Mellanox Technologies (MLNX) Eyal D. Waldman on Q2 2016 Results - Earnings Call Transcript

| About: Mellanox Technologies, (MLNX)

Mellanox Technologies Ltd. (NASDAQ:MLNX)

Q2 2016 Earnings Call

July 20, 2016 5:00 pm ET

Executives

Jeff A. Schreiner - Director-Investor Relations

Eyal D. Waldman - President, Chief Executive Officer & Director

Jacob Shulman - Chief Financial Officer

Analysts

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc.

Mark D. Kelleher - D.A. Davidson & Co.

Andrew James Nowinski - Piper Jaffray & Co. (Broker)

Joseph Wolf - Barclays Capital, Inc.

Harlan Sur - JPMorgan Securities LLC

John William Pitzer - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Srinivas S. Nandury - Summit Redstone Partners LLC

James Kisner - Jefferies LLC

Operator

Good afternoon and welcome to the Mellanox Technologies Second Quarter 2016 Financial Results Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. And as a reminder, this conference is being recorded.

And now, I would like to turn the conference over to Mellanox. Please go ahead.

Jeff A. Schreiner - Director-Investor Relations

Good afternoon and welcome to Mellanox Technologies second quarter 2016 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 event.

Now, I will turn the call over to Eyal for his opening remarks. Eyal?

Eyal D. Waldman - President, Chief Executive Officer & Director

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us. I am pleased to announce the fifth consecutive record quarter for Mellanox. Second quarter revenues were $214.8 million, representing 32% year-over-year growth. We saw strong growth in our Ethernet business, driven by our 25-gigabit, 50-gigabit and 100-gigabit Ethernet products. We believe the transition to 25-gigabit Ethernet and above has begun, providing Mellanox multiple growth opportunities. Deployments of our InfiniBand solutions remain robust. InfiniBand now connects the world's fastest supercomputer. Mellanox is well-positioned to benefit from technology and market trends in both Ethernet and InfiniBand in the coming years.

In the second quarter, our Ethernet business was 41% of total revenue. InfiniBand contributed 52% of total revenue. Second quarter results reflect ongoing revenue diversification efforts. Our 25-gigabit, 50-gigabit and 100-gigabit Ethernet adapters saw strong sequential growth as multiple customers began deployment of higher speed networks. Mellanox continues to lead in the 25-gigabit Ethernet and above adapter markets, driven by shipments to leading hyperscale customers and OEMs worldwide.

Our first-mover advantage in 25-gigabit Ethernet and above adapters has allowed Mellanox to capture new businesses. As an example, during the second quarter, we saw all of the leading U.S. server OEMs start shipping our 25-gigabit Ethernet and above adapters. These and other new customer relationships create momentum for Mellanox's revenue growth.

Shipment of our Spectrum Ethernet switch continued to grow in the second quarter. During the quarter, we announced general availability of Cumulus' network operating system running on Mellanox's Spectrum switch. The addition of Cumulus provides customers freedom of choice versus prior industry approach of closed, proprietary, black box offerings.

Engagements with hyperscale and other customers have continued to progress, and we believe Spectrum is well-positioned for multiple deployments. We expect Spectrum switch revenues to continue to grow in 2016 and beyond.

Our LinkX products continued to gain significant design wins as we go to production with our 25-gigabit, 50-gitabit and 100-gigabit per second products. In the third quarter we will ship tens of thousands of 100-gigabit Ethernet transceivers to Web 2.0 and cloud customers. We expect to continue to grow our cable and transceiver revenues during the second half of 2016 and beyond.

EZchip revenues continued to grow in the second quarter. We are seeing strong customer demand for network processor solutions. We reiterate our prior 2016 EZchip accretion estimation of $0.60 to $0.70. Due to the integration of Mellanox and EZchip Technologies, we will not provide additional commentary about EZchip's standalone businesses.

Second quarter InfiniBand revenues were $111 million. Our InfiniBand results in the second quarter of last year included significant Chinese build-out, and the first quarter of this year had material Web 2.0 purchases. The current quarter results reflect strong InfiniBand execution, with continued growth in our EDR revenues. We anticipate customer deployments using EDR will increase in the second half, contributing to overall InfiniBand revenue growth in 2016. InfiniBand is the interconnect of choice for high-performance computing infrastructure and continues to be deployed in storage platforms, cloud, machine learning and Web 2.0 systems.

