Mellanox Technologies (MLNX) Q4 2017 Earnings Conference Call Transcript

Mellanox Technologies (MLNX)
Q4 2017 Earnings Conference Call
Jan. 18, 2018 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Mellanox Technologies Fourth-Quarter And Full-Year 2017 Financial Results Conference Call. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. If you'd like to ask a question at that time, please press *1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the # key.

If you should require operator assistance, please press *0. As a reminder, this is being recorded. And now I'd like to turn the conference over to Mellanox. Please go ahead.

Jeffrey Schreiner -- Director of Investor Relations

Good afternoon and welcome to Mellanox Technologies Fourth-Quarter and Full-Year 2017 Conference Call. Leading the call today will be Eyal Waldman, president and CEO of Mellanox technologies, and Jacob Shulman, chief financial officer. By now you've seen our press release and associated financial information that we furnished to the SEC on Form 8-K this afternoon. If not, you may access them on our website at ir.mellanox.com.

As a reminder, today's discussion includes predictions, expectations, estimates, and other information, all of which we consider to be forward-looking statements. Throughout today's discussion, we'll present important factors relating to our business that may potentially affect these forward-looking statements. These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements made today. As a result, we caution you against placing undue reliance on these forward-looking statements, and we encourage you to review our most recent SEC reports, including our 10-K and 10-Q for a complete discussion of these factors and other risks that may affect our future results or the market price of our ordinary shares.

Finally, we are not obligating ourselves to revise our results or publicly release any revisions to these forward-looking statements in light of new information or future events. Now, I will turn the call over to Eyal for his opening remarks. Eyal.

Eyal Waldman -- President and Chief Executive Officer

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us. I am pleased to report Mellanox achieved both record quarterly and full-year 2017 revenues. Fourth-quarter revenues was $238 million, a sequential increase of 5.3%, and full fiscal 2017 revenue was $864 million, an increase of 0.7% from the prior year.

Our quarterly cash flow from operations was $67 million, a new record, up 26% sequentially. Fourth-quarter diluted non-GAAP EPS prior was $0.82 and full-year diluted non-GAAP EPS was $2.28. Before I speak further on our individual product lines and financial results, I want to take a moment to talk about Mellanox. Since our founding in 1999, innovation and superior technology has been at the heart of the company.

We have consistently developed cutting-edge products across technology generation for the past two decades. One of the key values and drivers for our substantial growth for our high-performance product is the IP we developed and used to improve our product. Our investment strategy has enabled our long-term growth over the years and market prospect now and into the future. Over the years we've made significant investments in R&D to drive product innovation and long-term growth.

Initially, we invested heavily in InfiniBand and became the leaders in high-performance interconnect. In 2013 we added significant R&D and business investments into our second technology, Ethernet. Now, as we see the [Inaudible] across our product suite, Mellanox is beginning to reap the rewards of our investment. We are the leaders in Ethernet NICs for 25-gigabit Ethernet and above.

And No. 2, with Ethernet switch [Inaudible] of 25-gigabit Ethernet and above. Our emphasis on R&D and the creation of the most cutting-edge solutions in the marketplace has resulted in consistent revenue growth, averaging 27% on a pro forma basis over the last 11 years. As we approach $1 billion in annual revenue, further our end-to-end solution created strong substantial competitive advantage as we continue to lead key markets that are rapidly expanding, presenting exciting opportunity for us as we move ahead.

Mellanox's long-strong term market leadership in InfiniBand and Ethernet solutions is a testament to our investment in R&D, the talent of our worldwide engineering team, and the close relationship we have forged with our customers to best understand their product need. Our superior InfiniBand solutions deliver higher performance and better return on investment than the alternatives. Further, our Ethernet solutions, which are a strong growth engine for Mellanox, provide the best performance, efficiency, and scalability. The traction we are gaining in both of these product lines, which we will speak for the quarter and in our outlook, is extremely encouraging and the success of this solution is solidifying our customer base and driving increased loyalty to the Mellanox brand.

Recently we added a processor product line to our portfolio resulting from the EZchip acquisition. We merged the IP of the two companies to introduce our first system-on-a-chip product, BlueField. We started shipping BlueField product in the fourth quarter of 2017 and are seeing good the results and traction in the market. Our next growth stack is to continue to increase market share, revenue, and operating margin.

