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North America Equity Research

19 July 2012

Mellanox Technologies
Solid 2Q Results & Significant Growth Outlook; Market Adoption and Design Win Traction to Drive 2H Growth
Mellanox reported solid 2Q results that were better than our and the consensus estimates on both revenues and EPS. 2Q revenues of $133.5M grew 50% Q/Q, better than our forecast of $128M and higher than the companys prior guidance range of $125 - $130M. EPS was $0.25 better than our expectations driven by higher revenues and better margins. Management guided 3Q revenue of $150-$155M (up +14.3% Q/Q at midpoint) for the September quarter which was substantially better than our expectation of $102M as the company continues to see broader acceptance/demand for its FDR 56Gb/s Infiniband and 10/40Gb Ethernet solutions. Given continued strength, we are increasing our forward revenue/EPS estimates and raising our PT to $80. Intel Romley server and storage platforms drove strong 2Q revenue growth. Revenue growth of ~50% sequentially was mainly due FDR Infiniband growth from all end-markets including the HPC, storage, data centers and web 2.0 markets. We note revenue from 10/40Gb Ethernet products also grew in the quarter. Margin improvement due to solid revenue growth and favorable product mix. A growing contribution (54% of 2Q12 sales vs. 31% in 1Q12) from high-margin 56Gb/sec FDR Infiniband products (carry 15-30% higher ASP than older-generation QDR products) resulted in further improvement in non-GAAP GM to 70.5% (up 50 bps Q/Q) and non-GAAP OPM to 32.0% (up 630 bps Q/Q) in 2Q12 (above its longterm operating margin goal of ~ mid to high 20s). Expect Infiniband proliferation to continue in 3Q and beyond. With at least a one-generation competitive lead, we believe MLNX's strong design win momentum and Infiniband penetration will continue as attach rates (and dollar contents) for its interconnect solutions (FDR Infiniband) are increasing from all end-markets particularly HPC, web 2.0, storage and cloud-based applications. We note Web 2.0 is the fastest growing market for MLNX with significant growth potential. We missed the stock call on MLNX, but not going to upgrade here the stock was trading at $90-100 in aftermarket trading post the earnings call last night already reflecting the significant upside in the 3Q guide. Our new price target of $80 assumes that the stock should trade at a 20x multiple (5-year top-line CAGR) applied to our $4.00 EPS estimate in 2013. Limited upside to where the stock was trading in after markets last night keeps us at Neutral, but we would look to get more constructive on the stock below $60.
Mellanox Technologies (MLNX;MLNX US) FYE Dec 2010A 2011A EPS (excl stock comp) ($) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY Bloomberg EPS FY ($) 0.29 0.29 0.22 0.21 1.01 0.97 0.24 0.27 0.31 0.31 1.13 1.11

Neutral
MLNX, MLNX US Price: $66.38

Price Target: $80.00


Previous: $52.00

SMid Semiconductors Harlan Sur


AC

(1-415) 315-6700 harlan.sur@jpmorgan.com

Saqib Jalil
(1-415) 315-6761 saqib.jalil@jpmorgan.com

John S. Ahn
(1-415) 315-6758 john.s.ahn@jpmorgan.com J.P. Morgan Securities LLC
Price Performance
80 60 $ 40 20
Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

MLNX share price ($) RTY (rebased)

Abs Rel

YTD 100.8 % 92.1%

1m -7.2% -11.4%

3m 53.2% 53.0%

12m 135.0 % 136.3 %

2012E

(Prev)

2012E

(Curr)

2013E

(Prev)

2013E

(Curr)

0.51A 0.74 0.51 0.58 2.34 -

0.51A 0.99A 1.15 1.06 3.71 2.30

0.58 0.62 0.67 0.73 2.60 -

0.94 0.98 1.02 1.06 4.00 2.71

Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date

66.38 18 Jul 12 77.69 - 25.81 2,885.41 Dec 43 80.00 31 Dec 12

Source: Company data, Bloomberg, J.P. Morgan estimates.

See page 9 for analyst certification and important disclosures.


