorded
a $250,000 impairment loss on this investment to reduce the carrying value to its estimated market
value. The impairment loss is included in other income, net, on the Consolidated Statements of
Operations for the nine months ended September 30, 2010. The carrying value of the Companys
investment was $0.4 million and is classified within other long term assets on the Companys
Consolidated Balance Sheets as of September 30, 2010.
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
nine months ended September 30, 2010 and 2009. As of September 30, 2010, the Company had forward
contracts in place that hedged future operating expenses of approximately 67.6 million NIS, or
approximately $18.4 million based upon the exchange rate as of September 30, 2010. The forward
contracts cover a substantial portion of future NIS denominated operating expenses expected to
occur over the next twelve months.
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 September 30, 2010 and December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets Reported in |
|
|
Derivative Liabilities Reported in |
|
|
|
Other Current Assets |
|
|
Other Current Liabilities |
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Foreign exchange contracts designated as cash flow hedges |
|
$ |
591 |
|
|
$ |
183 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
591 |
|
|
$ |
183 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
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 September 30, 2010 and December 31, 2009, and their impact on OCI for the nine months
ended September 30, 2010 (in thousands):
|
|
|
|
|
December 31, 2009 |
|
$ |
183 |
|
Amount of gain recognized in OCI (effective portion) |
|
|
658 |
|
Amount of gain reclassified from OCI to income (effective portion) |
|
|
(250 |
) |
|
|
|
|
September 30, 2010 |
|
$ |
591 |
|
|
|
|
|
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 nine months ended
September 30, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Gain (loss) on foreign exchange contracts designated as cash flow hedges |
|
$ |
33 |
|
|
$ |
122 |
|
|
$ |
250 |
|
|
$ |
(717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 COMMITMENTS AND CONTINGENCIES:
Leases
As of September 30, 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) |
|
Remainder of 2010 |
|
$ |
86 |
|
|
$ |
1,284 |
|
2011 |
|
|
316 |
|
|
|
4,978 |
|
2012 |
|
|
158 |
|
|
|
2,415 |
|
2013 |
|
|
|
|
|
|
915 |
|
2014 and beyond |
|
|
|
|
|
|
312 |
|
|
|
|
|
|
|
|
Total minimum lease payments and sublease income |
|
$ |
560 |
|
|
$ |
9,904 |
|
|
|
|
|
|
|
|
|
Less: Amount representing interest |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of capital lease obligations |
|
|
553 |
|
|
|
|
|
Less: Current portion |
|
|
(316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations |
|
$ |
237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service commitments
At September 30, 2010, the Company had non-cancelable service commitments of $2.1 million,
$1.0 million of which is expected to be paid within 2010 and $1.1 million in 2011 and beyond.
Purchase commitments
At September 30, 2010, the Company had non-cancelable purchase commitments of $8.9 million
expected to be paid within one year. As of September 30, 2010, the Company had no non-cancelable
purchase commitments with suppliers beyond one year.
NOTE 6 SHAREHOLDERS EQUITY:
Comprehensive income
12
The components of comprehensive income, net of taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
3,503 |
|
|
$ |
4,773 |
|
|
$ |
14,057 |
|
|
$ |
8,633 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains on available-for-sale securities, net |
|
|
6 |
|
|
|
(30 |
) |
|
|
(74 |
) |
|
|
(102 |
) |
Change in unrealized gains on derivative contracts, net |
|
|
1,084 |
|
|
|
366 |
|
|
|
408 |
|
|
|
711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
4,593 |
|
|
$ |
5,109 |
|
|
$ |
14,391 |
|
|
$ |
9,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine
months ended September 30, 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 |
|
|
494,000 |
|
|
$ |
21.21 |
|
|
$ |
12.24 |
|
Options exercised |
|
|
(998,363 |
) |
|
$ |
4.68 |
|
|
$ |
2.13 |
|
Options canceled |
|
|
(216,787 |
) |
|
$ |
11.99 |
|
|
$ |
6.03 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 |
|
|
5,682,529 |
|
|
$ |
10.06 |
|
|
$ |
6.65 |
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted was $11.74 and $8.22 for the three months
ended September 30, 2010 and 2009, respectively, and $12.24 and $7.65 for the nine months ended
September 30, 2010 and 2009, respectively.
