In a letter to Israel’s Mellanox Technologies Ltd., activist investor Starboard Value LP, which is the company’s largest shareholder, attributed the firm’s underperformance compared to other semiconductor companies to “weak execution,” “excessive spending” and “missed growth opportunities.”
Starboard, a New York-based investment adviser that invests in publicly traded US companies, in November acquired a 10.7 percent stake in the Israeli maker of servers and storage switching solutions, in a bid to turn around its fortunes.
“We invested in Mellanox because we believe the company is deeply undervalued and there are significant opportunities to create value based on actions within the control of management and the Board,” Peter Feld, a managing member of Starboard wrote in a letter to Mellanox CEO Eyal Waldman and the Israeli firm’s board of directors. “Mellanox has a highly differentiated product set and a leading market position in a number of key verticals.” The company has a leadership position in the industry.
However, “despite an extremely strong product and technology portfolio, Mellanox has been one of the worst performing semiconductor companies for an extended period of time,” Feld wrote, with the firm “dramatically” under-performing in its peer group and the broader semiconductor industry over the past one, three and five years.
The firm has outsized research and development spending and other operational and administrative expenses, while revenue growth has lagged behind peers, Starboard said.
“This consistent underperformance is troubling and puzzling, given both the strong performance of Mellanox’s peers and the tailwinds provided by the Company’s favorable exposure to many of the most attractive end markets in the industry: high-performance computing, cloud computing, hyperscale data centers, and artificial intelligence,” Feld wrote. “This underperformance has led to a crisis of confidence among investors and has contributed to Mellanox trading at a meaningful discount to its peers. We believe that this poor stock price performance has been driven by a pattern of weak execution that has included both excessive spending and missed growth opportunities.”
Starboard said that the targets set by Mellanox for 2018, released in December, for low to mid-teens revenue growth in 2018, represent just “a modest improvement” in the firm’s strategy for the future, and it remains “concerned that these commitments are merely reactionary, and, even if these new goals are achieved, do not come close to addressing the magnitude of the problem.”
Furthermore, Feld wrote, given Mellanox’s “extended history of underperformance and missed expectations,” the company “lacks sufficient credibility” to convince shareholders “that it will hit even these modest targets.”
“Even more concerning, this pattern of missing expectations has come during a time when almost every other semiconductor company has repeatedly beaten expectations and raised guidance,” said Feld.
Feld added that in order to “create substantial value” for shareholders, the “time for fringe changes and marginal improvements has long passed.”
“Given the significant and continuing underperformance at Mellanox, and the high level of frustration among the shareholder base, the Company’s recently announced targets are not nearly enough to offset years of poor performance and missed expectations.”
Feld calls for “substantial change” at the company, well beyond its recently announced 2018 targets, and urges Mellanox to work with Starboard to help “drive significant improvements in operating and financial performance.”
A comment from Mellanox was not immediately available.
Mellanox was founded by entrepreneur Eyal Waldman, in 1999 in Yokne’am, Israel, with the purpose of developing semiconductors for data center infrastructure based on the next generation input output (NGIO) standard. The company is headquartered in Sunnyvale, California, and in Yokne’am and listed shares on Nasdaq in 2007. It has a market value of $3.3 billion.