J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.morganmarkets.com

Harlan Sur (1-415) 315-6700 harlan.sur@jpmorgan.com

North America Equity Research 19 July 2012

Mellanox (MLNX, Neutral, $80PT)


Table 1: Mellanox 2Q Earnings Summary and 3Q Outlook
$ in millions, except per share
2Q12 MLNX Actual $ 133.5 Revenue ($M) 50.4% Q/Q Change 70.5% Non-GAAP Gross Margin 32.0% Non-GAAP Op Margin $ 32.09 Net Income (incl SBC) $0.74 Proforma EPS (incl SBC) $0.99 Proforma EPS (excl SBC) JPM Estimate $ 127.5 43.7% 67.5% 27.2% $ 22.67 $ 0.52 $ 0.74 2Q12 3Q12 Consensus 3Q12 Guidance Consensus 6.0 $ 128.3 $ 150.0- $155.0 $ 103.67 6.7% up 14% at MP 3.0% 70-71% 4.8% OpEx up 6-8% 9.42 0.22 0.25 $ 0.74 $ 0.50 Diff

$ $ $

Source: Company reports and J.P. Morgan estimates.

Table 2: Mellanox Product (% of Sales)


$ in millions, except per share
Products (% of total sales) IC/Board Switch Systems Cable & accessories Software Total
Source: J.P. Morgan estimates.

2Q 2011 53.0% 29.0% 11.0% 7.0% 100.0%

3Q 2011 50.0% 34.0% 9.0% 7.0% 100.0%

4Q 2011 57.0% 30.0% 10.0% 3.0% 100.0%

1Q 2012 49.0% 35.0% 12.0% 4.0% 100.0%

2Q 2012 47.0% 36.0% 12.0% 5.0% 100.0%

Cash flow and balance sheet


The company exited 2Q 2012 with a total cash position of $327.8 million (up +60.2mm in 2Q12) and generated $59.2 million in cash flow from operations. DSOs in 2Q12 decreased to 35 days from 49 days in 1Q12 (with ~ 97% of outstanding AR amounts are current or less than 30 days passed). Inventory turns in 2Q12 increased to 5.2x versus 4.0x in the prior quarter.

Increasing 2012 and 2013 estimates


Given solid 2Q revenue/EPS performance and significantly better 3Q12 revenue outlook, we are increasing our forward estimates. We now estimate the company will grow its revenues by 103% Y/Y to $527 M in 2012 (versus our prior view of $428M) and generate an EPS of $3.71 per share (versus our prior estimate of $2.34). Additionally, our 2013 revenue and EPS estimates are now at $631M (versus prior estimate of $495M) and $4.00 (versus prior estimate of $2.60 per share), respectively.

Valuation
Our new price target of $80 assumes that MLNX will trade at an unchanged 20x multiple off our new 2013 EPS estimate of $4.00 which is consistent with the 20% EPS growth rate we anticipate the company will generate over the next 3-5 years. Limited upside to our target keeps us at Neutral.

Investment Thesis
Mellanox is the leading supplier of field-proven InfiniBand-compliant semiconductor and system level products that deliver industry-leading performance and capabilities.
2

Harlan Sur (1-415) 315-6700 harlan.sur@jpmorgan.com

North America Equity Research 19 July 2012

In addition to supporting InfiniBand, MLNXs products also support the industry standard Ethernet interconnect specification and provide unique product differentiation and connectivity flexibility. With the strategic acquisition of Voltaire, the company now offers complete end-to-end interconnectivity solutions including ICs, adapters, switch systems and software.

We believe that the company has established significant expertise within the high-performance (HPC) interconnect solutions from successfully developing and implementing multiple generations of their products. The company is now focused on penetrating the fast growing markets of Web2.0, cloud and data storage by leveraging its expertise in the HPC market.