The total pretax intrinsic value of options exercised in the nine months ended September 30,
2010 and 2009 was $17.2 million and $2.5 million, respectively. This intrinsic value represents the
difference between the fair market value of the Companys ordinary shares on the date of exercise
and the exercise price of each option. Based on the closing price of the Companys ordinary shares
of $19.64 on September 30, 2010, the total pretax intrinsic value of all outstanding options was
$55.3 million. As of September 30, 2010, options to buy 3,039,069 shares were exercisable, out of
which options to buy 3,034,415 shares were fully vested and options to buy 4,654 shares were
unvested but exercisable. The total pretax intrinsic value of exercisable options at September 30,
2010 was $34.8 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.
Restricted stock units activity in the nine months ended September 30, 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 |
|
|
437,008 |
|
|
|
19.93 |
|
Restricted stock units vested |
|
|
(6,668 |
) |
|
|
22.54 |
|
Restricted stock units canceled |
|
|
(9,547 |
) |
|
|
19.89 |
|
|
|
|
|
|
|
|
Non vested restricted stock units at September 30, 2010 |
|
|
420,793 |
|
|
$ |
19.89 |
|
|
|
|
|
|
|
|
13
There were no restricted stock units granted in the three months ended September 30, 2010.
The weighted average fair value of restricted stock units granted in the nine months ended
September 30, 2010 was $19.93.
The total intrinsic value of all outstanding restricted stock units was $8.3 million as of
September 30, 2010.
The Company had the following ordinary shares reserved for future issuance under its equity
incentive plans as of September 30, 2010:
|
|
|
|
|
|
|
Number |
|
|
|
of |
|
|
|
Shares |
|
Stock options outstanding |
|
|
5,682,529 |
|
Restricted stock units |
|
|
420,793 |
|
Stock authorized for future issuance |
|
|
1,116,236 |
|
ESPP shares available for future issuance |
|
|
114,302 |
|
|
|
|
|
Total shares reserved for future issuance as of September 30, 2010 |
|
|
7,333,860 |
|
|
|
|
|
Share-based compensation
The following weighted average assumptions are used to value stock options and ESPP granted in
connection with the Companys equity incentive plans for the nine months ended September 30, 2010
and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Share |
|
|
Employee Share |
|
|
|
Options |
|
|
Purchase Plan |
|
|
|
Nine Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Dividend yield, % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility, % |
|
|
60.0 |
|
|
|
63.3 |
|
|
|
54.7 |
|
|
|
57.7 |
|
Risk free interest rate, % |
|
|
2.15 |
|
|
|
2.53 |
|
|
|
0.10 |
|
|
|
0.10 |
|
Expected life, years |
|
|
6.25 |
|
|
|
6.19 |
|
|
|
0.53 |
|
|
|
0.53 |
|
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 |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Cost of goods sold |
|
$ |
96 |
|
|
$ |
64 |
|
|
$ |
284 |
|
|
$ |
199 |
|
Research and development |
|
|
2,091 |
|
|
|
1,378 |
|
|
|
5,925 |
|
|
|
4,200 |
|
Sales and marketing |
|
|
642 |
|
|
|
528 |
|
|
|
1,895 |
|
|
|
1,405 |
|
General and administrative |
|
|
724 |
|
|
|
413 |
|
|
|
2,259 |
|
|
|
1,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
3,553 |
|
|
$ |
2,383 |
|
|
$ |
10,363 |
|
|
$ |
6,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010, there was $28.4 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 2.34 years.
NOTE 8 INCOME TAXES:
As of September 30, 2010 and December 31, 2009, the Company had unrecognized tax benefits of
$1,672,000 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 September 30, 2010, the amount of accrued interest
and penalties totaled $100,000. As of September 30, 2010, calendar years 2004 through 2009 were
open and subject to potential examination in one or more jurisdictions. The Companys U.S.
subsidiary is currently under examination by the Internal Revenue Service for fiscal year 2008
related to income tax and for fiscal years 2008 and 2009 related to employment tax.
