In the quarter ended in September, Mellanox posted sales of $156.5m, more than double that of year ago period, and the $48.4m in net income the company raked in was ten times--as in 10X--that of the black ink it had in the third quarter of 2011, when the Xeon E5s were expected but did not come out.
The InfiniBand and Ethernet networking component maker was riding a wave of pent up demand of silicon, adapters, and switches related to Intel's rollout of Xeon E5 processors earlier this year. While it is anticipating that sales are going to be good in the fourth quarter, the company is not providing guidance out beyond that.
In a conference call with Wall Street analysts, Eyal Waldman, CEO and chairman at the networker, said that the adoption curve for 56Gb/sec InfiniBand products, which includes SwitchX ASICs to OEM partners as well as switches made by Mellanox and the ConnectX-3 adapter cards to link the InfiniBand switches to servers, accounted for 57 per cent of total revenues, which works out to $89.2m. That is the fastest that InfiniBand goes, and is also known as Fourteen Data Rate or FDR.
In the first quarter, as Intel was just beginning its rollout of Xeon E5 processors and a number of big HPC centers had received early release chips from Intel to be used in the servers of their choice, FDR InfiniBand accounted for 31 per cent of revenues and in the second quarter, when Xeon E5 chips were widely available, it jumped to 54 per cent of sales. The two are linked together for HPC customers because the on-chip PCI-Express 3.0 controllers in the Xeon E5s are necessary to drive the FDR InfiniBand adapters.
Not that everybody just jumps to the fastest protocols and processors. In the third quarter, 40Gb/sec (QDR) InfiniBand products accounted for $48.5m or 31 per cent of sales, about the same as in the second quarter, according to Michael Gray, CFO at Mellanox. Slower 20Gb/sec InfiniBand devices are still sold as some companies just add to their clusters instead of upgrading their networking, and pushed $6.3m or 4 per cent of sales, down a point of share from the second quarter.
For all the talk about the acquisition of Voltaire by Mellanox, 10GE and 40GE Ethernet products still make up a relatively small part of sales at Mellanox, about $11m in the quarter or 7 per cent of sales, similar to the second quarter. And most of that comes from Ethernet server adapter cards, not switches.
That said, Mellanox is positioned with its two-timing SwitchX ASICs and converged adapter cards to support either InfiniBand or Ethernet protocols on the same devices, and over time it will be impossible to tell what protocol a given device might be running.
Gray added that integrated circuits and boards accounted for $82.9m in revenues, or about 53 per cent of total sales, the same per cent as in the second quarter, with switch products (regardless of protocol) bringing in $46.9m or 30 per cent of the pie.
Three very big customers
Mellanox had three customers who contributed more than 10 per cent of sales, and when that happens, the Securities and Exchange Commission says you have to disclose who they are. In this case, HP was a 19 per cent customer, IBM was an 18 per cent customer, and Polywell, a Chinese system integrator obviously building some big ole clusters, was a 17 per cent customer. Polywell actually started its ramp (presumably for FDR products) in the second quarter, according to Waldman, who added that three big system deals came through in the third quarter and contributed $25m to the coffers.
Mellanox says that its server customers have now burned through their pent up demand for Xeon E5 clusters left over from late 2011 and into early 2012, but adds that InfiniBand's uptake as a transport layer for storage clusters is growing fast and that similarly cloud operators, looking for high bandwidth and low latency are beginning to consider using InfiniBand instead of Ethernet. And thus, the company says that it is confident that in the fourth quarter that it can set the revenue bar at somewhere between $145m and $150m.
As for the prospects of another bump up to 100Gb/sec speeds for either InfiniBand or Ethernet, we're going to have to wait a while for that. Intel is expected to get its 100Gb/sec products out the door sometime in 2015 or 2016, according to Waldman; Chipzilla currently has 10Gb/sec Ethernet and 40Gb/sec InfiniBand products.
"We will find the right way to work with Intel - or compete with them."
Mellanox is already able to push either InfiniBand or Ethernet up to 56Gb/sec and expects to have 100Gb/sec ASICs in the field around 2014 or so. (One would guess timed to a "Haswell" Xeon server upgrade cycle.) Given that edge, Waldman says that he hopes to be able to take market share away from competitors who sell switches or those who use alternative ASICs such as those available from Intel or Broadcom or homegrown from vendors such as HP or Cisco.
As for all the talk about what Intel will do now that it owns Ethernet, InfiniBand, and Cray interconnect technologies and the obvious move of getting networking down onto the CPU die, Waldman didn't say it wouldn't happen and did say that Mellanox would cope.
"Then we will find the right way to work with them," Waldman said of Intel, "or compete with them."
Those are, in fact, the only two options. And the company could try to do a lot more of the former before the latter becomes the only option.
In the meantime, Mellanox has $397.7m in cash and equivalents in the bank and no debt, which gives it some leeway to compete and maybe do acquisitions of its own.
With its shares trading at close to $100 a pop and a market capitalization of $4bn, the company is probably too expensive for anyone but the largest companies to buy. And interesting outsider like EMC, which doesn't have a server biz per se and who is perceived as being a neutral player (thanks to VMware) might be able to do it.
Oddly enough, if Mellanox gets in a pinch fighting with Intel, it could try to buy Advanced Micro Devices just to make things interesting. None of this seems likely, and Mellanox will no doubt do the smart thing and stick to its knitting, selling ASICs, adapters, and switches and make sure it has a place in a world of software-defined networks. ®