During the quarter, we were able to conduct several additional application level tests comparing costs between Mellanox's EDR InfiniBand solutions and Intel's Omni-Path offering. The average performance advantage for EDR InfiniBand was 45% while providing 27% better average cost per application. InfiniBand continues to demonstrate significant performance advantages versus Omni-Path. We believe the performance advantages of InfiniBand demonstrated in multiple tests has led Intel to aggressively price Omni-Path in an attempt to gain market share. We believe application performance advantages will remain a key differentiation for customers. Despite competitive pricing, we expect to grow our InfiniBand business.

In the second quarter, Mellanox attended the 2016 International Supercomputing Conference in Frankfurt, Germany. At the conference, the most recent TOP500 supercomputer list was released and included significant number of systems from markets outside of high-performance computing. The list demonstrated continued leadership of Mellanox to interconnect including both InfiniBand and Ethernet systems.

In 2008 Mellanox's InfiniBand was chosen to connect the world's first Petaflop system. Now in 2016, InfiniBand connects the world's first 100 Petaflop supercomputer, the number one system on the TOP500 list. This supercomputer incorporates almost 41,000 nodes and 10 million CPU cores. The TOP500 list highlighted that 41% of all systems use Mellanox. InfiniBand now connects 45 Petascale systems, equaling almost half of total Petascale systems on the TOP500. In addition, 70% of all high performance computing systems on the TOP500 list uses Mellanox.

In the second quarter we introduced ConnectX-5, an intelligent 10-gigabit per second, 25-gigabit per second, 40-gigabit per second, 50-gigabit per second and 100-gigabit per second InfiniBand and Ethernet adapter. ConnectX-5 delivers in-network computing, enabling customers to analyze data within the network. In-network computing reduces prior bottlenecks associated with CPU-centric architectures, allowing the interconnect to function as a processor in the network. ConnectX-5, together with Switch-IB 2 enables high application performance and scale through intelligent offloading. We expect this product to be significant building blocks for our future Exascale systems.

Integration efforts between EZchip and Mellanox have been ongoing since the acquisition closed in late February. During the second quarter, we announced the first joint product, our multi-core system-on-a-chip solution named BlueField. BlueField combines multiple ARM cores interconnected by a coherent mesh network with the leading ConnectX-5 network adapter. Initial target markets include storage and network applications.

Utilizing offload accelerators within the embedded ConnectX-5 adapter, BlueField delivers a programmable intelligent network solution. Within storage markets, BlueField can be utilized in scale-out NVMe over fabric systems as storage controller. BlueField is designed to support increasing demand from high-performance storage networks such as NVMe speed surge to 20-gigabit per second and beyond per drive. NVMe over fabrics is a new micro trend emerging in storage markets offering customers a replacement for legacy fiber channel installations. We believe this trend will result in multiple opportunities for revenue growth from BlueField in 2017.

Now I will turn the call over to Jacob for a review of our first (sic) [second] (10:53) quarter financial results and discuss our expectations for the second (sic) [third] (10:58) quarter 2016. Jacob?

Jacob Shulman - Chief Financial Officer

Thank you, Eyal. Good afternoon, everyone. Let me now review some financial details relative to our second quarter 2016.

Our total revenues were $214.8 million, up approximately 9% from $196.8 million in the first quarter of 2016 and up approximately 32% from $163.1 million in the second quarter of 2015.

The following are a few selected Q2 2016 revenue metrics for you. Revenues from RICs represented 22% of second quarter revenues. Revenues from boards were 38% and switch systems revenues accounted for 23%.

Revenues from our InfiniBand base products represented 52% of revenues in Q2, down from 58% of revenues in Q1 2016. Our EDR 100-gigabit per second InfiniBand product represented 22% of InfiniBand revenues. Our FDR 56-gigabit per second InfiniBand product represented 67% of InfiniBand revenues. Ethernet related revenues represented 41% of second quarter revenues, up from 35% in the first quarter of 2016. We had one more than 10% customer in the second quarter. It was HP with 12% of revenues.