We are committed to achieving this while maintaining focus on our competitive advantage of superior technology for the long term. In addition to efficiently managing cost, we continue to rationalize our product portfolio and focus our investment on businesses with the greatest potential for growth and highest return on investment capital. As we demonstrated in our decision to cease investment into new generation of network for certain unit family of products and discontinue our 1550 nanometer silicon photonics development facility. Moving ahead, we're committed to an operating margin in the high teens for 2018 fiscal year and plan to exit the year in the 20%-plus range and be even higher in 2019.

Now, I'll turn back to our fourth quarter and full-year 2017 performance. During the fourth quarter, Mellanox's 25-, 50-, and 100-gigabit-per-second Ethernet revenues increased 47% sequentially, driven by a broad adoption of our Ethernet adapters, switches, and cables across multiple customers, market, and geographies. Our revenues from this product grew 156% for the full-year 2017. In 2017, our Ethernet revenues increased 26% year over year, driven by significant expansion in customer demand for our 25, 50, and 100 -gigabit-per-second Ethernet solutions.

Our 2017 Ethernet results demonstrate the benefit from prior investment spending, which allowed Mellanox to capture a market-leading position in 25-gigabit-per-second and above Ethernet adapters and deliver upon our multi-year revenue diversification strategy. In 2017, our high-performance computing and artificial intelligence revenues increased 13%. Overall, our InfiniBand revenues declined roughly 15% due to declines in storage and embedded customers, driven by customer product transitions and customer M&A activities. For Ethernet adapters, the growth is led by deployment of our solutions with multiple OEMs and leading Tier 1 and Tier 2 global hyper-scale customer.

During the fourth quarter, Tier 1 U.S. OEM selected Mellanox as its leading supplier of 25 -gigabit-per-second Ethernet adapters. Mellanox is the preferred solution for 25 -gigabit-per-second Ethernet adapters across leading global OEMs. Customers selecting Mellanox acknowledge the performance, feature advantages, robustness, and resiliency of our ConnectX solutions compared to alternatives.

Mellanox remains the leader in 25-gigabit-per-second and above Ethernet adapters, with the majority of market share with third-party analysis. We anticipate much broader adoption of our 25-gigabit-per-second and above Ethernet adapters in 2018, as deployments are forecasted to accelerate and expand across global OEM hyper-scale financial services and artificial intelligence customers. We believe our market-leading position and performance advantages in 25-, 50-, and 100-gigabit-per-second Ethernet adapters create an opportunity to capitalize on estimated 45% CAGR these markets are expected to deliver over the next five years. Spectrum Ethernet switch revenues achieved another quarterly record, growing 41% sequentially.

Our deployments accelerated across global customers. During the quarter, several Tier 1 and Tier 2 hyper-scale customers began initial deployments of our Spectrum Ethernet switch platforms. Several of these deployments were end-to-end design wins, which included Mellanox cables and adapters, highlighting the performance advantages of Mellanox's end-to-end Ethernet solutions. Use of our Ethernet switches by multiple customers in 2017 demonstrate broad geographic adoption and recognition from leading global customers that our spectrum-based switches provide the best cost and performance advantages versus alternatives.

We anticipate production-level Spectrum shipment [Inaudible] additional US-based hyper-scale customers in 2018. Engagements with global OEMs and hyper-scale customers regarding Spectrum switches in both storage and networking applications is accelerating. Customers acknowledge the performance, efficiency, and cost advantages offered by Spectrum switches versus alternatives. Our 2018 outlook for Ethernet switches anticipates revenue growth would more than double from 2017 levels.

Revenues of LinkX cables and transceivers nearly doubled sequentially in the fourth quarter as global hyper-scale customers accelerated deployments of 100-gigabit transceivers. Driven by high attach rate with our switches and growth in adoption by global hyper-scale customers, we estimate revenues for 2018 LinkX cables and transceivers could grow 50% or more year over year. Mellanox InfiniBand solutions continue to deliver superior performance at a lower total cost of ownership, as demonstrated by the most recent top 500 supercomputing systems. Based on updated top 500 data announced in November of 2017, 77% of new high-performance computing systems and 60% of overall high-performance computing systems utilize InfiniBand.