14
The Companys effective tax rate is highly dependent upon the geographic distribution of its
worldwide earnings or losses, tax regulations and tax holiday benefits in Israel, and the
effectiveness of the Companys tax planning strategies. The Companys effective tax rates were
28.2% and 29.4% for the three and nine months ended September 30, 2010, respectively and 30.4% and
33.0% for the three and nine months ended September 30, 2009, respectively. 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, and interest and penalties associated with unrecognized tax positions,
partially 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 September 30, 2010 and
results of operations for the three and nine months ended September 30, 2010 and September 30, 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 fabless semiconductor company that produces and supplies high-performance
connectivity products which facilitate efficient data transmission between servers, communications
infrastructure equipment and storage systems. We design, develop and market adapter, gateway and
switch ICs, all of which are silicon devices that provide high performance connectivity. We also
offer a complete line of adapter cards that incorporate our adapter ICs, and switch and gateway
system product lines that incorporate our switch and gateway ICs. Our end-to-end products,
including adapter, gateway and switch ICs, adapter cards, switch systems, gateway systems and
cables are an integral part of a total networking 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.
Our adapters 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. Our switch systems based on our switch
ICs range in port size and density from top-of-rack 36-port switches through director-class
648-port switches.
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 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. In addition to reselling our adapter cards, one of our major OEM customers has begun to
embed our ConnectX VPI Ethernet and InfiniBand silicon devices directly on the motherboard of
multiple server and server blade products. This will increase the proliferation of our IB and
Ethernet solutions in the market. Over time, we expect that other major OEMs will similarly embed
our high-speed interconnect products due to the market demand for higher I/O throughput and
performance.
15
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.
Revenues. We derive revenues from sales of our ICs, cards, switch systems and accessories
primarily to leading server, storage and communication infrastructure OEM customers. The sales of
our products are made worldwide through multiple channels, including direct sales force, our
network of domestic and international sales representatives and independent distributors. Revenues
were approximately $113.9 million for the nine months ended September 30, 2010, compared to
approximately $80.5 million for the nine months ended September 30, 2009, representing an increase
of approximately 41.5%. 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 27% and 47% of our total revenues for the nine months ended September 30,
2010 and 2009, respectively. The loss of one or more of our principal customers, the reduction or
deferral of purchases, or changes in the mix of our products ordered 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 and
Comtel, 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 over the past three quarters 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, switch systems and cables, 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 expenses. 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 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, increased
marketing activities and higher commission payments related to increased revenues.
16
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 expenses 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.
In connection with the commencement of the Approved Enterprise Tax Holiday in 2011, all
deferred tax assets associated with our Yokneam and Tel-Aviv operations will be remeasured at a 0%
rate. We expect that approximately $3.7M will need to be recognized as tax expense during the
fourth quarter of 2010 due to this remeasurement.
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 |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Total revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenues |
|
|
(26 |
) |
|
|
(25 |
) |
|
|
(26 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
74 |
|
|
|
75 |
|
|
|
74 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
40 |
|
|
|
33 |
|
|
|
36 |
|
|
|
37 |
|
Sales and marketing |
|
|
14 |
|
|
|
13 |
|
|
|
14 |
|
|
|
15 |
|
General and administrative |
|
|
7 |
|
|
|
8 |
|
|
|
7 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
61 |
|
|
|
54 |
|
|
|
57 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
13 |
|
|
|
21 |
|
|
|
17 |
|
|
|
15 |
|
Other income, net |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1 |
|
Provision for taxes on income |
|
|
(4 |
) |
|
|
(6 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
9 |
% |
|
|
15 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Comparison of the Three Months Ended September 30, 2010 to the Three Months Ended September 30, 2009
The following table represents our total revenues for the three months ended September 30,
2010 and 2009 by product type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
%of |
|
|
|
|
|
%of |
|
|
|
2010 |
|
|
Revenues |
|
|
2009 |
|
|
Revenues |
|
|
|
(In thousands) |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
ICs & boards |
|
$ |
29,337 |
|
|
|
78 |
|
|
$ |
29,151 |
|
|
|
89 |
|
Switch systems |
|
|
5,438 |
|
|
|
14 |
|
|
|
1,716 |
|
|
|
5 |
|
Cables, accessories and other |
|
|
3,004 |
|
|
|
8 |
|
|
|
1,804 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
37,779 |
|
|
|
100 |
|
|
$ |
32,671 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues were $37.8 million for the three months ended September 30, 2010 compared
to $32.7 million for the three months ended September 30, 2009, representing an increase of
approximately 16%. The increase was primarily attributable to higher switch system revenues. We
expect our switch system revenues to continue to increase as we provide more end-to-end solutions.