Our non-GAAP gross margins in the second quarter were 71.4%, unchanged from the first quarter of 2016. Major reconciling items from GAAP to non-GAAP gross profit are share-based compensation expenses of $671,000, amortization of acquired intangibles of $13.5 million and acquisition related costs of $4.2 million.

Second quarter non-GAAP operating expenses increased by $8.7 million sequentially to $107.9 million and represented 50.2% of revenues compared with $99.2 million, or 50.4% of revenues in the first quarter of 2016. Major reconciling items from GAAP to non-GAAP operating expenses are stock-based compensation of $17.4 million, acquisition related charges of $627,000 and amortization of acquired intangibles of $2.4 million.

Our non-GAAP research and development expenses in the second quarter were $71.2 million, compared to $61.2 million in the first quarter of 2016, representing a sequential increase of 16.3%. The increase was primarily due to higher employee related costs resulting from the first full quarter of EZchip acquisition impact. Non-GAAP sales and marketing expenses were $26.3 million in the second quarter compared to $26.5 million in the first quarter of 2016, representing a sequential decrease of 0.7%.

In the second quarter, our non-GAAP general and administrative expenses were $10.4 million compared to $11.5 million in the prior quarter, representing a sequential decrease of 9.4%. The decrease was primarily due to lower professional service expenses.

Interest expenses associated with the term debt during the quarter were $2.2 million. During the quarter, we paid off $7 million of the debt principal amount. The second quarter tax expense was $933,000 compared to tax expense of $1.1 million in the first quarter of 2016. The non-GAAP tax expense excludes $1 million tax benefit associated with the utilization of deferred tax assets on net operating losses in Israel.

Second quarter non-GAAP net income was $42.7 million, or $0.87 per diluted share. This compares to our first quarter 2016 non-GAAP net income of $39.3 million, or $0.81 per diluted share. Cash provided by operating activities during the second quarter was $44.8 million compared to $48.6 million in the first quarter of 2016. Our cash and investments at the end of the quarter were $276.5 million compared to $261.8 million at March 31, 2016.

We currently expect our third quarter 2016 non-GAAP results to be as follows: quarterly revenues of $221 million to $227 million; Q3 2016 non-GAAP gross margins of 71% to 72%; we expect a sequential increase in non-GAAP operating expenses of 2% to 4%; we estimate our third quarter compensation expense to be between $17.9 million and $18.4 million; non-GAAP diluted share count guidance for the third quarter is 49.3 million shares to 49.8 million shares.

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

Eyal D. Waldman - President, Chief Executive Officer & Director

Thank you, Jacob. The transition to 25-gigabit Ethernet and above networks is underway, and Mellanox is poised for market share gains given our first-mover advantage in adapters and relationships with leading OEMs. Mellanox's Spectrum switch is gaining traction and the general availability of Cumulus further strengthens our position. We anticipate customer demand for higher networking speeds continues to grow during the second half of 2016. We believe the industry transition to 25 gigabit per second and above technologies as a significant growth catalyst for Mellanox in the coming years.

In the second half of 2016, we expect further adoption of our InfiniBand EDR solutions. The most recent TOP500 Supercomputing List validated Mellanox's continued leadership in high-performance interconnects. Our plans for 200 gigabit per second InfiniBand HDR solutions remain on track for introduction in 2017.

Silicon photonics products go to production in the second half of 2016. We are experiencing good traction with our fiber optics interconnects and expect them to grow in the second half of 2016 and beyond. In addition to the InfiniBand and Ethernet NIC businesses driving the majority of revenues today, Mellanox has four significant growth engines for the future. First, the Ethernet switch solutions based on Spectrum silicon; second, the LinkX cable and transceiver business; third, the network processing unit based platforms which demonstrate significant price/performance advantages versus software-based offerings; and fourth, the new BlueField product which will begin shipping in 2017. These four drivers are expected to contribute to our growth in 2017 and 2018.

We are pleased with our performance during the first half of 2016. We see growth opportunities across both InfiniBand and Ethernet product lines in the second half of 2016 and beyond. We will now take questions.

Question-and-Answer Session

Operator

Thank you. The floor is now opened for questions. Thank you. Our first question comes from Kevin Cassidy with Stifel. Please go ahead.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc.