InfiniBand connected six times more new HPC systems on the top 500 than Intel's Omni-Path. The world's largest supercomputer in China, as well as the largest supercomputer in Japan, Canada, and upcoming 2018 largest supercomputer in the United States all utilize InfiniBand. Some end-users who initially selected Omni-Path for deployments in their high-performance computing systems are coming back to utilize InfiniBand as their interconnect of choice. The Meltdown and Spectre security bugs impacts performance in systems utilizing Omni-Path and non-RDMA based Ethernet interconnect.

We have not seen nor do we expect to see any performance impact using RDMA with either our InfiniBand or Ethernet products. We recently announced customer shipments of our BlueField-based storage systems and SmartNIC adapters. These BlueField-based solutions represent investments made during 2017, which allow Mellanox access to a $2 billion [Inaudible] opportunity. Beginning in May 2017, in an effort to ensure Mellanox continues to allocate capital as efficiently as possible, we began a comprehensive cost-review process and review of our strategic priorities and investment.

This review involved a portfolio-rationalization process, including ceasing investment in a new generation of the network processing unit, the NPS product family. Our board of directors and management also made the decision to discontinue our 1550 nanometer silicon photonics development activities in early January of 2018 as the business has not become profitable. The discontinuation of investment in our 1550 nanometer silicon photonics product line will not impact our variable optical attenuators product and is not expected to have an impact on our fiscal 2018 revenues. The actions we're taking as a result of this review process would enable Mellanox to managed cost more effectively while ensuring we retain our long-term competitive advantage and superior technology.

Mellanox's board of directors and management remain committed to continually reviewing the company's investment spending levels and closely monitoring key projects and the returns on investment. Our 2018 outlook includes a commitment to manage OPEX and to achieve our targeted non-GAAP operating margins of 18% to 19%.Now I'll turn the call over to Jacob for review of our fourth quarter and full-year 2017 results and to discuss expectations for 2018. Jacob.

Jacob Shulman -- Chief Financial Officer

Thank you, Eyal. Good afternoon, everyone. Let me now review some financial details relative to our fourth quarter of 2017 results. Our total revenues were $237.6 million, up 5.3% sequentially from $225.7 million in the third quarter of 2017 and up approximately 7.2% from $221.7 million in the fourth quarter of 2016.

Full-year 2017 revenues were $863.9 million, up 0.7% from $857.5 million in 2016. The following are a few selected Q4 2017 revenue metrics for you. Revenues from our ICs represented 15% of fourth-quarter revenues. Revenues from boards were 21%, and switch-system revenues accounted for 26%.

Fourth-quarter InfiniBand revenues were $102 million. Our InfiniBand revenues increased by 1.9% sequentially. Revenues from our InfiniBand-based products represented 43% of revenues in Q4 2017, down from 44% of revenues in Q3 2017. Our EDR 100-gigabit-per-second and CML products were up 11.2% sequentially and up 2.8% year over year and represented 49% of the fourth-quarter InfiniBand revenues.

Quarterly Ethernet revenues were $122.8 million, up 11% sequentially and up 73% year over year. Ethernet revenues represented 52% of fourth-quarter revenues. We had two more-than-10% customers in the fourth quarter. They were HPE, with 13%, and Dell, with 11% of revenues.

Our non-GAAP gross margins in the fourth quarter were 68.8%, down 186 basis points from the third quarter of 2017. Major reconciling items from GAAP to non-GAAP gross profits are share-based compensation expenses of $417,000 and amortization of acquired intangibles of $10.6 million. The gross margins were slightly below the lower range of our guidance due to high [Inaudible] portion of revenues derived from lower-margin products. Fourth-quarter non-GAAP operating expenses increased by $4.5 million sequentially to $125.4 million and represented 52.8% of revenues, compared with $121 million, or 53.6% of revenues, in the third quarter of 2017.

Major reconciling items from GAAP to non-GAAP operating expenses are share-based compensation of $17.4 million, amortization of acquired intangibles of $2.4 million, acquisitions and other charges of $1.7 million, and impairment of long-lived assets of $12 million. The impairment of long-lived assets relates the discontinuation of our 1550 nanometer silicon photonics activities. Our non-GAAP research and development expenses in the fourth quarter were $83.3 million, compared to $79.8 million in the third quarter of 2017, representing a sequential increase of 4.3%. Non-GAAP sales and marketing expenses were $32.5 million in the fourth quarter compared to $31.2 million in the third quarter of 2017, representing a sequential increase of 4%.

