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Edited Transcript of MLNX earnings conference call or presentation 26-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Mellanox Technologies Ltd Earnings Call

Yokneam Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Mellanox Technologies Ltd earnings conference call or presentation Wednesday, April 26, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eyal Waldman

Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director

* Jacob Shulman

Mellanox Technologies, Ltd. - CFO

* Jeffrey Schreiner

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Conference Call Participants

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* Andrew James Nowinski

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* David Alexander Kurtz

Pacific Crest Securities, Inc., Research Division - Senior Research Analyst, Enterprise Infrastructure

* Harlan Sur

JP Morgan Chase & Co, Research Division - Senior Analyst

* James Martin Kisner

Jefferies LLC, Research Division - Equity Analyst

* Joseph Eric Wolf

Barclays PLC, Research Division - MD and Deputy Head of United States Equity Research

* Kevin E. Cassidy

Stifel, Nicolaus & Company, Incorporated, Research Division - Director

* Mark Daniel Kelleher

D.A. Davidson & Co., Research Division - VP and Senior Research Analyst

* Srini Nandury

Summit Redstone Partners, L.L.C - MD, and IT Hardware and Software Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Mellanox Technologies First Quarter 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. And now I would like to turn the conference over to Mellanox. Please go ahead.

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Jeffrey Schreiner, [2]

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Good afternoon, and welcome to Mellanox Technologies First Quarter 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 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'll turn the call over to Eyal for his opening remarks. Eyal?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [3]

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Thank you, Jeff. Good afternoon, everyone, and thank you for joining us. We are disappointed with the results of our first quarter 2017. This is the second time in the last 10 years of being a public company, in which we missed our guidance. First quarter was $189 million in revenues, a year-over-year decline of 4%. First quarter diluted non-GAAP EPS was $0.29, declined 64% year-over-year. We generated $35 million in first quarter 2017 operating cash flow and ending the quarter with $325.2 million in cash and investments.

Our results reflect the impact of seasonal trends in high-performance computing, delays in general availability of the next generation X86 CPUs to the market and technology transitions occurring across several key customers. As a result, our InfiniBand revenues were down sequentially below our expectations. We believe, InfiniBand revenues will see sequential growth in coming quarters, driven by backlog and additional pipeline opportunities. We do not see InfiniBand losing share in the market.

We anticipate strong demand for our EDR products in 2017. As customers continue to transition to higher network speeds as the need for higher bandwidth, driven by data growth, continues to accelerate for high-performance computing, machine learning, Big Data, storage, financial services and cloud deployments. Our recent competitive analysis conducted by a leading global OEM comparing Mellanox' InfiniBand to Intel's Omni-Path demonstrated customers can achieve 30% to 250% higher application performance using Mellanox' InfiniBand versus Omni-Path. The performance analysis was conducted at an end-user site across multiple applications, covering several key commercial industries.

The analysis also highlighted the benefits customers achieve from the scalability and off-load capabilities offered with InfiniBand. A key differentiator versus Omni-Path allowing for 50% lower total cost of ownership for multiple applications. We believe the competitive advantages of InfiniBand over Omni-Path will further widen with the introduction of our 200-gigabit HDR solutions in 2017.

During the first quarter, of Ethernet revenues grew 17% year-over-year and 13% sequentially. Ethernet revenues grew across all product lines. Customer interest and engagement regarding our 25, 50 and 100 Gigabit Ethernet solutions remained strong. Revenues from our 25, 50 and 100 Gigabit Ethernet solutions are now greater than revenues from 10 and 40 Gigabit Ethernet solutions.

Mellanox is the preferred network interface card deployed in global OEM shipment of 25 Gigabit per second and above. This is the first time that Mellanox Ethernet NICs has been a preference choice for OEM service. Our Spectrum Ethernet Switch revenues grew in the first quarter. We started shipping 100s of Spectrum-based switches to Tier 2, Web 2 customers worldwide. We see growing interest for Spectrum across multiple markets and applications. Further deployments of Spectrum is expected in the second half of the year, and we believe that our Spectrum switch revenues will accelerated through the remainder of 2017 and offer a broad long-term growth opportunities to Mellanox.

