Cavium Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.30.13 | About: Cavium Networks, (CAVM)

Cavium (NASDAQ:CAVM)

Q3 2013 Earnings Call

October 30, 2013 5:00 pm ET

Executives

Lilly Ly

Syed B. Ali - Founder, Chairman, Chief Executive Officer and President

Arthur D. Chadwick - Chief Financial Officer, Principal Accounting Officer, Vice President of Finance & Administration and Secretary

Analysts

Blayne Curtis - Barclays Capital, Research Division

Harlan Sur - JP Morgan Chase & Co, Research Division

Anil K. Doradla - William Blair & Company L.L.C., Research Division

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

Sundeep Bajikar - Jefferies LLC, Research Division

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Vijay Bhagavath - Deutsche Bank AG, Research Division

Sanjay Chaurasia - Nomura Securities Co. Ltd., Research Division

Ruben Roy - Mizuho Securities USA Inc., Research Division

Aaron Husock

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Cavium, Inc. Third Quarter 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, October 30, 2013. I would now like to turn the conference over to Lilly Ly. Please go ahead, ma'am.

Lilly Ly

Thank you. Good afternoon, everyone, and welcome to Cavium's third quarter 2013 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 margins, operating expenses, net income per -- from operations, 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 you to review it in conjunction with this call.

Additionally the information we provide on 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.

I will now turn this call over to Syed Ali. Syed?

Syed B. Ali

Thanks, Lilly, and thanks to everyone for joining us today. Q3 was another excellent quarter on major metrics that we track, including topline growth, non-GAAP gross margins, non-GAAP operating margins, cash flow and design wins. In brief, Cavium's third quarter revenue was $79.1 million, up 7% sequentially and up 30% year-over-year. This was our sixth quarter in a row of strong sequential revenue growth. Non-GAAP gross margins were 66%, and non-GAAP net income was $16 million or $0.29 per diluted share. GAAP net income for the quarter was $4.3 million or $0.08 per diluted share.

Art will discuss our Q3 financial results and Q4 guidance in more detail shortly.

In Q3, growth was driven by chip sales into our core service provider Enterprise and Data Center markets. Sales into the broadband and consumer markets were up slightly. In Q3, we saw good growth from both the service provider and the Enterprise and Data Center markets. In the service provider market, we saw strength in both wireless and wired infrastructure. Wireless infrastructure sales were driven by base stations, radio network controllers and EPC equipment. Sales into the wired infrastructure were also strong coming from EDGE routers, cable infrastructure and transport equipment.

Sales into Enterprise and Data Center markets growth was driven by growth in Enterprise switches, routers and security equipment, while Data Center growth was driven by our LiquidIO cards.

In Q3, our top customer was, once again, Cisco Systems, which came in at 18% of sales and was up 10% sequentially.

I would now like to provide an update on Q3 design wins. Q3 was another record design win quarter based upon expected annual revenue from those design wins. Our flagship OCTEON product line continued to lead the way, driving design wins across a broad range of Enterprise, Data Center and wireless and wired infrastructure markets. Design wins covered the entire range of our products. A large majority of the designs were brand new sockets in new applications or at new customers. We believe this again highlights our strong competitive position in our served end markets. The design pipeline continues to be extremely strong.

Now I would like to give you an update on other new highlights since our last earnings call. We did widespread sampling of our new 28-nanometer OCTEON III 70 and 71 products that we announced last quarter across a very wide range of customers and end applications. These processors integrate high-performance MIPS64 cores with full hardware virtualization, deep packet inspection, packet processing, security and quality of service capabilities, along with very sophisticated power management in a highly integrated System-on-Chip, which we believe is setting a new bar in performance per watt.

The 28-nanometer silicon met or beat every goal that we set for performance, power and cost. This is an excellent achievement by our development team, and they got it right on the first pass.

This is by far the widest sampling we've done for a brand new device, which is now sampling to over 30 customers worldwide over a wide range of end applications, which also indicates the robustness of the product design. We also have made good progress on the OCTEON Fusion business. We are now in pilot stage deployment in 2 service providers in Europe and 1 new one in Asia. We are also in intensive lab trials at 2 large U.S. service providers.

Our NEURON family continues to get good traction, with evals occurring at a number of customers. In fact, we are now shipping our first-production units this quarter. It is shipment to a smaller customer, but this is a strong validation of the robustness of our groundbreaking technology. We also continue to make excellent progress on Project Thunder. Our silicon design team, software group and ecosystem development is in full swing, and we have engagements with a number of Tier 1 customers.