In the fourth quarter, our non-GAAP general and administrative expenses were $9.7 million, compared to $9.9 million in the third quarter, representing a sequential decrease of 2.3%. The fourth-quarter 2017 non-GAAP operating income was $38 million and represented 16% of revenues, compared with operating income of $38.5 million, or 17.1% of revenues in the previous quarter. Interest expenses associated with the current debt during the fourth quarter were $1.9 million. During the quarter we paid down an additional $126 million in debt.

The outstanding debt principal amount was $74 million at quarter-end. The fourth-quarter, non-GAAP net income was $6.2 million. During the quarter we recognized an income of $7 million due to reversals of reserves for unrecognized tax benefit due to statute of limitation expiration. Fourth-quarter non-GAAP net income was $42.9 million, or $0.82 per diluted share.

This compares to our third-quarter 2017 non-GAAP net income of $36.6 million or $0.71 per diluted share. For the full fiscal 2017, non-GAAP net income was $116.6 million with $2.28 per diluted share, as compared to $169.5 million, or $3.43 per diluted share, in fiscal 2016. Cash provided by operating activities during the quarter was $67 million, compared to $53 million in the third quarter of 2017. Our cash and investments at the end of the quarter were $272.8 million, compared to $346.2 million on September 30, 2017.

[Inaudible] our first-quarter 2018 non-GAAP results to be as follows. Quarterly revenues of $222 to $232 million. Non-GAAP gross margin range of 68.5% to 69.5%. We expect non-GAAP operating expenses of $120 million to $122 million.

We estimate our first-quarter share compensation expense to be between $16.3 million and $16.8 million and non-GAAP diluted share count in the first quarter of 52.4 million shares to 52.9 million shares. In the first quarter of 2018, we expect to recognize remaining restructuring charges related to discontinuation of 1550 nanometer silicon photonics activities, an amount of $9 million to $12 million. For the full fiscal 2018, we currently project revenues of $970 million to $990 million. Non-GAAP gross margins of 68% to 69%.

Non-GAAP operating margins up 18% to 19%. Non-GAAP operating margins of more than 20% exiting 2018. I will turn it back now to Eyal for a few closing comments. Eyal.

Eyal Waldman -- President and Chief Executive Officer

Thank you, Jacob. We are experiencing strong momentum as we enter 2018. Our 2018 outlook suggest a revenue range of $970 to $990 million, gross margin range of 68% to 69% and non-GAAP operating margin range of 18% to 19% and expectations of exiting 2018 with non-GAAP operating margin of about 20%. We anticipate growth will accelerate further in 2019 as key products such as BlueField and our 200-gigabit-per-second InfiniBand solutions contribute to our revenues growth.

We expect operating margins to expand further into the mid-20s and above in 2019. We continue to regularly review our operating expenses and investments on a project-by-project basis. Notably, our realignment of the NPS investment into BlueField and closing down of the 1550 nanometer silicon photonics product line demonstrate our focus on projects which provide the highest return on investment. As we look beyond 2018 into potential opportunities in 2019, we anticipate Mellanox's revenue growth to be in double-digit, driven by continued customer adoption of our market-leading 25-gigabit-per-second and above Ethernet adapters and switches.

New product offerings such as BlueField and our 200-gigabit-per-second InfiniBand and Ethernet solutions, continued focus on non-GAAP operating expenses, and investments should allow for non-GAAP operating margins in the mid-20s or higher, producing further expansion in our year-over-year operating leverage. This would lead EPS potentially expanding at a rate of more than double that of potential 2019 revenue growth. We're in the stage of reaping the results of investments in prior years. We forecast top-line and bottom-line growth, with more significant operating leverage.

Any disruption will negatively impact our momentum. We remain confident that Mellanox is well-positioned to deliver the right product in the right place at the right time.Before we turn to questions-and-answers portion of today's call, I wanted to briefly address the recent announcements made by Starboard Value. As you saw, we issued a press release yesterday regarding this development. Mellanox remains committed to engaging constructively with our shareholders toward our shared goal of creating value and we are committed to taking the appropriate steps to ensure that Mellanox is best-positioned to provide high return to our shareholders.

That said, the purpose of today's call is to discuss our operating and financial results for the quarter. We ask that you please keep your questions focused on this topic. With that, we will open up the call for questions. Operator.

Questions and Answers:

Operator

The floor is now open for questions. If you have a question or comment, please press *1 on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the # key. Again, we do ask that while you ask your questions that you pick up your handset to provide optimal sound quality.

