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Mellanox Technologies Ltd  (NASDAQ:MLNX)
Q4 2018 Earnings Conference Call
Jan. 30, 2019, 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 Fiscal Year 2018 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 prepared remarks. As a reminder, this call is being recorded.

And now, I would like to turn the conference over to Shanye from Mellanox Investor Relations. Please go ahead.

Shanye Hudson -- Vice President Investor Relations

Thanks, Alice. Good afternoon, and welcome to Mellanox Technologies fourth quarter 2018 conference call. Joining me on the call today are Eyal Waldman, President and Chief Executive Officer; and Doug Ahrens, our recently appointed 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 earlier 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 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 being made today.

As a result, we caution you against placing undue reliance on these forward-looking statements. 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 obligated to revise our results or publicly release any revisions to these forward-looking statements in light of new information or future events.

Now I would like to turn the call over to Eyal for his opening remarks. Eyal?

Eyal Waldman -- President, Chief Executive Officer & Director

Thank you, Shanye. Good afternoon, everyone and thank you for joining us for our fourth quarter 2018 earnings call. Let me begin by introducing Doug Ahrens, who joined Mellanox at the beginning of the year as Senior Vice President and Chief Financial Officer.

Most recently Doug was CFO of GlobalLogic, an international software development company. He also brings over 20 years of financial and strategic experience across multiple large semiconductor companies including Intel, Maxim Integrated and AppliedMicro, where he served as their CFO. His depth of experience make him well suited for his role and we believe that Doug will further strengthen our leadership team and we're excited to have him on board.

I'll now provide an overview of our performance and business trends before turning the call over to Doug to share details of our Q4 financial results and outlook for the Q1 of 2019. We had an outstanding financial result in fiscal '18, increasing top-line revenue by 26%, while holding operating expenses flat, even with the successful completion of three new 60-nanometer product tape outs. Additionally, I am pleased to report that we have met or exceeded all of the financial targets we set at the beginning of both periods.

Fourth quarter revenue of $290.1 million represented the sixth consecutive quarter of record revenue and an increase of 22% compared with Q4 '17. Top-line growth was led by strong demand for our InfiniBand product and record sales for our Ethernet switches and LinkX cables and transceivers. Non-GAAP operating expenses remain flat at approximately $121 million, reflecting ongoing expense discipline. Our resulting fourth quarter and non-GAAP operating income more than doubled year-over-year to $78.7 million or 27.1% of revenue with non-GAAP EPS of $1.42.

We generated record cash flow from operations of $96.4 million and increased cash and investments to $438.5 million at the end of 2018. For the full year, we exceeded the $1 billion revenue milestone, achieving revenue of $1.09 billion, up 26% from 2017. By leveraging top-line sales and managing expenses, we grew non-GAAP operating income 128% year-over-year to $270.2 million or 24.8% of total 2018 revenue, compared with $118.7 million in '17 or 13.7% of '17 revenue. Our results reflect strong execution and the success of our strategy to invest in innovation and differentiated technologies.

I'll now provide an update on our Ethernet business. Our ability to drive the pace of innovation has enabled us to capture them and maintain over 69% of the merchant Ethernet adapter business at 25 gigabit and faster speeds. In addition to providing best-in-class latency and throughput, we offer the broadest portfolio of offload and acceleration engines, which deliver a meaningful performance and cost advantages to our customers.

For example, Alibaba leveraged the speed and efficiency of our 25 gigabit Ethernet adapters with RDMA over Ethernet or RoCE to achieve a record $31 billion in sales during last November's single day in China. Acceleration engines like RoCE have been a key driver behind our market share growth. We continue to develop new acceleration engines, which offload the main CPU allowing customers to run more application workloads on their data center infrastructure.

Total Ethernet revenue for the fourth quarter increased 21% compared with Q4 '17. With fiscal '18 revenue up, approximately 54% year-over-year, the solid annual growth reflects the early transition to 25 gigabit and above Ethernet speeds. Consistent with our expectations, Ethernet revenue declined on a sequential basis as several of our large hyperscale customers digest inventory they've built during the period, the prior quarters. While our visibility is limited, we expect revenue from hyperscale customers to grow progressively throughout the year and currently forecast '19 revenue from hyperscale will exceed '18 revenues.

We're still in the early phase of the 25 gigabit and above transition, large cloud and hyperscale customers were among the first adopters. However, we see a broadening of demand across Tier 2 cloud providers, large scale enterprises, storage customers and more. This diverse customer base supports revenue stability for our Ethernet adapter business and is an indication of the meaningful growth opportunities we foresee in '19 and beyond, including that transition to 100 gigabit per second speeds. Revenue for our 100 gigabit Ethernet adapters in '18 were around 2.5x that of '17, an indication that the transition to 100 gigabit technology has begun, which will drive the next leg of growth.