As announced previously, Project Thunder provides a scalable family of 64-bit ARMv8 processors incorporated into a highly differentiated SoC architecture optimized for next-generation cloud and data center applications.

Thunder will leverage significant amounts of Cavium's developed 28-nanometer in-house IP and leverages our extensive expertise in developing multi-core software solutions to provide highly optimized and scalable solutions that integrate high-performance compute, networking, security and storage, along with targeted workload acceleration and high-speed industry-standard I/Os. Project Thunder processors will complement our OCTEON and NITROX families and will significantly increase our footprint across high-growth, next-generation cloud and data center markets.

We have recently released an updated version of our Thunder Software Development Kit that offers a full Linux operating system, toolchain, and example applications that enable ISVs and programmers to start distributed-computing development on the latest 64-bit ARMv8 architecture. Our comprehensive Thunder SDK includes the complete SoC environment, including multiple ARMv8 cores, the SoC and the I/Os. Customers can develop a range of software, including application software, middleware, operating systems and device drivers ahead of silicon availability. The developed software will be able to run out-of-the-box on our silicon. This reduces time to market for our customers and time to revenue for us. This is in use today at multiple Tier 1 customers worldwide.

More recently, we announced that Cavium's ARMv8 processors are the first ARMv8 processors supported in Ubuntu 13.10, which is the latest server release from Canonical. Ubuntu is a leading operating system for cloud servers and is deployed in major cloud data centers around the world. The Ubuntu server class distribution is extremely comprehensive and includes operating systems along with over tens of thousands of software packages, of which, 29,000 packages are compiled and available for Thunder today. This includes runtime environments like libraries, Java and Python. It includes various application workloads, such as web servers, databases, networking and administrative utilities for provisioning multiple cores and multiple virtual machines, along with windowing systems such as X Window.

This platform is widely available to thousands of developers from around the world who can start developing for our Thunder processors immediately. The look, feel and functionality of Cavium Thunder running this release will be identical to that running on standard X86 processors. Ubuntu 13.10's ARMv8 developer preview will enable developers, cloud operators and ecosystem to quickly and easily start using, developing, testing and migrating to Cavium's Thunder multi-core solutions. We are currently hosting demonstrations of the Ubuntu server running on Cavium's Thunder SDK at the ARM TechCon in Santa Clara that is going on this week. Cavium's Thunder developer platform with Ubuntu server 13.10 will also be available in HP's Moonshot Discovery Lab to offer developers a head start on porting, developing and testing on future cloud center servers.

Now I would like to move on and give a brief outlook on our served end markets for Q4. For Q4, we expect to see continued growth in the Enterprise, Data Center and wireless infrastructure markets but partially offset by some seasonal year-end softness in the wired infrastructure markets, which have shown good growth over the last 3 quarters. We expect the broadband and consumer business to be down in Q4.

On that note, I would now like to turn the call over to Art Chadwick, who will provide a detailed discussion of Q3 financial results and guidance for Q4. And after that, we'll be happy to take your questions. Art?

Arthur D. Chadwick

Great. Thanks, Syed, and thanks to all of you for joining us today. I'll first go through Q3 financial highlights and then provide guidance for the fourth quarter of 2013. As Syed mentioned, Q3 was another excellent quarter for us. We had strong sequential revenue growth with expanding non-GAAP growth and operating margins, strong non-GAAP EPS growth and very positive cash flow.

Revenue in the third quarter was $79.1 million, up 7% sequentially and 30% year-over-year. This was an all-time record revenue quarter for the company.

Sales into the enterprise and service provider market were $67.5 million or 85% of total sales, up 7% sequentially and 37% year-over-year. Sales into broadband and consumer were $11.6 million or 15% of sales, up 3% sequentially but down 3% from the same quarter last year due to businesses we exited during the year. Sales to Cisco were $14.5 million or 18% of sales, up 10% sequentially.

Non-GAAP gross margins were 66.0%, a record high for the company. This was a 20-basis-point sequential expansion over Q2 due primarily to favorable product mix. Our restructuring activities earlier this year continue to pay off. We were able to add additional headcount to our core engineering groups while keeping total company expenses relatively flat.

Total non-GAAP operating expenses were $35.2 million, less than 1% sequential growth from Q2. Non-GAAP R&D expenses were $24.0 million, and non-GAAP SG&A expenses were $11.1 million.

Non-GAAP operating income was $17.1 million, compared to $13.9 million in Q2. This was a 23% sequential increase in non-GAAP operating income.