Thank you, and congratulations on the great results.

Eyal D. Waldman - President, Chief Executive Officer & Director

Thank you.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc.

The Spectrum switch qualifications, can you say how many trials you have going on? How many different customers?

Eyal D. Waldman - President, Chief Executive Officer & Director

I'd say it's more than 10 customers.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc.

Okay. And primarily web or hyperscale cloud service providers?

Eyal D. Waldman - President, Chief Executive Officer & Director

We have hyperscale guys; we have a cloud, both public and private cloud. We have storage, hyper-converged system users with Spectrum. There's many – both market applications and customers that are using us.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc.

Okay. And what about the attach rate of your cards to those switches? Is that typical? Or are they sold separately?

Eyal D. Waldman - President, Chief Executive Officer & Director

So, obviously, they're sold separately. Today our Ethernet network interface cards have significant volume shipments into multiple markets without having such a success yet with the Ethernet switch. The Ethernet switch based on Spectrum is just now catching up. So they are sold separately. Usually, when we well Spectrum, we have a higher probability of also using ConnectX-3 or ConnectX-4 in the systems.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc.

Okay. And if I could just ask one other, what speeds are in the trials now? Are they 100-gigabit mostly or are they 25-gigabit?

Eyal D. Waldman - President, Chief Executive Officer & Director

They're both 25-gigabit and 100-gigabit, so it's probably equal number. And I think people that will use 25-gigabit will also use 100-gigabit, for example, for their storage systems. Some people just use 25-gigabit. Some people have a mix of 25 gigabit per second and 100 gigabit per second in the data center.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc.

Okay, great. Thank you.

Eyal D. Waldman - President, Chief Executive Officer & Director

Thank you.

Operator

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

Mark D. Kelleher - D.A. Davidson & Co.

Great. Thanks for taking the questions. Earlier in the quarter you announced a partnership with Oracle to work together on some InfiniBand initiatives. Can you just expand on that? And maybe tell us how you see your relationship with Oracle evolving?

Eyal D. Waldman - President, Chief Executive Officer & Director

Yes. So Oracle has developed some silicon products for InfiniBand, and we think it's important to enlarge the ecosystem. We've done interoperability testing with Oracle. We're working together with them to utilize our products in their solutions, including also some of their products. So we continue with this strategic relationships and co-develop both silicon, cables, systems, switches with mainly our silicon and also some of their silicon.

Mark D. Kelleher - D.A. Davidson & Co.

And are you noticing kind of a headwind from revenue from Oracle as they make this switchover?

Eyal D. Waldman - President, Chief Executive Officer & Director

No. And we don't expect to experience these headwinds for quite some time, if at all. We'll experience it eventually, but for now we don't expect to see any headwinds from Oracle.

Mark D. Kelleher - D.A. Davidson & Co.

Okay, great. Thanks.

Eyal D. Waldman - President, Chief Executive Officer & Director

Thank you.

Operator

Our next question comes from Andrew Nowinski with Piper Jaffray. Please go ahead.

Andrew James Nowinski - Piper Jaffray & Co. (Broker)

Okay. Thanks. Nice quarter. I just had one question on the InfiniBand side. It looks like revenue declined sequentially in Q2, which I think is fairly unusual for Q2. I was wondering if there's any deals that may have pushed out of Q2? Or any other unusual circumstances that caused that revenue to be down sequentially?

Eyal D. Waldman - President, Chief Executive Officer & Director

It's probably more a flattish quarter, but the Q1 we had a huge quarter for InfiniBand and that's why we're seeing like this small decline in InfiniBand revenue in Q2, and we expect to continue growing in Q3 and Q4.

Andrew James Nowinski - Piper Jaffray & Co. (Broker)

Got it. And that's growing sequentially or year-over-year in Q3, Q4 that you're referring to?

Eyal D. Waldman - President, Chief Executive Officer & Director

Today we expect both, I guess.

Andrew James Nowinski - Piper Jaffray & Co. (Broker)

Okay. Got it. And then last question for me, I just want to ask on CCIX Accelerator Consortium that was announced in May. Obviously, Intel was not a part of that consortium. It looks like Mellanox is the only interconnect vendor in that. Is it fair to assume that gives you another advantage over Intel?