Risk to Rating and Price Target


Infiniband penetration in HPC and datacenter could be higher than we expect, which could pose upside risk to our revenue estimates. Infiniband penetration could be slower than our expectations. If the market adoption rate is slower than our expectations, our outlook on Mellanoxs revenue and earnings growth could be overly optimistic. Customer concentration is high as Mellanox derived 49% of its 2Q12 revenues from two major customers (HP at ~30% and IBM at ~19%). Any weakness in just a small handful of these customers performance could adversely affect the companys growth performance.

Harlan Sur (1-415) 315-6700 harlan.sur@jpmorgan.com

North America Equity Research 19 July 2012

Appendix I: Comp and Group Valuation


Table 3: SMid Semiconductor Comp and Group Valuation
Name Broadcom Marvell Cavium Freescale Intermolecular M/A-COM Audience PMC-Sierra NVIDIA LSI Mellanox SanDisk NXP Entropic Micron Ticker BRCM MRVL CAVM FSL IMI MTSI ADNC PMCS NVDA LSI MLNX SNDK NXPI ENTR MU Rating Overweight Overweight Overweight Overweight Overweight Overweight Overweight Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Stock Price Shares (M) $ 30.65 570 $ 10.87 599 $ 24.22 49 $ 9.53 248 $ 7.51 44 $ 17.45 48 $ 21.94 17 $ 5.75 232 $ 13.06 619 $ 5.95 573 $ 66.38 42 $ 34.26 247 $ 21.86 248 $ 5.84 89 $ 5.84 981 Mkt Cap ($M) $ 17,471 $ 6,514 $ 1,187 $ 2,363 $ 331 $ 833 $ 376 $ 1,334 $ 8,079 $ 3,409 $ 2,775 $ 8,448 $ 5,412 $ 517 $ 5,731 Proform EPS 2012E $3.00 $ 1.19 $ 0.40 $ 0.34 $ 0.05 $ 1.26 $ 0.77 $ 0.42 $ 0.95 $ 0.78 $ 3.71 $ 1.41 $ 1.88 $ 0.36 $ (1.06) Proform EPS 2013E $3.35 $ 1.55 $ 1.50 $ 1.30 $ 0.45 $ 1.63 $ 0.95 $ 0.62 $ 1.20 $ 0.82 $ 4.00 $ 2.50 $ 2.82 $ 0.45 $ (0.69) Rev 2012E ($M) $ 8,058 $ 3,458 $ 242 $ 4,123 $ 58 $ 329 $ 131 $ 576 $ 4,192 $ 2,641 $ 527 $ 4,556 $ 4,257 $ 321 $ 8,345 Rev 2013E ($M) $ 9,095 $ 3,854 $ 351 $ 4,584 $ 80 $ 374 $ 170 $ 660 $ 4,583 $ 2,811 $ 631 $ 5,610 $ 4,653 $ 393 $ 9,087 P/E 2012E 14.7 10.9 NM 49.2 NM NM 31.1 19.0 16.7 10.6 24.3 37.7 12.4 53.1 NM 22.9 P/E 2013E 12.3 8.0 28.8 8.7 19.9 10.7 23.8 11.4 12.8 9.8 22.3 16.9 8.1 25.4 NM 13.9 Prof P/E 2012E 10.2 9.1 60.6 28.0 137.8 13.9 28.6 13.6 13.7 7.6 17.9 24.2 11.6 16.2 NM 14.9 Prof P/E 2013E 9.1 7.0 16.1 7.3 16.9 10.7 23.2 9.3 10.9 7.3 16.6 13.7 7.8 13.0 NM 11.7 EV/Sales EV/Sales 2012E 2013E 1.9 1.7 1.2 1.1 4.6 3.2 1.9 1.7 NM NM 2.4 2.1 2.0 1.5 0.0 0.0 1.2 1.1 0.9 0.9 5.1 4.2 1.7 1.4 1.6 1.5 1.2 1.0 0.8 0.7 1.4 1.2

SOX Nasdaq SP500

SOX CCMP SPX

363.91 2,942.60 1,372.78

Source: Company reports and J.P. Morgan estimates. Prices are as of market close 07/18/2012

