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Mellanox itching to close Voltaire, crank up InfiniBand

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While many IT players are seeing revenue and profit flushes in the fourth quarter, the results were mixed at network adapter and InfiniBand chip and switch maker Mellanox Technologies.

In the fourth quarter of 2010 ended in December, Mellanox booked $40.7m in sales, up 14.5 per cent, but the company posted a $517,000 loss, which did not compare favorably to the $4.3m profit it had in the final quarter of 2009. Costs were up pretty much across the board - cost of components, research and development, sales and marketing, and general costs all rose significantly. Contributing to the loss was $900,000 in costs associated with the $281m acquisition of InfiniBand partner/rival and Ethernet upstart Voltaire; that deal was announced in late November 2010. The company also chose this time to take a $500,000 impairment on an unspecified private investment, and also had a $3.6m deferred tax payment it decided to book now while the news was not great. Ignoring these charges as well as stock-based compensation, non-GAAP earnings were $7.7m, down a bit from the $9.9m in non-GAAP earnings in the year-ago quarter.

In a conference call with Wall Street analysts, Eyal Waldman, the president, chief executive officer, and chairman at Mellanox, said that Voltaire shareholders had approved the acquisition and he now expected the deal to close in February. Once the deal does close, Mellanox will provide updated guidance for 2011 and talk a bit more about how Voltaire's software will be mashed up with the combined Mellanox and Voltaire hardware.

Michael Gray, chief financial officer at Mellanox, said in the call that during Q4 margins were hit a bit by product mix - the company sold more InfiniBand switches and boards and fewer InfiniBand integrated circuit chips, and the latter have higher gross margins. About 76 percent of the company sales came from chips and boards in Q4. Gray added that 40 Gb/sec InfiniBand products (chips, boards, adapters, and cables all lumped together) accounted for 71 per cent of revenues, and 20 GB/sec InfiniBand products made up another 9 per cent. (Those are about the same as in the third quarter.) Mellanox had three customers who represented more than 10 per cent of revenues in Q4: Hewlett-Packard was 14 per cent, Dell was 13 per cent, and IBM was 10 per cent. When asked if Oracle would eventually become a 10 per center as well in the wake of its taking a 10.2 per cent stake in Mellanox a month ahead of the announcement of the Voltaire takeover, Waldman quipped, "We hope so."

In the meantime, Mellanox is ramping up its LAN-on-motherboard efforts to get its ConnectX-2 chips embedded onto mobos. It had some design wins in 2010 here, and expects to get more this year. Waldman said that Mellanox was working with Intel and its OEM server partners on getting chips on system boards for the "Romley" server platform, which will be based on the upcoming "Sandy Bridge" Xeon processors for two-socket boxes. He said that Mellanox was even getting some action booting other vendors' silicon off system boards.

Mellanox taped out a new InfiniBand chip in the fourth quarter, and said it would be taping out another one this quarter; the costs associated with those tape-outs will be incurred in the first quarter of 2011. Waldman did not elaborate on what the chips were, but Mellanox was already showing off FDR (56 Gb/sec) switch technology back in November at the SC10 supercomputing show in New Orleans, and these could be the matching adapter chips. The second chip is probably related to EDR (100 Gb/sec) InfiniBand. What Waldman did say is that FDR products would be coming in 2011, end to end, from cables to adapters to switches, and that an EDR adapter would ship before the end of 2011. So that second chip is likely for supporting EDR rates on Connect-X cards and their on-mobo equivalents.

The InfiniBand race is going to come down to QLogic versus Mellanox once the Voltaire deal closes and once you realize that Oracle is probably not going to ever design another InfiniBand switch again. (Cisco Systems has InfiniBand products, but doesn't seem to care.) And Mellanox is buying Voltaire at least in part to have a channel of partners and direct customers through which it can peddle InfiniBand products and at least control its own destiny better. And Waldman thinks Mellanox has the edge, of course, just like QLogic thinks it does.

Waldman said that Mellanox would beat QLogic to market with FDR InfiniBand products, no bones about it. "I think we will be able to maintain our market share in InfiniBand technology, and on top of that, I think we will be able to extend our share in Ethernet technology." That latter bit comes from the Voltaire acquisition, and Waldman said that Voltaire's Ethernet switch sales had more than quadrupled in 2010.

Small wonder, then, that QLogic kicked out its "Bullet" 10 Gigabit Ethernet switch chip last summer, which was incorporated into HP's FlexFabric switches for its BladeSystem blade servers.

Looking ahead, Gray said that Mellanox expected revenues in the first quarter of 2011 would be in the range of $42.5m to $43m, and that the company would incur $3.8m in costs relating to the tape out of the two chips mentioned above. ®

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