Mellanox: Dreadful Timing on “SiPh” Halt

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The day after it became public that Mellanox Technologies’ biggest shareholder, Starboard Value, sent a letter along with slides to the CEO and the Board of Directors, critical of the vendor’s performance, a press release was issued stating that it is ceasing “its 1550nm silicon photonics development activities.” In our opinion, Mellanox’s move was a tone-deaf reaction as it further substantiated Starboard’s claim of “excessive spending” and its apprehension about “commitments [being] merely reactionary and… not com[ing] close to addressing the magnitude of the problem.” Even worse for Mellanox, although there is in effect universal agreement that the supplier is a technologically strong company, including by Starboard, its announcement highlights a technical weakness that it has been grappling with for quite a while. Most importantly, despite its dominant position in the high-performance computing space, corporate cultural constraints will likely prohibit Mellanox from making the necessary dramatic changes to put it on a comparable course with other semiconductor players.

The “expected fiscal 2018 non-GAAP operating expense savings” – just over $25 million is almost negated by the “estimated aggregate charge.” It is also not clear what the development cost will be in “utilizing other technologies” to ship high-end cable and transceiver solutions.

We also find it quite revealing that Mellanox only “began [its] review of the silicon photonics business in May of 2017.” It definitely picked the wrong horse in purchasing Kotura in 2013 as many of the standards and MSAs operate at 1310nm. The problem with a company, which has a heavy emphasis on technology, is that it can have devastating outcomes. Although Melanox was stalwart in insisting that it could extend the 1550nm wavelength, it has been clear for some time that it resulted in a very complicated solution that was not practical.

Undoubtedly, Mellanox has benefited from its experience in being closer to optical development trends in the enterprise sector. However, the proper step for the company would have been to cut its losses sooner and perhaps even look to make another acquisition.

Maybe the most extreme example of Mellanox’s mindset and its inability to adapt, is the inexplicable entry into the 100G PSM4 market last year. Even assuming there may have been some benefits for its other products, getting into a business in which profits are hardly existent is not a move that would usually be made by any big chip vendor.

Putting aside the fact that we have yet another example of “silicon photonics” being a bust, we look back at an article published in 2015 by fibeReality on Mellanox’s lack of marketing prowess. A major part of marketing includes imagination and attitude.

For example, Broadcom became a powerhouse because of these attributes, including at times even being ruthless. It is hard to see Mellanox having the creativity of the original Avago in ridding itself of its optical module business, apparently without a direct cash transaction. Naturally, excelling at selling can be an important prerequisite in any kind of substantial M&A activity as well.

As always fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.

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[written by Mark Lutkowitz]