Eyal D. Waldman - President, Chief Executive Officer & Director

You know, Intel wants to delay the progress in the PCI Express generations, and I think that's why they didn't join this consortium. Yes, we believe it will enable and give advantage for people that integrate CCIX standard into their PCI Express interface, because we'll have a faster, more efficient, cache-coherent interface for their CPUs, GPUs and our interconnect.

Andrew James Nowinski - Piper Jaffray & Co. (Broker)

And have you seen any revenue that resulted from that yet? Or is that something that's for back-half of the year?

Eyal D. Waldman - President, Chief Executive Officer & Director

No, we believe that some of the ecosystem will start having products in 2017, and that's where we'll start to see more evidence (24:34) related to CCIX.

Andrew James Nowinski - Piper Jaffray & Co. (Broker)

Got it. Keep up the good work.

Eyal D. Waldman - President, Chief Executive Officer & Director

Thank you.

Operator

Our next question comes from Joseph Wolf with Barclays. Please go ahead.

Joseph Wolf - Barclays Capital, Inc.

Thank you. I had a question about the composition of the Ethernet business. You mentioned a lot about the growth in 25-gigabit, 50-gigabit, and 100-gigabit. Could you talk a little bit about the transition away from 40-gigabit, if that's going to decline significantly? And then from a port count and opportunity, as we think about 2017, how much bigger is the 25-gigabit, 50-gigabit, 100-gigabit market in terms of ports, if not in numbers but in magnitude versus the peak 40-gig sales cycle?

Eyal D. Waldman - President, Chief Executive Officer & Director

So, first, 40-gigabit continue to be ours and we continue to ship 40-gigabit Ethernet adapters. We've seen in some places the transition from 40-gigabit to 50-gigabit and then from 10-gigabit to 25-gigabit. We think it's good that we're replacing our own 40-gigabit Ethernets with our 50-gigabit or sometimes 25-gigabit Ethernet. This will provide better cost performance to our customers. For us, it's a higher ASP, so we like that. We don't have enough visibility to answer your other questions in terms of adoption rates and so on. We just follow what our customers' trends are.

Joseph Wolf - Barclays Capital, Inc.

Is there anybody else out there of significance in the 25-gigabit, 50-gigabit market that you think is going to be appearing in 2H?

Eyal D. Waldman - President, Chief Executive Officer & Director

In Q1 we had 100% of the NIC market for ourselves. We don't have yet the numbers for Q2. We expect to be at 100% or close to 100% 25-gigabit Ethernet NIC market for Mellanox, which means we have like gap or an advantage of at least two quarters compared to our competition. We hear other people coming out with 25-gigabit, but we don't yet see them really in the market in production. We're the only guys. So this first-mover advantage gives us significant advantage over our competitors, because we really are embedded in the server OEMs, in storage OEMs, in the hyperscale guys. So we expect to continue to see growth with that.

Joseph Wolf - Barclays Capital, Inc.

Okay. And then just finally, you've mentioned the BlueField as also one of the four legs of the opportunity for diversified growth. If you think about the first applications for that next year, could you kind of handicap storage versus data center and your initial thoughts on intelligent NICs?

Eyal D. Waldman - President, Chief Executive Officer & Director

Right. So I think BlueField will be mainly, initially, used for storage applications and controllers. Later on it will also be used as a smart NIC that can process data on the fly. So I believe that the early adoption will be by storage systems and the appliances, followed by adoption of smart NIC and then adoption into data communication platforms, the CPU controller there.

Joseph Wolf - Barclays Capital, Inc.

Perfect. Thanks, Eyal.

Eyal D. Waldman - President, Chief Executive Officer & Director

Thank you very much.

Operator

Our next question comes from Harlan Sur with JPMorgan. Please go ahead.

Harlan Sur - JPMorgan Securities LLC

Hi. Good afternoon. Thanks for taking my question. On the competitive pricing that you talked about from Intel and Omni-Path, I know, Eyal, you said you expect your 100-gig InfiniBand business to continue to grow on a go-forward basis. But are you actually seeing some impact to your 100-gig InfiniBand design win momentum? Or as you mentioned, customers are more focused on performance, and therefore, maybe pricing is not having that much of an impact?