Revenues for the three months ended September 30, 2010 are not necessarily indicative of future
results.
Gross Profit and Margin. Gross profit was $27.9 million for the three months ended September
30, 2010 compared to $24.6 million for the three months ended September 30, 2009, representing an
increase of approximately 14%. As a percentage of revenues, gross margin decreased to 73.9% in the
three months ended September 30, 2010 from 75.2% in the three months ended September 30, 2009. The
decrease in gross margins, as a percentage of revenues, was primarily due to the increase in sales
of our switch systems, cables and accessories, which typically yield lower gross margins. Gross
margin for the three months ended September 30, 2010 is not necessarily indicative of future
results.
Research and Development. Research and development expenses were $15.0 million in the three
months ended September 30, 2010 compared to $10.9 million in the three months ended September 30,
2009, representing an increase of approximately 37%. The increase consisted of $2.5 million in
employee related expenses primarily due to headcount additions and merit increases, $861,000 in
facilities and maintenance associated with additional office space in Israel, $712,000 in
share-based compensation expenses related to new share-based awards, $287,000 in depreciation
expenses, $240,000 in outsourcing expenses due to additional support required for an upcoming tape
out and software support, and $208,000 in software and equipment related expenses, partially offset
by a decrease of $772,000 in new product expenses. We expect that research and development expense
will increase in absolute dollars in future periods as we continue to devote additional resources
to develop new products, meet the changing requirements of our customers, and expand into new
markets and technologies.
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 $5.4 million for the three months ended
September 30, 2010 compared to $4.3 million for the three months ended September 30, 2009,
representing an increase of approximately 27%. The increase consisted of $663,000 in employee
related expenses primarily due to headcount additions and merit increases, $168,000 in sales and
marketing activities, $162,000 in expenses related to design work, educational research and
freight, and $114,000 in share-based compensation expenses primarily related to new share-based
awards. The increases were partially offset by a decrease of $179,000 in external sales
representative compensation associated with changes in our external sales representative
compensation plan.
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 $2.7 million for the
three months ended September 30, 2010 compared to $2.6 million for the three months ended September
30, 2009, representing an increase of approximately 2%. The increase consisted of $311,000 in
share-based compensation expense primarily due to new share-based awards, $293,000 in employee
related expenses associated with to headcount additions and merit increases, and $109,000 in HR
related expenses related to training and special events, partially offset by decreases in
professional services of $743,000.
For a further discussion of share-based compensation included in general and administrative
expense, see Share-based Compensation Expense below.
18
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
approximately $55,000 for the three months ended September 30, 2010 compared to approximately
$126,000 for the three months ended September 30, 2009. The decrease consisted of $98,000 of
foreign currency exchange losses partially offset by an increase of $15,000 in interest income
associated with higher average interest rates paid on investments.
Provision for Taxes on Income. Provision for taxes on income was $1.4 million for the three
months ended September 30, 2010 compared to $2.1 million for the three months ended September 30,
2009. The effective tax rate was 28.2% and 30.4% for the three months ended September 30, 2010 and
2009, respectively. The difference between our 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, and interest and penalties associated with
unrecognized tax positions, partially offset by profits earned in Israel, where the tax rate is
lower than the U.S. tax rate.
Comparison of the Nine Months Ended September 30, 2010 to the Nine Months Ended September 30, 2009
The following table represents our total revenues for the nine months ended September 30, 2010
and 2009 by product type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
%of |
|
|
|
|
|
%of |
|
|
|
2010 |
|
|
Revenues |
|
|
2009 |
|
|
Revenues |
|
|
|
(In thousands) |
|
|
|
|
|
|
(In thousands) |
| | | |
|
ICs & boards |
|
$ |
92,999 |
|
|
|
82 |
|
|
$ |
69,475 |
|
|
|
86 |
|
Switch systems |
|
|
13,125 |
|
|
|
11 |
|
|
|
7,331 |
|
|
|
9 |
|
Cables, accessories and other |
|
|
7,823 |
|
|
|
7 |
|
|
|
3,709 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
113,947 |
|
|
|
100 |
|
|
$ |
80,515 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues were $113.9 million for the nine months ended September 30, 2010 compared
to $80.5 million for the nine months ended September 30, 2009, representing an increase of
approximately 42%. Our revenues were impacted by unfavorable economic conditions during the nine
months ended September 30, 2009. The increase in revenues during the nine months ended September
30, 2010 was attributed to expanded adoption of our products in different market segments. Revenues
for the nine months ended September 30, 2010 are not necessarily indicative of future results.