Harlan Sur (1-415) 315-6700 harlan.sur@jpmorgan.com

North America Equity Research 19 July 2012

Appendix II: Financials Tables


Table 4: Mellanox Income Statement
$ in millions, except per share
Total revenue % Change Y/Y % Change Q/Q Cost of goods sold % Change Y/Y % Change Q/Q Gross m argin Non-GAAP GM (excl SBC) R&D % Total revenue SG&A % Total revenue Operating income % Total revenue Non-GAAP OpEx % Non-GAAP OpM (excl SBC) Opexp % change Q/Q opex (non-GAAP) % change Q/Q (non-GAAP) Interest/other Pretax incom e % Total revenue Income tax Tax rate Net income % Total revenue Diluted shares Diluted shares - no options 1Q11A 55.1 52.0% 35.3% 19.4 115.2% 69.2% 64.7% 68.4% 20.3 36.9% 17.0 30.9% (1.7) (3.0%) 52.3% 16.5% 2Q11A 63.3 58.5% 15.1% 22.2 118.4% 14.6% 64.9% 68.9% 23.7 37.4% 14.6 23.1% 2.8 4.4% 51.6% 17.3% 38.3 #DIV/0! 32.7 (0.7%) 0.1 2.8 4.5% 0.7 25.3% 2.1 3.4% 37.3 38.5 $0.06 -70.0% NM 8.2 $0.27 -6.9% 12.5% 3Q11A 68.2 80.4% 7.6% 24.2 145.0% 8.6% 64.5% 68.2% 23.4 34.3% 15.0 22.0% 5.6 8.2% 47.9% 20.3% 38.4 0.1% 32.6 (0.1%) 0.4 6.0 8.9% 1.2 20.3% 4.8 7.1% 38.0 42.4 $0.13 0.0% 117% 8.2 $0.31 40.9% 14.8% 4Q11A 72.7 78.6% 6.6% 26.2 128.2% 8.4% 64.0% 67.0% 25.1 34.6% 15.5 21.3% 5.9 8.1% 47.3% 19.7% 40.6 5.8% 34.4 5.3% 0.2 6.1 8.4% 1.4 23.4% 4.7 6.4% 41.8 42.8 $0.11 22.2% -15% 8.4 $0.31 47.6% 0.0% F11A 259.3 67.6% 92.0 126.9% 64.5% 69.8% 92.5 35.7% 62.1 24.0% 12.6 4.9% 51.2% 18.6% 154.6 70.6% 132.6 72.7% 0.8 13.4 5.2% 3.4 25.3% 10.0 3.8% 37.9 40.4 $0.25 -59.7% 1Q12A 88.7 61.2% 22.1% 28.9 48.8% 10.3% 67.4% 70.0% 29.0 32.6% 17.7 19.9% 13.2 14.9% 44.3% 25.7% 46.6 14.8% 39.3 14.2% 0.2 13.4 15.1% 1.0 7.2% 12.4 14.0% 42.4 43.0 2Q12A 133.5 110.7% 