CAVM

Cavium, Inc. (CAVM)

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Cavium Networks, Inc. (CAVM)

Q2 2008 Earnings Call Transcript

July 16, 2008 5:00 pm ET

Executives

Angel Atondo – Marketing Communications Manager

Syed Ali – President and CEO

Art Chadwick – VP and CFO

Analysts

Tim Luke – Lehman Brothers

Quinn Bolton – Needham & Co.

Krishna Shankar – JMP Securities

Allan Mishan – Oppenheimer

Gary Mobley – Piper Jaffray

Sandy Harrison – Signal Hill

Kevin Cassidy – Thomas Weisel Partners

Arnab Chanda – Deutsche Bank

Sanjay Devgan – Morgan Stanley

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Cavium Networks Q2 2008 Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the presentation there will be question-and-answer period. Please limit your question to one and refrain from multi-part questions in order to give management time to answer as many questions as time permits. If time permits additional questions will be taken. With that, I will turn the call over to Angel Atondo, Marketing Communications Manager. Please go ahead.

Angel Atondo

Thank you. Good afternoon, everyone, and welcome to Cavium Networks second quarter 2008 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 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 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 reconsolidation 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?

Syed Ali

Thanks, Angel, and thanks to everyone for joining us today. Today we are extremely pleased to report a record quarter with record sequential growth and further accelerated year-over-year growth. In brief, Cavium's first quarter revenue was a record $21.6 million, which represents an 18% sequential and 70% year-over-year growth.

Non-GAAP gross margins came in slightly above our guidance at 64.2%. Non-GAAP operating margins increased from 12.6% in Q1 to 16.8% in Q2. These higher operating margins, along with the higher revenue, increased non-GAAP operating income 56% sequentially. Non-GAAP net income was $3.8 million, or $0.09 per share, and our GAAP net income was $2.1 million, or $0.05 a share. Art will provide more details on the Q2 financial results and Q3 guidance shortly.

I will begin by giving some more color on Q2 revenues, along with a general update on the demand environment, after which I will discuss design wins, product news, and relationships. Following this, I will talk about the Star Semiconductor acquisition, which we announced just this evening. In Q2 we had a strong growth across the board in all segments of the market we serve.

This quarter we saw an accelerated diversification in our revenue mix. The enterprise and data center segment was the largest segment at 65% of sales and grew 7% quarter-over-quarter. The remaining segments, including access service provider, broadband consumer, and software and service segment combined to achieve 35% of sales for the quarter and grew 40% sequentially. By contrast, in Q4 the enterprise – I'm sorry in Q1 the enterprise data center segment grew 5% sequentially, while the non-enterprise data center segment grew at about 34%. So we had increased growth in both segments of the market.

Our growth this quarter was driven by lead customers in all three market segments that we serve. Sales to Cisco Systems continue to be very strong as newly introduced products started to ramp in the enterprise and access and service provider market segments. Sumitomo Electric Networks, Cavium's customer in the broadband fiber-to-the-home segment, to whom we started shipping volume production to in Q1, also had an extremely strong quarter in Q2. We also saw growth from F5 Networks and Blue Coat Systems in the data center segment as new platforms went to production.

Now I would like to move on and give you some more color on the overall demand environment in our target end markets. In past conference calls, we have been talking about the 10X growth in line rates at every node in the network. We have talked about a range of new Web 2.0 applications in the enterprise and at the consumer that are driving the need for intelligent processing at the Layer 4 to Layer 7 level, the exponential growth of video traffic and mobile data traffic. We have also talked about the need for Layer 3 to Layer 7 security across the network. These long-term growth trends have recently been published by Cisco as part of the Visual Networking Index initiative which forecasts and explores the implications of the growth of IP, video, mobile data and enterprise data traffic from 2007 to 2012.

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