Gross Profit and Margin. Gross profit was approximately $84.9 million for the nine months
ended September 30, 2010 and $60.5 million for the nine months ended September 30, 2009
representing an increase of approximately 40%. As a percentage of revenues, gross margin decreased
to 74.5% in the nine months ended September 30, 2010 from 75.2% in the nine months ended September
30, 2009. The decline in gross margins as a percentage of revenues was primarily due to changes in
our product mix. As a percentage of revenues, we experienced increases in our switch system, cable
and accessories revenues, for which we typically earn lower gross margins. Gross margin for the
nine months ended September 30, 2010 is not necessarily indicative of future results.
Research and Development. Research and development expenses were $41.2 million in the nine
months ended September 30, 2010 compared to approximately $29.7 million in the nine months ended
September 30, 2009, representing an increase of approximately 39%. The increase consisted of $7.7
million in employee related expenses primarily due to headcount additions and merit increases, an
increase in share-based compensation expenses of $1.7 million associated with new share-based
awards, an increase in facilities and maintenance of $1.5 million related to additional office
space in Israel, an increase in software and equipment related expenses of $998,000, and an
increase of $488,000 in outsourcing expenses, partially offset by a decrease in new product
expenses of $1.4 million primarily due to product design costs associated with a tape out during
the nine months ended September 30, 2009.
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 $15.9 million for the nine months ended
September 30, 2010 compared to approximately $12.0 million for the nine months ended September 30,
2009, representing an increase of approximately 32%. The increase consisted of $2.5 million in
employee related expenses primarily due to headcount additions and merit increases, an increase in
share-based compensation of $490,000 associated with to new share-based awards, an increase in
sales and marketing activities of $255,000, an increase in equipment expenses of $207,000 related
to evaluation equipment, and an increase in travel related expenses
19
of $184,000, partially offset by a decrease of $381,000 in commission expenses due to changes
in our external sales representative compensation plan.
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 approximately $8.1
million for the nine months ended September 30, 2010 compared to approximately $6.8 million for the
nine months ended September 30, 2009, representing an increase of approximately 19%. The increase
was due to higher share-based compensation expenses of $1.1 million related to share-based awards,
an increase in employee related expenses of $703,000 associated with headcount additions and merit
increases, and an increase in HR related expenses of $303,000 related to training and special
events, partially offset by a decrease in professional services of $971,000 associated with legal
and accounting fees.
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 |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Cost of goods sold |
|
$ |
96 |
|
|
$ |
63 |
|
|
$ |
284 |
|
|
$ |
199 |
|
Research and development |
|
|
2,091 |
|
|
|
1,378 |
|
|
|
5,925 |
|
|
|
4,200 |
|
Sales and marketing |
|
|
642 |
|
|
|
528 |
|
|
|
1,895 |
|
|
|
1,405 |
|
General and administrative |
|
|
724 |
|
|
|
413 |
|
|
|
2,259 |
|
|
|
1,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
3,553 |
|
|
$ |
2,382 |
|
|
$ |
10,363 |
|
|
$ |
6,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010, there was $28.4 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 2.34 years.
Other Income, Net. Other income, net consists of interest earned on cash and cash equivalents
and foreign currency exchange gains and losses. Other income, net was approximately $217,000 for
the nine months ended September 30, 2010 compared to approximately $864,000 for the nine months
ended September 30, 2009, representing a decrease of approximately 75%. The decrease consisted
primarily of lower interest income of $256,000, an impairment of an investment in a privately held
company of $250,000 and foreign exchange losses of $193,000.