Our LinkX revenues grew sequentially and year-over-year during the first quarter. In March, at the 2017 Optical Fiber conference, Mellanox introduced a new line of 200 Gigabit per second silicon photonics and VCSEL-based transceivers. This new transceivers double the bandwidth for HyperScale, Web 2.0 and cloud customers. We believe LinkX revenues for both InfiniBand and Ethernet are well positioned for growth in 2017 and beyond.

In the first quarter, our network processor revenues attributable to the acquisition of EZchip in February of 2016 grew sequentially and year-over-year, when taking into account the full first quarter of 2016 results. We see growth for network processors in 2017 with NP-4 and NP-5 solutions continuing to represent the majority of the revenues.

Now I will turn the call over to Jacob for a review of our first quarter results and to discuss expectations for the second quarter of 2017. Jacob?

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Jacob Shulman, Mellanox Technologies, Ltd. - CFO [4]

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Thank you, Eyal. Good afternoon, everyone. We are disappointed with the first quarter 2017 results. Our total revenues were $188.7 million, down approximately 4.1% from $196.8 million in the first quarter of 2016. The following are a few selected Q1 2017 revenue metrics for you.

Revenues from our ICs represented 22.5% of first quarter revenues. Revenues from boards were 34% and switch system revenues accounted for 25%. First quarter InfiniBand revenues were at $97 million.

Our InfiniBand revenues declined 14.3% year-over-year. Revenues from our InfiniBand-based products represented 51.4% of revenues in Q1 2017, down from 57.5% of revenues in Q1 2016.

Our EDR 100 Gigabit per second InfiniBand products were up 89% year-over-year and represented 40.9% of InfiniBand revenues.

Quarterly Ethernet revenues were $80.5 million, up 17.3% year-over-year and grew 13.3% sequentially. Ethernet revenues represented 42.7% of first quarter revenues.

Revenues from our latest generation 25, 50 and 100 Gigabit Ethernet products increased by 20% sequentially. We had 2 more than 10% customers in the first quarter. They were HP and Dell, each with 13% of revenues.

Our non-GAAP gross margins in the first quarter were 71.7%, down 20 basis points from the fourth quarter of 2016. Major reconciling items from GAAP to non-GAAP gross profit are share-based compensation expenses of $482,000 and amortization of acquired intangibles of $10.6 million. First quarter non-GAAP operating expenses increased by $4.5 million sequentially to $119.6 million and represented 63.4% of revenues, compared with $115 million or 51.9% of revenues in the fourth quarter of 2016. Major reconciling items from GAAP to non-GAAP operating expenses are share-based compensation of $14.3 million, amortization of acquired intangibles of $2.4 million and acquisition-related charges of $477,000.

Our non-GAAP research and development expenses in the first quarter was $79.3 million compared to $74.5 million in the fourth quarter of 2016, representing a sequential increase of 6.5%. The increase was primarily due to higher development and PayPal expenses as we continued to invest in our new products.

Non-GAAP sales and marketing expenses were $30.1 million in the first quarter compared to $29.5 million in the fourth quarter of 2016, representing a sequential increase of 2%. In the first quarter, our non-GAAP general and administrative expenses were $10.1 million compared to $11 million in the fourth quarter, representing a sequential decrease of 8%.

The first quarter 2016 non-GAAP operating income was $15.7 million and represented 8.3% of revenues compared with operating income of $44.4 million or 20% of revenues in the previous quarter. Interest expenses associated with the term debt during the first quarter were $2 million. During the quarter, we paid down an additional $20 million of the debt. The outstanding debt principal amount was $226 million at quarter-end.

The first quarter non-GAAP tax benefit was $300,000. The non-GAAP tax benefit excludes $1.4 million associated with utilization of deferred taxes on net operating losses in Israel.