50.4% 41.7 87.4% 44.4% 68.8% 70.5% 37.7 28.2% 22.1 16.6% 32.0 24.0% 38.5% 32.0% 59.8 28.3% 51.4 30.8% 0.2 32.2 24.1% 0.1 0.3% 32.1 24.0% 43.5 43.4 3Q12E 152.5 123.7% 14.3% 47.4 96.3% 13.7% 68.9% 70.5% 39.6 26.0% 23.9 15.7% 41.6 27.3% 36.0% 34.4% 63.5 6.2% 55.0 7.0% 0.2 41.8 27.4% 2.5 6.0% 39.3 25.8% 43.9 43.7 $0.89 584.6% 20% 10.9 $1.15 271.0% 16.2% 4Q12E 152.5 109.8% 0.0% 49.6 89.3% 4.5% 67.5% 69.0% 41.0 26.9% 24.0 15.7% 37.9 24.9% 36.9% 32.1% 65.0 2.4% 56.3 2.4% 0.2 38.2 25.0% 2.3 6.0% 35.9 23.5% 44.4 44.2 $0.81 636.4% -9% 11.0 $1.06 241.9% -7.8% F12E 527.2 103.4% 167.6 82.1% 68.2% 70.0% 147.2 27.9% 87.7 16.6% 124.7 23.7% 38.3% 31.7% 234.9 51.9% 201.9 52.2% 0.8 125.6 23.8% 5.9 4.7% 119.7 22.7% 43.5 43.5 1Q13E 146.4 65.0% (4.0%) 48.3 67.2% (2.5%) 67.0% 68.6% 41.0 25.0% 24.0 16.4% 33.1 22.6% 38.4% 30.3% 65.0 0.0% 56.2 (0.2%) 0.4 33.4 22.8% 2.8 8.5% 30.6 20.9% 44.9 44.7 2Q13E 153.7 15.2% 5.0% 50.7 21.6% 5.0% 67.0% 68.6% 42.5 27.6% 25.0 16.3% 35.5 23.1% 38.1% 30.5% 67.5 3.8% 58.6 4.3% 0.4 35.8 23.3% 3.0 8.5% 32.8 21.3% 45.4 45.2 $0.72 -2.7% 6% 11.3 $0.98 -1.0% 4.3% 3Q13E 161.4 5.8% 5.0% 53.3 12.3% 5.0% 67.0% 68.5% 44.0 27.3% 26.0 16.1% 38.1 23.6% 37.8% 30.7% 70.0 3.7% 61.1 4.3% 0.4 38.5 23.8% 3.3 8.5% 35.2 21.8% 45.9 45.7 $0.77 -13.5% 7% 11.3 $1.02 -11.3% 4.1% 4Q13E 169.5 11.1% 5.0% 55.9 12.8% 5.0% 67.0% 68.4% 46.0 27.1% 27.0 15.9% 40.5 23.9% 37.8% 30.6% 73.0 4.3% 64.1 4.9% 0.4 40.9 24.1% 3.5 8.5% 37.4 22.1% 46.4 46.2 $0.81 0.0% 5% 11.3 $1.06 0.0% 3.9% F13E 631.0 19.7% 208.2 24.3% 67.0% 68.5% 173.5 27.5% 102.0 16.2% 147.3 23.3% 38.0% 30.5% 275.5 17.3% 239.8 18.8% 1.4 148.7 23.6% 12.6 8.5% 136.0 21.6% 45.7 45.4 $2.98 9.2% 45.3 $4.00 7.8%

