Activist investor Starboard Value has sent a letter to Mellanox CEO Eyal Waldman demanding dramatic operational changes to boost returns to shareholders. This is the latest missive in an ongoing struggle between Starboard and Mellanox that began back in November when Starboard raised its stake in the interconnect specialist to 10.7 percent. Starboard argues Mellanox is significantly undervalued and that its costs, notably R&D, are unreasonably high.
The letter, dated January 8 and under the signature of Peter Feld, is pointed as shown in this excerpt:
“As detailed in the accompanying slides, over the last twelve months Mellanox’s R&D expenditures as a percentage of revenue were 42%, compared to the peer median of 22%. On SG&A, Mellanox spent 24% of revenue versus the peer median of 17%. It is critical to appreciate that Mellanox is not just slightly worse than peers on these key metrics, it is completely out of line with the peer group.”
Mellanox issued 2018 guidance for “low-to-mid-teens” (percent) revenue growth. Starboard cites a ‘consensus’ estimate of $816.5 million in revenue for 2017 and $986.4 million (14.5 percent). At 70.6 percent, Mellanox has one of the highest gross margins among comparable companies, and one of the lowest operating margins at 13.8 percent, according to Starboard.
“We believe there is a tremendous opportunity at Mellanox, but it will require substantial change, well beyond just the Company’s recently announced 2018 targets,” wrote Feld.
Link to Starboard letter: http://www.starboardvalue.com/wp-content/uploads/Starboard_Value_LP_Letter_to_MLNX_01.08.2018.pdf