Eyal D. Waldman - President, Chief Executive Officer & Director

We are seeing some impact. So, first, Intel does have some design wins, and I think they have eight entries in the TOP500 list of supercomputers. We are seeing some price pressure in some locations. We don't expect to lose significant market share, but Intel is seeing some success where people that say good enough is good enough for them.

Harlan Sur - JPMorgan Securities LLC

Thanks for that. And then on switch side, looks like your switch business grew nicely sequentially in June. Was this partially due to Spectrum sales? I know you guys starting shipping that Q1, Q2. And if you were to take a guess, what percentage of your switch business could Spectrum represent exiting this year?

Eyal D. Waldman - President, Chief Executive Officer & Director

So Spectrum is the main cause for, I would like to say significant, but nice growth in our Ethernet switch business. We expect multiple hyperscale customers to adopt Spectrum into their data centers. One of them is already kind of in very early go-to-production stages. So we do expect to see Spectrum in the next several quarters become more significant in our revenues.

Harlan Sur - JPMorgan Securities LLC

All right. Thanks, Eyal.

Eyal D. Waldman - President, Chief Executive Officer & Director

Thank you.

Operator

Our next question comes from John Pitzer with Credit Suisse. Please go ahead.

John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)

Yeah. Thanks, Eyal, for letting me ask the question. I guess I have a couple of follow-ons from Harlan. Just going back to Intel's pricing on OPA, just given that OPA is really more applicable to new deployments for people who are willing to only use Xeon Phi, I'm just kind of curious if you can help us understand, of your current InfiniBand business today and what you expect in the back half of the year, just how much revenue could Intel be disrupting to your business just given that OPA still seems very nichey?

Eyal D. Waldman - President, Chief Executive Officer & Director

I think they can use OPA with additional CPUs, not just the Xeon Phi. Again, Intel is positioning OPA just for the HPC. On the TOP500, we just saw eight entries. It takes a lot of work to deploy that. We're not sure how scalable Omni-Path is. It's not really utilized for storage interconnect and also, in the high-performance computing platforms. So I don't know, but it could be around a 10% market or something like that. We don't expect it to be very significant for us.

John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)

That's helpful. And then maybe another follow-up around Spectrum. You guys in the past have talked about maybe a $10 million per quarter or greater run rate exiting this year. Is that still what we should be thinking about? And, Jacob, as Spectrum becomes a bigger part of the switch mix, is there any impact to gross margin? Or how should we think about the economics of the product?

Eyal D. Waldman - President, Chief Executive Officer & Director

Yeah, so there is a good probability we will exit with about $10 million a quarter with Ethernet switch revenues. And gross margins?

Jacob Shulman - Chief Financial Officer

And, John, with regard to gross margins, we'll have, as we said, two types of engagements. It will be box engagement as well as silicon, so it all will be dependent at the end on this mix of revenues coming from box versus silicon. In general, the gross margins on the box model should be comparable to other products.

John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)

Okay. Thanks, guys. Appreciate it.

Eyal D. Waldman - President, Chief Executive Officer & Director

Thank you.

Operator

Our next question comes from Srini Nandury with Summit Redstone. Please go ahead.

Srinivas S. Nandury - Summit Redstone Partners LLC

All right. Thank you for taking my call. Congrats on a good quarter. Eyal, you mentioned in your prepared remarks that Intel is being aggressive, right, and on the pricing and so forth. Can you talk about the pricing of Intel and how does Mellanox stack up versus Intel's pricing? And more importantly, can you talk about Mellanox's willingness to cut pricing for strategic context to win large deals?

Eyal D. Waldman - President, Chief Executive Officer & Director

Yeah. So, you know, we sell value with our interconnect, and we think that if you really want to scale, a great demonstration is by the number one supercomputer in the world in China using our InfiniBand interconnect. So if you really want to build a supercomputer that has a very attractive return on investment, efficiency, utilization, you would probably use InfiniBand. If the supercomputer building is not that performance sensitive or ROI sensitive, you may use InfiniBand A (33:12) or Omni-Path. So in some cases where we see that a small reduction in price will get us the business or will assure us winning the business, we do that. We don't go overboard with our pricing tactics, and that's why we maintain our low-70%s gross margin.