32.9 50.7% 0.0 (1.6) (2.9%) 0.0 (0.2%) (1.6) (2.9%) 34.5 38.1

Proforma EPS (including options) ($0.05) % Change Y/Y -125.0% % Change Q/Q -156% adjustment EPS (Pro-forma, NO Options) % Change Y/Y % Change Q/Q 10.8 $0.24 -17.2% 14.3%

$0.29 $0.74 NM 1133.3% 164% 155% 10.8 $0.99 266.7% 94.1%

$2.73 $0.68 992.0% 134.5% -16% 42.3 $3.71 228.3% 11.2 $0.94 84.3% -11.3%

9.6 35.6 $1.13 $0.51 112.5% 11.9% 64.5%

Source: Company reports and J.P. Morgan estimates.

Harlan Sur (1-415) 315-6700 harlan.sur@jpmorgan.com

North America Equity Research 19 July 2012

Table 5: Mellanox Balance Sheet


$ in millions
FY End: Dec Assets Cash and ST investment Accounts receivable Inventories Prepaid and other Total current assets PP&E, net Severance assets Intangible assets Goodwill Other assets Total assets Liabilities Accounts payable Other accrued liabilities Deferred Revenue Capital lease obligations, current Total current liabilities Accrued severance Capital lease obligations Deferred Revenue Other long-term obligations Total liabilities 1Q11A 2Q11A 3Q11A 4Q11A 1Q12A 2Q12A 3Q12E 4Q12E 93.3 35.5 15.3 8.6 152.7 22.1 9.3 34.5 132.9 5.6 357.0 107.1 45.5 15.5 6.1 174.1 21.8 9.6 31.4 132.9 7.8 377.6 220.6 46.0 17.7 6.2 290.5 30.3 8.3 28.6 132.9 7.6 498.3 238.1 48.2 25.0 7.4 318.6 36.8 7.8 25.7 132.9 8.3 530.0 264.2 47.1 32.2 7.8 351.4 38.8 8.2 23.3 132.9 8.7 563.2 324.5 54.6 31.4 8.1 418.6 41.7 7.9 20.8 132.9 10.5 632.5 205.8 88.7 51.0 8.1 353.6 41.8 7.9 20.8 132.9 10.5 567.6 256.5 88.7 53.3 8.1 406.6 41.9 7.9 20.8 132.9 10.5 620.7 1Q13E 300.1 85.2 52.0 8.1 445.4 42.0 7.9 20.8 132.9 10.5 659.5 2Q13E 344.3 89.4 54.6 8.1 496.4 42.1 7.9 20.8 132.9 10.5 710.7 3Q13E 390.9 93.9 57.3 8.1 550.2 42.2 7.9 20.8 132.9 10.5 764.5 4Q13E 439.6 98.6 60.2 8.1 606.5 42.3 7.9 20.8 132.9 10.5 821.0

15.9 24.4 4.1 0.3 44.7 12.1 0.1 2.0 3.2 62.1

17.6 27.1 4.4 0.3 49.4 12.7 2.6 4.7 69.4 308.2 377.6

25.5 21.7 4.7 0.2 52.2 11.2 3.0 4.6 71.0 427.3 498.3

30.1 31.1 5.6 0.3 67.1 10.4 0.3 3.7 6.2 87.7 442.3 530.0

32.2 32.2 6.6 0.2 71.2 10.8 0.3 3.6 6.9 92.8 470.4 563.2

34.6 48.0 7.1 0.1 89.9 10.8 0.3 6.0 7.1 114.0 518.4 632.5

48.0 81.0 7.1 0.1 136.2 10.8 0.3 6.0 7.1 160.4 407.2 567.6

50.1 84.6 7.1 0.1 142.0 10.8 0.3 6.0 7.1 166.2 454.5 620.7

48.9 82.5 7.1 0.1 138.6 10.8 0.3 6.0 7.1 162.8 496.8 659.5

51.3 86.6 7.1 0.1 145.2 10.8 0.3 6.0 7.1 169.4 541.3 710.7

53.9 90.9 7.1 0.1 152.1 10.8 0.3 6.0 7.1 176.2 588.3 764.5

56.6 95.5 7.1 0.1 159.3 10.8 0.3 6.0 7.1 183.5 637.5 821.0

Total stockholders' equity (deficit) 294.9 Total liability and stockholders' equity 357.0
Source: Company reports and J.P. Morgan estimates.

Harlan Sur (1-415) 315-6700 harlan.sur@jpmorgan.com

North America Equity Research 19 July 2012

Table 6: Mellanox Cash Flow Statement


$ in millions
FY End: Dec Net income (GAAP) Depreciation and amortization Stock-based compensation Other adjustments Change in working capital Change in Receivables Changes in Inventory Prepaid expenses and other assets Accounts payable Other accrued liabilities Cash Flow from operations Purchases/sales of marketable securities Purchases of PP&E Other Investing Activities Cash flow from investments 1Q11A 2Q11A 3Q11A 4Q11A 1Q12A 2Q12A 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E

(1.6) 3.9 4.3 0.4 (3.1) 1.0 (1.6) 6.8 3.5 13.6 135.0 (2.2) (203.7) (70.9)

2.1 5.0 5.4 (0.3) (10.1) (0.2) 1.8 1.7 7.0 12.5 2.3 (2.3) 0.0

4.8 5.5 5.6 (0.9) (0.5) (2.2) 0.0 8.0 (5.5) 14.9 9.5 (11.3) (1.8)

4.7 5.4 6.1 (1.8) (2.3) (7.3) (0.8) 4.6 13.7 22.2 (32.8) (8.9) (41.8)

