Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Cavium Networks, Inc. (NASDAQ:CAVM)

Q4 2012 Results Earnings Call

January 31, 2013 5:00 PM ET

Executives

Angel Atondo - Senior Marketing Manager

Syed Ali - President and CEO

Art Chadwick - Vice President and CFO

Analysts

Blayne Curtis - Barclays

Sundeep Bajikar - Jefferies

Anil Doradla - William Blair

Harlan Sur - J.P. Morgan

Hans Mosesmann - Raymond James

Alex Gauna - JMP Securities

Steven Eliscu - UBS

Quinn Bolton - Needham and Company

Brian Modoff - Deutsche Bank

Phillip Lee - Lazard Capital Markets

Kevin Cassidy - Stifel Nicolaus

Krishna Shankar - Roth Capital

Operator

Good day, ladies and gentlemen. And welcome to the Cavium, Inc. Fourth Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation, the conference will be opened for questions. (Operator Instructions)

As a reminder, this conference is being recorded today, January 31, 2013. I would now like to turn the conference over to Angel Atondo, Senior Marketing Manager. Please go ahead, ma’am.

Angel Atondo

Thank you. Good afternoon, everyone. And welcome to Cavium’s fourth quarter 2012 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 purposes 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 the date hereof and we disclaim any obligation 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 on-going economic performance and Cavium therefore uses non-GAAP reporting internally to evaluate and manage the company’s operation.

Cavium has chosen to provide this information to investors to enable them to perform comparison of operating results in a manner similar to how the company analyses 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 the call over to Syed Ali. Syed?

Syed Ali

Thanks, Angel, and thanks to everyone for joining us today. In brief, Cavium’s fourth quarter revenue was $66.4 million, up 9% sequentially from Q3 and up 18% year-over-year. GAAP gross margin came in at 64.5%. Non-GAAP net income was $10.6 million or $0.20 per share.

Our GAAP net loss for the quarter was $78.8 million or $1.56 per share, which includes two non-cash charges, one, related to goodwill impairment and the second, to establishing valuation allowance against our U.S. net deferred tax asset. Art will discuss this in more detail shortly.

Q4 was another strong quarter with strong topline growth, increasing gross margins and accelerating operating margins. The strong sequential growth in Q4 was driven by growth across all our segments.

In Q4, our Enterprise, Data Centre and Service Provider markets experienced double-digit growth in the Service Provider segment, which was somewhat offset by a softer environment in the Enterprise and Data Center markets.

In the Service Provider market, growth was primarily driven by continued ramps in the 3G, 4G wireless infrastructure market. We also saw strength in the Broadband and Consumer markets driven by product shipments for wireless display and over-the-top products.

In Q4, our top customer was once again Cisco Systems, which came in at 17% of sales and was down 22%, sequentially. In Q4, we saw the full effect of our customer de-emphasizing a Data Center product line in which we have significant content.

However, on the flip side we saw increase business from other customers in that end market. There were no other 10% customers. Art will provide more details on the Q4 financial results and Q1 2013 guidance shortly.

I would now like to provide an update on Q4 design wins. Our overall design win momentum continued, and pipeline remains very strong and similar to what we have seen over the recent quarters.

Design wins in Q4 was spread across many markets and performance points. The Enterprise and Service Provider market segment delivered the highest design wins based on expected annual revenues followed by the Broadband and Consumer segment.

In the Enterprise and Service Provider market we closed new design wins at a number of Tier 1 customers, including Alcatel-Lucent, Cisco, F5, Huawei and others. New design wins for applications such as routers, wireless land controllers, DPI blade, data center appliances, and enterprise access points.

On the Broadband and Consumer side, we won several new designs at Asian customers. Our designs in the segment were for applications such as over-the-top video gateway, wireless display adapters and low end routers.

Now I’d like to update our progress on our new products and initiatives. We have demoed and sampled our NEURON product at multiple customers worldwide and evaluation are progressing very well since the product is meeting and exceeding the development targets we have set for this product line.

As a result, we are pleased to announce that we have received our first design wins in this segment. We expect to continue to drive additional design wins over the upcoming quarters.

Our OCTEON Fusion product shipped into a large small cell deployment in Asia in Q4 and is in deployment now. We expect revenues to increase for this segment in Q1 significantly, although it offer smaller base. We have also sharply increased our engagement at a number of customers worldwide.

Our PureVu wireless display product has started to ship to multiple handset vendors for wireless display functionality and also in over-the-top OTT applications. This product is in the initial phases of its launch and we will closely monitor the sell-through over the next couple quarters to ascertain the growth that we can expect for 2013.

Also we continue to make excellent progress on our roadmap products and have expanded our early engagements with customers, potential customer feedback on our Project Thunder processors has been extremely positive, which in turn has made us much more positive on both the market potential and our competitive position and value proposition for these new products.

Today we also made new announcements in the software area, we announced the new SDK 3.0 Software Development Kit for all our OCTEON processors that provide a comprehensive, fully integrated 69 Carrier Grade quality Linux 3.x distribution and bare metal software capabilities that can take advantage of the wide range of hardware accelerators included in all our OCTEON processors.

It also includes device drivers, simulation and tracing tools along with support for virtualization in a holistic integrated environment, along with commercial level support and service options that will reduce development time and cost for users.

We also announced availability of the Project Thunder Software Development Platform. The Thunder Software Development Kit offers application programmers an accessible platform to start developing and porting their software on Cavium’s upcoming Project Thunder 64-bit ARMv8 processors.