Thank you. Our first question comes from Kevin Cassidy with Stifel. Please go ahead.

Kevin Cassidy -- Stifel -- Analyst

Thanks and congratulations on the good quarter. For your guidance for the first quarter for revenue down 4.5%, what products are you expecting to see the weakness and which ones? Can you give us any more details on that? What's going to be weak? What's still are going to be strong?

Eyal Waldman -- President and Chief Executive Officer

We actually expect to have a mix and as we enter the quarter, we don't have too much visibility. We can be even flat in some cases. So, we don't have enough information to give you visibility into what's going to go up and down.

Kevin Cassidy -- Stifel -- Analyst

OK. As we look out through the year for your guidance for $970 to $990, are there any levers you can pull on OPEX just in case that revenue doesn't come in line with what you're expecting?

Eyal Waldman -- President and Chief Executive Officer

Yes. Obviously, we can manage our operating expenses more tightly and if we don't see us taking the top line to where we anticipate it will grow, we'll manage better our operating expenses and take them down.

Kevin Cassidy -- Stifel -- Analyst

OK, great. Thanks. I'll get back in the queue.

Eyal Waldman -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from John Pitzer with Credit Suisse. Please go ahead.

John Pitzer -- Credit Suisse -- Analyst

Yeah, good afternoon, guys. Congratulations on the strong results as well. I apologize if I missed this in your prepared comments, there were many of them. But back on the 7th of December when you gave the initial guidance for the full calendar year, you talked about InfiniBand overall being flattish for the year.

I'm just kind of curious if that's how you still see the year playing out and maybe it'd be helpful for me if you could talk about maybe the HPC AI parts of the business and what you're seeing there versus other segments.

Eyal Waldman -- President and Chief Executive Officer

Yes, we expect InfiniBand, like we guided, to stay flat to small single-digit growth in 2018. As we've seen in 2017, AI and HPC grew 13.4% year over year. In 2018 we expect a smaller growth for our HPC and AI. There were large deals in 2017 such as the core project with IBM and NVDIA.

So, overall, we expect InfiniBand to stay flat to slightly up.

John Pitzer -- Credit Suisse -- Analyst

That's helpful. And then just on the long-term operating margin targets, you're clearly now on a path to get to north of 20 exiting this year and you're very comfortable talking about sort of a mid-20s number on a percent basis as you look at the calendar year 2019. I'm just kind of curious relative to the growth aspirations and the need to continue to invest, how do you think about terminal operating margins over a three- to four-year period? Is 30% the right sort of ceiling or do you feel like there's continued operating leverage in the model if revenue growth is there but you could see aspirationally a mid-30% operating margin over time?

Eyal Waldman -- President and Chief Executive Officer

First, in the past we were for a short time about 30% operating margin. So, what we like to see on the conservative side is maybe mid- to high-20s in 2019. We can grow and approach the 30s. Obviously, if we scale faster with our Ethernet solutions, we may be in the 30s as well.

So it really depends on our growth and adoption of our products in the marketplace.

John Pitzer -- Credit Suisse -- Analyst

And if I could make just one last question and just relative to your growth aspirations on the Ethernet side, how are you thinking about incremental competition over time in 25, 50, 100 and what that might do to pricing, margin, and market share?

Eyal Waldman -- President and Chief Executive Officer

All right. So, we're seeing Broadcom, Intel, and Cavium and probably some more already have Ethernet NICs out there in the market. We're still being perceived as the market leaders and there's a big advantage and differentiation of the Mellanox's 25 gigabit and above NICs and those companies and we still have the majority of the market both at the hyper-scale and OEM customers. We are not standing still.

So, we're continuing to develop more offload engines and improve the functionality, one example is the BlueField SmartNIC, into our NICs and we believe we can open the gap. So, I think we'll be able to add more value to our customers using our NICs and we don't anticipate significant price pressure moving forward. On the previous product, the old, I'm saying old, but 25 is pretty new, but in the previous 25-gigabit-per-second NICs, obviously, we will take the price down while the new 25 and above Ethernet NICs will remain in a higher [Inaudible.

John Pitzer -- Credit Suisse -- Analyst

Thanks, guys. Congratulations.

Eyal Waldman -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Gary Mobley with Benchmark. Please go ahead.

