CAVM

Cavium, Inc. (CAVM)

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Cavium Networks, Inc. (CAVM)

Q3 2008 Earnings Call

October 20, 2008 5:00 pm ET

Executives

Angel Atondo – Marketing Communications Manager

Syed Ali – President and Chief Executive Officer

Art Chadwick –Vice President and Chief Financial Officer

Analysts

Tim Luke – Barclays

Sanjay Devgan – Morgan Stanley

Krishna Shankar – JMP Securities

Arnab Chanda – Deutsche Bank

Dan Morris - Oppenheimer

Kevin Cassidy – Thomas Weisel Partners

Gary Mobley – Piper Jaffray

Sandy Harrison – Signal Hill

Quinn Bolton – Needham & Co.

Christian Schwab – Craig-Hallum Capital

Presentation

Operator

Welcome to the Cavium Network third quarter 2008 earnings conference call. (Operator Instructions) With that I will turn the call over to Angel Atondo, Marketing and Communications Director.

Angel Atondo

Leading the call today are Mr. Syed Ali, President and CEO of the Company, and Art Chadwick, Vice President and Chief Financial Officer.

Before we begin, I would like to remind you that various remarks that we make on this call, including those about our future financial results, including revenue, gross margin, operating expenses, design wins, product plans, our competitive situation, market trends, and our anticipated growth and profitability all constitute forward-looking statements for the purpose of the Safe Harbor provisions under the Private Securities Litigation Reform Act. These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially.

We refer you to our most recent Form 10-K and Form 10-Q filed with the SEC in particular to the section entitled Risk Factors and to other reports that we may file from time to time with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. These forward-looking statements speak only as of the date hereof and we disclaim any obligation to update these forward-looking statements.

In addition, Cavium reports gross margins and net income and basic diluted net income per share in accordance with GAAP and additionally on a non-GAAP basis. Management believes the non-GAAP information is useful because it can enhance the understanding of the Company's ongoing economic performance and Cavium, therefore, uses non-GAAP reporting internally to evaluate and manage the Company's operations.

Cavium has chosen to provide this information to investors to enable them to perform comparisons of operating results in a manner similar to how the Company analyzes its operating results. The full reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued earlier today and we ask that you review it in conjunction with this call.

I would now like to turn the call over to Syed Ali.

Syed Ali

Today we are extremely pleased to report yet another record quarter with strong double digit sequential growth and further accelerated year-over-year growth.

In brief, Cavium’s third quarter revenue was a record $24.5 million which represents a 14% sequential and 73% year-over-year growth. Non-GAAP gross margins came in at 62.8%. Non-GAAP operating margins increased from 16.8% in Q2 to 19.2% in Q3. These higher operating margins along with higher revenue increase non-GAAP operating income 30% sequentially. Non-GAAP net income was $4.6 million or $0.11 per share and our GAAP net income was $1.8 million or $0.04 per share.

Art Chadwick, our CFO, will provide more details on the Q3 financial results and Q4 guidance shortly.

I will now move on to give you some more details on our Q3 revenues along with a general update on the demand environment after which I will discuss design wins and new customer and partner relationships. Following this I will give you an update on the Star Semiconductor acquisition.

In Q3 we saw strong growth in both the broadband consumer and the enterprise and data center segments. The enterprise and data center segment continued to be the largest segment at 64% of product sales and grew 8.5% quarter-over-quarter. The remaining segments including consumer broadband, access service provider and software services segment combined to achieve 36% of sales for the quarter and grew 22% sequentially.

By contrast, in Q2 the enterprise data center segment grew 7% sequentially while the non-enterprise data center segment grew about 40%. The broadband and consumer segment continued to experience extremely robust growth with continued strong sales into the home segment for Sumitomo in Japan and a European service provider.

We also have some new designs starting to go into production in the SOHO and some B segments for the 802.11 wireless plan and broadband routers. Growth in the enterprise and data center segments was driven by record sales into the network security segment and new product cycles in the data center with customers such as F5 networks and [Centrix].

Now I would like to discuss the current demand environment. All of us are aware of the uncertain macro environment outlook that exists today so it would be prudent for us to prepare ourselves for increased customer cautiousness this quarter. Reducing some pockets of softness in certain areas of our run rate business and one area of our concern for us this quarter, which is Q4, is demand for higher end boxes for the service provider and data center segment. This is typically equipment in the $20,000 to $100,000 range. Although this is not yet a huge segment for us it nevertheless will have some impact for us.

On the positive side, in Q4 we expect to see continuing growth in the broadband, SOHO and medium business segments in Q4. We are particularly excited about the prospects of Actiontec and GTE. We have announced that Actiontec CPE Box for Verizon’s file service uses a dual core Cavium OCTEON processor. Volume shipments will begin late this year and we expect this deployment to deliver excellent growth during the first half of 2009.

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