Turning now to Ethernet switch business, we delivered record sales of our Spectrum Ethernet switches in the fourth quarter with the revenue run rate of more than $100 million. 2019 -- 2018 Ethernet switch revenue was up about 70% year-over-year. We expect that 2019 Ethernet switch revenue grow to accelerate even faster. Our results were supported by increased adoption of our Spectrum Ethernet family of switches across a broad and growing customer base spanning cloud, hyperscale, storage, media and entertainment and OEM partners. Spectrum demonstrates our strategy to provide a scalable, programmable, open platform with a broad range of network operating systems including SONiC, Cumulus, Switch Dev, Onyx and more.

As a result of the multiple network operating system choices, customers are able to deploy the switch (ph) solution that best meets their network requirements, while benefiting from the Spectrum's performance advantages, power efficiency and low latency, which offer the highest return on their investment. In December, we announced an Ethernet end-to-end win with LINE Corporation, who provides the largest messaging app in Japan and is the fastest growing mobile messaging app in the world. LINE deployed Mellanox 100 gigabit Ethernet spectrum switches to scale their business, while also delivering higher performance at lower operational costs.

In addition to securing new design wins in 2018, we drove integration activities and strengthened our product competitiveness to build a solid platform for future growth. We brought up our 50 gigabit service technology and recently we successfully demonstrated our 200 gigabit and 400 gigabit system, utilizing Spectrum-2 switches.

I am pleased to share that Spectrum-2 is now shipping to select customers, a milestone that we achieved only a few weeks after receiving first silicon, which speaks to the stability and backwards compatibility of our software and capabilities of our team. Spectrum-2 which supports speeds from 10 gitabit to 400 gigabit per second should contribute to another year of growth for our Ethernet switch business.

Turning now to InfiniBand business. We solidified our leadership in InfiniBand in 2018 releasing our HDR 200 gigabit InfiniBand solutions, which offer leading performance, scalability and efficiency. Demand for HDR helped boost fourth quarter InfiniBand revenue, which increased 33% over the fourth quarter of 2017 and led to annual revenue growth of around 8% in 2018.

We began shipping HDR InfiniBand to multiple customers in 2018 and continue to see demand for HDR across all geographies fueled by the strategic race to Exascale supercomputing. Government agencies in the U.S., Asia and Europe are competing to be the first to build a platform capable of processing 1000 petaFLOPS or 1 exaFLOPS of computing capacity, which is 5x to 10x higher performance compared to the leading supercomputers of today.

We have announced multiple large supercomputer wins in 2018 and beyond such as Texas Advanced Computing Center, The University of Michigan, The High Performance Computing Center of the University of Stuttgart, the Finnish IT Center of Science and more. We expect InfiniBand revenue to grow in the upper single to low double digit range in 2019, supported by the race to Exascale as well as the increasing demands to analyze growing amounts of data, enabling advances in research and industry product development.

InfiniBand performance advantage and in-network computing capabilities make it the interconnects of choice for large scale, high performance computing, artificial intelligence, cloud, storage and other data center deployments. According to the latest top 500 list published in November, our InfiniBand solutions accelerate nearly 55% of the high performance computing and artificial intelligence platforms on the list including the top three fastest supercomputers in the world.

Let me now provide an update on our BlueField family of system-on-a-chip SmartNIC storage controllers and edge computing devices. As a reminder, BlueField combines our market leading InfiniBand and Ethernet, connect ex-network adapters with up to 16 ARM cores to offload networking stores, security and virtualization from the main CPU. Importantly, customers who utilize our ConnectX adapters can seamlessly transition to Bluefield because the software is backward compatible. I would like to focus on the benefits of BlueField as a storage controller. There is a growing trend toward NVMe over fabric systems for enterprise storage applications.

NVMe is an interface that allows users to take full advantage of high performance SSD storage device with faster data access at lower power. Bluefield supports bandwidth of up to two ports of 100 gigabits per second and over 8 millions I/O operations per second, making it the world's fastest storage controller. Accordingly, we are garnering tremendous interest for the product including multiple large OEM, cloud and hyperscale customers.

We're working with numerous partners to integrate Bluefield as a storage controller for scale out and NVMe traffic system. A few of our partners showed the benefit of Bluefield during the recent supercomputing 2018 conference including EA storage, Excel Arrow, REC I/O who demonstrated a significant storage over fabric efficiency across multiple applications. In 2019, we will continue to focus on building out the software and integration with our partners and customers and expect to begin ramping in the second half of this year and see more meaningful revenue in 2020.