Gary Mobley -- Benchmark -- Analyst

Good afternoon, gentlemen. Thanks for taking my question and congrats on strong finish to the year. To start, asking a question about your OPEX assumption for 2018, I believe you're forecasting non-GAAP OPEX to decrease slightly from 2017. And the last bit of restructuring that is yet to be accomplished in silicon photonics, is that the last shoe to drop to get to that assumption or are there some additional R&E rationalization steps that have to take place?

Eyal Waldman -- President and Chief Executive Officer

I think what we've done both with the NPS and silicon photonics and our regular way of business in the beginning of the year allows us to reach this OPEX target.

Gary Mobley -- Benchmark -- Analyst

OK. Forgive me if you shared this already, I don't think you did, but could you give us the mix of revenue between Ethernet switches, NICs, and LinkX?

Eyal Waldman -- President and Chief Executive Officer

I don't think we'd break those down publicly for now.

Gary Mobley -- Benchmark -- Analyst

OK. And last question from me with respect to interest expense. I think you cut your debt nearly in half in the fourth quarter, if I'm not mistaken, and should have the cash flow to have the debt completely gone by the midpoint of 2018. So should we model interest expense basically to go to zero by the second half of the year?

Eyal Waldman -- President and Chief Executive Officer

Yes we'll definitely see significant reduction in our interest expense as we continue to pay down the debt.

Gary Mobley -- Benchmark -- Analyst

OK, that is it for me. Thank you, guys.

Eyal Waldman -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Harlan Sur with JP Morgan. Please go ahead.

Harlan Sur -- JP Morgan -- Analyst

Good afternoon and thanks for taking my question and it's good to see the reacceleration in the business. If I just keep the OPEX flat from the Q1 level for the remainder of the year, [Inaudible] would be able to hit your full-year OP margin target, assuming you hit your revenue-growth target, and you'd still be able to exit the year with about roughly 22, 23% operating margins. The bottom line is you'd be able to hit all of your targets by keeping OPEX flat from the Q1 level for the full year. Is that how we should be modeling the OPEX or do you expect further step-down in OPEX on a quarterly basis as the year unfolds?

Eyal Waldman -- President and Chief Executive Officer

So, roughly the answer is yes. We may have some quarters where we have more takeouts that may impact some of our operating expenses for that quarter, but roughly in a general perspective, you're right.

Harlan Sur -- JP Morgan -- Analyst

OK, great. Thanks for that. And then if I take that OPEX level roughly at $120 million, $121 million per quarter and I look out to Q4 of this year, your OPEX ratio is still sitting at about 46%. If I look at some of your peers out there, let's say somebody like Cavium, significant IP portfolio like you, they're driving about 40% to 41% OPEX ratio at similar revenue levels and growth targets and arguably they're developing just as much leading-edge [Inaudible] as you guys are.

So what prevents the Mellanox team from driving your OPEX ratio down to that kind of 40%-41% level?

Eyal Waldman -- President and Chief Executive Officer

So, I think with the growth and expansion of our market share in multiple products, we'll get to a similar percentage of our OPEX. It will not happen overnight. It'll take a couple of quarters to get there but I think we'll do that. By the way, we are investing more than Cavium.

We have our analog and [Inaudible] technology which neither Cavium nor Marvell has. On top of that, we are developing a higher-level added-value solution such as the switches and other solutions now around BlueField. So we do invest slightly more. We believe that those will show results and significant growth in 2018 and 2019.

Harlan Sur -- JP Morgan -- Analyst

Thanks. Just one last question on the product side. On 200-gig HDR InfiniBand, can you just help us understand when your HPC customers are going to start to adopt technology? Is it first half of this year you're going to start seeing some revenues or it'll happen more in the second half?

Eyal Waldman -- President and Chief Executive Officer

It'll happen more in the second half of this year.

Harlan Sur -- JP Morgan -- Analyst

OK, thank you.

Eyal Waldman -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from James Fish with Piper Jaffray. Please go ahead.

James Fish -- Piper Jaffray -- Analyst

Hey, guys, thanks for the question and congrats on the quarter. You guys keep talking about the BlueField opportunity here. Can you just elaborate how material it could be for 2018 and 2019, sort of just a little bit more detail around the expectation there?

Eyal Waldman -- President and Chief Executive Officer

Yeah. So, for 2018 because it is the design-in cycle, it will not be material. This is the year of developing the software, the solutions, and so on. We already shipped to tens of customers systems and SmartNICs and we're seeing good traction with that.