Operating margins were 21.6%, a 290-basis-point sequential increase over Q2. Operating income improved as a result of higher sales, slightly higher gross margins and operating expense leverage.

Income tax expense for the quarter was $714,000 or approximately 4% of non-GAAP income. GAAP net income was $4.3 million or $0.08 per share compared to a loss of $4.3 million or $0.08 per share in Q2.

Non-GAAP net income was $16.0 million or $0.29 per share, compared to $12.6 million or $0.23 per share in Q2.

As a recap, we have had strong non-GAAP EPS growth this year going from $0.19 per share in Q1 to $0.23 per share in Q2 to $0.29 per share now in Q3.

Q3 non-GAAP results exclude $11.7 million in non-GAAP adjustments, but this is down from $16.9 million in Q2. Non-GAAP results in Q3 excludes stock-based compensation expenses, amortization of acquired intangible assets and other expenses as detailed in our reconciliation between our GAAP and non-GAAP results in the press release.

We generated very positive cash flow this quarter. Cash generated from operations was $18.0 million, which was an all-time record for the company. $2.7 million was used for the purchase of property and equipment, thus increasing our net cash balance by $15.3 million. We ended the quarter with $113 million in cash and cash equivalents. Inventory at the end of the quarter was $42.5 million. This was a 7% increase over Q2, consistent with the sequential sales growth this quarter.

Accounts receivables were $46.5 million. This equates to DSOs of 54 days, 1 day more favorable than DSOs were in Q2.

I'd now like to provide more specific guidance for the fourth quarter of 2013. We expect revenue in Q4 to increase sequentially by between 1% and 4%. As Syed mentioned, we expect to see continued growth in the Enterprise, Data Center and wireless infrastructure markets, partially offset by some softness in the wired infrastructure markets due to year-end inventory management at a few specific Cavium customers. We also expect a decrease in sales into the broadband and consumer markets.

We expect non-GAAP gross margins in Q4 will continue to expand due to good product mix and are expected to be approximately 66.5%, plus or minus 25 basis points. Non-GAAP operating expenses are expected to increase sequentially by between 2% and 3%. Interest and other nonoperating expenses are expected to be approximately $500,000. Q4 income taxes are expected to be between 3% and 4% of non-GAAP income, and taxes in 2014 are now expected to be between 6% and 8% of non-GAAP income, which is 2 points lower than the guidance we provided 1 quarter ago.

The Q4 non-GAAP share count is expected to be approximately 56 million shares. Non-GAAP income in Q4 will exclude approximately $9 million in stock-based compensation expense and $3 million in amortization of acquired intangible assets and other items.

So based on those assumptions, Q4 non-GAAP EPS is expected to be between $0.29 and $0.31 per share.

We've had strong sequential revenue growth every quarter this year and have done so even with declining revenue from businesses we exited earlier in the year, including the MontaVista auto business and certain consumer product businesses, but we believe this headwind will be behind us as we exit this year.

And on that note, I'd like to hand the call back to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

Just maybe from a high level, Syed, if you can talk about -- I mean, obviously, others are seeing the weakness in comps, so I guess, no surprise that you're actually growing. If you could just maybe give a little bit more color as to what specific areas in wired you were referring to, and then on the wireless side, still growing. Are you seeing any sort of more tempered behavior there as well? And you're all seeing that with share gains? Any color there also would be helpful.

Syed B. Ali

Curtis, so regarding the wired infrastructure business, this is equipment such as things like EDGE routers and transport equipment, some CMTS head-ends. And it's primarily at 2 specific customers that have accounted for pretty much all the softness in that particular sector. Now regarding the wireless. The wireless, as you know, both on the 3G and 4G side, has been a great growth driver for us in 2013. It did very well for us in Q3 and is continuing to grow in Q4, and it's across a wide range of equipment, across a wide range of regions. So overall some -- where I look at on the macro side of the equation, it still looks pretty decent for us on pretty much all the businesses on our infrastructure side, Enterprise, Data Center into Q4 and the wireless infrastructure. The only kind of softness, like I pointed out to you, is a couple of customers on the wired side.

Blayne Curtis - Barclays Capital, Research Division

And then maybe from a product perspective, you mentioned LiquidIO as a driver. I'm assuming it's still fairly small today, but you do seem to be talking more about it. If you can kind of frame that opportunity and give any color as the traction you've gotten with that since you've launched it.

Syed B. Ali

As I've said in my previous calls, Blayne, that we have gone into production with a large data center, and that's being sampled and evaluated at a number of other customers out there. And we expect -- we see that this product is bringing a very high-value proposition in a range of cloud markets as a NIC product, as a 10-gigabit Ethernet NIC product, and we expect a very nice growth from it next year.