And with that I will turn the call over to Doug Ahrens to discuss the financials in greater detail. Doug?

Douglas T. Ahrens -- Chief Financial Officer

Thank you, Eyal and welcome to everyone on the call. Let me start by first saying how excited I am to join Mellanox. I have had the opportunity over the past few weeks to engage with a broad cross-section of our organizations and I've been impressed by the caliber of our team and their unwavering focus on execution as illustrated by our outstanding fourth quarter and 2018 results. I'm looking forward to working with all of you.

I will be discussing our non-GAAP financial performance. You can find the detailed reconciliation between GAAP and non-GAAP results in the press release and on our website. As Eyal highlighted in his opening remarks, we met or exceeded our guidance across all financial metrics. Fourth quarter revenue was $290.1 million up approximately 4% from the third quarter and up 22% from the fourth quarter of 2017. Revenue from Ethernet products was $148.5 million in the fourth quarter, down about 15% from the third quarter and up 21% from the fourth quarter of 2017.

As Eyal mentioned earlier, Q4 Ethernet revenue was impacted as hyperscale customers consumed inventory. Notably, we're seeing healthy demand for our 100 gigabit per second products, which drove sequential revenue growth for both adapters and switches. As a percent of the total, Ethernet represented 51% of Q4 revenue and 57% of full year 2018 revenue.

Revenue from our InfiniBand products increased to $135.2 million in Q4, up 38% sequentially and up 33% from Q4, 2017. Our performance in Q4 reflects revenue driven by research, government deployments and storage applications. We continue to see healthy demand for both our EDR 100 and HDR 200 gigabit solutions, which we expect to carry into 2019.

InfiniBand represented 47% of total Q4 revenue and 40% of 2018 annual revenue. Overall revenue from ICs contributed 16% of fourth quarter revenue, compared with 17% in Q3. Board revenue represented 38% of Q4 revenue, down from 47% in Q3 and switch system revenue increased to 28% of Q4 revenue, compared with 19% of Q3 revenue with growth from both InfiniBand and Ethernet product families.

Two customers were greater than 10% of revenue in the fourth quarter. Dell EMC with 14% and HPE with 11% revenue. Non-GAAP gross margins for the fourth quarter were 69%, in line with our guidance midpoint and down 60 basis points sequentially driven by product mix. Major reconciling items from GAAP to non-GAAP gross profit or amortization of acquired intangibles of $9.8 millions and share based compensation expenses of $609,000.

Non-GAAP operating expenses came in at $121.4 million flat with the third quarter and included research and development expenses of $81.5 million, sales and marketing expenses of $29.8 million and general and administrative expenses of $10.1 million. The improvement to guidance reflects funding from the Israeli innovation authority along with ongoing cost discipline. Major reconciling items from GAAP to non-GAAP operating expenses, our share based compensation of $21.7 million, amortization of acquired intangibles of $2.2 million, acquisition and other charges of $345,000 and restructuring charges of $21,000.

I would highlight that our full year 2018 operating expenses were approximately flat compared with 2017. Although over the same period, we grew revenue by 26%. In addition to prudently managing expenses, we stopped investments in new network processing unit products and development activities for 1550 nanometer silicon photonics.

We implemented cost reduction programs developed with PWC, such as utilizing engineering resources in lower cost regions and numerous other operational efficiencies across both OpEx and cost of goods sold, which we will continue driving in 2019. As a result of these actions, 2018 non-GAAP OpEx represented 44% of total revenue down from 57% of revenue in 2017.

The combination of strong revenue and expense discipline drove record non-GAAP operating income and supported record non-GAAP earnings per share for the quarter. Non-GAAP operating income of $78.7 million or 27.1% of fourth quarter revenue, up from $73.2 million or 26.2% of revenue in Q3. Based on a non-GAAP tax expense of $3 million, fourth quarter non-GAAP net income of $77.1 million translating to $1.42 per diluted share. This compares to $71.4 million or $1.33 per diluted share in the third quarter.

We've generated a record $96.4 million in cash from operations during the fourth quarter, up from $66.4 million in Q3. Cash and short term investments grew to $438.5 million at the end of Q4 compared to $350.2 million at September 30th, 2018. In a rising revenue environment, inventory went down quarter-over-quarter to $104 million reflecting our ongoing focus on managing inventory levels.

Looking ahead, we currently expect our first quarter 2019 results to be as follows; quarterly revenue of $295 million to $305 million, non-GAAP gross margins of 68% to 69%, non-GAAP operating expenses of $123 million to $125 million, non-GAAP diluted share count of 54.5 million to 55 million shares.