First quarter non-GAAP net income was $14.7 million or $0.29 per diluted share. This compares to the first quarter of 2016 non-GAAP net income of $39.3 million or $0.81 per diluted share.

Cash provided by operating activities during the first quarter 2017 was $35 million compared to $49 million in the first quarter of 2016. Our cash and investments at the end of the quarter were $325.2 million compared to $328.4 million at December 31, 2016.

We currently expect our second quarter 2017 non-GAAP results to be as follows: quarterly revenues of $205 million to $215 million; second quarter 2017 non-GAAP gross margins of 70.5% to 71.5%. We expect a sequential increase in non-GAAP operating expenses of 3% to 5%. We estimate our second quarter share-based compensation expense to be between $17.3 million and $17.8 million. Non-GAAP diluted share count in the second quarter is 50.8 million shares to 51.3 million shares.

I'll turn it back to Eyal now for a few closing comments. Eyal?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [5]

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Thank you, Jacob. While we're disappointed with the first quarter results, we believe revenues will see sequential growth in coming quarters. We continue to see multiple design wins for our products in multiple platforms, which we expect will ship later this year and in 2018. These design wins include more than 10 storage platforms, more than 20 artificial intelligence projects and multiple Web 2.0 and cloud-provided platforms worldwide. We're also seeing success in third-party software offerings on top of Spectrum which, by date, Mellanox' commitment to open networking. We expect revenues from Spectrum utilizing third-party software to continue to grow.

In 2017, we plan on introducing multiple new products, including the BlueField, system-on-a-chip and our 200 Gigabit per second end-to-end solutions to the market. We believe these products will create growth opportunities for Mellanox. The increase in investment into this new product introductions has impacted our operating leverage during the first half of 2017. We are proactively managing future expenses, and with anticipated improvement in sequential revenue growth during 2017, we believe leverage can return to our model in late 2017. We remain confident that Mellanox is well positioned to deliver the right product in the right place and the right time.

And now we will take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Kevin Cassidy with Stifel.

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Kevin E. Cassidy, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [2]

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Just to understand a little better of what changed from your guidance to the results. In the InfiniBand revenue miss, how much of that was related to an HPC deployment?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [3]

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We don't have the exact numbers, but I think multiple percentages of miss was due to HPC deployments. We had no large HPC deals in Q1. And we do see large HPC deals in Q2 and Q3 coming in 2017.

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Kevin E. Cassidy, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [4]

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Okay. So the ones that you were expecting for Q1, they are being pushed out, so the actual revenue estimates for 2017 should stay about the same?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [5]

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Some of the projects were pushed out to Q2 and Q3. And that's why we kind of guided the growth that we gave a conservative guidance for Q2.

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Operator [6]

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Our next question comes from Joseph Wolf with Barclays.

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Joseph Eric Wolf, Barclays PLC, Research Division - MD and Deputy Head of United States Equity Research [7]

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The question is just on the HPC market to start. Is the EDR -- can you give us the percentage of the -- of your HPC customers who are using EDR at this point given the growth in that number? Or is the EDR growth coming from non-InfiniBand end-markets?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [8]

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It's coming from the HPC market mainly. I mean, most of the (inaudible) InfiniBand is HPC and artificial intelligence companies.

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Joseph Eric Wolf, Barclays PLC, Research Division - MD and Deputy Head of United States Equity Research [9]

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Okay. So -- and then on the spending side, is any of the spending side related to the currency? Or it's just mainly for a new product innovation -- new products? And should we expect the percent -- the sequential increases to stay at this 3% to 5% each quarter for the rest of the year? I know you don't want to give guidance on that. But just in terms of the kinds of things being spent on over some of this currency and unavoidable in any case on a reporting basis.

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Jacob Shulman, Mellanox Technologies, Ltd. - CFO [10]

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Yes. So the increase in R&D investments in Q1 was due to development -- increasing development and tape-out costs. The currency input was very minimal. Going forward, we expect to keep our operating expenses between flat to low-single digits growth sequentially quarter-over-quarter.