Provision for Taxes on Income. Provision for taxes on income was approximately $5.9 million
for the nine months ended September 30, 2010 compared to approximately $4.3 million for the nine
months ended September 30, 2009. Our effective tax rates were 29.4% and 33.0% for the nine months
ended September 30, 2010 and 2009, respectively. The difference between our effective tax rates and
the 35% federal statutory rate resulted primarily from non-tax-deductible expenses such as
stock-based compensation expense and the accrual of unrecognized tax benefits, interest and
penalties associated with unrecognized tax positions, partially offset by 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 September 30, 2010, our principal source of
liquidity consisted of cash and cash equivalents of $52.2 million and short-term investments of
$187.4 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
20
Net cash provided by our operating activities amounted to $31.1 million and $25.4 million in
the nine months ended September 30, 2010 and 2009, respectively. Net cash provided by operating
activities in the nine months ended September 30, 2010 was primarily attributable to net income of
$14.1 million and net non-cash items of $17.1 million, partially offset by changes in assets and
liabilities of $68,000. Changes in assets and liabilities resulted from an increase in accrued
liabilities and other payables of $2.8 million, an increase in accounts payable of $1.5 million,
and a decrease in prepaid expenses of $1.1 million, partially offset by an increase in inventory of
$3.4 million due to higher safety stock levels and an increase in accounts receivable of
approximately $2.1 million due to the timing of sales during the period.
Net cash provided by operating activities of approximately $25.4 million in the nine months
ended September 30, 2009 was primarily attributable to net income of approximately $8.6 million and
non-cash items of $12.6 million, partially offset by changes in assets and liabilities of $4.2
million. Changes in assets and liabilities resulted from a decrease in accounts receivable of
approximately $4.4 million associated with improved collections and an increase in accounts payable
of approximately $1.3 million, partially offset by a decrease of approximately $2.0 million in
accrued liabilities and other payables due to a reduction in payroll related liabilities.
Investing activities
Net cash used in investing activities was approximately $30.6 million in the nine months ended
September 30, 2010 and was primarily attributable to net purchases of short term investments of
$20.6 million and purchases of property and equipment of $9.3 million. Net cash used in investing
activities was approximately $73.3 million in the nine months ended September 30, 2009 and was
primarily attributable to the net purchases of short term investments of $69.6 million, purchases
of property and equipment of $2.1 million and an increase in restricted cash of $884,000.
Financing activities
Our financing activities generated $8.0 million in the nine months ended September 30, 2010
and were primarily due to proceeds from stock option exercises and purchases pursuant to our
employee stock purchase plan of $7.3 million and excess tax benefits from share-based compensation
of $1.2 million, partially offset by principal payments on capital lease obligations of $449,000.
In the nine months ended September 30, 2009, our financing activities provided approximately $1.6
million primarily due to proceeds from stock option exercises and purchases pursuant to our
employee stock purchase plan of $2.1 million, partially offset by principal payments on capital
lease obligations of $447,000.
Off-Balance Sheet Arrangements
As of September 30, 2010, we did not have any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our contractual obligations at September 30, 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 |
|
$ |
560 |
|
|
$ |
323 |
|
|
$ |
237 |
|
|
$ |
|
|
Non-cancelable operating lease commitments |
|
|
9,904 |
|
|
|
4,767 |
|
|
|
4,637 |
|
|
|
500 |
|
Service commitments |
|
|
2,071 |
|
|
|
1,300 |
|
|
|
746 |
|
|
|
25 |
|
Purchase commitments |
|
|
8,897 |
|
|
|
8,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,432 |
|
|
$ |
15,287 |
|
|
$ |
5,620 |
|
|
$ |
525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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.
21
Contingencies
As of September 30, 2010, our unrecognized tax benefits totaled approximately $1.7 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 unrecognized tax
benefits as of September 30, 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 nine months ended September 30,
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 our
investments to highly rated securities. Individual securities are limited to comprising no more
than 10% 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
22
expenses and our Israeli facility 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 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 profits.
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 $110,000 at September 30, 2010. There would also be an
impact on future operating expenses denominated in currencies other than the U.S. dollar. At
September 30, 2010, approximately $3.6 million of our monthly operating expenses were denominated
in NIS. As of September 30, 2010, we had forward contracts in place that hedged future operating
expenses of approximately 67.6 million NIS, or approximately $18.4 million based upon the exchange
rate as of September 30, 2010. The forward contracts cover a significant portion of 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 risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2009, the other information set forth in this
report and our other filings with the SEC, 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:
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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.