In conclusion, we executed well in 2018 and as you can distill from our guidance we're off to a good start entering 2019. With that I'll turn the call back to Eyal for few closing comments. Eyal?

Eyal Waldman -- President, Chief Executive Officer & Director

Thank you, Doug. I am pleased with our execution in 2018. We draw revenue growth across all of our product families. We grew profitability faster than revenue and we continue to invest in our future growth making us well-positioned for revenue growth in 2019. As the recognized leader in 25 gigabit and above Ethernet adapters, we're beginning -- we're benefiting from the transition to 25, 50 and 100 gigabit technologies each representing a successive three to four year growth opportunity. We're accelerating growth in our Ethernet switch business supported by broad customer adoption of our spectrum products family and we expect 2019 revenue will grow faster than 2018.

We have solid momentum with our 200 gigabit HDR InfiniBand products, which support InfiniBand revenue growth in the upper single digit or lower double digits into 2019. We are gaining traction with our family of Bluefield system-on-a-chip SmartNIC, storage controllers and edge computing devices, which represent a strong future growth engine for the company.

We target another year of healthy double-digit revenue growth in 2019 and operating margin expansion, reflecting our focus on delivering substantial -- sustainable profitable growth. We exited 2018 within operating margins of 27.1% in the fourth quarter resulting in 24.8% for the full year and we expect to further increase our profitability in 2019. We are celebrating our 20th year as a company in 2019. I am proud of the strong results we achieved in 2018. I would like to thank the team for their extraordinary contributions toward this record setting year and for laying the foundation for another successful growth year in 2019 and beyond.

Operator, we will now take questions.

Questions and Answers:

Operator

(Operator Instructions) Thank you. Our first question comes from George Notter with Jefferies. Please go ahead.

George Notter -- Jefferies LLC -- Analyst

Hi, there. Thanks guys very much. So I guess I wanted to lead off maybe by asking about InfiniBand obviously a big sequential improvement there I think you said 38% way above certainly the trend line growth that you've seen there in recent years and then even above I think the guidance that you're talking about for this year. So I guess I'm curious about that business where you're seeing pent-up demand there that's contributing to that step function up is that HDR, is this a limited number of projects that are coming through or is this more broad-based, and kind of talk about what happened there I'd be really curious?

Eyal Waldman -- President, Chief Executive Officer & Director

Yes, I think some of it is definitely HDR and its higher adoption for InfiniBand products. So we're seeing nice HDR revenue in Q4 which is the first quarter of more significant achievement of HDR. And we expect to grow from that in Q1 of 2019 which will contribute again growth of InfiniBand in Q1 2019.

George Notter -- Jefferies LLC -- Analyst

Got it. Okay. Great. And then, was that again a limited number of projects spend or is it more broad-based in terms of the adoption like few ways --

Eyal Waldman -- President, Chief Executive Officer & Director

We mentioned some of the products during the conference call like TACC, University of Michigan and more places, where we had design wins. Some of them had been deployed and some of them will continue to be deployed. But we are seeing in all geographies the pool for InfiniBand through 100 megabits per second. We're not seeing a demand for Omni-Path, almost at all. Very rarely do we see demand from Omni-Path, so InfiniBand is gaining momentum and taking back market share from Omni-Path.

George Notter -- Jefferies LLC -- Analyst

Got it. Okay. Great. That's super helpful. And then maybe just if you can help us with the data center spending debate where you mentioned you're seeing some digestion obviously it's showing up in your Ethernet business among the big content providers, can you just talk about what's going on there, is that Mellanox here that's actually installed the networks and then waiting to be sold up with traffic or are there discrete inventories that those guys are holding waiting to deploy and then how long before you start to see that digestion kind of abate and start to see the growth again? Thanks a lot.

Eyal Waldman -- President, Chief Executive Officer & Director

Yes. So from our expectations, yes, there was a digestion of capacity in inventory that started like mid Q4. We expected throughout Q1 and then we -- we are told to expect that Q2 will resume growth and growth throughout the years, quarter-over-quarter. And we believe also that 2019 will be bigger than 2018 in that regard.

George Notter -- Jefferies LLC -- Analyst

Okay. And then I assume that's installed capacity at this point. That's not being fully utilized yet, is that the right read?

Eyal Waldman -- President, Chief Executive Officer & Director

It's either installed capacity or inventory, that is waiting to be installed.

George Notter -- Jefferies LLC -- Analyst

Okay, great. Thanks very much.

Eyal Waldman -- President, Chief Executive Officer & Director

Thank you.

Operator

Our next question comes from Kevin Cassidy with Stifel. Please go ahead.