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Joseph Eric Wolf, Barclays PLC, Research Division - MD and Deputy Head of United States Equity Research [11]

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Okay. And then just finally, has the switch business gone through a $10 million quarter run rate. And as you look at that, you mentioned towards the end of your comments that the third-party opportunities were emerging. Can you just walk us through some of that, how that's going? Whether that's going to be the biggest driver of growth? And then also just sort of link to that, but not entirely, you mentioned the OEM, but I thought you also made an announcement about ODMs, just some of the partnerships you've got to boost the Ethernet business going forward for the rest of the year.

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [12]

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So first, we think that InfiniBand will also contribute to our growth in 2017 during the quarters and in 2018 as well. So we do see InfiniBand -- or do expect InfiniBand to continue growing for 2017. We just see people wait one of the X86 new posters introduction to the market is delayed, and we're seeing people on the whole part and waiting for the new processor to be in the market to deploy HPC clusters and computers. So that's why we're seeing the push out. On the Spectrum and third-party software, 10s of percentages for revenue related to Spectrum comes from platforms we ship with third-party software on top of it. And we expect to continue seeing this. We expect to see more OEMs and ODMs adopt our Spectrum-based platforms and ship them in Asia, in the U.S. and in Europe in the coming quarters.

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Operator [13]

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Our next question comes from Srini Nandury with Summit Redstone.

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Srini Nandury, Summit Redstone Partners, L.L.C - MD, and IT Hardware and Software Analyst [14]

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In your press release, you mentioned that there were several technology transitions happening at your OEM customers as well as some end customers. So can you -- Eyal, can you please explain what you're referring to in that?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [15]

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First, there is bandwidth transitions that are happening. In some cases, you're seeing consolidations in the market of some of our customers. Those are the things that we're experiencing in this transition quarter.

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Srini Nandury, Summit Redstone Partners, L.L.C - MD, and IT Hardware and Software Analyst [16]

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I see. I see. Okay. In terms of -- one of the things that's going to struck me was that, InfiniBand was down so much, and have you lost any deals during the quarter to Intel Omni-Path? And can you talk about the competition in general with Intel? Are they getting aggressive? And how are they competing with you guys in the market right now?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [17]

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So no, we don't think we're losing market share to Intel with Omni-Path. We're actually seeing more people being disappointed with the Omni-Path's interconnect, and some are actually reconsidering their decisions. Intel's continuing to be aggressive in terms of pushing Omni-Path into the market with their pricing strategy and convincing customers to join Omni-Path, but we don't think they are successful in turning or taking more market share from us.

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Srini Nandury, Summit Redstone Partners, L.L.C - MD, and IT Hardware and Software Analyst [18]

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Okay. In terms of a CPU delays, which you've mentioned in the press release as well, what are the expectations for those CPUs? And when did you guys get to know that the CPUs were getting delayed and why didn't you guys actually preannounce if you knew that you're going to miss the numbers?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [19]

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Well, first, we can't. We are under NDA in terms of how to -- announce when is the schedule for the X86 CPU. And then in terms of preannouncement, we're looking at benchmark industry practices for regulatory parameters, and we didn't think that there is a need to preannounce.

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Operator [20]

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Our next question comes from Harlan Sur with JPMorgan.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [21]

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When you talk about the delay in CPU transitions, obviously, I assume you're talking about Purley/Skylake CPU launch. I thought that this was always targeted -- planned to be targeted for kind of middle of this year. So this shouldn't have been new news to your customers. Or was there some expectation that there would have been some availability of Purley and Skylake processors in Q1?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [22]

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Again, we have information under NDA, but the expectations -- there are delays in the new X86 CPU deployments in the market.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [23]

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So as it relates to your view that InfiniBand will start to grow sequentially starting in Q2, is that under the assumption that there is going to be availability of Purley and Skylake CPUs starting in Q2?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [24]