12.4 5.3 7.2 (1.5) 1.1 (7.7) 0.4 2.1 4.2 23.6 (96.2) (4.5) (100.7)

32.1 5.6 8.4 (2.6) (7.5) 0.8 0.3 2.4 19.7 59.2 (49.4) (6.0) (55.4)

39.3 1.1 10.9 (34.1) (19.6) 13.4 32.9 43.9

35.9 1.1 11.0 (2.3) 2.2 3.6 51.5

30.6 1.1 11.2 3.5 1.3 (1.3) (2.1) 44.4

32.8 1.1 11.3 (4.3) (2.6) 2.4 4.1 44.9

35.2 1.1 11.3 (4.5) (2.7) 2.6 4.3 47.4

37.4 1.1 11.3 (4.7) (2.9) 2.7 4.5 49.5

(1.2) (1.2)

(1.2) (1.2)

(1.2) (1.2)

(1.2) (1.2)

(1.2) (1.2)

(1.2) (1.2)

Principal payments on capital leases/debt Payments on deferred public offering cost, other Proceeds from exercise of warrants Proceeds from exercise of stock options Proceeds from public offering, net Other Cash flow from financing Cash at beginning of period Net change in cash and equivalents Cash at end of period
Source: Company reports and J.P. Morgan estimates .

(0.1)

(0.1)

(0.1)

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

3.9

5.5 0.4 5.8 54.5 18.3 72.8

3.8 108.0 (53.5) 54.5

5.4 104.2 1.0 110.5 72.8 123.6 196.4

3.7 1.0 4.5 196.4 (15.1) 181.3

6.2 1.0 7.1

8.1 0.8 8.9

0.5

0.5

0.5

0.5

0.5

0.5

0.4 123.8 43.1 166.9

0.4 166.9 50.7 217.6

0.4 217.6 43.6 261.3

0.4 261.3 44.2 305.5

0.4 305.5 46.6 352.0

0.4 352.0 48.8 400.8

181.3 111.2 (70.1) 12.6 111.2 123.8

Harlan Sur (1-415) 315-6700 harlan.sur@jpmorgan.com

North America Equity Research 19 July 2012

Mellanox Technologies: Summary of Financials


Note: $ in millions (except per-share data). Fiscal year ends Dec Income Statement - Annual FY11A FY12E Revenues 259 527 Cost of revenues 92 168 Gross profit 167 360 R&D 93 147 SG&A 62 88 Other operating expenses Operating income 13 125 EBITDA 17 129 Non-operating income / (expense) 1 1 Pretax income 13 126 Income taxes 3 6 Tax rate 25.3% 4.7% Minority interest/other Net income - recurring 10 120 Diluted shares outstanding 38 44 EPS (incl stock comp) 0.25 2.73 EPS (excl stock comp) 1.13 3.71 FY13E 631 208 423 174 102 147 152 1 149 13 8.5% 136 46 2.98 4.00 FY14E Income Statement - Quarterly Revenues Cost of revenues Gross profit R&D SG&A Other operating expenses Operating income EBITDA Non-operating income / (expense) Pretax income Income taxes Tax rate Minority interest/other Net income - recurring Diluted shares outstanding EPS (incl stock comp) EPS (excl stock comp) Days of sales outstanding (DSOs) Days of inventory outstanding (DIOs) Ratio Analysis Revenue growth EBITDA growth EPS growth Gross margin EBITDA margin Net margin Debt / EBITDA Debt / capital (book) Return on invested capital (ROIC) Return on equity (ROE) Return on assets (ROA) 1Q12A 89A 29A 60A 29A 18A 13A 14A 0A 13A 1A 7.2%A 12A 42A 0.29A 0.51A 48A 102A FY11A 67.6% (39.0%) (59.7%) 64.5% 6.6% 3.8% 2.5% 2.7% 2.3% 2Q12A 133A 42A 92A 38A 22A 32A 33A 0A 32A 0A 0.3%A 32A 43A 0.74A 0.99A 37A 69A FY12E 103.4% 659.8% 992.0% 68.2% 24.5% 22.7% 25.7% 25.9% 20.1% 3Q12E 153 47 105 40 24 42 43 0 42 3 6.0% 39 44 0.89 1.15 53 98 FY13E 19.7% 17.5% 9.2% 67.0% 24.0% 21.6% 23.8% 24.0% 18.4% 4Q12E 153 50 103 41 24 38 39 0 38 2 6.0% 36 44 0.81 1.06 53 98 FY14E -