Operator

Our next question comes from the line of Harlan Sur with JPMorgan.

Harlan Sur - JP Morgan Chase & Co, Research Division

Syed, on the inventory adjustments in your wired business, how confident are you that these inventory issues will be behind you entering the first half of next year?

Syed B. Ali

If you look at it this year, I mean, these are brand new platforms that are ramping out there, and they've done very well for us in Q1, Q2 and Q3. Q4, there is definitely some adjustments, and we expect them to -- since these are brand new platforms, these are not kind of legacy platforms that are trailing off. These are brand new platforms, so they should continue growing very nicely for us in 2014.

Harlan Sur - JP Morgan Chase & Co, Research Division

Great. And then it's good to see the continued operating margin expansion as the team has held to your target rate of growing your OpEx at a lower rate than your topline growth. But as the company continues to grow, and I'm talking about 2014, and given the performance and technology transitions next year, you guys have a lot on your plate, LTE-Advanced, networking virtualization, early adoption of 64-bit ARM. Maybe you've got a lookahead projects on 20 and 16 nanometer on the foundry side. How comfortable is the team that you can sustain your OpEx growth at a lower rate than topline and continue to drive up margins as you move through 2014?

Arthur D. Chadwick

Harlan, this is Art. Very fair question. To answer that, let me just kind of recap 2013. I think we've done a really good job of maintaining our OpEx growth at less than half of our topline growth. And we've been able to do that by leveraging the technology we built within the company to our various products. So just to remind you, this year, we've gotten Fusion out. NEURON is out. OCTEON III is sampling. We're well along the development phase on Project Thunder. So we've done all of this work with our current OpEx base. So next year, we do plan an increasing OpEx, but our target is to increase it at somewhere around half of our topline growth. It's what we've been doing for the last year-plus, and that's what our goal is going forward. So we've been able to do a lot with what we have today. We're going to add to that, and we think we'll continue to able to do a lot without having to increase OpEx anywhere near the rate of our topline growth.

Syed B. Ali

Another basic point there is the basic 28-nanometer technology is out, checked -- the cores are checked, the caches, the I/Os, the 30s [ph], the memory controllers. So now all the products that I'm going to be taking out subsequently and our primary tape-outs for next year are 28 nanometer. These are incremental costs for us. So in any particular quarter, we may be a little bit higher or lower than the 50%, like for example in Q1, we have a jump up like we have talked about every year. But beyond that, I think on a year-over-year basis, to kind of keep that in the range that Art has talked seems definitely very doable. We have done that in the past, and we believe that we can continue doing that in 2014.

Operator

Our next question comes from the line of Anil Doradla with William Blair.

Anil K. Doradla - William Blair & Company L.L.C., Research Division

A couple questions. Syed, can you share with us your latest thoughts on China, the 4G buildout. I know, historically, you've not been -- you've not asked us to raise our expectations too high but would love to see -- hear what your latest thoughts are on that, and I have a followup?

Syed B. Ali

Yes, Anil. In terms of the China Mobile buildout, we did ship in Q3, and we are shipping increased quantities in Q4 for that. So that development is going on -- I'm sorry, that revenue shipment is increasing for us. Now exactly what is the cadence of the total deployment there is what's going to happen in 1 quarter, 2, 3, 4 quarters, that's the remainder part is still -- the jury is still out. But we expect, overall -- again, I think, from my interaction with investors, they seem to be kind of very hung up on China Mobile. China Mobile is a very important, obviously, consumer offset [ph]. But the problems are happening all over the world, and we see, for 2014, wireless infrastructure will be again a very strong growth driver for us, not only in 4G. There is still a lot of 3G deployments that are happening in kind of the more third world and emerging countries. So we feel very good about the wireless infrastructure moving forward and right through 2014.

Anil K. Doradla - William Blair & Company L.L.C., Research Division

Now the inventory issues with your wired customers, when you talk about wired infrastructure, can you give us a sense of what applications they were and did...

Syed B. Ali

Yes, I did that -- I did talk about that. There are typically things like EDGE routers, cable head-ends and telecom-type equipment -- transport.

Anil K. Doradla - William Blair & Company L.L.C., Research Division

Okay, great. So as we look into 2014 and 2015 or in the shorter term actually, you made an announcement on your ARM-based server, I think it was today or yesterday, but over the next 3, 4 months, we've got CES coming up also. I mean, how should we be looking at, perhaps, the news flow on your ARM-based server platforms?

