Mellanox Banks On Storage and Cloud For Future Growth 

Clouds, storage arrays, and clustered database servers are turning into very good drivers of business for Mellanox Technologies. These target markets together now account for more sales than its traditional business of selling adapters and switches that end up is parallel supercomputer clusters.

In a conference call going over the financial results for the company's third quarter, Eyal Waldman, who is president and CEO at Mellanox, said that through the first three quarters of this year, the high performance computing market generated under 50 percent of the company's revenues. He added that it is not just that sales for HPC systems are flat, but that they are declining. Waldman did not say by how much, and he certainly did not mean to imply that HPC was a bad business for the company. But as we all know, the supercomputing business does have dramatic ups and downs.

Cluster sales are driven by processor product cycles. The brand new "Ivy Bridge-EP" Xeon E5 processors from Intel have been in a number of large HPC deals, to be sure, but those deals were inked a year or more ago and were tied to 56 Gb/sec InfiniBand for the most part. The next big upgrade cycle for supercomputing will be in late 2014 or early 2015, which is when Intel will likely get its "Haswell-EP" Xeon E5 processors into the field, and not coincidentally, that is roughly the same time when we can expect 100 Gb/sec InfiniBand adapters and switches from Mellanox.

Don't think for a second that Mellanox is not ambitious when it comes to sales of switches, adapters, cables, and software for parallel supercomputers. It is. But the company is also practical about its markets. "We were expecting the HPC market to be down," explained Waldman. "And when HPC comes back we will see additional growth."

Mellanox is obviously pleased with the diversification of its business. In a way, Mellanox is fulfilling the original purpose behind the creation of the InfiniBand protocol, which was intended to be a universal interconnect to link servers to each other, storage to servers, and client devices to the whole shebang. (Two out of three ain't bad.)

At the moment, storage-related sales of Mellanox products is the second largest driver of revenues, according to Waldman, and cloud providers are coming on strong, too, as they choose  either InfiniBand end-to-end for their clouds or use 10 Gb/sec or 40 Gb/sec Ethernet adapters in their servers. Having gotten a toe-hold inside the cloud datacenters through adapters, Mellanox is hoping to be able to increase its sales of Ethernet switches among cloud builders who do not want to switch to InfiniBand. When it comes to clustered databases, InfiniBand is pretty much the standard for linking server nodes together, and InfiniBand is becoming a standard for linking nodes together in clustered storage arrays, thanks to its low-latency and high bandwidth. InfiniBand is also being pitched as a replacement for Fibre Channel switching to hook servers to storage arrays.

In the quarter ended in September, Mellanox managed to turn in its third quarter in a row of sequential growth this year, but sales were off against a very tough compare. In the year ago period, Mellanox had a $25 million in pent up demand for its networking products because Intel shipped its "Sandy Bridge-EP" Xeon E5 chips several months later than expected. Moreover, one of the big OEM buyers of Mellanox products (who was not ever named) had inadvertently overbought components in the fourth quarter of last year, and has been burning off that inventory. This obviously put pressure on revenues at Mellanox this year. With increased development costs for 100 Gb/sec chips, which will keep Mellanox well ahead of the competition when they ship, the company was pushed to a small loss in the current quarter.

In Q3, total sales at Mellanox came in at $104.1 million, down 33.5 percent from the year-ago period, and if you want to be generous and back out the Sandy Bridge bump, sales are still down 20.8 percent. Sales were up 6 percent sequentially, and Waldman said that the company expects sequential growth again in the fourth quarter. Research, development, sales, marketing, and general costs were all up in Q3, and the company booked a $5.4 million loss.

Sales of integrated circuits, adapters, and boards accounted for 45 percent of sales in the quarter, or $46.8 million, while switches had a 35 percent of slice of the Mellanox pie, or $36.4 million. Revenues from 56 Gb/sec InfiniBand products were flat sequentially at $50 million compared to the second quarter, and 40 Gb/sec InfiniBand products brought in $18.7 million and 20 Gb/sec InfiniBand accounted for $7.3 million. Ethernet products drove 15 percent of sales, up a bit sequentially as a percent of sales and bringing in $15.6 million. Waldman said on the call with Wall Street analysts that sales of 40 Gb/sec adapters and switches were up 40 percent sequentially.

The US Securities and Exchange Commission makes public companies say when they have customers who represent more than 10 percent of their total revenues, and Mellanox had two such customers in the third quarter: IBM with $17.7 million (17 percent) and Hewlett-Packard with 12.5 million (12 percent).