A small number of customers account for a significant portion of our revenues. For the three
months ended September 30, 2010, sales to Hewlett-Packard, Dell and Super Micro Computer Inc.
accounted for 14%, 12% and 12%, respectively, of our total revenues, while sales to our top ten
customers accounted for 71% of our 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, while sales to our top ten customers accounted for 79% of our 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 September 30, 2010, we
had 22 issued patents and 33 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.
Indemnity obligations pursuant to various agreements expose us to potentially substantial liability
for intellectual property infringement, damages related to our products and technologies and other
claims.
In the normal course of business, we enter into agreements and terms and conditions that
require us to indemnify the other party against third-party claims alleging that one of our
products infringes or misappropriates intellectual property rights, as well as against certain
claims relating to property damage, personal injury or acts or omissions relating to supplied
products or technologies, or acts or omissions made by us or our employees, agents or
representatives. In addition, we are obligated pursuant to indemnification undertakings with our
officers and directors to indemnify them to the fullest extent permitted by law for claims and
expenses related to acts or omissions made by our directors and officers in their capacities as
such. If we receive demands for indemnification under these agreements and terms and conditions,
they will likely be very expensive to settle or defend, and we may incur substantial legal fees in
connection with any indemnity demands. Our indemnification obligations under these agreements and
terms and conditions may be unlimited in duration and amount, and could have an adverse effect on
our business, financial condition and results of operations.
See the risk factor in our Annual Report on Form 10-K for the year ended December 31, 2009
entitled Intellectual property litigation, which is common in our industry, could be costly, harm
our reputation, limit our ability to sell our products and divert the attention of management and
technical personnel for a further discussion of this risk factor.
Risks Related to Operations in Israel and Other Foreign Countries
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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 September
30, 2010, we had 345 full-time and 58 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 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 56% and 63% of our revenues in the nine months ended September 30, 2010 and 2009,
respectively, from sales outside of North America. As a result, we face additional risks from doing
business internationally, including:
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reduced protection of intellectual property rights in some countries; |
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difficulties in staffing and managing foreign operations; |
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longer sales and payment cycles; |
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greater difficulties in collecting accounts receivable; |
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adverse economic conditions; |
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seasonal reductions in business activity; |
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potentially adverse tax consequences; |
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laws and business practices favoring local competition; |
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costs and difficulties of customizing products for foreign countries; |
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compliance with a wide variety of complex foreign laws and treaties; |
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compliance with the United States Foreign Corrupt Practices Act and similar anti-bribery
laws in other jurisdictions; |
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compliance with export control and regulations; |
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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; |
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foreign currency exchange risks; |
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fluctuations in freight rates and transportation disruptions; |
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political and economic instability; |
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variance and unexpected changes in local laws and regulations; |
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natural disasters and public health emergencies; and |
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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.
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 and our Israeli facility 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 amounted to 3.4%, 3.8% and 3.9% for
the years ended December 31, 2007, 2008 and 2009, respectively, and to 1.9% and 3.4% for the nine
months ended September 30, 2010 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 nine months ended September 30, 2010 and September 30, 2009, the
increase in the value of the NIS against the U.S. dollar amounted to 2.9% and 1.2%, respectively.
If the U.S. dollar cost of our research and development operations and facility expenses 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 37% of our outstanding ordinary shares
as of September 30, 2010. Moreover, based on information filed with SEC or reported to us, four of
our shareholders, Fidelity Management and Research, Delek Group, Migdal Insurance and Financial
Holdings and Psagot Investment House, combined beneficially owned approximately 29% of our
outstanding ordinary shares as of September 30, 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,
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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 REMOVED AND RESERVED
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS
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3.1 (1)
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Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 18, 2008). |
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4.1 (2)
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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. |
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4.2 (3)
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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. |
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31.1
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Certification of the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of the Companys Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2
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Certification of the Companys Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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(1) |
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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. |
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(2) |
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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. |
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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.
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Date: November 4, 2010
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Mellanox Technologies, Ltd.
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/s/ Michael Gray |
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Michael Gray |
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Chief Financial Officer |
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(Duly Authorized Officer and Principal Financial Officer) |
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Exhibit Index
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3.1 (1)
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Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 18, 2008). |
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4.1 (2)
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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. |
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4.2 (3)
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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. |
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31.1
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Certification of the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of the Companys Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2
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Certification of the Companys Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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(1) |
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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. |
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(2) |
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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. |
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(3) |
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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. |
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