Syed B. Ali

I think one of the things that we are doing -- being very diligent on is ahead of the silicon putting together the entire ecosystem, right? There's a lot of different pieces, and there are some pieces that are more important than others. There are software ecosystem partners, hardware ecosystem partners. so overall, you'll start seeing, over the next few months, a lot of that. In terms of the specific announcement of the product, we want to do it fairly close to silicon. We believe that this is a very differentiated product, and we would like to kind of keep it under the covers as long as we can. Obviously our customers have all the details of the products, and they're working with them, but on a general basis for competitive reasons, we are kind of keeping this a little bit more quieter than we normally do.

Operator

Our next question comes from the line of Kevin Cassidy with Stifel, Nicolaus.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

I guess, 1 housekeeping one quickly, if -- what's happened with the tax rate for next year? What's changed?

Arthur D. Chadwick

So our tax rate is comprised of the taxes we pay in various tax jurisdictions and the mix of products that we have in those various tax jurisdictions. As we get closer to the year, we have a better understanding of that allocation. So at this point, we think our tax rate next year is going to be somewhere between 6% and 8%. When I made comments 3 months ago on what we thought the tax rate would be for 2014, we thought it'd be somewhere between 8% and 10% of non-GAAP earnings. So all of that is good news. At this point, it does appear that our expected tax rate next year will be somewhere lower than what we had thought just a few months ago.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And you had mentioned LiquidIO that shift for revenue in the third quarter, can you say what your plans are going forward? Is that going to become significant revenue, or what's the stickiness of that design?

Syed B. Ali

Obviously the card itself is very programmable. There's a lot of different pieces of software that can run on it, and different customers will utilize it in kind of different environments -- different distributed environments in a data center. So like I said, we have gone into production now, and we are being -- we are in evaluations at a number of other Tier 1 customers in a pretty wide range of applications. So we feel pretty excited about the prospects of that particular product as it ramps into 2014.

Operator

Our next question comes from the line of Sundeep Bajikar with Jefferies and Company.

Sundeep Bajikar - Jefferies LLC, Research Division

So Cavium announced its Thunder software development platform yesterday running on Ubuntu, and one of your competitors made an announcement related to Ubuntu today. So can you help provide us some context around how Cavium's offering might be different from competition -- what competition appears to be providing up until this point?

Syed B. Ali

Sundeep, I better not comment upon what the -- I don't really know what the competition is providing. What I can tell you is what we are providing is, it's a very comprehensive SDK. It is -- it has the operating system and, as I talked about, tens of thousands of software packages that go with it. So it's a very comprehensive environment, and the comments that I made in my prepared comments that the look and feel and functionality and usability is identical to any Cisco x86 platform out there. So this is a very, very comprehensive solution, and developers -- this is a very widely available distribution. So they have thousands and thousands of developers around the world. We will now have access to it to develop applications for our Thunder processors.

Sundeep Bajikar - Jefferies LLC, Research Division

Okay, great. And then as a followup, as you think about increasing your market share through kind of the shift that's happening with software-defined networking, are there any other kind of major adjacent technologies that you think Cavium may either need to develop or acquire. I guess, one example might be a switching fabric?

Syed B. Ali

Yes, I think we're all right. You've seen we've done a lot of organic development over time, and we will continue to do that. We want to make sure that we have pretty much all the technology that is required for building up a very strong infrastructure business. So over time, there's a lot of development going on internally, and we will continue to do that.

Operator

Our next question comes from the line of Rick Schafer with Oppenheimer and Company.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Just a couple of questions. I guess, first, just a little more color on Project Thunder. I guess, my main question is what type of customers are you primarily engaged with? I mean, are these Web 2.0 companies? Are these OEMs, ODMs? Could -- maybe provide just a little bit of color there and maybe even -- I assume revenue is still on track for 2015, but can you talk about how big, what kind of numbers we could be talking about in 2015?

Syed B. Ali

Yes. So we are engaged with a wide range of customers who are potential users of Thunder. So on one side, you have kind of the end users themselves that is people who build large data centers and who go ahead and spec out-of-box and get it built in Taiwan or wherever. So that's 1 class which are end users themselves. The second class of customers is really more the classical server manufacturers. The third class is large diversified Tier 1s who have a range of products and who use high-end control plane processors for -- I mean, high-end multi-core processors for also the control plane. And then finally, you have the wide-box ODMs. So essentially, we do have engagements with pretty much all of the above that I mentioned. So overall, in terms of product, obviously, in terms of potential revenues, this is a very, very large market, even considering that ARMv8 addresses only a subset of the total market. So the numbers can be very significant for us.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Okay. And then maybe an update on some of your base station ramps at your 3 major customers there. I mean, I guess, where we are at now in terms of ramping to a full run rate. I think that run rate was roughly $25 million a customer a year. I believe that was -- I'm right -- was fully ramped. Any update there for any additional traction with additional Tier I OEMs outside the Big Three you already have?