The Thunder SDK offers Linux operating system, virtualization support, tool change and example applications that will enable independent software vendors and programmers to start distributed computing development on the latest 64-bit ARMv8 architecture.

Middleware such as enterprise application and data integration and messaging can be ported. Full applications such as web front-end like LAMP and Memcachedcan are also available which can scale across a massive number of virtual machines.

Data Center and Cloud Management applications can be ported to setup full scale -- full cloud scale workloads with multiple application tiers with dynamic provisioning and on-the-fly upgradeability.

The Project Thunder SDK provides programmers access to an array of cache coherent 64-bit ARMv8 CPU cores, Interrupt Controller, Network connectively, Mass storage interface, Timers, SMMU and console. All device drivers and utilities required for the Project Thunder platform components are included.

The SDK also includes a cross development platform enabling programmers to write their own applications or build third-party packages for Project Thunder. The SDK includes a UEFI compliant firmware which is used to boot OS images.

This SDK will enable developers to develop complete applications for Cavium Project Thunder family of multi-core ARM 64 processors in advance of the silicon availability and also help reduce time to production after silicon availability.

In conjunction with this announcement, we also announced that we are collaborating with Red Hat sponsored Fedora Project. The Fedora Project software with Project Thunder processors will provide early adopters with an end-to-end development solution for next-generation cloud and Data Center markets.

Also in Q4 we announced Cavium joined other industry leaders in the Linaro Enterprise Group, which is developing open source software for the ARM architecture. The Linaro Enterprise Group will collaborate and accelerate the development of foundational software for ARM Servers and Linux.

The LEG benefit have broadened the three imputations including time-to-market acceleration, lower development cost and access to innovative and differentiated system fundamental to the ARM ecosystem.

Also in Q4, we were ranked for the fifth consecutive year in Deloitte’s Technology Fast 500, a ranking of the 500 fastest growing technology, media and telecom companies in North America.

Cavium’s revenue grew 378% between fiscal year 2007 and fiscal year 2011. We also received the GSA award for Most Respected Public Semiconductor Company achieving $258 million to $1 billion in annual sales.

In the recent quarter, we also highlighted our products and solutions at a number of trade shows and conferences, including CES, where we showcased our Broadband and Consumer Solutions and also sampled -- also announced the production shipments of our PureVu-based wireless display dongle for Samsung’s Galaxy III and Galaxy Note smartphones. We also showcased our small cell solutions in the Small Cells America Trade Show.

I would now like to move on and give a brief outlook on our served end markets for Q1. Booking trends in Q4 continued to be strong, following the pattern that we have seen over the last few quarters. For Q1 we expect growth in our core Enterprise and Service Provider segment being partially offset by softness in the other segments.

For Q1 growth in our core Enterprise and Service Provider markets will be much more broad-based than in Q4. We expect our Enterprise and Data Center areas to pick up strength in Q1 after some softness in Q4, driven by new product cycles. We expect a wide and wireless infrastructure business to continue to be strong in Q1.

We expect our Broadband and Consumer business to be down this quarter following a strong Q4. We have a number of customers who have build product and shipped into the channel in Q4 and we see some seasonality for Q1.

Now a quick note on our restructuring activities, our restructuring efforts that we have talked about over the last couple of quarters is now complete. In the Broadband and Consumer product area we have reduced our investment by reducing the market that we were targeting.

We have also completed restructuring of the Software and Services business to eliminate investments on certain segments like the automotive markets, while increasing the focus on software and services for our core Enterprise, Service Provider market along with allocating more resources to delivering software and driving design wins for Cavium core products. The resulting reduction in R&D expenses is being plowed back into our core products, in the Enterprise, Data Centre and Service Provider groups.

We believe that we now have excellent resource alignment between our focus markets of Enterprise, Data Centre and Service Provider and are very well-positioned to address the new product initiatives that we have announced.

On that note, I would now like to turn the call over to Art Chadwick, who will provide a detail discussion of Q4 financial results and guidance for Q1 and after that we’ll be happy to take your questions. Art?

Art Chadwick

Great. Thanks, Syed, and thanks to all of you for joining us today. I’ll first go through Q4 financial highlights and then provide our guidance for the first quarter of 2013. But first, I would like to remind you that in our press release we announced both GAAP and non-GAAP results, and ask that you refer to our press release for the detailed reconciliation between the GAAP and non-GAAP results that I will discuss in a moment.

Additionally, the information we provide in this call regarding sales by market, does involve certain management judgment as to which market each sale is assigned and you should consider that when analyzing such information.

So as Syed mentioned, Q4 was a good quarter for us. We had strong sequential revenue growth, gross margin expansion, operating margin expansion, non-GAAP EPS growth and positive cash flow.

Q4 revenue was $64.4 million, up 9% sequentially, with sales increasing in all reported market segments. Sales into Enterprise and Service Provider were $46.9 million or 71% of total sales, up 5% sequentially. Sales of Software and Services were $7.4 million or 11% of sales, up 9% sequentially.

Sales in the Broadband and Consumer were seasonally strong at $12.1 million or 18% of sales, up 23% sequentially. Cisco was our only 10% customer with sales of $11.5 million, or 17% of sales. This was down 22% sequentially due primarily to their exit from ADC market. However other Cavium customers made up a shortfall, as sales to our top five customers in Q4 were 49% of sales, as compared to 48% in Q3.