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It's under the assumption of deployments that we already have in our backlog for Q2.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [25]

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Okay. And then, Eyal, do you expect growth in your InfiniBand business for full 2017 because, if you do, I mean, that would imply at least 15% sequential growth for your InfiniBand business every single quarter for the remainder of this year. So do you expect full growth for InfiniBand for full year and confidence level about kind of strong double-digit sequential growth June quarter, September quarter, December quarter?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [26]

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So we don't have enough visibility into the full year. We do expect a growth -- sequential growth for InfiniBand in the coming quarters. And we see, like I said, we didn't see any large deal in Q1, and we are seeing multiple large deals in Q2 and Q3 that already are in our backlog. But we don't have enough visibility to give you guidance for the full 2017. We do expect to grow '17 to '16 like we said. And as we have more visibility, we'll guide when we can.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [27]

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Okay. And then on the Ethernet side. Obviously, good to see the crossover 25, 50, 100 versus 40. So I guess, maybe the near-term question is, do you expect continued growth in the Ethernet NIC card business in Q2 and for the remainder of this year? And is that primarily going to be 25, 50, 100 gig?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [28]

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Yes. We expect to continuously growth with our Ethernet NIC as people transition more into the 25, 50, and 100. And we expect to continue to take market share on the NIC side.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [29]

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And then my final question on the Ethernet NIC side. Outside, of you guys -- I mean, are you seeing any other competitors in the market at this point?

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Jacob Shulman, Mellanox Technologies, Ltd. - CFO [30]

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We're seeing other companies announce products availability of 25, 50, 100 Gigabit NICs. We still -- industry analysts estimate that Mellanox has more than 90% market share for those NICs. Like we said, it's the first time we're the preferred vendors by Tier 1 OEMs and Tier 2 OEMs for the 25 Gigabit and above. I just returned from Asia, where I was last week, and we're getting very good traction compared to other NIC vendors that they are trying in terms of our Ethernet NICs version. So first, we have 90%, and we continued to expect to maintain the lion share of the 25, 50 and 100 Gigabit Ethernet NIC market in the market.

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Operator [31]

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Our next question comes from Andrew Nowinski with Piper Jaffray.

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [32]

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Maybe just a clarification first. You talked about having leverage returning late in the 2017. Are you saying that you expect year-over-year revenue growth in Q4 to exceed your year-over-year growth in OpEx?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [33]

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Can you repeat the question, Andrew?

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [34]

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Yes, I just wanted clarification in terms of what you referred to as seeing leverage return late in the model in 2017. Are you expecting the year-over-year revenue growth in Q4 to exceed the year-over-year growth in OpEx?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [35]

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Yes. And also we don't have good visibility into Q4. So it's in our model, but..

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [36]

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I guess I'm just trying to understand what you guys said at the end of the prepared remarks in terms of having leverage return. What are you referring to?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [37]

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Yes. We expect our increase in revenue growth to exceed the expense growth year-over-year.

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [38]

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Okay. And then Dell wasn't a 10% customer at all over the last 2 years, can you just give us an update on what -- on the opportunity at Dell, and then do you think that's sustainable going forward or is that just a one quarter thing here?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [39]

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No. Don't forget that there was EMC/Dell merger that's closed. So it's a combination of 2 of our large customers into 1.

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [40]

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All right. Going forward, do you think they'll stay at 10% customer?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [41]

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We hope so.

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Operator [42]

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Our next question comes from Mark Kelleher with D.A. Davidson.

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Mark Daniel Kelleher, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [43]

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Most have been asked and answered, but just a couple of follow-ups. On the Ethernet side, you've talked in the past about 2 cloud OEMs that had adopted, and we're going to ship and 2 more that were in evaluation, can you give us an update on those?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [44]

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Yes. In Asia, we're making good strides in adoption of the Spectrum by several HyperScale data center guys with Spectrum. In the U.S., we're in the process of having 2 HyperScale customers adopt Spectrum into the data centers.