Syed B. Ali

Well, I think the first piece of news -- good news there is -- the run rates we now expect on the -- for base station businesses higher than $25 million, and that's a good thing because when we had modeled it, we had modeled a certain kind of an uptick or a certain deployment rate, and that rate seems to be faster. So on a per customer basis, we should expect when they are ramped to be well above $25 million. So we are, I would say, in different positions with different customers. With some customers, we are probably in kind of the 60%, 70% with our lead customer, and we are probably 20%, 25% in terms of the lagging one of the 3 customers. So it's kind of all over the map, but I think the most important point here is that there is still plenty of growth ahead.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Got it. If I could sneak 1 more quick one just on Cisco. Correct me if I'm wrong, but I think you've got roughly or you've talked about having roughly 70 design wins there, I believe, because it makes sense to think about how long it would take to ramp those and what would the implied run rate be at Cisco for you guys if all 70 of those designs, let's say, were ramped?

Syed B. Ali

Yes, I think from the overall design wins, we think roughly right now probably kind of 60% to 70% somewhere in that ballpark is -- 60% or so is in production. So when you take a look at what our run rates are, you could say that this will be more than 60%, 70% higher than what it is right now. So Cisco itself has -- should have a good growth for us going forward. Our goal essentially is with the embedded designs, and I'm not including any potential other designs that we could possibly get like Thunder, but if I even discount that, our goal is to get Cisco to be a $100 million per year customer.

Operator

Our next question comes from the line of Vijay Bhagavath with Deutsche Bank.

Vijay Bhagavath - Deutsche Bank AG, Research Division

I was calling on behalf of Brian Modoff. Question is on this NEURON chip and Fusion heading into next year. How should we look at the volume ramp of both of these chipsets? Would it be the second half of next year? Would it be throughout next year? Help us understand.

Syed B. Ali

Yes, the NEURON, right, obviously, some of the smaller customers will go to production earlier. Like we said, we have our leading small customer just went into production, and you'll have a few more, I would say, in the first half. But if you take a look at tradition TCAMs, they go into higher end class of equipment. So this is a little bit more of the big iron that takes a little bit longer to go to production. So we expect revenues from kind of the larger boxes, larger customers in the second half -- starting in the second half of 2014.

Vijay Bhagavath - Deutsche Bank AG, Research Division

A quick followup for Art. Help us understand the moving parts from the gross margin line. Do you see mix moving more favorably heading into next year in terms of the higher ASP design wins getting into production?

Arthur D. Chadwick

So, Vijay, you faded out a little bit, but I assume the question really has to do with gross margins going into 2014.

Vijay Bhagavath - Deutsche Bank AG, Research Division

Yes, and how would the mix shift heading into next year, especially as some of -- some new design wins get in...

Arthur D. Chadwick

Sure. Well there's a couple of dynamics to gross margins. The long story short is we think they will be relatively flattish through 2014. The fundamental driver towards mix and higher core counts would generally drive higher gross margins next year. So that is a very positive trend that I think continues as our customers move to higher and higher core-count products. The counter to that next year is we have a lot of new products coming out, a lot of new tape-outs coming out, and we amortize those over 12 months through cost of sales. So that will temper some of that. So when you look at all of that together, kind of flattish gross margins is probably a reasonable way to look at it.

Syed B. Ali

And I think the key thing, again, here is mix. And if you look at last year versus this year, and we monitor revenues coming in between our high-end mid-range and low end, the high end has been growing very nicely that is -- and the more revenue that comes in from the high end, that gives a tailwind to gross margins. So next year, if the mix remains relatively flat, we should see something in the same range. But if the mix shift of our revenue continues moving towards higher core counts, that would increase it incrementally.

Operator

[Operator Instructions] And our next question comes from the line of Sanjay Chaurasia with Nomura Securities International.

Sanjay Chaurasia - Nomura Securities Co. Ltd., Research Division

Syed, question for you. Last quarter, you talked about your visibility. You said your visibility had increased from earlier in the year. I was just wondering where you stand in terms of visibility now in heading into Q4 and maybe the first half next year, and also there's some uncertainty around federal government buying this equipment. I'm just wondering if you could let us know how much you are incorporating when you're guiding for Q4?