Kevin Cassidy -- Stifel Nicolaus Weisel -- Analyst

Yes, thanks for taking my question and congratulations on the great results for both the quarter and the year.

Eyal Waldman -- President, Chief Executive Officer & Director

Thank you.

Kevin Cassidy -- Stifel Nicolaus Weisel -- Analyst

Maybe just as a follow-up on the digestion in the data center, have your lead times for your cards come in for the Ethernet? I guess what is the lead time now that for -- time you get an order, you can ship it?

Eyal Waldman -- President, Chief Executive Officer & Director

It's a few to several weeks. We've tried to maintain that throughout the year. So, we're pretty proud that we can ship orders for the mainstream. Ethernet mix, few to several weeks.

Kevin Cassidy -- Stifel Nicolaus Weisel -- Analyst

Okay, great. And maybe can you give us a description of how you see this transition from 25 gig to a 100 gig, you're expecting 25 gig to continue to grow through this year, the transition maybe even on units, when do you think the 50% crossover would be for shipping 100-gig versus 25 gig?

Eyal Waldman -- President, Chief Executive Officer & Director

That's a further away. But so what we're happy to see first is 25 will continue to grow throughout 2019. 100 gigabit deployment started in '18 which is a very good sign, obviously lower volume but we expect to continue to grow. That transition from 25 to 100 will not happen in the next, I guess, two at least maybe even three years. 25 will be the majority and then both 50 and 100 are growing and then you'll have the 200 on top of that. So the way should view it is like wave of 25 adoption, that's why I'm replacing 10 and 10, then you see a wave on top of that 50 gigabit replacing mainly 40, and then you see a wave of 100 gigabit deployments riding on top of that. And all of them are multi-year cycle transitions 25, it is in early stages, a 100 gigabit started in 2018, and will increase in 2019, and 200 gigabit will probably start late '19 or 2020.

Kevin Cassidy -- Stifel Nicolaus Weisel -- Analyst

Okay, great. And if I can just ask one more as a follow-up on that, 100 gig clearly was 69% call it 70% market share and 25 gig cards, but do you think you have a larger lead in 100 gig?

Eyal Waldman -- President, Chief Executive Officer & Director

We don't have that visibility, but I think it's the same order, probably higher than that. But I don't have the numbers.

Kevin Cassidy -- Stifel Nicolaus Weisel -- Analyst

Okay. Congratulations again.

Eyal Waldman -- President, Chief Executive Officer & Director

Thank you. But, what's important to notice about this is the same architecture people use for 25 gigs, they will probably want to use for the 100 gig, specifically because of the software stack, so -- and the performance and also in the (inaudible) if they've used us in 25 gig, they would probably -- most probably use also of 100 gig.

Kevin Cassidy -- Stifel Nicolaus Weisel -- Analyst

Okay. Thank you.

Operator

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

Gary Mobley -- Benchmark -- Analyst

Good afternoon, everybody. Congratulations on a strong year and strong outlook. And Doug welcome to the call. I want to start by asking about your competitive landscape in Ethernet switches, just to see if this kind of status quo from a competitive standpoint. Is it fair to assume that all the traction continues to be for top-of-rack switches or have you started to see some traction at the expense of the big guy in spine switches?

Eyal Waldman -- President, Chief Executive Officer & Director

For us it's many top-of-rack switches for now. And that's where people are putting us through their Tier-0 or Tier-1.

Gary Mobley -- Benchmark -- Analyst

Okay. And with respect to Bluefield, Of course there's been some hyperscale guys announced some internally fixed, it's really no surprise there, but I'm wondering how Bluefield can survive in a world where there's an increasing amount of internally developed custom ASICs basics for SmartNIC applications and even within those particular hyperscale guys can there be some coexistence?

Eyal Waldman -- President, Chief Executive Officer & Director

Yes. So we believe that it'll be easy transition for people using ConnectX to move to Bluefield. We're seeing more and more people work with this and evaluate that, both with storage platform and the compute platform. We expect people to start deploying this year, both as a storage controller and an intelligent NIC. And we are competing in several places or few places with a hyperscale that have designed their own stuff.

Gary Mobley -- Benchmark -- Analyst

Okay. Just last follow question. You're looking for about the same sequential revenue delta in the first quarter, which you've been producing in the past few quarters, even though if I'm not mistaken first quarter for you typically in a fiscal year is a seasonally soft period. And just so I get this straight that this above seasonal trend is being driven by perhaps what continued increase in InfiniBand, driven by HDR and then as well continued sequential growth in the Ethernet switches.

