Chip Designer Cavium Gets Lift From Smartphone Race

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Chipmakers got some encouraging news in early March when the Semiconductor Industry Association said global chip sales in January rose 8.8% year-over-year to a record $26.28 billion -- the biggest increase in almost three years.

Part of the growth is due to a move by global wireless carriers to ramp up their networks in preparation for smartphones with faster processors.Apple 's ( AAPL ) iPhone 5S was the first phone out with 64-bit processors . This yearGoogle ( GOOG ) Android-based devices will get them too.

As service provider networks upgrade to deliver faster speed and more capacity, more consumers will want to buy new smartphones, which in turn heightens demand for chips the service providers use.


One of the beneficiaries isCavium ( CAVM ), which designs systems on a chip for the networking, telecom, storage, wireless, security and video markets. Cavium is a "fabless" chipmaker, meaning it designs the chips and outsources the manufacturing process.

The company has strung together five straight quarters of double-digit or better sales and earnings growth. Analysts expect the trend to continue in coming quarters.

Outlook For The Year

Cavium is poised to benefit in 2014 from a "strong core products design win pipeline, sizeable growth opportunities for new products, and greater customer diversification," Wedbush analyst Betsy Van Hees said in a report earlier this year.

One of the main growth drivers this year should come from the wireless sector, which has benefited not only from a desire to upgrade networks but also from an improving macroeconomic environment.

Cavium officials did not respond to requests for comment. On a fourth-quarter conference call with analysts, CEO Syed Ali said Cavium should see growth this year across all of its core enterprise, data center and service provider markets.

"We expect to see very robust revenue growth in the wireless infrastructure market across macro base stations, radio network controllers and EPC (evolved packet core) at all our major customers in Asia and across the world," Ali said.

Those customers include Samsung and Emerson Network Power, a unit ofEmerson Electric ( EMR ). Cavium's biggest customer isCisco Systems ( CSCO ), which accounted for 19% of sales during the 2013 fourth quarter. Cavium's Q4 sales to Cisco rose 8% from a quarter earlier to $15.7 million.

"We were encouraged to see Cisco results beat expectations in the quarter," noted John Vinh, analyst at Pacific Crest Securities.

Although Cavium guided revenue for Q1 2014 below estimates, partly due to softness in the telecom sector, Vinh said this outlook "may prove to be conservative."

"Cavium indicated that one of its wireline customers has already indicated a recovery in Q1," Vinh noted. "Additionally, booking trends at Cisco remain healthy, with revenue expected to be flat to up slightly."

Earnings Report Ahead

Cavium is due to report Q1 results on April 30. Analysts polled by Thomson Reuters expect earnings of 28 cents a share, up from 19 cents a year earlier. They expect revenue to rise 17% to $81.56 million.

Financially, Cavium continues to rebound from a rough patch a couple of years ago, when it posted four straight quarters of lower sales and earnings beginning with the December 2011 quarter. Several chipmaker stocks had also slumped around demand weakness in parts of the industry.

During Q4 2013 the company logged earnings of 31 cents a share, up 55% from a year earlier and a penny above consensus estimates. Revenue climbed 22% to $81.1 million, in line with views.

On the conference call, CEO Ali said Cavium saw growth in the enterprise and data center markets, with strength in enterprise switches, routers and security equipment.

"We saw continued strength in the wireless infrastructure market being offset by weakness in wireline and telecom markets," he added.

Ali says Cavium's new 28-nanometer Octeon III product line has shown particular promise. This line has been "sampled extensively" to a wide range of customers and end applications, with thousands of shipments recorded.

"We already have over 20 customers for this product and have won over 35 design wins in a very short time period," Ali said. "We're especially pleased with winning a number of sockets that in the previous generation was being serviced by incumbent competitors."

Cavium also expects continued growth in security products, where it is a leader in the chip market.

Analysts polled by Thomson Reuters expect Cavium to report full-year EPS of $1.35 for 2014, up 32% from last year. EPS is seen rising 29% to $1.74 in 2015.

The company "should maintain share in the highest-growth portion of the communications processor market, thus outgrowing the peer group," Morgan Stanley analyst Joseph Moore noted.

Competitors in IBD's Electronics-Semiconductor Fabless group includeBroadcom (BRCM),Marvell Technology Group (MRVL) andAmbarella (AMBA). The group ranks No. 12 of 197 industries tracked and hit a record high on March 21. That day, Cavium shares touched a nearly three-year high of 47.47. The stock then slid, but rebounded more than 4% intraday Monday to near 44.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AAPL , GOOG , CAVM , EMR , CSCO

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