Non-GAAP gross margins were 64.5%, a 130 basis point sequential improvement over Q3 due to lower product costs and higher sales volume. Non-GAAP operating expenses were $33.6 million, a 3% sequential increase from Q3. Non-GAAP R&D expenses were $22.0 million and SG&A expenses were $11.6 million.

Restructuring activities decreased total company headcount from 856 employees in Q3 to just 831 employees at the end of Q4, a net decrease of 25 employees during the quarter. We recently restructured our Software and Services Group and reduced headcount in non-strategic areas, including automotive. The resultant reduction in R&D expenses are being redeployed into our core enterprise, data center and service provider markets.

Direct software and services revenues are now expected to be less than 10% of total revenue in Q1 2013 and beyond. And as such, we will no longer manage or report software and services as a separate business or market segment.

As a result of performing our annual goodwill impairment test and restructuring of software and services business, we determined that certain intangible assets were impaired and recorded a $33.3 million non-cash, goodwill and intangible asset charge in Q4.

Non-GAAP operating income was $9.2 million or 13.8% of sales. This was a 400 basis point sequential expansion of operating margins due to higher sales, expanded gross margins and managed increase in operating expenses.

In regard to taxes, we established a full valuation allowance against our U.S. net deferred tax assets, which resulted in a one-time, non-cash charge of $43.5 million. Had we not established that valuation allowance, we would have recognized a tax benefit of $2.1 million during the quarter.

The decision to establish the valuation allowance was based on an assessment we made at year-end that considered factors, including 2012 actual financial results as well as projected income. This accounting treatment does not in any way preclude us from using our tax loss carryforwards or other deferred assets in the future.

Resulting GAAP net loss was $78.8 million, or $1.56 per share, due primarily to the goodwill impairment in tax charge. Non-GAAP net income was $10.6 million or $0.20 per share, which includes the 2.1 million income tax credit that would have been recorded had we not established the tax valuation allowance.

Q4 non-GAAP results excluded $89.5 million in non-GAAP adjustments, comprised of $43.5 million due to the valuation allowance, $33.3 million of impaired goodwill and intangible assets, $8.6 million in stock-based compensation expense and $4.1 million in amortization of acquired intangible assets, restructuring and other charges as detailed in our press release reconciliation.

We ended the quarter with $76.8 million in cash and equivalents, up from $67.3 million in Q3. Inventory at the end of the quarter was $46.5 million, up $2.5 million from Q3 due to increased inventory staged for higher Q1 sales.

Accounts receivable were $33.6 million which equates to DSOs of 47 days. This was a further improvement over DSOs of 50 days in Q3. The improved AR was a result of the very linear shipping quarter as well as good collections. However, our longer-term DSO model is still 60 days, so DSOs may increase going forward.

I’d now like to provide more specific guidance for the first quarter of 2013. Strong Q4 bookings should lead to sequential revenue growth in Q1. Sales in the first quarter should increase to between $68.5 million and $70.0 million, which is the midpoint, would drive 4% sequential growth and 30% growth over the same quarter last year. This would be our fourth quarter of consecutive revenue growth.

By market segment, we expect enterprise and service provider revenue to increase and broadband and consumer revenue to decrease sequentially. Non-GAAP gross margins should expand by another 50 to 100 basis points in Q1, driven by good product mix.

Non-GAAP Q1 operating expenses are expected to be between $35.0 million and $35.4 million, which is a midpoint would be a 5% sequential increase over Q4, due primarily to beginning of the year salary increases and payroll taxes. Interest expense in Q1 is expected to be approximately $200,000.

Income taxes in 2013 are now expected to be between 3% and 5% of non-GAAP income, which is a decrease from our previous guidance of 5% to 7%. Taxes in 2014 should be between 8% and 10% of non-GAAP income, which is lower than previously expected. Our non-GAAP share count in Q1 is expected to be approximately 55 million shares.

Non-GAAP net income in Q1 will exclude approximately $10 million in stock-based compensation expense, $2 million in amortized intangible assets and approximately $1 million in restructuring charges. And based on those assumptions, non-GAAP EPS in Q1 is expected to be between $0.17 and $0.19 per share.

And on that note, I’d like to hand the call back to the operator so we can begin our Q&A. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Blayne Curtis from Barclays, please go ahead.

Blayne Curtis - Barclays

Hey guys, good afternoon and great results and guidance. Maybe just a little color on the guidance between enterprise and service provider where you see the strengths and then more specifically, you had the big drop as expected in your largest customer. They finally announced to cast 3K. Do you expect that customer to come back for you and drive growth?

Syed Ali

Yeah, Curtis. This is Syed. Regarding the color on the core business, if you remember or if you look at our past conference calls, a lot of the growth have actually came from sharply increased sales in the wireless infrastructure and things like base stations, radio network controllers and EPC and that was kind of one of the primary drivers of growth for us in our core market in the back half of the year.

However, as we move forward right now for Q1, we are seeing that the enterprise and data center markets starting to recover a bit from the softness in Q4 and also become a significant contributor to the overall growth rate in Q1. And regarding the new platform from our largest customer, it has been announced and we are going to be doing our initial shipments. We do have backlog for it for Q1.

Blayne Curtis - Barclays

Thanks. And then you announced first design wins for NEURON. If you could maybe talk about what the timing of -- maybe those wins would be, obviously early here but what are your expected revenue this year?