Eyal Waldman -- President, Chief Executive Officer & Director

Yes, I think you this year, you're right, usually we had Q1 as the soft quarter and sometimes even a down quarter. But this year, I guess we bucked out this trend and we're growing in Q1. We expected continued growing in the next quarters. Its a result of the HDR. Its a result of the adoption of 25 gig and above. So basically, also the diverse of our business is to move this out, only depending on -- a high performance computing trend. So we expect to continue growing.

Gary Mobley -- Benchmark -- Analyst

All right . Thank you guys.

Eyal Waldman -- President, Chief Executive Officer & Director

Thank you.

Operator

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

Harlan Sur -- JP Morgan -- Analyst

Good afternoon and congratulations on achieving greater than $1 billion in revenues and strong earnings power. Eyal, you've always talked about --

Eyal Waldman -- President, Chief Executive Officer & Director

Thank you.

Harlan Sur -- JP Morgan -- Analyst

-- the teams. Yes, you've always talked about the team's strong traction in China cloud, hyperscale or Enterprise, HPC pretty much across the board. Many of your peers that are focused in compute and networking are citing a slowdown by China. Just given the sluggish -- macroeconomic trends. As you think about your business from a geographical perspective, are your China custome showing any signs of weakness relative to let's say the U.S. cloud based service provider as a U.S. base HPC customers?

Eyal Waldman -- President, Chief Executive Officer & Director

First, in 2018 we grew very nicely much more than in the U.S. and China, that's one. Second, we expect to continue growing. We believe maybe even faster in China than in the U.S. in 2019 and we're in a pretty diversified the account base in China. Tier-1 hyperscale, Tier-2 hyperscale government and education and so on. So we expect to continue grow in 2019 in China.

Harlan Sur -- JP Morgan -- Analyst

Great. Thanks for the insights there. And then on the financial side you know, team drove very strong operating leverage in 2018. You essentially kept your OpEx flat of a very strong revenue growth. How should we think about your OpEx growth here this year? If I look at your Q1 guidance you're starting off the year with OpEx up above 2% year-over-year, but maybe if you could just give us a sense of how should we think about the OpEx trajectory, either full year or for the remainder of the year from the Q1 levels?

Eyal Waldman -- President, Chief Executive Officer & Director

Yes, so looking at the full year, we fully expect to see continued expansion of our operating margins because we're going to continue to drive our efficiency programs. So you'll see OpEx grow much more slowly than the top line. It's going to be in the -- right now we're expecting kind of low-to-mid single digits in OpEx growth and that's what's going to drive that efficiency and the expansion of the operating margins.

Harlan Sur -- JP Morgan -- Analyst

Great. Thank you very much.

Eyal Waldman -- President, Chief Executive Officer & Director

I might add just one thing about Q1, just a seasonality effect that comes in which is in the fourth quarter. We do get the benefit of the vacation utilization and we did get some investment from the Israeli government. So we got some non-recurring things that benefit us in the fourth quarter. And so you see a little bit of a delta in Q1 but it's driven by those things rather than headcount growth or something like that.

Harlan Sur -- JP Morgan -- Analyst

Great. Thank you for the insights.

Operator

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

John Pitzer -- Credit Suisse. -- Analyst

Yes, good afternoon guys. Thanks for allow me to ask the questions. Eyal ,let me add my congratulations on the solid results both for the quarter and for the year.

Eyal Waldman -- President, Chief Executive Officer & Director

Thank you.

John Pitzer -- Credit Suisse. -- Analyst

Eyal, I just want to get it. I want to get a better understanding of where you think you are in the inventory digestion for your cloud customers. Clearly, Ethernet was down about 15% sequentially in the December quarter. Are you expecting that business to be down again sequentially in Q1?

I know you talked for the full year you continue to see Ethernet as a growth business. I was kind of curious you know to the extent you made the comment that Q1 you think still represents an inventory digestion quarter is not down.

If so by how much and if it is, help me understand the offsets and what's driving that to get you guys up a little bit.

Eyal Waldman -- President, Chief Executive Officer & Director

Yeah. So you know we still believe Q1 would be at digest and quarter and it's hard for us to tell it's going to be played down or up a quarter and from the hyperscale guys, but if there's going to be a digestion quarter we expect growth in Q2 so kind of almost full depletion of the inventory that's our export business in Q1 and then starts going back in Q2 and then going further in Q3 and Q4.

John Pitzer -- Credit Suisse. -- Analyst

Got it and then remind us again what percent of the business is sitting in cloud today and how you think that might trend throughout 2019. And then when you think about InfiniBand as a growth year is it going to be a stronger year-over-year growth here in the first half.

Or do you think it's going to be pretty consistently kind of a good growth year and every quarter?

