Building 100G Momentum To Lift Mellanox Further

With its research and development costs for its latest generations of 100 Gb/sec InfiniBand and Ethernet adapters and switches largely behind it and product sales ramping, switch maker Mellanox Technologies is significantly bolstering its top and bottom lines and positioning itself to make acquisitions to broaden and deepen its product lines.

In the fourth quarter ended in December, Mellanox posted revenues of $176.9 million, up 25.4 percent from the year-ago period. The company also was able to drop $43.2 million to the bottom line, a significant improvement over the $4.8 million loss it turned in in the final quarter of 2014 as the 100 Gb/sec EDR InfiniBand switches and adapters were first coming to market.

For the full year, Mellanox had $658.1 million in sales, up 42 percent, and it booked a $96.1 million in net income, which again was a big reversal from the $24.7 million loss it had in 2014 when the company was making significant investments in the Switch-IB and Switch-IB 2 InfiniBand chips and Spectrum Ethernet chips, which all drive 100 Gb/sec ports. The heavy investment came just as sales of older 40 Gb/sec QDR InfiniBand products were slowing.


It takes a few quarters for any new technology to take off, and the EDR InfiniBand uptake among HPC centers, hyperscalers, and cloud builders is under way. In the fourth quarter, EDR InfiniBand products (including switches, adapters, chips, and circuit boards) drove $18.1 million in sales, a factor of 13X higher revenues than when these products first started shipping late last year. Sales of slower 56 Gb/sec FDR InfiniBand products rocketed up in early 2012 as one of the OEM partners of Mellanox bought a little more product than it was able to sell, and after that capacity burned off, sales continued along a normal pace.

While HPC centers tend to be on a two-year or three-year cycle for their systems, companies that use InfiniBand interconnects as the fabric linking server nodes for database or storage clusters tend to stretch out their roadmaps for both interconnects. (HPC centers also stay as close to the cutting edge as they can for processors, and database and storage system makers often hang back on Intel Xeon generations, too.) This is why Mellanox is still selling lots of FDR InfiniBand products four years after their ramp started and QDR InfiniBand is still generate revenues for the company. Check it out:


The EDR InfiniBand ramp will likely be accelerated with the advent of the Switch-IB 2 chips, which Mellanox launched last November and which take Message Passing Interface (MPI) operations and move them off servers and adapter cards and put them on the switch itself where they can run most efficiently. These Switch-IB 2 36-port switches and server adapters cost about the same as the EDR InfiniBand products they replace while offering a 10X drop in latencies as data cuts through the switch and software stack. (What is not to like about that?) We think that those customers who invested in earlier generation Switch-IB switches running EDR InfiniBand will probably be offered generous upgrade deals, particularly if the new switches are part of a cluster expansion, but Mellanox has not promised such deals.

On the Ethernet front, sales of the company’s SwitchX-2 chips (which supported 56 Gb/sec InfiniBand as well as 40 Gb/sec Ethernet) and related Connect-X2 adapters continue apace as the 100 Gb/sec Spectrum Ethernet switches and related ConnectX-4 adapters, which we detailed last June when they were announced, are starting their ramp.

In a conference call with Wall Street analysts, Mellanox CEO Eyal Waldman said that the Spectrum switches, which support port speeds of 25 Gb/sec, 50 Gb/sec, and 100 Gb/sec using the new protocol compelled upon the IEEE two years ago by hyperscalers Google and Microsoft with the backing of switch chip makers Mellanox and Broadcom, started to ship to multiple hyperscale and OEM customers in the third quarter of 2015. The prior generation of SwitchX-2 chips are still getting design wins, and as the year ended, switches based on these chips were accepted by the Open Compute Project spearheaded by Facebook as well as by the US Department of Defense for its internal networks. Waldman said that in general, 40 Gb/sec switch and adapters were doing well, and that Mellanox had over 90 percent market share for Ethernet adapters running at 40 Gb/sec speeds.


As for the new 25 Gb/sec Ethernet standard driven by the hyperscalers, Mellanox started driving revenues for these Spectrum products in the fourth quarter. “We believe Mellanox is the market leader in each of its solutions at speeds of 25 Gb/sec and above and is well positioned to capture meaningful share within the 25 Gb/sec, 50 Gb/sec, and 100 Gb/sec Ethernet market,” Waldman said. “We are in the early stages of the market transition to 25 Gb/sec Ethernet and above and expect to see continued growth with this product.”

Intel unveiled its “Red Rock Canyon” FM10000 multihost adapters back in November 2015, but has not revealed any plans it might have to deliver switch ASICs that support the 25 Gb/sec standard and that can be used to create Ethernet switches with 25 Gb/sec, 50 Gb/sec, and 100 Gb/sec speeds. Broadcom is ramping up its own “Tomahawk” ASICs, and Cavium is doing the same with its XPliant chips, both of which support the 25 Gb/sec standard.

The acquisition of EZchip, a maker of network processors, embedded CPUs, and intelligence network adapters that Mellanox announced it would acquire for $811 million ($620 million net of cash) back in September 2015, is moving towards closure. Among other things, the EZchip deal will give Mellanox the products and expertise to expand into storage, security, deep packet inspection, and video encoding and streaming markets. Mellanox will be borrowing $300 million to do the EZchip deal and spending a chunk of its cash hoard for the remaining $320 million to close the acquisition. The combined companies have 2,400 employees and $770 million in revenues for 2015. EZchip shareholders approved acquisition earlier this month, and Mellanox expects it to close in late February.

“The combination of EZchip and Mellanox Technologies provides unique capabilities for building intelligent interconnect for server and storage infrastructure,” explained Waldman on the call. “Intelligent networks are the foundation of future datacenters, all floating functions and algorithms from the CPU to the network. Mellanox is uniquely positioned to take advantage of this trend.”

Looking ahead to this year, Waldman said that the storage market will be the number one driver of growth for InfiniBand, followed by the HPC segment then enterprise and hyperscale and cloud builders. All of these key markets grew for Mellanox in 2015. Waldman added that 40 Gb/sec Ethernet would continue to grow in 2016, and the ramp for 25 Gb/sec products (including higher speed Spectrum switch and Connect-X4 adapter chips and units) would obviously grow. He said that “tens of entities” were in the proof of concept phase with Spectrum Ethernet at the moment and that these customers would start deploying in the first and second quarters of this year.

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