Syed B. Ali

All right. Generally visibility this quarter has been very similar to visibility in Q3. No differences. I would say visibility for this quarter is probably, I think, a little bit, just tiny bit, a little bit incrementally better, but overall at a high level, it's roughly the same. Now regarding the other factors, they could be having some effect, but it's very difficult for us to actually, really, quantify that.

Sanjay Chaurasia - Nomura Securities Co. Ltd., Research Division

Okay. And as a followup, going back to Project Thunder, HP showcased their Moonshot server, and they had 3 applications and using silicon from 3 different suppliers, one is TI, Calxeda and then APM. I was just wondering if you could explain that where exactly you will be focusing on at the several OEM kind of customer? Which specific application you're going after in the context of what they showcased a few days back?

Syed B. Ali

Our Thunder family of processors has different SKUs, if you will, that address essentially the compute, networking and storage requirements for the DEM [ph] server. Obviously we are not DSP, so we don't address DSP-type applications, but pretty much all the standards, computer-, networking-, storage-type applications. We should be able to address with the family of processors that we're coming after.

Operator

Our next question comes from the line of Ruben Roy with Mizuho Securities.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Syed, I just wanted to follow up on some of the discussion you've had on the wireless area of your business. If you look out into 2014, should we be thinking about that as, perhaps, the biggest growth -- potential driver of growth? And I was also wondering if that is the case, is that growth predominantly being driven by CapEx spend, would you say? Or is it more a case of Cavium gaining share at new customers increasing content and boxes -- new boxes shipping, et cetera, if you could just maybe outline some of those points?

Syed B. Ali

Sure, Ruben, I think the short answer is it's all of the above. But in 2014, we expect the wireless infrastructure to, again, be a very, very nice growth driver for us. From an overall dollar viewpoint, it could be the highest single segment of the market in terms of growth. And there are a number of factors that go with it, but one thing, obviously, is it has subsequent generations of products come out, the dollar content increases incrementally there, so our content goes up. So for example, in an EPC of the previous generation versus the new EPCs being designed now for release end of '14, our content there has gone up at least 30% in terms of dollars because they're doing more things, and they require more throughput. They require more horsepower, so that's a good sign there. And obviously, we are trying to increase our footprint across the entire wireless infrastructure chain, right from kind of the small cell side of the equation, which I talked about, all the way up till the EPC. So the short answer again is it's going to be little bit of all.

Ruben Roy - Mizuho Securities USA Inc., Research Division

That's great. And just so I understand, the EPC stuff and RNC stuff, that's next year or are you seeing production volumes this year?

Syed B. Ali

No, no, we have guys with the RNC and EPC in production today with -- some are even there with the OCTEON Plus, which is a generation ago, and some are just starting to ramp with OCTEON II. I'm talking about the new EPCs that replace these with that OCTEON III products.

Operator

[Operator Instructions] And our next question comes from the line of Aaron Husock with ShearLink Capital.

Aaron Husock

The application to the re-controller market has been a little bit lumpy this year across both of your major remaining customers there. Can you talk a little bit about how you think about that market and maybe how your content has been changing on the next-generation boxes of those customers? And then I have a followup.

Syed B. Ali

Sure, yes. The earlier part year, it definitely was a bit lumpy, but it was more customer-specific lumpy. Starting Q4, actually, we are starting to see a better environment than what was there in the first half. One of the key reasons there is that our content per box is significantly higher in this new generation of ADCs than it was in the previous generation. So even if unit volumes don't increase significantly, our total revenues from this particular segment should start increasing fairly nicely in 2014.

Aaron Husock

Great. And then just on broadband and consumer, can you give us a sense for -- I mean, usually, there is some positive seasonality to that in Q4. Can you give us a sense for how much you think broadband and consumer might be down sequentially? And after this drop, are you about done burning off the parts of that business that you don’t really want to stay in? Can it start to grow again?

Syed B. Ali

Yes, so from an overall viewpoint, on that segment, some of the legacy stuff is winding down and is about, I would say, cannot come into this quarter to the steady state, if you will. So if you take a look at the broadband and consumer, there are 2 pieces: The consumer piece and then there's a broadband piece. The broadband piece will keep growing. This is more of our low-end OPTEON processors, whereas the consumer fees has kind of come down to a level that is small enough right now that it should not be very material in 2014. But the broadband piece itself, these are things like broadband routers, 802.11ac APs, SOHO/SMB-type equipment, VPN routers for SOHO/SMB, those type of things. Those things will continue to grow.