Eyal Waldman -- President, Chief Executive Officer & Director

Right, so I don't think we specified that cloud business as percentage of our business, but it's pretty good. In terms of the InfiniBand, you know some of the business in the InfiniBand is pretty lumpy and we're waiting for several deals to get -- we have them in kind of visibility, but not in backlog yet in Asia and in the U.S, and we do see a strong Q1. And we have to wait to see when those deals are starting to be deployed, whether it's Q2, Q3 or second half of this year to know how the quarters go. But overall, we expect to grow between high single-digit to low double-digits for InfiniBand in 2019.

John Pitzer -- Credit Suisse. -- Analyst

Okay. And then my last question now, I'll just really quickly. You did a good job kind of articulating the operating leverage you expect to see in '19. I'm kind of curious if you've got a longer term target of what you think the ultimate op margin for your business should be? Is this something that we think 30% to 35% is the right long-term margin given your desired to an investor? Do you think 35% to 40% is a better long-term target?

Eyal Waldman -- President, Chief Executive Officer & Director

I think lower 30s is kind of a better target, especially with our company. We want to continue investing in technology. It's also depends on the size of the revenue. So if we grow much faster, we maybe able to leverage more to the bottom line, but for now a good aim is low 30s.

John Pitzer -- Credit Suisse. -- Analyst

Perfect. Thanks, guys. Really appreciate it.

Eyal Waldman -- President, Chief Executive Officer & Director

Thank you, John.

Operator

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

Joseph Wolf -- Barclays Capital -- Analyst

Thank you, and welcome Doug. A question on just some of the gross margin puts and takes. With the mix of InfiniBand, which seems to be high in 1Q, but switching, and then Bluefield, how does the Bluefield piece of that start to contribute to gross margin if we think about the different pieces of the gross margin mix in 2019?

Eyal Waldman -- President, Chief Executive Officer & Director

No, it's not that significant to really have an impact to the very small numbers in 2018.

Joseph Wolf -- Barclays Capital -- Analyst

But overall will it be lower?

Douglas T. Ahrens -- Chief Financial Officer

It depends if it's silicon or boards. We believe it will be similar to our other devices. If we serve just a silicon, it's going to be higher. If you sell the board, it's going to be in the range of the board. So that's where we're trying to meet our models. We haven't yet met our efficiency in terms of COGS for Bluefield, because we haven't yet reached volume. So initially it probably to be lower gross margins, we hope that with volume and with future generations of the family, we'll be able to increase the gross margins for Bluefield.

Joseph Wolf -- Barclays Capital -- Analyst

Thank you. And then I guess you talked about the diversity and the breadth of some of the switching applications that you're seeing from your customers and driving that growth. Could you talk about the geographic mix of those customers? Is it uniform? Is it more Asia-based? What's the -- how does that look in terms of your success in switch?

Eyal Waldman -- President, Chief Executive Officer & Director

It's actually everywhere. We're seeing, like we said in Japan, China, Europe, so and the U.S. is pretty diversified. And we're having it in multiple markets such as -- obviously hyperscale cloud, media entertainment storage embedded and more.

Joseph Wolf -- Barclays Capital -- Analyst

Thank you.

Eyal Waldman -- President, Chief Executive Officer & Director

Thanks.

Operator

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

James Fish -- Piper Jaffray -- Analyst

Hey guys congrats on a great quarter and Doug welcome to the team. Maybe just a start off, any sense of the overall market share you guys think you are at with InfiniBand today and what amount of InfiniBand business got pushed from Q3 and Q4 again?

Eyal Waldman -- President, Chief Executive Officer & Director

So, we believe we're probably back to above 85% market share and what was the second part?

James Fish -- Piper Jaffray -- Analyst

You guys have talked that InfiniBand business got pushed from (inaudible)?

Eyal Waldman -- President, Chief Executive Officer & Director

Yes, some of it is HDR and we had some deployments of a push from Q3 to Q4 and that's also why you see the nice growth in Q4.

James Fish -- Piper Jaffray -- Analyst

Are you guys quantifying how much it got pushed into this quarter from last?

Eyal Waldman -- President, Chief Executive Officer & Director

No I don't think we did.

James Fish -- Piper Jaffray -- Analyst

Okay. And then maybe Doug for you, no one kind of asked this one, maybe you could discuss what brought you to Mellanox and how you are thinking about the company over the next year, kind of what are your top priorities now?

Douglas T. Ahrens -- Chief Financial Officer

Thank you. So what I saw when I looked at Mellanox was a great market. They're focused on the data center. So that laser focus is a great attraction. I saw differentiated products, which you can see through their gross margins. Obviously doing something special they have gross margins like that. And then when I got to know the team, I really liked the culture and the focus on execution. So all of the things that resonated with me were those, so I saw a lot of great -- growth prospects and definitely did not want to miss the opportunity to join a company like this.

