Earlier this month, Nvidia CEO Jensen Huang announced that the company was acquiring Israeli chip maker Mellanox for $6.9 billion, the Silicon Valley chip maker’s largest acquisition in its 26-year history.
In a note to clients, my firm, Atherton Research, said at the time that the Mellanox acquisition will significantly expand Nvidia’s footprint in the skyrocketing datacenter market which includes high-performance computers (HPC) and huge server farms built by large Internet companies (Amazon, Google, Facebook, Alibaba, etc), telecommunication companies as well as Forbes 5000 companies.
Mellanox is unique in the HPC market as it builds the high-performance chips networking that goes into its equipment, unlike most of its competitors including Intel, Cisco or Arista, that rely on semiconductor suppliers like Broadcom or Marvell.
By itself, Mellanox is a growing and profitable business. And with the help of Nvidia, the combination could become a powerhouse in the HPC and data center market, providing critical technologies to the world’s biggest companies, and not just limited to the large Internet, telecom and Cloud players.
New data from Synergy Research shows that data center spending by 20 of the world’s major cloud and Internet service firms, including Google, Amazon, Microsoft, Facebook, and Apple, reached almost $120 billion, with the majority went towards building, expanding and equipping huge data centers.
Meanwhile, the world’s 40 largest telecommunication companies, which in aggregate account for 85% of the communications services market, spent over double that amount to expand their own data centers.
Around the world, there are now a total of 439 hyper-scale—in other words, massive—data centers in operation, with more than 120 new centers in the pipeline for this year.
Summit and Sierra, operated by the U.S. Department of Energy, are currently the world’s fastest computers and they both use Nvidia and Mellanox technologies.
At the 10th annual Open Compute Project (OCP) Global Summit 2019 that was held last week in Silicon Valley, where cloud providers and hardware makers were showcasing their open hardware systems for large scale cloud computing operators, I talked with Kevin Deierling, Mellanox’s vice-president of marketing, about the key technology reasons behind Nvidia’s acquisition of the company.
The full interview is below, edited for clarity and length.
JB Su: I’ve been tracking Mellanox for almost 2 decades now but for our audience, tell us in a nutshell what the company does today?
Kevin Deierling: That’s a great question. You know, when you were tracking us way back when at the beginning, all we did was Infiniband chips and cards to connect servers at high speed. Six or seven years ago that was still 80% of our business. So today, we’re really the leading vendor for building supercomputers altogether, we connect more than half of the top 500 supercomputers in the world. Interestingly, one of our big partners there is Nvidia. And if you look at the number one supercomputer in the world today, it was built by IBM and it’s called Summit supercomputer. It’s not only the number one supercomputer it’s also the number one artificial intelligence computer. So it has a boatload of Nvidia graphics chips (GPUs). So the rationale behind the acquisition was really the partnerships that we’ve already had, and really the ability to optimize computing at data center scale. So being able to look across the entire platform stack, from chips to GPUs to the interconnect to software and the applications even. So the key rationale here was really that ability to stop thinking about individual server boxes, and start thinking about data center level compute platforms, and how to optimize for those. So pretty exciting times.
JS: Tell us more how Mellanox transitioned from being 80% dependent on this obscure but critical infrastructure technology that is Infiniband to what the company sells today.
KD: That transition I talked about earlier when we used to be 80% Infiniband, now today our business is actually more Ethernet than Infiniband. So, about eight years ago, we really started to enter the Ethernet business in a big way. And we realized that we really have taken the lion’s share of high-performance computing market with Infiniband, and we have some other nice successful enterprise storage customers like EMC, and some database customers like Oracle. But the Infiniband market was slowing, but because we were the leading vendor in that market with something like 75-80% market share, we weren’t going to be able to grow any faster than the market. So the Infiniband market is growing today at high single digits, maybe the low double digits, but we grew last year at 26% year-over-year. 2018 was a good year for us, we cracked the $1 billion revenue for the first time: We had 1.09 billion in revenues in 2018. And what was really driving that growth was the Ethernet side of our business. So we expanded from Infiniband to Ethernet, and today we’re the number two supplier of Ethernet network adapters (NICs) behind Intel. But the interesting there is if we look at what we call high-performance NICs, which is 25 Gbps and above, that’s where all the growth is today and everybody’s moving for higher speed networks to push more and more data, we have 69% market share. So we’re the leader in high-performance Ethernet adapters. And then the other market we entered was Ethernet switching competing with companies like Cisco and Arista. And there, we have a relatively small market share, in the single-digit market share. So it kind of reminds me of where we were five or six years ago with Ethernet adapters, where we have really great products, but single-digits market share. And, if you fast forward a few years, we’re almost 70% of the high-performance Ethernet adapter market, and that’s what we want to do with our Ethernet switch business to0. We grew that business 70% year over year, last year and said that it’s now at a $100 million annual run-rate.
