Mellanox makes InfiniBand hay while the sun shines

But can you hear the ground shake? Chipzilla's a-comin'

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If someone (that means you, Larry Ellison, and maybe you, Michael Dell, or maybe you, Ginni Rometty) was thinking about buying networking chip, switch, and adapter maker Mellanox Technologies, it is probably too late unless that certain someone wants to spend a whole lotta cash doing the deal.

Mellanox just wrapped up its second quarter, and not only is it selling InfiniBand stuff like crazy, it is also getting some traction in Ethernet wares and, more importantly, the company is piling up the black ink like a software maker even through it is fundamentally a hardware manufacturer.

These will likely be remembered as the salad days at Mellanox some years hence, when Intel has taken over networking much as it has done with processing. Perhaps during the 100 Gigabit InfiniBand and Ethernet rollouts maybe in 2014 or 2015, and maybe the next generation after that if Mellanox can keep its lead.

But don't tell Mellanox investors that, who are going nuts on Wall Street this morning in the wake of the Q2 report after the market closed yesterday (July 19), when the company posted $133.5m in revenues, more than double (110.1 per cent, to be precise) from the year ago period. Net income rose to $32.1m, a factor of 15X higher than in the second quarter of 2011.

That income is 24 per cent of sales – the kind of money that a software maker with a niche all to itself can command. And that profit in Q2 came despite a substantial increase in sales, marketing, research, and development costs that are being pumped into its switch-hitting SwitchX ASICs, the InfiniBand and Ethernet switches that use them, and the ConnectX adapters that talk to them from server ports.

Mellanox shares were up a staggering 38 per cent, to just under $92 a pop, when Wall Street opened. Profit taking by investors will no doubt bring that number down as the day progresses. But the point to remember is that Mellanox now has a market capitalization of $2.5bn or so, making it a very pricey acquisition indeed, even for a company that might generate more than $500m in revenues.

Mellanox generated $59.2m in cash from operations during the quarter, a record for the company, and exited Q2 with $327.8m in cash and investments. If networking assets were not so expensive, Mellanox might be able to do some acquiring of its own. Clearly the $218m acquisition of sometime rival, sometime partner Voltaire back in November 2010 has paid off.

In the conference call with analysts, Eyal Waldman, who is president, CEO and chairman at Mellanox, said that the ramp to 56Gb/sec FDR InfiniBand products was progressing nicely, with FDR products comprising 54 per cent of company sales in Q2, or around $74.7m compared to 31 per cent in the first quarter and 40 per cent in the four quarter of 2011. The tail end of last year made a big bump for FDR InfiniBand as Intel was shipping Xeon E5-2600 servers to supercomputer customers to get some machines on the Top 500 list in November, and the current quarter got a bigger bump as Intel actually announced the Xeon E5-2600s in March and the Xeon E5-2400 and E5-4600 processors in May.

Waldman said that traditional HPC customers, hyperscale data center operators, database clusters, and clustered storage systems were all driving InfiniBand network sales.

"InfiniBand is becoming the interconnect of choice for storage systems," he said, adding later in the call that storage products are now driving somewhere between 15 and 20 per cent of revenues, with the rest being driven by servers. Waldman added that Mellanox was also working closely with Microsoft on Windows Server 2012, due to launch in September, to make sure it was tuned up to make use of the FDR InfiniBand and 40 Gigabit Ethernet switches and adapters that the company is peddling.

Sales of 10GE and 40GE switches and adapters rose in the quarter, but Waldman did not say by how much or what percentage of total sales Ethernet products were. Ethernet switches and adapters running at 40GE speeds are getting uptake by financial services and Web 2.0 customers, and the company added Ethernet distributors in the quarter, including China's Sugon and Taiwan's Quanta (which El Reg discussed here) so they could use Mellanox silicon and resell its products, whatever suits their needs. Ethernet is still a small slice of the Mellanox biz, but at some point in the future, Mellanox will be selling switches and adapters that can switch protocols on the fly and the difference will be moot.

Michael Gray, CFO at Mellanox, said on the call that Ethernet products accounted for about 7 per cent of overall revenues, which puts it at $9.3m. That means Ethernet sales are up by 146 per cent compared to the year-ago period, and accelerating since that growth rate is three times higher than it was a year ago. Most of the revenues in the Ethernet side of Mellanox are driven by 10GE, but the company is seeing prototypes of 40GE installations and has been clear that it thinks customers should jump straight to 40GE and skip 10GE now that it has faster products out.

Believe it or not, sales of 20Gb/sec DDR InfiniBand products rose as companies built out existing systems, up 31.7 per cent to $6.7m and making up about 5 per cent of overall revenues in the quarter. Sales of 40Gb/sec QDR InfiniBand ASICs, switches, and adapters was down a smidgen at $41.4m and comprised 31 per cent of company revenues, and of course, that $72m in FDR InfiniBand product sales was all brand new.

All told, switches accounted for 36 per cent of sales, or $48m, and if you do the math, that's a factor of 2.6 growth year-on-year. Network ASICs and adapters accounted for $62.7m in revenues in Q2, and presumably the remaining $22.7m in revenues was from software and services. Mellanox had two OEM customers who drove more than 10 per cent of sales in the quarter, and the biggie was Hewlett-Packard, which pushed 30 per cent of sales, and IBM, which accounted for 19 per cent; Gray said there was a big hyperscale data center account that was associated with the revenue driven by HP and IBM, but he didn't say which one it might be.

Gray said that looking ahead, Mellanox was looking for sales in the third quarter to be even higher, between $150m and $155m. ®

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