CAVM

Cavium, Inc. (CAVM)

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Cavium Networks, Inc (CAVM)

Q3 2009 Earnings Call

October 27, 2009 5:00 pm ET

Executives

Angel Atondo - Marketing Communications Manager

Syed Ali - President and CEO

Art Chadwick -VP and CFO

Analysts

Sanjay Devgan - Morgan Stanley

Tim Luke - Barclays Capital

Quinn Bolton - Needham and Company

Hans Mosesmann - Raymond James

Arnab Chanda - Roth Capital

Dan Morris - Oppenheimer

Kevin Cassidy - Thomas Weisel Partners

Sandy Harrison - Signal Hill

Anil Doradla - William Blair

Gary Mobley - Noble Financial Group

Christian Schwab - Craig Hallum Capital Group

Alex Gauna - JMP Securities

Colin Denman - D.A. Davidson

Allan Mishan - Brigantine Advisors

Presentation

Operator

Welcome to the Cavium Networks Q3 Earnings Call. (Operator instructions)

I would now like to turn the conference over to our host, Angel Atondo, Marketing Communications Manager.

Angel Atondo

Good afternoon, everyone. Welcome to Cavium Networks' third quarter 2009 financial results conference call. 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 revenues, gross margins, 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 obligations to update these forward-looking statements.

In addition, Cavium reports gross margin and net income and basic and 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 will now turn over the call to Cavium's Syed Ali.

Syed Ali

Thanks, Angel. And thanks to everyone for joining us today. In brief, Cavium's third quarter revenue was $25.9 million, which represents a 14% sequential increase, and a 6% year-over-year growth. Non-GAAP gross margins grew 370 basis points quarter-over-quarter, and came in at 55.7%, which resulted in a non-GAAP net income of approximately $0.8 million or $0.02 per share.

Our GAAP loss for the quarter was $4.2 million or $0.10 per share. During the quarter, we also generated a healthy cash flow. Art will provide more details on the Q3 financial results and Q4 guidance shortly.

I will now move on to give you a breakdown of our Q3 revenues, along with the general update on the demand environment. I will discuss design wins and new customer and partner relationships.

Q3 was our second quarter in a row this year of strong double-digit sequential topline growth. In our last conference call, we had mentioned that unlike our growth in the first half of calendar year 2009, which was primarily driven by sales into the broadband and consumer segment that we expected our growth in the second half of calendar year 2009 to be driven strongly by sales into the enterprise and datacenter segments.

This is now happening in a way which is even more robust than our expectations. This quarter, the enterprise and datacenter segment was up from 43% of sales in Q2 of 2009, to 51% of total revenues and grew 34% quarter-over-quarter. Growth in this segment was driven by several new product ramps and to a smaller extent a continuing recovery in the run rate business.

The securities segment, which was very soft in the first half, also had a strong rebound in the third quarter. The remaining segments, including consumer broadband, access service provider, and software and services segment combined for 49% of sales, and declined 2% quarter-over-quarter.

The broadband and consumer segment was the second largest segment and came in at 36% of revenues, and declined 6% quarter-over-quarter. Our top customer in Q3 was once again Cisco Systems, which came in at 26% of sales and grew 61% quarter-over-quarter. The other two 10% customers were Actiontec for Verizon, and Sumitomo Electric for NTT, which were 11% and 10% respectively, both of which were down due to softness in fiber to the home deployments in Q3.

Other customers who had excellent sequential growth include, Citrix, Juniper, F5, Huawei and SonicWall, all of which are starting new product cycles that use our processors.

Now, I would like to move on and talk about the business and booking trends that we have seen in Q3. Q3 was a record bookings quarter again. Book-to-bill was once again well in excess of one. Additionally, the booking trends were very linear right through the quarter.

In Q4 we expect revenues will continue to be driven by new product ramps, as well as a continued in the run rate business. We expect continued strength in the enterprise and datacenter segment, driven by increasing sales to our top enterprise customers including Cisco, Juniper, Citrix, F5 and Brocade.

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