JB: Some of your competitors experienced some slow down in that market actually. Do you worry about that? What’s your take?
KD: Last quarter, a lot of people thought we weren’t gonna be able to hit our numbers because some of our competitors, particularly Intel, have missed their numbers, because of some headwinds at hyper-scale cloud customers that we share with them. But in fact, we were able to grow our business last quarter and a part of that is just the diversification we have with our Infiniband/HPC business group. So even though we did see some headwinds from the cloud data centers, we were able to continue to grow last quarter: There was a digestion period where some of the big cloud guys bought a ton of stuff, deploy a ton of things, and then sort of settle out, and then they’ll start accelerating their growth again, so their businesses are growing, but they sort of consume in waves. And I think it was probably just a wave, we said that we saw some softness in the data center in Q4 and we see it Q1 as well, and factor that into our growth and talked about it and our forecast and we see that in Q2 the growth is resuming again strongly. So, Ethernet is a bigger business but if there are some headwinds in the data center we can actually still grow just by grabbing market share. So even if the market sort of flat for a quarter or two, we’re growing market share so quickly that we can continue to grow even through market cycles. And we’re able to do that because we just have better products.
JB: How Mellanox is able to differentiate from its closest competitors which are really huge ones, like Intel, Cisco, and Arista?
KD: So we actually built the Ethernet chip that we use in our adapters and switches, and then we build the optical cable silicon that goes into the optical interconnects that connect between the switches, the servers, and the adapters. So we build silicon for all of those, and more and more of our business is actually taking that silicon and putting into higher value components. So in the case of the adapters, we build the network interface card, and most of our business is network interface cards. We actually sell the cards to companies like Alibaba, Baidu, and Tencent. Facebook has been very public about the fact they’re using our cards. So they buy cards from us that go into servers and storage boxes, and that’s where we have the 69% market share that I mentioned on the 25 Gbps and above cards. The same thing with our Ethernet switch silicon: We put those into boxes. So we build switch boxes that really competes with the likes of Arista which buys its silicon from Broadcom and others and build their system around that. We actually build our own silicon, build the boxes, and that’s what makes us unique. For example, HPE is an OEM customer: They actually buy the boxes from us and label them HP. The other thing we do is we embrace Open networking platforms. So we will sell you a box that has our own operating system in it and we’re really much like Cisco and Arista in that regard. But we will also sell you a box that you can put a third party operating system on. So a network operating system that runs on our switch. So we’ve demonstrated that with Microsoft: They have their own operating system, which is called Sonic, running on our switch. We’ve done that with a company called Cumulus which develops network operating systems. So these are open platforms and the idea here is desegregation: You separate the hardware and the software and you don’t lock somebody in. So if you buy a box from Arista, you get their silicon from Broadcom, Arista software, and you’resort of locked in whatever they do. What we’re doing is we’ll give you the hardware platform and you can choose to run whatever software you want which really decouples those 2 systems. If you think about a server today, not like in the old days when you buy a big IBM that came with all the operating system, when you buy a server you can install whatever software you want, Windows, Linux, VMware, you get to choose and what we’ve done it’s the same thing for switches.
JB: Who would be Mellanox’s main competitors in the semiconductor side of the business?
KD: In the adapter business, the main competitors there are Intel and Broadcom. There’s a bunch of other smaller guys, but they are the two that really matter. Intel is number one overall and that’s because they have the market share of 10 Gbps. But what we’re seeing now is that 10 Gbps actually peaked and started to decline last year, and all of the growth going forward is 25/50/100 Gbps. And that’s where Mellanox is the leader. So we have 69% of the revenue share, 70% share of the port share of 25 Gbps and above adapters. On the switch side, Broadcom owns the lion share of the market. We’re a distant number 2. Broadcom has you know something like over 90% market share. In the optical transceivers, Finisar is one of the competitors.