Balance Sheet and Cash Flow Data Cash and cash equivalents Accounts receivable Inventories Current assets PP&E Goodwill / intangibles Total assets Short-term debt Current liabilities

FY11A 238 48 25 319 37 26 530 67

FY12E 256 89 53 407 42 21 621 142 166 455 178 4 5 165 3.78 (159) 17

FY13E 440 99 60 607 42 21 821 159 183 637 186 4 5 181 3.97 (5) 2

FY14E -

Long-term debt Total liabilities 88 Shareholders' equity 442 Operating Cashflow 63 Depreciation & Amortization 4 Capex 5 Free cash flow 38 Free cash flow / share 1.02 Cash flow from investing activities (114) Cash flow from financing activities 125 Source: Company reports and J.P. Morgan estimates.

Harlan Sur (1-415) 315-6700 harlan.sur@jpmorgan.com

North America Equity Research 19 July 2012

Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Market Maker: JPMS makes a market in the stock of Mellanox Technologies.

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Mellanox Technologies within the past 12 months. Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Mellanox Technologies. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Mellanox Technologies. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Mellanox Technologies. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Mellanox Technologies. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing research.disclosure.inquiries@jpmorgan.com with your request.
Mellanox Technologies (MLNX, MLNX US) Price Chart

Date
N $28 N $33

Rating Share Price ($) N N N N N OW OW N N N N N N N N N N 16.67 7.05 7.98 8.98 13.92 15.90 17.70 19.46 25.75 25.44 15.49 27.27 29.15 33.38 33.71 36.24 43.33

Price Target ($) -7.00 9.00 15.00 17.50 18.50 21.50 27.00 28.00 21.00 29.00 31.00 33.00 37.00 38.00 52.00

125 N $7

OW $17.5

20-Mar-07 24-Oct-08
N $52

100 N Price($) 75 N

N $15

N $27

N $31

06-Jan-09 21-Apr-09 23-Jul-09 01-Oct-09 06-Oct-09 25-Feb-10 14-Apr-10 22-Apr-10 22-Jul-10 15-Feb-11 28-Apr-11

N $9 OW $18.5 $21.5 N $21 N

N $29

N $37N $38

50

25

0 Feb 07 Nov 07 Aug 08 May 09 Feb 10 Nov 10 Aug 11 May 12

21-Jul-11 12-Oct-11 25-Jan-12 18-Apr-12

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Oct 24, 2008 - Jan 06, 2009.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stocks expected total return is compared to the expected total return of a benchmark country market index, not to those analysts

Harlan Sur (1-415) 315-6700 harlan.sur@jpmorgan.com

North America Equity Research 19 July 2012

coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research website, www.morganmarkets.com. Coverage Universe: Sur, Harlan: Audience (ADNC), Broadcom Corporation (BRCM), Cavium Inc (CAVM), Entropic Communications (ENTR), Freescale Semiconductor (FSL), Intermolecular (IMI), LSI Corporation (LSI), M/A-COM (MTSI), Marvell Technology Group (MRVL), Mellanox Technologies (MLNX), Micron Technology (MU), NVIDIA Corporation (NVDA), NXP Semiconductors (NXPI), PMC-Sierra (PMCS), SanDisk Corp (SNDK) J.P. Morgan Equity Research Ratings Distribution, as of July 6, 2012
J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* Overweight (buy) 45% 51% 44% 70% Neutral (hold) 43% 47% 48% 62% Underweight (sell) 11% 34% 8% 51%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com. Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

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Harlan Sur (1-415) 315-6700 harlan.sur@jpmorgan.com

North America Equity Research 19 July 2012

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