Data center connectivity specialist Mellanox (NASDAQ: MLNX) is well known for its data center connectivity products that implement the InfiniBand standard. InfiniBand, the company says, "provides superior bandwidth and latency relative to other existing interconnect technologies and has maintained this advantage with each successive generation of products."
InfiniBand is extremely important to Mellanox's business, comprising a whopping 52% of its revenues during the second quarter of 2016.
In the past, Mellanox used to compete with a company called QLogic in developing Infiniband-based products. Mellanox was the market leader, while QLogic was a clear second. However, QLogic sold its InfiniBand assets to microprocessor giant Intel (NASDAQ:INTC) back in 2012.
Intel didn't continue the development of InfiniBand-based products, however. Instead, Intel used those assets to define a proprietary interconnect technology that it dubs Omni-Path. Omni-Path is now, at long last, shipping.
On Mellanox's second-quarter earnings call, management provided some insight into how the introduction of Omni-Path into the marketplace is affecting its InfiniBand business. Let's take a closer look.
Intel is apparently way behind on performance, pricing aggressively
Mellanox CEO Eyal Waldman told investors on the aforementioned earnings call that the company was "able to conduct several application level tests comparing costs between Mellanox's EDR InfiniBand solutions and Intel's Omni-Path offering."
Waldman says that Mellanox's solutions delivered 45% better performance and 27% lower cost on average relative to Intel's Omni-Path offering.
The executive further added that the performance deficit of Intel's Omni-Path relative to Mellanox's InfiniBand products "has led Intel to aggressively price Omni-Path in an attempt to gain market share."
The impact to Mellanox's business
During the call, analyst Harlan Sur asked Waldman about the potential impact that Intel's aggressive Omni-Path pricing could be having on Mellanox's InfiniBand "design win momentum."
Waldman was blunt, replying that the company is "seeing some impact." The executive pointed to the fact that Intel's Omni-Path technology now powers eight of the TOP500 list of supercomputers. Additionally, Waldman said Mellanox is "seeing some price pressure in some locations."
Waldman asserted that Mellanox doesn't "expect to lose significant market share" but conceded that "Intel is seeing some success where people say good enough [performance] is good enough for them."
As far as the impact on margins goes, Waldman explained that in situations where a "small reduction in price" will allow it to keep business out of Intel's hands, the company will go for it. However, Waldman did say that Mellanox won't "go overboard with [its] pricing tactics" -- something that he indicated will allow the company to keep its gross profit margins in the low-70% range.
When all is said and done, Waldman seems confident that despite the challenge posed by Intel, the company expects its InfiniBand business to grow, particularly as the performance characteristics of Mellanox's InfiniBand technology "will remain a key differentiation for [its] customers."
The investment takeaway
What we have here with Mellanox versus Intel is an interesting battle. Mellanox appears to have a significant technical edge over Intel when it comes to performance relative to Intel's solution. However, in the near term, Intel has the advantage of being able to undercut Mellanox, as Omni-Path is just one part of the full server platform that Intel can offer potential customers -- CPUs, flash storage drives, software, FPGAs, and so on.
Further, Intel has indicated that it plans to integrate key Omni-Path fabric components into its future processors, which could potentially make it even easier for Intel to "throw it in" at a much lower upfront cost than going with Mellanox's standalone solutions.
Mellanox's bet is clearly that the performance and power advantages of its solutions should, for many customers, lead to an overall total cost of ownership advantage relative to the more aggressively priced Omni-Path solutions from Intel.
Given that both InfiniBand and Omni-Path are technologies that fundamentally target applications that demand very high levels of performance, I suspect that -- barring a dramatic improvement in the performance and power competitiveness of Intel's Omni-Path solutions compared with Mellanox's InfiniBand -- Mellanox's InfiniBand business will stay in good shape.