We believe we will start seeing revenue ramp in 2019 and we think it's going to be more material in the second half of 2019.

James Fish -- Piper Jaffray -- Analyst

Got it. Actually most of my questions have already been asked. So, thank you.

Eyal Waldman -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Joseph Wolf with Barclays. Please go ahead.

Joseph Wolf -- Barclays -- Analyst

Hi, thank you. I have a question about the cable business that you said is going to grow 50% and fitting that into 100 G transceivers and what's going on optical as you rationalize the 1550. Is the silicon photonics market not necessary or is your product not up to speed or it just isn't a core requirement for Mellanox right now as you think about the things that you should be doing in the cabling business or is regular optics and transceivers enough for the current architectures and the data centers?

Eyal Waldman -- President and Chief Executive Officer

We think silicon photonics has a future and we continue looking into it and working with it. We think that 1310 nanometer solutions are being utilized and will continue to be utilized in the data centers, so we decided to stop our investment in the 1550 nanometer. We have products that are based both on [Inaudible] and silicon photonics solutions and we will keep developing both for the future. So, we think both are viable in the market.

Joseph Wolf -- Barclays -- Analyst

But you'd rather not develop it in-house. How has your development happened with what you've shut down?

Eyal Waldman -- President and Chief Executive Officer

Yeah. So, our development was around the 1550 nanometer and that was not standardized in the data center because they wanted to use single-mode, use 1310 nanometer. So, we're aligning with the market and working on solutions that are 1310-based.

Joseph Wolf -- Barclays -- Analyst

And just a question on the OPEX and the R&D. Should the levels be about the same in the year? And I guess as a follow-on to what you looked at and continuing to monitor OPEX, you made a comment about having made the cuts that are necessary to get to the end of the year. With the unit that you decided to realign, were there other units that were under discussion and have those units been put on notice that they have to operate more efficiently or bring products to market faster?

Eyal Waldman -- President and Chief Executive Officer

We always say we want to bring our products faster to market but, yeah, we review each and every project in Mellanox and made the decisions we've made. We stopped doing the NPS product line in 2017. We decided to stop investing in the 1550 nanometer silicon photonics solution. In 2017, we looked for other alternatives, how to materialize on that product line and eventually decided to shut it down in January of this year.

Joseph Wolf -- Barclays -- Analyst

OK, that's helpful. And I guess just finally maybe for Jacob, the gross margin guidance for the first quarter is a little bit higher than for the full year and I'm just wondering if you could help us think about mix throughout the year which would drive that or is it just not that material, that half-point on the range for the full year versus the first quarter?

Jacob Shulman -- Chief Financial Officer

Obviously, throughout the year we project a higher portion of revenues deriving from switch systems and cable and transceivers, which are low-margin products and that's why we will continue to see gradual convergence toward 68% to 69% guidance.

Joseph Wolf -- Barclays -- Analyst

So, that's the trajectory of the switching through the year.

Jacob Shulman -- Chief Financial Officer

Correct.

Joseph Wolf -- Barclays -- Analyst

All right, thank you.

Eyal Waldman -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Christopher Roland with Susquehanna International Group. Please go ahead.

Christopher Roland -- Susquehanna International Group -- Analyst

Hey, guys, thanks for the question. I guess the first question is, can you guys talk broadly about the mix of EDR, FDR, and other within InfiniBand during the quarter?

Eyal Waldman -- President and Chief Executive Officer

Obviously, EDR is our later-generation today, widely adopted by high-performance computing. FDR is primarily still on the storage side and embedded, and we're seeing those customers looking into EDR and even HDR and develop their systems around those technologies. So, we'll continue to see growth in EDR and when HDR is available, we will see what's our -- a ramp in HDR products.

Jacob Shulman -- Chief Financial Officer

And most of the artificial intelligence customers are using EDR today and waiting for the HDR.

Christopher Roland -- Susquehanna International Group -- Analyst

Got it. And then, Eyal, I thought your comments on, I guess, Meltdown and Spectre were kind of interesting. I was wondering if maybe you could elaborate how these aren't affected by RDMA? And is this at all a potential driver for your products? I just was looking maybe for a little more of your point of view there.

