Most of Voltaire's (VOLT) revenues come from sales of InfiniBand switches, which are most-often used to tie together Intel-based servers in corporate data centers. Over the past few weeks, sell-side analysts and my own contacts have indicated that data center equipment experienced strong levels of budget flush (end of year spending). We've seen this thesis play out via strong Q4 results from companies like F5 (FFIV), Seagate (STX) and IBM (IBM).
In regard to Voltaire, IBM’s "System x" server business is arguably the greatest contributor to the company's switch sales. On Tuesday, IBM provided a positive sign for Voltaire's upcoming earnings report (they will announce Q4 results on February 8). Specifically, System x was one of the key highlights on IBM's call. Sales increased 37% year over year, accelerating from Q3's 1% growth rate and Q2's 22% decline. On the call, management said “Year-to-date growth improved again in the fourth quarter, with share gains in most brands and particular strength in System x.”
IBM's Systems group also saw the company's greatest increase in gross margins in Q4 (+2.6%), which was a very nice improvement considering that systems margins were down 0.2% on a full year basis. This is a sign that demand is beginning to outstrip supply.
Further, IBM gained market share during the quarter, but only 3 points. To see System x revenues up 37% y/y with only 3 points of market share gains implies that the entire market experienced strength in Q4. This bodes very well for VOLT, which also generates sales from Sun (JAVA), NEC (OTC:NELTY), and SGI. The company also has a buding relationship with Fujitsu. As VOLT signs new OEM partners, the company should continue to grow at a faster rate than the market.
Finally, IBM’s report only adds to the recent wave of positive data points for VOLT. Most recently, on January 12, Mellanox (MLNX) presented at the Needham conference. MLNX supplies VOLT with the InfiniBand chips that help power its products. Mellanox painted a bullish picture for the future of InfinBand and confirmed sell-side reports that version 2 of ORCL’s Exadata offering is experiencing a meteoric rise in popularity. This impacts Voltaire because Exadata boxes are most often tied together using InfiniBand switches, like the ones sold by Voltaire.
Bottom Line: VOLT holds a commanding lead in selling InfiniBand switches into the commercial market (the company claims 90% market share). It is also well-positioned with new products to benefit from the emergence of 10Gb Ethernet, which appears to be ramping ahead of analyst projections.
My positive view of Voltaire has been centered on its best-of-breed leverage to these high-growth segments. Based on the recent commentary provided by IBM and MLNX, it appears that the sell-side's estimates are conservative for VOLT's December quarter, as well as 2010. As a result, I believe that the stage is set for a strong beat-and-raise when the company reports its Q4 results.
Disclosure: I hold a long position in VOLT.