Srinivas S. Nandury - Summit Redstone Partners LLC

Okay.

Eyal D. Waldman - President, Chief Executive Officer & Director

And you can also see in the guidance that there's no impact to the gross margins.

Srinivas S. Nandury - Summit Redstone Partners LLC

Oh, okay. Thank you for the clarity there. Can you comment about the impending Cavium QLogic deal? I know you have a relationship with Cavium. And how will your relationship change going forward? And what does that mean for the Internet NIC competition because they buy the – QLogic sources its ASICs from Broadcom? And how does all this play out? What are you guys thinking about this?

Eyal D. Waldman - President, Chief Executive Officer & Director

Yeah. I think the market showed the valuation impact to Cavium up to the acquisition of QLogic. We looked at QLogic and decided to stay with our organic growth. We like Cavium. We are, like you said, we have good communications with them. We'll compete more in the markets. We think that our products have advantage over what QLogic has to bring into Cavium and that's why we've won most of the business compared to QLogic. So, we don't think that's going to be a big impact for Mellanox.

Srinivas S. Nandury - Summit Redstone Partners LLC

Okay. Final question, if I may. In the recently released TOP500 supercomputer list, Intel Omni-Path had eight wins, if I am right, out of the 155 new that were added. Can you comment whether Mellanox actually made an attempt to win those eight deals which Intel won? And if you did, what were the reasons why you did not win those deals?

Eyal D. Waldman - President, Chief Executive Officer & Director

We go after each and every deal, so yeah, of course we attempted all of those deals. We didn't gain them because Intel paid their way into the market. So they made it very attractive for the customers to use Omni-Path.

Srinivas S. Nandury - Summit Redstone Partners LLC

All right. Thank you so much for your time.

Eyal D. Waldman - President, Chief Executive Officer & Director

Thank you.

Operator

Our next question comes from James Kisner with Jefferies. Please go ahead.

James Kisner - Jefferies LLC

Great. Thank you. So just a quick clarification and then a real question. Just on the tax rate, it came in a bit low versus our expectations in the quarter. I mean, is this kind of where it's going to be in the sort of $1 million-ish range in the next couple of quarters? Or should we expect it to kind of tick up?

Jacob Shulman - Chief Financial Officer

Yeah. We still expect kind of low to mid single-digits for the full year.

James Kisner - Jefferies LLC

Okay. So the real question here, on EDR adoptions, so it did grow pretty nicely sequentially, but not quite as much as we thought it would. And I've just been hearing here that 100-gig is probably more than what's needed for most apps today, that bandwidth is not the bottleneck. I'm just wondering from your perspective, do you see EDR kind of growing as a proportion of revenues at a similar rate the next couple of quarters? Or is there any reason to think that it might inflect? Just any comments qualitatively on EDR adoption would be helpful. Thanks.

Eyal D. Waldman - President, Chief Executive Officer & Director

Yeah. We believe the adoption of EDR InfiniBand will grow. People need to move more data. If you really want to build a supercomputer, you want to build it with EDR, so – and also for storage systems, we also see some cloud customers using InfiniBand EDR. Yeah, we think it's going to grow.

James Kisner - Jefferies LLC

I'm just going to sneak one in here. I mean, you guys were so nice (36:53) at our conference to say you thought you might get $26 million out of EZchip in this quarter. And I know you're not going to disclose it going forward, but might you comment on whether or not it even came in on that expectation? Thanks.

Jacob Shulman - Chief Financial Officer

James, we said that we're not going to discuss EZchip standalone business, so we'll not comment on that.

James Kisner - Jefferies LLC

I had to try. Thanks a lot.

Eyal D. Waldman - President, Chief Executive Officer & Director

No problem.

Operator

Thank you. It appears we have no further questions at this time. I'll turn it back to Eyal Waldman.

Eyal D. Waldman - President, Chief Executive Officer & Director

Thank you, everybody, for your interest in Mellanox, and thank you for joining the call.

Operator

Thank you. This concludes today's conference call. Please disconnect your lines at this time, and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!