Syed Ali

No. I think, revenues were pretty much all our platform unless you get lucky, it takes time. So we expect revenues for these wins to start flowing in, in the back half of ‘14. So typically about a year and half or so from now.

Blayne Curtis - Barclays

Perfect. And then just one quick question, if I may, the interest expense has popped up. I mean, you are guiding to 200k going forward. Is that the right range and I guess, you ticked on a little debt?

Art Chadwick

That is the right range. No, we don’t have any bank debt per se. This is imputed interest based on long-term license agreement. So if you pay a license over a period of time, you actually have to impute the interest that’s embedded in that payment. So that’s what that is expensed -- that’s included in the guidance that I provided for Q1. And you’ll also see it in our Q4 income statement, we had interest expense for exactly the same reason.

Blayne Curtis - Barclays

Got you. And just one quick one, if I may, the software going away, is that just now rolled into the other two segments?

Syed Ali

In terms of reporting, yeah.

Blayne Curtis - Barclays

Okay.

Syed Ali

So overall, as we’ve been talking about over the last couple of quarters, we’re going to restructure the business, reduce kind of focus onto the core markets and also inward looking. You saw a stream of announcements starting to coming out on very, very comprehensive software for our processors. So essentially, we expect this to be kind of range bound and for the year, we expect this to be less than 10% and that’s the reason why we took this -- why we took this step.

So what we’ll go ahead and do is take this software and allocate it into either our core markets, which most of it should be and balanced into the broadband and consumer segment, which should be pretty nominal?

Blayne Curtis - Barclays

Thanks so much and congrats again. Thanks guys.

Art Chadwick

Thanks Curtis.

Operator

And our next question comes from the line of Sundeep Bajikar with Jefferies, please go ahead.

Sundeep Bajikar - Jefferies

Hi guys. Nice job in the quarter. Can you give us some idea what the mix was for Cavium’s wireless infrastructure revenues both for the fourth quarter and full year. And what portion of it was base station. Related to that, I guess, if we assume that wireless infrastructure would be the most important growth driver in 2013 then how would you characterize the mix of base station versus backhaul and EPC opportunities in terms of expected revenue growth?

Syed Ali

Yeah, Sundeep. So when you take a look at our, kind of, infrastructure business and wireless infrastructure business overall, the infrastructure business, about a year, year and a half ago was probably 2.5 to one, I’m sorry, the enterprise being 2.5 to one to the infrastructure business and now, it is less than two.

So overall though both -- though the combined segment has grown, wireless infrastructure has obviously grown faster compared to the enterprise. However, moving forward into 2013 there are some interesting new platforms on the enterprise and data center side that are starting to go to production at companies like Cisco, F5, Citrix, Palo Alto Networks and the like which should start driving a decent growth on the enterprise market again compared to 2012.

Sundeep Bajikar - Jefferies

Okay. That’s helpful. As a follow-up, on the longer-term basis perhaps how should we think of the TD LTE or China LTE opportunity for Cavium both in base station as well as other parts of the mobile infrastructure, at least one of your base station customers appears to have technology that they can leverage in that market. In what timeframe, should we expect to see Cavium’s revenue growth in that particular market?

Syed Ali

Regarding TD LTE, it’s more than one customer of ours who has a solution. So when you take a look at most of our wireless infrastructure customers, they have kind of a base design and then they modify it or have different software and different radio for the various flavors of LTE which are around the world.

So we will have more than one customer participate in that. In fact, taking a look at the contractors that have been selected for the large Chinese deployment, I think we have approximately two to three of the fixed vendors having Cavium base solution.

Sundeep Bajikar - Jefferies

That’s great. Very helpful. Just last one from me. It sounds like you’re making really good progress on Thunder. Can you just update us on potential timing for revenues or if it hasn’t moved up from your previous expectations?

Syed Ali

I think the progress on project Thunder has been very good and as you can see we have released very, very comprehensive software development kit, which actually models the entire chip. So typically for example, some peers or competitors use things like FPGAs and when you use FPGAs you cannot map the whole chip onto an FPGA. So you map portions of the core, you map portions of the data pack.

So it’s a very, very skinny type of a stimulation environment. But as with Cavium right now, we have a full multi-code environment with low-to-high score counts, that can be addressed. And actually users can go ahead right now both OEMs and independent software vendors actually go ahead and develop the software and when the silicon comes out that software will run seamlessly.

So this is the first time, we have really released a software development kit, a very, very comprehensive software development kit, which is far ahead of the need in the market just to be able to accelerate it and intersect the silicon and also reduce the production ton to revenue.

Overall revenues again, I think from an overall view points, we haven’t exactly specified our sampling dates. But what we have said publicly is that we expect revenues for this segment in the back half of ‘14.

Sundeep Bajikar - Jefferies

Great. Thank you so much.

Syed Ali

Thanks Sundeep.

Operator

And our next question comes from the line of Anil Doradla with William Blair, please go ahead.

Anil Doradla - William Blair

Good job, given what’s going on at Cisco. Syed, can you give us a sense of how Cisco will shakeout in 2013 given some of the ADC stuff has gone down. Now, they move from 24% to 17%. Was that primarily driven by the segments that there were exiting or were there some other dynamics and then I have follow-up.

