The competitive landscape is shifting for a small part of Aliso Viejo’s QLogic Corp.
The maker of electronics for data storage networks is likely to become the smaller player in a duopoly with Israel’s Mellanox Technologies Ltd. for a type of networking technology used by supercharged computers and servers.
The move stems from Mellanox’s recent $176 million pact to buy Israel’s Voltaire Ltd., a company that makes what are called Infiniband switches that speed up the flow of data in storage networks.
“The Infiniband networking market is now a duopoly between Mellanox and QLogic, the two suppliers that design their own adapter and switch chips,” said Frank Berry, a former QLogic executive who now writes for stock tracking website seekingalpha.com.
If the Voltaire deal goes through, Mellanox will become the dominant player with some 56% of the market for Infiniband, Berry estimates.
Others see that as conservative.
Analyst Adam Benjamin of Jefferies & Co. sees Mellanox’s post-deal share rising north of 70%.
Analyst Paul Mansky of Cannacord Genuity Corp. expects to see Mellanox end up with 80% of the Infiniband market.
“With this transaction, Mellanox takes a big step toward the 80/20 rule upper hand, thereby materially challenging QLogic’s future Infiniband market share potential,” Mansky said.
Mansky, who has a “buy” rating on QLogic’s shares, said he sees the Mellanox deal as “modestly negative in the long term” for QLogic.
Big Customers
Mellanox’s acquisition of Voltaire gives it immediate business with some big customers, including server makers IBM Corp., Dell Inc. and Hewlett-Packard Co.
“Given that industry pioneer Mellanox now owns the leading technology, software, sales and marketing machines for InfiniBand host channel adapters and switches, the company is well positioned to fend off challenges from QLogic,” Berry said in a seekingalpha.com report.
The bulk of QLogic’s business is in fibre channel networking, where it vies for dominance with top rival Costa Mesa’s Emulex Corp.
Less than 10% of QLogic’s yearly $584 million in revenue are from sales of Infiniband products.
Infiniband is what’s known as an interconnect protocol that bridges two devices together, such as servers to other servers or servers to desktop computers.
It’s used in military applications and research.
“The benefit of Infiniband is that it gets the data packets where they need to go quickly, with little latency,” said Kaushik Roy, an analyst at Wedbush Securities Inc. in San Francisco.
Small Market
The overall market for Inifiniband is relatively small, totaling an estimated $200 million per year.
It’s expected to grow as cloud computing takes hold with corporations. Cloud computing essentially outsources the need for big banks of servers by tapping into hefty software applications that are stored elsewhere.
“Although that is not the bulk of the market today, the expansion of cloud computing and the overall growth of network data management needs suggests it’s an increasing important market,” said Stephen Simpson in a report on website Investopedia.com.
Infiniband is expected to see an average yearly growth rate of about 15%, according to an investor presentation by QLogic.
Analyst Roy sees the Mellonox deal as good for QLogic, because it knocks out a competitor (Voltaire) and keeps prices stable.
“In a way (the acquisition of Voltaire) is actually better for both Mellonox and QLogic,” he said. “I would say that consolidation helps in a sense that you wouldn’t see so much pricing pressure.”
QLogic, which declined to comment for this story, announced an Infiniband customer win last month with New Orleans’ Lawrence Livermore National Laboratory, which does national security research and is home to one of the fastest supercomputers.
