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InfiniBand chips developer Mellanox Technologies (MLNX - Snapshot Report) recently announced that it has completed the acquisition of privately-held Kotura for $82.0 million, subject to certain adjustments.

Kotura’s silicon-based photonics technology allows signals to pass between chips using photon (light) instead of electron. This makes data communication between chips much faster, an important criterion for the smooth running of modern scale-out data centers.

Currently, data centers are facing a huge challenge to improve communication speed between switches and routers in order to efficiently manage the ongoing data explosion. Data center administrators are finding it increasingly difficult to speed up interconnection between switches and routers from 10 gigabyte per second (“Gbps”) to 100 Gbps, primarily due to low deployment of 100 Gbps transceivers.

According to Kotura, the bottlenecks behind the usage of 100 Gbps transceivers are the huge size of the first-generation C Form Factor Plugs (CFP – a standardized pluggable transceiver that supports 100Gbps Ethernet), higher consumption of power and higher costs.

This is where Kotura’s silicon photonics technology comes into play. Currently, Kotura offers a fiber-based transceiver that can deliver 100 Gbps inside the data center, which can eventually expand to 400 Gbps to 1.6 terabit per second (Tbps). Moreover, silicon photonics solutions consume low power compared to 100Gbps CFP transceivers.

Mellanox believes that the acquisition will boost its competitive position in the high-speed, scalable and efficient end-to-end interconnect solutions market for servers and storage systems. The company expects the acquisition to add at least a penny to a maximum of 3 cents to its fiscal year 2014 earnings per share.

Apart from being accretive to the bottom line, the takeover of Kotura will enable Mellanox to open its first research & development (“R&D”) center in the United States.

Mellanox reported sluggish second-quarter results and also provided a tepid guidance. However, we believe that Mellanox’s product offerings such as InfiniBand products and Ethernet solutions will help the company to drive top-line growth.

Moreover, the acquisitions of Kotura and IPtronics will drive 100Gb/s InfiniBand and ethernet solutions revenues over the long run.

However, sluggish macroeconomic environment, and increasing competition from established players like Intel (INTC - Analyst Report), International Business Machines (IBM - Analyst Report) and Cisco (CSCO - Analyst Report) may act as headwinds, going forward. Moreover, customer concentration could be another headwind for the stock.

Currently, Mellanox has a Zacks Rank #3 (Hold).

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