Syed Ali

Yeah. When you take a look at the reduction, it was primarily driven by the exit from the ADC markets, pretty much all of the other components came in as expected. And like I said, other customers in that market segment did pick up a lot of the flag. So moving forward, I think from a Cisco viewpoint, we do expect growth year-over-year.

In any given quarter, based on any specific event, it’s difficult to predict, but year-over-year, we definitely think that we should show -- we should see, we expect good growth from Cisco in 2013.

Anil Doradla - William Blair

And Syed, can you just quantify cat 3K, not that they are shipping, when will they hit sweet spot. How much could that be because that’s a high volume application for Cisco and that could be very positive long-term from you -- from your point of view, right?

Syed Ali

I think definitely it’s a high volume platform and typically as has been our experience with previous enterprise platforms at our largest customer, everything takes time to get to the run rate. So a rule of thumb that we use internally as to kind of get to the run rate, it could take anywhere from five to six quarters from initial.

So generally customers don’t -- in this market, don’t just stop shipping the previous one and start hitting the new one. It’s kind of a phased reduction in the older model and a phased increase in the newer model.

Anil Doradla - William Blair

Great. And finally, one of the key criticisms has been the increased R&D cost as you go to some of the more cutting edge process notes. This is especially in the context of what’s going in Thunder fusion. So can you help us understand issues related to R&D utilization whether you could reuse some of the OCTEON work or I mean, how should we be looking at your R&D efforts as we go to smaller process notes? Thanks.

Syed Ali

Anil, I think arguably we are probably one of the most if not the most efficient company in developing a, new technology and then b, in developing our first products on new notes. This year, you’ll see a stream of 28 nanometer products. So the highest cost of R&D is in kind of first development of it and we are winding that to an end, and then subsequent parts are lot smaller investments.

So, overall, you’ve seen that despite the multiple product initiatives that we have undertaken on 28. There is a lot of reusable IP and we have very nice methodology on the design side to build modular blocks that are very easily reusable within the various product family. So overall, we are able to execute this of it, a very, very modest R&D budget compared to some of our competitors and peers who are spending a lot more money doing this.

Anil Doradla - William Blair

Thanks, a lot, Guys.

Syed Ali

Thanks, Anil.

Operator

And our next question comes from the line of Harlan Sur with J.P. Morgan. Please go ahead.

Harlan Sur - J.P. Morgan

Hey, good afternoon. Great job on the quarter, good execution and the solid outlook and very good bookings results in Q4. But as you guys know, the broader macro environment continues to be quite challenging. So maybe you can just discuss, Syed, how orders have trended here through the first month of this quarter?

Have bookings remained strong given all of the park cycles you guys are driving or have you been seeing some deceleration in the forecast? Run rates also, any color in terms of current order trends, the differences between your service provider and enterprise data center customers that would be helpful as well. And then I have a follow-up question.

Syed Ali

Harlan, I think overall, the bookings have been strong. I think they kind of turned for us, probably in the February, March of last year timeframe. And every quarter we’ve had a book-to-bill ratio well in excess of 1, which has allowed us to deliver a pretty significant sequential increases quarter-over-quarter.

Now, one of the points that I would like to make here is that some things -- is a point that have started to stress a little bit more in some of the tech conferences that we’ve had over the last quarter or so and that is.

Overall, where we stand in Q1 2013 versus where we were at the end of ‘011, beginning of ‘12. There is one significant difference and the difference is the overall customer base has diversified pretty nicely and it has diversified in the enterprise. It has diversified in the data center and it has diversified in the service provider.

And even in the service provider side of the equation where we were primarily shipping to wireless infrastructure customers, we are starting to see pretty decent growth on the wide infrastructure also. So overall, our base of customers has expanded nicely. You can see now that if one customer has a little bit of a challenge in a given quarter, it doesn’t suite the company.

We have many, many customers and each one of these may not be significantly large as a standalone. But overall when you add them up altogether, they have started to give us much more stability and much more predictability of our revenue.

So, overall, standing where we are at the beginning of 2013, we feel pretty good and bookings in January have continued to be strong. Again, probably, when you take a look at last quarter, as we get into Christmas timeframe things kind of close down but compared to December actually, January is a little bit of an uptick better.

Harlan Sur - J.P. Morgan

Great. Thanks for that insights on the customer diversification because I agree that is important. You guys kicked off shipments into small cell LTE deployments in Q4. As this deployment is now in full ramp, I’ve got to believe that this has attracted other potential customers for Cavium.

So maybe, Syed, if you can just talk about any other design wins you’ve captured in small cell and when we can expect these potential new opportunities start to add to your top line growth?

Syed Ali

Harlan, regarding small cells, one of the significant value propositions that we are bringing to market is we have a reference design not only on the hardware side, but we have a complete production quality software stack. And when you take a look at other companies, there is a lot of companies out there that are developing solutions for this. But right now being in deployment at large service providers in Asia, definitely gives us much more credibility in the market than just being able to do demo.

So this definitely has attracted a lot of interest and I’ve said in my prepared comments, the overall engagements regarding small cell have increased very sharply. So we have that and this is channel. The small cell market is a little bit different. In this small cell market, you not only have larger kind of Tier-1 OEMs bringing product to market, but also you have smaller, almost wide-box type guys who are also bringing products to market for some of the larger guys.

So it is an interesting market and having started to ship in production definitely gives us a lot of credibility. So over this year, we expect to have a good traction and definitely get more design wins in this segment.

Harlan Sur - J.P. Morgan

Excellent. Thank you very much.