Aaron Husock

Okay. And then just in Q4, can you give us a sense for how much broadband and consumer might be down sequentially?

Syed B. Ali

High enough -- but at this point, we think it will be somewhere in kind of the mid to high single digits.

Operator

Our next question comes from the line of Harlan Sur with JP Morgan.

Harlan Sur - JP Morgan Chase & Co, Research Division

Syed, on the 70- and 71XX family based on the OCTEON II architecture, I think you mentioned this on the call. It's -- I think it's about a $400 million to $500 million market opportunity for the team. Can you just give us an update on where these products are finding the most traction as a control plane, is it broadband application, et cetera. And then when do you expect some of these opportunities to start to contribute to the top line growth given that the time to market for these products is typically faster than your higher-core comp products?

Syed B. Ali

As I've mentioned in our last earnings call, this is the first time we have a product that is very targeted towards a section in terms of performance, power and cost. And in my prepared comments, I said we are planning to sample this or we're sampling this to 30-plus customers, many of them are new applications or new customers, which means that these were traditionally applications of customers that would not have used our products. So it is $400 million to $500 million incremental market that we have not addressed. This is definitely incremental to our overall TAM, and you're right, time to production for this is much faster. I would say it's in kind of 12 to 15 months. So starting Q4, about a year from now, we should start seeing revenues from that segment.

Harlan Sur - JP Morgan Chase & Co, Research Division

Got it. And then just 1 last question for Art. So on customer diversification, I also asked this on the last call as well, but kind of looking out over kind of the next, I don't know, 1 to 3 quarters outside of Cisco, do you guys expect any of your other customers will grow to become 10% or more of your revenues and will this customer or customers be more service provider or Enterprise- data Center-focused?

Arthur D. Chadwick

So if you take a look at it, beyond Cisco, if you take a look at the top 5, you take Cisco out, there's 4 customers. Three are service provider and 1 is an enterprise customer. So they are running quarter-to-quarter -- it may vary, but they are -- the higher ones of them are running in kind of the high single digits. So we do expect at some point, obviously, it also depends on what our topline growth, but we do expect people to come to the 10% marker in 2014.

Operator

We have a followup from the line of Anil Doradla with William Blair.

Anil K. Doradla - William Blair & Company L.L.C., Research Division

Syed, one of the criticisms against Cavium has been some delays in the 28-nanometer OCTEON family, and there have been some concerns about you guys are behind competition, that's actually some of the bigger players, would love to hear your perspective and how would you refute that criticism?

Syed B. Ali

Sure, Anil. This is probably one of the easier questions for me to answer because when you take a look at today, normally, if you take a look at it today, our 32-core 68XX OCTEON II processor is the single highest performance processor for our end target markets that is there in the industry irrespective of note. So essentially, we still are getting, even this quarter, despite 28-nanometer being sampled by other customers, we are still getting the designs. So essentially at the high hand, we have been competing with ourselves. So when you say we are a bit late, I'd rather maximize the revenues that I can get on my OCTEON II before I can transition myself -- before I transition customers to OCTEON III. So overall -- from an overall viewpoint, we see absolutely no issue because again, our OCTEON II family of products -- except for the low ends -- for the low end, we really didn't have a product on the OCTEON II. We needed the OCTEON III for that, but that's an incremental TAM, but for the mid-range and high end in terms of cost, performance, features, these products still absolutely rule the roost.

Anil K. Doradla - William Blair & Company L.L.C., Research Division

So it's fair to say that you have not won -- you have not lost any design wins against the 28-nanometer design sample?

Syed B. Ali

Not because we don’t have 28. Absolutely not.

Operator

Our next question comes from the line of Hans Mosesmann with Raymond James.

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Syed, some more detail on the 3 applications that are covered in wired that received inventory correction. What portion of the wired business do they usually represent, or what's the kind of granularity can you give us there?

Syed B. Ali

Generally, wired is roughly 1/3, 25% to 30% of the total. So let me put it another way, maybe in a much more similar way understand is if these customers were flat quarter-on-quarter, our guidance would have been a little bit above what the consensus was on the topline.

Operator

There are no further questions at this time. Ladies and gentlemen, this concludes the Cavium, Inc. Third Quarter 2013 Earnings Conference Call. If you would like to listen to a replay of today's conference, please dial (303) 590-3030 or 1 (800) 406-7325, with the access code 4643642. We thank you for your participation, and at this time, you may now disconnect.

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