Mellanox breathes down Intel’s neck for Ethernet adapter market dominance

Strong demand from cloud service providers (CSPs) is boosting Mellanox’s profile in the Ethernet adapter business, with the company’s market share rising to within 5 percentage points of industry-leader Intel in the first quarter of 2019.

Mellanox’s share of the Ethernet adapter market revenue climbed 3 percentage points in the first quarter to reach a total of 20 percent, according to the latest Data Center Ethernet Adapter Equipment report from IHS Markit. This compares to a 25 percent market share for Intel.

CSPs have been the key driver behind Mellanox’s winning streak. These companies are transitioning to higher networking speeds, i.e., 25GE, 50GE and 100GE. They also are adopting adapters with CPU offload capabilities, such as processing of networking and storage protocols.

As enterprises ramp their 25GE adoption, they’re creating favorable market conditions for Mellanox to continue gaining share in the Ethernet adapter market. The 25GE+ Ethernet adapter market where Mellanox competes is poised for 39 percent revenue growth in 2019.

“Growth in artificial intelligence (AI) and other data-intensive workloads was a definitive trend in the first quarter of 2019, and this was reflected in strong demand for offload Ethernet adapters,” said Vladimir Galabov, principal analyst at IHS Markit.

“As a result, revenue for offload adapters accounted for more than 50 percent of the total Ethernet adapter market revenue for the first time. Another significant trend continued to be the transition to 25GE and 100GE adapter speeds, which recorded 16 percent and 298 percent year-over-year revenue growth in the first quarter, respectively. Hyperscale CSPs are leading this transition, although the first signs of larger enterprise deployments were evident in the first quarter.”

Intel impacted by aging product line
Intel, in the first quarter, garnered a 25 percent share of the Ethernet adapter market, representing a 6-percentage point decline compared to the first quarter of 2018. The company’s portfolio, which is made up of 1GE and 10GE adapters, continues to lose its market appeal, impacting revenue growth. Intel is updating its portfolio in the second half of this year, which could help strengthen its competitive position.

Mellanox recorded a rise in enterprise adoption of 25GE adapters. As a result, revenue from enterprise customers made up 35 percent of Mellanox’s quarter, a 12-percentage-point increase from the first quarter of 2018. For the first time, sales of programmable adapters totaled more than $1 million in revenue for Mellanox, with a deployment of 40GE adapters driving the growth.

Broadcom eats into Intel’s share
Broadcom won share from Intel in the established market for 1GE and 10GE basic network interface controllers (NICs). It also recorded a $2 million revenue upside from a 50GE offload adapter deal with a hyperscale CSP.

Marvell narrowly clung to its number-four position in revenue market share after reporting a fifth quarter of sequential revenue decline. At Marvell’s latest earnings call, chief executive officer Matt Murphy indicated that the Ethernet adapter business it gained through the acquisition of Cavium was not a focus for the organization and was not expected to become a significant growth engine.

Amazon’s processor design team, which includes Annapurna Labs that it acquired in 2015 for $350 million, developed an application specific integrated circuit (ASIC) to power in-house built Ethernet adapters for Amazon’s servers. The volume of Amazon adapters started ramping in the second half of 2017, fueled by the CSPs’ transition from 10GE to 25GE. In the first quarter, the value of the in-house built Ethernet adapters deployed by Amazon represented 8 percent of the total Ethernet adapter market’s revenue.

“A review of the initial shipment reports for the second quarter of 2019 revealed that Mellanox attained 20 percent quarter-over-quarter growth, driven by adoption of its 25GE and 100GE programmable adapters and its 25GE and 40GE offload adapters,” Galabov said. “Within the next month we will know if Intel managed to keep its leadership position in the Ethernet adapter market.”

IHS Markit expects to publish its second-quarter Data Center Ethernet Adapter Equipment report on September 16.

Additional data center Ethernet adapter equipment market highlights

• Offload NIC revenue was down 5 percent quarter-over-quarter and up 3 percent year-over-year, hitting $182 million in the first quarter.
• Programmable NIC revenue was down 28 percent quarter-over-quarter and down 21 percent year-over-year, hitting $42 million in the first quarter.
• Open compute revenue was up 22 percent quarter-over-quarter and up 78 percent year-over-year, hitting $70 million in the first quarter.
• CSP revenue totaled $121 million, telco was $63 million, and enterprise was $162.5 million in the first quarter.
• In the first quarter, the average price per 1GE port equivalents shipped was $3 for ports shipped to CSPs, $8 for telco, and $13 for enterprise.

-- Vladimir Galabov, principal analyst at IHS Markit, USA.