Syed Ali

Thanks, Harlan.

Operator

And our next question comes from the line of on Hans Mosesmann with Raymond James. Please go ahead.

Hans Mosesmann - Raymond James

Thank you. Congratulations on a good quarter and outlook. Syed, now that you have a chance to work on Project Thunder and talk to lots of customers. What’s your expectation on, if there is any change in terms of the size of the opportunity?

Syed Ali

I think from an overall viewpoint on here, Hans, as I’ve said in my prepared comments, when we started on this we had done some initial conversations. But as we moved from mid of last year towards the end of 2012, overall, we’ve been able to have a lot more interaction with customers and have done some fine tuning in terms of some of the product features, requirements and integrate that into our products.

So, overall, where we stand today -- first, a, if you ask the question, is this a real market which is substantial and the answer I think that we are coming to is yeah. And number two, the product definition that we have and the value proposition that we have is being endorsed by the multiple customers that we are talking to.

So, if you ask me six-months ago versus now I feel definitely a much more positive about both the market size. I think it’s a little bit larger than what we thought, and secondly about our competitive position in the market after reviewing the competitive offerings of the other players in this camp.

Hans Mosesmann - Raymond James

Okay. And then quickly as a follow-up, can you just talk about the competitive dynamic in the current environment in multicore generally? Thanks.

Syed Ali

The current dynamic is as -- it is as competitive as it has been in the past. When you take a look at it, kind of the main competitors are pretty much the same names. And essentially, we don’t expect this to dramatically change. So overall this has been a very competitive market with larger competitors than Cavium, and we just need to keep executing and we think we should be doing okay.

Hans Mosesmann - Raymond James

Great. Thank you.

Syed Ali

Thanks.

Art Chadwick

Thanks, Hans.

Operator

And our next question comes from the line of Alex Gauna with JMP Securities. Please go ahead.

Alex Gauna - JMP Securities

Thanks for taking my question and nice quarter. I was wondering with all the momentum you’ve got going in PureVu you’ve got cut the Samsung. You’ve got the LG and HTC accessories. What’s the real market opportunity for you here now, potentially revenue wise this year but even looking forward in terms of instead of giving out of the adapters and maybe directly into the platform either with silicon or through licensing? Thank you.

Syed Ali

Alex, we definitely see -- I think you visited us at CES booth. You can see kind of the wide range kind of Tier-1 customers bringing products to market. So we think that that market is starting to reach critical mass, but still at this point I don’t really want to as I would have guess in terms of what the size of this market will be and what the adoption will be. Definitely at the highest level, we think we’ll have good growth year-over-year but beyond that it’s a little bit difficult to say.

But anecdotally, what we’ve been hearing from our customers is that consumers are warming up to this and it is -- the pull from customers is more significant or the most significant in Asia compared to the other geographies around the world. So we’ll just take it quarter-by-quarter and take it from there.

Alex Gauna - JMP Securities

Okay. And Then I was wondering if I could talk to us about maybe your efforts on 28 nanometers here. Just remind us what products are going there, where we are in those life stages and what that might mean for your expense line rolling forward here in 2013? Thank you.

Syed Ali

The expense line already has a lot of the 28 nanometer built in, so there shouldn’t be any dramatic changes. If we continue the type of guidance that we have given for OpEx growth as a percentage of top line, we don’t see any real change to that. And as I mentioned, our 28 nanometer development on two products right now is starting to come to an end.

So we will be ready swiftly, starting to deliver products for the 28-nanometer node this year. So, again, we don’t see any dramatic differences or big step-ups in R&D that we have to do. It’s going to be incremental. And if you can take a look at what we are developing in 28-nanometer right now is two OCTEON products and one Thunder product, a lot of shared IP, a lot of reuse. So we believe that we have the OpEx pretty well under control.

And additionally one more aspect is, as me and Art have talked about, we have reduced some of R&D expenditure on the broadband and consumer side and on the software and infrastructure side. So we have already taken this and started to apply back end. So we feel pretty good about the R&D trajectory moving forward.

Alex Gauna - JMP Securities

Okay. Real quick, preparing on that, have any of your 28-nanometer products hit production and customer revenue run rates yet or that?

Syed Ali

No, no. Not at all. In fact, 28 nanometer production revenues are probably back half of ‘014, ‘015. Everything takes forever here.

Alex Gauna - JMP Securities

Okay. All right. Thank you very much. Nice quarter.

Syed Ali

Yeah.

Operator

And the next question comes from the line of Steven Eliscu with UBS. Please go ahead.

Steven Eliscu - UBS

Thank you. First question on gross margin. We’ve seen 400 bps increase in two quarters. We are guiding up to another 100 bps. With the ramp of new enterprise programs that you’ve talked about, is it more appropriate for us to think about your gross margin being closer to the upper 60s then the mid-60s range that you’ve talked about in the recent past?

Art Chadwick

So, Steve, this is Art. But you are right. Our gross margins have expanded nicely over the last few quarters. I guided up another 50 to 100 basis points going from Q4 to Q1. So going into 2013, you’re right. Our higher-end products generally have higher than corporate average margins, so that would help our blended margins.

We also have this 28-nanometer math that will be coming in, which we capitalized and amortized in the cost of sales, which will temper some of that gross margin expansion. So to answer your question, we do expect continued gross margin expansion to a certain extent in 2013. But we don’t want folks to get too carried away with that at this point.