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Mark Daniel Kelleher, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [45]

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Okay. And how are you doing selling the switch, not just the chip, but the full system, is that getting traction?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [46]

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Yes. I think we're selling more a Spectrum systems than Spectrum silicon into the market.

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Operator [47]

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We'll go next to Alex Kurtz with Pacific Crest.

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David Alexander Kurtz, Pacific Crest Securities, Inc., Research Division - Senior Research Analyst, Enterprise Infrastructure [48]

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So Eyal, just to clarify on the last question on the 2 domestic Spectrum deployments, they're taking the switches or the silicon?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [49]

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They're taking the systems, and not only that, we are having good traction with a number of OEMs. They will adopt also our systems and take them to market in 2017. So on top of the Web 2 and cloud HyperScale guys, we have OEMs that we believe will adopt Spectrum systems and ship them upstairs.

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David Alexander Kurtz, Pacific Crest Securities, Inc., Research Division - Senior Research Analyst, Enterprise Infrastructure [50]

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Okay. And just more clarification on Purley/Skylake. I think most folks really weren't expecting general availability until maybe Q3, and so I think we're just trying to understand exactly what happened in Q1. And from what I hear, it sounds like people are just putting projects on hold until they get the benchmarks back in the specs and try to understand when they want to make the purchase. Or is there -- was there some actual products that were delayed in Q1 from your processor partners?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [51]

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We were expecting to have a number of deals to be deployed in Q1 and some of them pushed out to Q2. And we believe that some of them were due to waiting for the next-generation technology.

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Operator [52]

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We'll go next to James Kisner with Jefferies.

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James Martin Kisner, Jefferies LLC, Research Division - Equity Analyst [53]

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So just -- first, I don't think this was asked -- sorry, if it was, but you've mentioned in the press release technology transitions at several OEMs. Is that the Ethernet transition or is there something else happening?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [54]

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It's the Ethernet transition and then some consolidation in some of our customer base. So those are the kind of the main transitions we're seeing.

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James Martin Kisner, Jefferies LLC, Research Division - Equity Analyst [55]

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Okay. That helps. And so you mentioned in the release also you expected to grow this year. When we were talking about healthy double-digit, I mean, could you give us a little more than just you expect to grow, I mean, is it low single digits, mid-single digits, anything you can see there knowing that you don't have a whole lot of visibility?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [56]

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We continue to see growth in 2017 compared to 2016, but we don't have enough visibility to give you a more accurate number for now.

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James Martin Kisner, Jefferies LLC, Research Division - Equity Analyst [57]

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Okay. Still it's interesting to -- DRAM and NAND have been scapegoats. I think in the server business recently and even in the seeding (inaudible) call today. So I'm wondering it seems like you guys aren't really blaming that. Are you seeing any kind of impact from DRAM or NAND or is that just not a problem?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [58]

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No. We're not seeing impact from that.

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James Martin Kisner, Jefferies LLC, Research Division - Equity Analyst [59]

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Okay. And then just finally here, could you give us a little more on the transceiver business, I think you've talked about some numbers like tens of thousands a quarter, I think, in HyperScale demand seems to be ramping pretty strongly, but just kind of wondering how robust that ramp is in this quarter in Q2 that expectation. At some point, should we start to see some margin pressure on that potentially this year?

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [60]

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So we're actually seeing, again, shipping tens of thousands of transceivers to multiple customers. Gross margins stays healthy from the way we see it from our perspective. We expect the things to have healthy gross margins for the transceivers. We're coming with some new revisions of those transceivers, so we expect maybe even to grow volume there, and we continue to expect grow our LinkX business in 2017.

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Operator [61]

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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.

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Eyal Waldman, Mellanox Technologies, Ltd. - Co-Founder, CEO, President and Executive Director [62]

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So thank you very much for joining the conference call this afternoon and your interest in Mellanox. Thank you very much.

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Operator [63]

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