Eyal Waldman -- President and Chief Executive Officer

Yeah. Because both our InfiniBand and Ethernet products offload the management of interconnect with the communication, the storage, and more, we actually don't utilize the CPU cycles to do that. So, as security bugs that have been discovered recently do slow the CPU down and your interconnect utilizes the CPU to manage and run the interconnect and communication, obviously, everything goes down. So, our RDMA technology, which is everything done by our products is [Inaudible], offloads this and enables the system performance to be higher or not be impacted by those security bugs.

We will try to present some performance differentiation numbers in the near future.

Christopher Roland -- Susquehanna International Group -- Analyst

Great. Thanks so much, guys.

Eyal Waldman -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Mike Burton with Longbow Research. Please go ahead.

Mike Burton -- Longbow Research -- Analyst

Hey, guys. Thanks for letting me ask questions. I just wanted to follow up on the forward outlook. As you mentioned, last year you had some really big projects which hit in Q2.

Any help you could give us with how we should be looking at our models toward seasonality or your expectations for some big projects in 2018 or just do you expect it more to be second half-loaded?

Eyal Waldman -- President and Chief Executive Officer

We expect to sequentially demonstrate growth throughout the quarters of the year.

Mike Burton -- Longbow Research -- Analyst

OK. And then following up on the OPEX, at a recent conference you presented a slide in which you actually said OPEX would be down in '18. It looks like based upon the guidance here, it's going to be more flat right around the 490 level. I assume, it includes the silicon photonics shutdown.

Is more OPEX revisions to come or will you continue to review a lot of these other projects on an ongoing basis or we should just continue to expect kind of flattish OPEX going forward for the company? Thanks.

Eyal Waldman -- President and Chief Executive Officer

Still both board and the management continues to review our operating expenses target and we are committed to the operating margin targets which are set for the year and we will meet them according to our revenue accomplishment throughout the quarters and the year.

Mike Burton -- Longbow Research -- Analyst

Thanks a lot.

Operator

Thank you. Our next question comes from Srini Nandury with Summit Redstone Partners. Please go ahead.

Srini Nandury -- Summit Redstone Partners -- Analyst

All right, thank you for taking my question. Now, like everybody else's questions, my questions have been answered but I have one follow-up just in case. What drove the acceleration of the Ethernet business during the quarter? Where there any large deals? And on the outlook for 2018, you said that switch revenue's going to be doubling. Can you talk about [Inaudible] expect attachers to increase throughout the year?

Eyal Waldman -- President and Chief Executive Officer

There were some large Ethernet switch deals in the Q4 of 2017 actually in multiple geographies around the world. They were part of end-to-end solutions at cloud and Web 2 customers. What was the other question?

Srini Nandury -- Summit Redstone Partners -- Analyst

Attachers, please.

Eyal Waldman -- President and Chief Executive Officer

Attacher to what?

Srini Nandury -- Summit Redstone Partners -- Analyst

Are you selling switches separately from your other or is it all bundled as end-to-end solution? That's what I was getting at.

Eyal Waldman -- President and Chief Executive Officer

Yes, yes, yes. So, we have some deals where it's full end-to-end, which basically means we sell the switches, the cables, and the NICs. In many cases, we just sell the network interface cards, the NIC. In some cases, we just sell the cables.

And in some cases, we just sell the switches. So, they are coupled and decoupled. It depends on the customer infrastructure.

Srini Nandury -- Summit Redstone Partners -- Analyst

All right, thank you.

Eyal Waldman -- President and Chief Executive Officer

Thank you.

Operator

Thank you. It appears we have no further questions at this time. I'll turn the floor back over to Eyal Waldman for any additional or closing remarks.

Eyal Waldman -- President and Chief Executive Officer

Everybody, thank you very much for your interest in Mellanox and we'll see you soon. Thank you very much.

Duration: 49 minutes

Call Participants:

Jeffrey Schreiner -- Director of Investor Relations

Eyal Waldman -- President and Chief Executive Officer

Jacob Shulman -- Chief Financial Officer

Kevin Cassidy -- Stifel -- Analyst

John Pitzer -- Credit Suisse -- Analyst

Gary Mobley -- Benchmark -- Analyst

Harlan Sur -- JP Morgan -- Analyst

James Fish -- Piper Jaffray -- Analyst

Joseph Wolf -- Barclays -- Analyst

Christopher Roland -- Susquehanna International Group -- Analyst

Mike Burton -- Longbow Research -- Analyst

Srini Nandury -- Summit Redstone Partners -- Analyst

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