Steven Eliscu - UBS

Okay. But it’s reasonable to think that Q4 gross margin will be higher than Q1. Is that correct?

Art Chadwick

Well, we have not given specific guidance for Q4 yet, but….

Syed Ali

It’s hard enough to do it for one quarter, Steve than to kind of project our four quarters. But generally as we roll out, the mix is shifting positively assuming that the broadband and consumer remains kind of in this range.

Gross margins should be in this range or pick up slightly and the gross margins that are net gross margins. Obviously, we are factoring in some extra math somatization to absorb some of that uptick. But even with that, we expect to have pretty good margins for the year.

Steven Eliscu - UBS

Okay. Understood. And as a follow-up question regarding Thunder, Syed, you’ve consistently talked about the chip being for big iron. What we’ve heard from your ARM-based competitors is the term micro server. Could you tell us from your point of view what the difference is? I mean, you mentioned terms like cache coherency and why is your approach the right one for this market?

Syed Ali

First of all, Steve, we haven’t really given in detail what our product will be. But just at the high level, the traditional concept of micro servers is kind of low core count devices that are not cache coherent in between different processors, number one. And number two, typically these so far have been mainly on the ARM side 32-bit.

So for the server side, we absolutely believe 64-bit is an absolute requirement. Having got 32-bit is an interesting vehicle for a proof-of-concept. But 64 is a compelling -- a compelling 64-bit product is what is really needed to gain market share in the segment. That’s number one.

And number two, there a lot of new nuances if you will. With the new cloud and data center that need to be factored into the architecture of the product. So we believe that we have a really good handle on the requirements. And over the next few quarters, I think we’ll actually be announcing much more details about this product. So that’s all I would like to comment at this time.

Steven Eliscu - UBS

Well done. And if I could just ask one last question on NITROX. One of your competitors just announced some new products in the security market. They talked about relative price-performance being superior to what you have. Even if software keeps -- drives some stickiness in this market, are you concerned that there might be some pricing pressure where you historically haven’t seen it?

Syed Ali

Steve, we did look at that and essentially it’s nothing different from what they have. It’s a single core PowerPC processor with security in it. So it’s not really a security coprocessor to begin with. So it has all the overheads that are needed for a standalone processor. To us it seems like, it seems more like a rebranded single core device than a real security processor for us.

If you take a look at our NITROX, this are really, really high-end product that go into the data center. So, overall, we don’t see this as a significant competitive trend moving forward.

Steven Eliscu - UBS

Okay. Thank you.

Operator

And our next question comes from the line of Quinn Bolton with Needham and Company. Please go ahead.

Quinn Bolton - Needham and Company

Hi, Syed. Hi, Art. Congratulations on the strong result. I had a technical question for you, Syed and then a quick finance situation for Art. On the technical question, you went through the project under software development kit that you announced today. I’m just kind of wondering, is this sort of targeted at existing sort of applications that can be ported over to Project Thunder? Or is it really more for sort of the lower level firmware software drivers? Can you talk to us what kind of software is going to be developed on this system?

And then for Art, you’ve got a number of platforms moving to production, you mentioned, sort of CAT 3K I think the third base station win should start to ramp late Q1 or early Q2.

I’m just kind of wondering, if you look through the year, could we see based on those platforms starting to ship a re-acceleration in the quarterly growth rate something back up to the sort of high single digits for couple of quarters those programs ramp?

Syed Ali

Let me take the first question there, Quinn, regarding, what will be possible to do on the Thunder SDK, is primarily going to be for both OEMs and ISVs to develop things like Middleware, applications, utilities, management software and alike. The lower level software we are providing with the Thunder SDK. So does not that much development required in that particular area.

Quinn Bolton - Needham and Company

Okay.

Syed Ali

So that’s one question. And second question, like we said, starting off 2013, yeah, starting off 2013, if you take a look at the mid-point of our guidance for Q1 and even if you extrapolated flat for the year that by itself delivers a pretty decent year-over-year growth. Obviously, we are not going to be flat for the year, we are going to -- we are targeting and expecting to have sequential growth quarter-over-quarter.

But if you overlay any significant growth on that, you will have quarters that are more closers to the highest single digits to the mid single digits like we have for Q1. So it’s going to be kind of mix on quarter-by-quarter basis based upon what is really kicking in in any giving quarter.

Quinn Bolton - Needham and Company

Okay. Thank you.

Syed Ali

Thanks.

Art Chadwick

Thanks Quinn.

Operator

And our next question comes from the line of Brian Modoff with Deutsche Bank. Please go ahead.

Brian Modoff - Deutsche Bank

Hi, guys. Hey, Syed, so I think people are trying to quantify the kind of small cell business for you, you kind of looking out over the next couple of years. So you think about network architectures and densification, you earlier talk about moving from perhaps hundreds of thousands of base stations to as many as millions, especially if you go to a level of QUALCOMM discusses of 10 users per base station across six billion people.

So potentially have some significant size in it, but this may take time to developed? How do you see this market evolving for you this year, can you give us any, so you talk and say, what, 75 bucks per box, 50 to 75 per box, we’re talking 10s of 1000s of units. Are we talking about something more for the year? And if you just look at say, AT&T as an example, with their processors talking about 40,000 small cells getting deployed in that one this year? So how would -- can you give us a little better color on this? Thanks.