So looking at the next year, it will be of course focused on the execution alongside the team and continuing our operational efficiencies that we talked about earlier. So we can continue to expand our operating margins throughout 2019, so carrying forward the great work that was started in 2018 and continuing that momentum on the spending.

James Fish -- Piper Jaffray -- Analyst

Thanks.

Eyal Waldman -- President, Chief Executive Officer & Director

You're welcome.

Operator

(Operator Instructions) Our next question comes from Wills Miller with Bank of America Merrill Lynch. Please go ahead.

Wills Miller -- Bank of America Merrill Lynch -- Analyst

Hi. Thanks for taking my questions and congrats on the strong results. You outlined expectations for InfiniBand growth this year, but just wondering if you're expecting Ethernet to grow faster than InfiniBand again. I think that's kind of been the case over the last few years. So just wondering if that repeatable this year?

Eyal Waldman -- President, Chief Executive Officer & Director

Yes, we believe Ethernet will grow faster than InfiniBand this year, yes.

Wills Miller -- Bank of America Merrill Lynch -- Analyst

That's helpful. And then just curious if you can share how big spectrum was last year, and what your expectations are for this year/ I think in the intro you mentioned, it grew greater than 50% last year. Is that repeatable again this year as well?

Eyal Waldman -- President, Chief Executive Officer & Director

I think it grew close to 70% last year. And we believe it will grow faster than that in 2019. And we also said I think that in Q4, we passed the run rate of $100 million in Q4 number.

Wills Miller -- Bank of America Merrill Lynch -- Analyst

Got it. That's helpful. And I guess just lastly, if I can squeeze one more in. Just wondering if you can give us a split of what your OpEx is in terms of Ethernet versus InfiniBand?

Eyal Waldman -- President, Chief Executive Officer & Director

We don't have that split out, and we don't provide it for now. Some of our projects like the ConnectX, basically include Ethernet and InfiniBand in the silicon, the same board. Also the cables are developed for both. We do in generally have a very clear budget differentiation between if you're working on Ethernet or on the InfiniBand, but we don't split that out.

Wills Miller -- Bank of America Merrill Lynch -- Analyst

Got it. That's helpful.

Operator

Thank you. Our final question comes from Chris Rolland with Susquehanna. Please go ahead.

Chris Rolland -- Susquehanna -- Analyst

Hey guys. Great quarter and congrats Doug, welcome to aboard.

Douglas T. Ahrens -- Chief Financial Officer

Thank you.

Chris Rolland -- Susquehanna -- Analyst

I guess my first question is, did you guys see any effects from slowing AI servers. Some other guys have described a slowdown in GPU servers, for example near term?

Eyal Waldman -- President, Chief Executive Officer & Director

No, we didn't see a significant slowdown in AI deployment.

Chris Rolland -- Susquehanna -- Analyst

Okay. And in terms of your TAM and your view on the eventual transition to 25 gig for the broader market, both mix and switches, where we in transition, how fully penetrated do you think we are at 25 gig and above?

Eyal Waldman -- President, Chief Executive Officer & Director

We're less than 22%. So we're very early. We have like 4x growth in the coming several years, that puts (ph) us to 25%. And then on top of that (inaudible), I know 90% transitions. So we're in the very early, we're like less than 22%.

Chris Rolland -- Susquehanna -- Analyst

Thank you, guys.

Eyal Waldman -- President, Chief Executive Officer & Director

Thank you. So there's multiple years of growth in front of us.

Operator

Thank you. As there are not further question, I will turn the floor back over to Eyal Waldman for closing remarks.

Eyal Waldman -- President, Chief Executive Officer & Director

Thank you, everybody for joining us this afternoon and we look forward to seeing you in the near future. Thank you.

Operator

Thank you. This concludes today's conference call. Please disconnect your line and have a good day.

Duration: 51 minutes

Call participants:

Shanye Hudson -- Vice President Investor Relations

Eyal Waldman -- President, Chief Executive Officer & Director

Douglas T. Ahrens -- Chief Financial Officer

George Notter -- Jefferies LLC -- Analyst

Kevin Cassidy -- Stifel Nicolaus Weisel -- Analyst

Gary Mobley -- Benchmark -- Analyst

Harlan Sur -- JP Morgan -- Analyst

John Pitzer -- Credit Suisse. -- Analyst

Joseph Wolf -- Barclays Capital -- Analyst

James Fish -- Piper Jaffray -- Analyst

Wills Miller -- Bank of America Merrill Lynch -- Analyst

Chris Rolland -- Susquehanna -- Analyst

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