Syed Ali

Yeah. I think, one other things that you have to kind of look at for the small cell market is, the small cell as we define it are really somethings that are kind of 16 user all the way up to the 100 user. And you are right, big Tier 1 semiconductor companies have said, hey, there could be as many as 10 small cell per macro based station and macro based station are shift well over 1 million units.

So, overall, the quantity is large, that’s one aspect of it. But, some of our peers and other people in this market also add femtocells into the small cell. The femtocells is primarily a home type appliance which is kind of two to four users or maybe even after late users for femtocells.

So, what we are talking about and what we are targeting is really the Enterprise and Service Provider segment of the small cell market. So, overall, it’s very difficult to give a overall number, but I think save that is in the few years that it should be in the millions of units per year overall for the camp.

And, obviously, this market is going to be competitive and it really depends upon, how much share you can carve out of that. But having said that, for a company our sizes, we believe that this will be a meaningful number on top over the next few years.

Brian Modoff - Deutsche Bank

Okay. And real quick question, just on the TCAM market kind of how do you see yourself shaping up now against the [Orasa] guys are, the Broadcom competitor in the market? Any comments on what you are seeing, you are getting some designs now? How do you see the competition shaping up? Thank.

Syed Ali

Yeah. I think, overall, in this market, it’s both a push and a pull situation. The pull situation is from customers who are looking for another source, number one and the other part of the equation is we really do have a very compelling solution because that approach is very different compared to the legacy architectures.

So we have started to receive design winds and you know we are in valuation like I said that multiple customer. So overall we expect to continue to get design winds. And one of the interesting things we’re finding out is in the opportunities that we are engaged with right now, about 30% to almost the third of the opportunities that we are looking at currently are boxes that have never used becomes before, because of cost and power use.

So not only is there kind of an existing market that we would like to take the market share in but there also seems to be a new market that the cost and power point of our solution our opening up, which is very good for the overall TCAM market also.

Brian Modoff - Deutsche Bank

Okay. Thanks.

Syed Ali

Yeah. Thanks Brian.

Operator

And the next question comes from the line of Daniel Amir with Lazard Capital Markets. Please go ahead.

Phillip Lee - Lazard Capital Markets

Hi. This is Phillip Lee on behalf of Daniel Amir, nice job on the resulting guide. Syed, it seems that much of the success in the data centre market is one of the main factors driving Q1 revenue growth. How much is due to market share gain versus growth in the overall data centre market?

Syed Ali

I think the data centre market at least the segment that we are addressing obviously, we are addressing a smaller portion of the data centre market than somebody -- some of the larger customers like an Intel but overall the segment that we are addressing are growing pretty fast because a lot of these are new deployments. I think last quarter for example I talked about OCTEON-based NIC cards going into a larger -- starting to be deployed in large data centre. This is brand new deployment and we are looking at one more, I think Q3 of this year.

So there is a lot of different solutions that are now being added to data centers that are playing to Cavium’s core competency and product lines. So overall this is one of the areas obviously. I’m taking project Thunder out of this but even our existing products are starting to play pretty well in these new requirements.

Phillip Lee - Lazard Capital Markets

Got it. Thanks. And as a follow up with the software business now less than 10%, does this continue to taper off as you guys shift more of the software resources to support your core focus areas or do you reach a level of single-digit baseline of revenues? Thanks.

Syed Ali

I think the latter is more true. I think we will just be at a single digit mid-to -- maybe somewhere in that range, a single digit runner and that will sustain.

Phillip Lee - Lazard Capital Markets

Great. Thank you.

Syed Ali

Great. Thanks Phillip.

Operator

And the next question comes from the line of Kevin Cassidy with Stifel Nicolaus. Please go ahead.

Kevin Cassidy - Stifel Nicolaus

Yeah. thanks for taking my question just along those lines, you reduced your employee head count by 25 employees. Is that expected to go, have more cut back or wherein -- where are these employees located?

Syed Ali

When you take a look at by the end of Q1, we should have further reduction in head count for areas like the MontaVista automotive business and that the primary employees of that are actually in India, most of the employees are based out at India but some being in the U.S.

Kevin Cassidy - Stifel Nicolaus

Okay. Thank you.

Syed Ali

Thanks Kevin.

Art Chadwick

Thanks Kevin.

Operator

And the next question comes from the line of Krishna Shankar with Roth Capital. Please go ahead.

Krishna Shankar - Roth Capital

Yeah. Syed, can you talk about the progress of going forward how Cisco will sort of shape up as revenue contributor over the next several quarters. I understand there are product been discontinued there but can you talk some of the new programs there and whether Cisco will kind of bottom out here in Q1 and see good sequential growth beyond that?

Syed Ali

Yeah. Regarding Cisco, overall our largest customer, we expect them to have year-over-year growth. We do have several programs that have either -- some program that FEF this quarter and a few more that will have FEF in Q2, Q3.

So overall the trajectory we should be positive. Like I said in any giving quarter based upon the particular requirements in that quarter, that could affect it but generally on a year-over-year basis, we expect fiscal to grow nicely year-over-year.

Krishna Shankar - Roth Capital

Okay. thank you.

Art Chadwick

Thanks Krishna.

Operator

I’m showing that there are no further question at this time. Ladies and gentlemen, this does concludes the Cavium, Inc. fourth quarter 2012 earnings conference call. If you would like to listen to a replay of today’s conference call, please dial 1-303-590-3030 or toll-free at 1-800-406-7325 and use access code 458-5433. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cavium's CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts