Friday, January 29, 2010

Cavium Networks (CAVM) Continues to Show Strong Growth

I am continuing to read over earnings reports and developing lists of companies that are hitting the cover off the ball in a very tough environment & I am interested in additing to the portfolio . Sharp revenue growth in this type of economy is impressive and all we can do is try to peck at those type of companies exhibiting secular growth, while realizing nothing is immune from the greater market.

Cavium Networks (CAVM) is another in the pantheon of "wireless / networking / storage equipment vendors"; we highlighted the name about a month ago as it was breaking out.  [Dec 18, 2010: Cavium Networks Raises Guidance, Breaks Out of 4 Month Range]   This broad sector of the technology space in doing so well, even companies like PMC Sierra (PMC) are back from the dead (you have to be a veteran from the bubble days of 1999 to remember that one)

Cavium Networks is a leading provider of highly integrated semiconductor products that enable intelligent processing in networking, communications, storage, wireless and video applications. Cavium Networks offers a broad portfolio of integrated, software compatible processors ranging in performance from 10 Mbps to 40 Gbps that enable secure, intelligent functionality in enterprise, data-center, broadband/consumer and access & service provider equipment.

With the recent sell off Cavium has now done a full round trip from where it originally broke out, and yesterday's action finally caused it to flush below the 50 day moving average.  There is also a gap at $22.

The company is growing revenue very well and its non-GAAP earnings growth is solid; however as with just about all American public corporations its numbers using traditional accounting are not quite so pleasing.  As always stock payouts to management (in this case $3.3M for a company that only "earned" $4.5M) sucked up the vast portion of profits.  And that is before we get into the other "1x" costs that Wall Street ignores (acquisition costs, ammortization).  To repeat, we talk about this issue - I am not picking on this specific company.  Almost every company now does this, and the wink wink nature of Wall Street where using the corporation as a public trough for rewarding management while diluting shareholders - and pretending those costs do not exist, is par for the course.  We'll use the "Wall Street accounting" below but the reality is Cavium lost $4.5M (11 cents a share) using "real accounting".  In Wall Street's world, they earned 8 cents.

Full report here, the stock was up a percent or so in after hours after beating recently increased guidance by a penny.  There was no guidance in the press release but apparently it was discussed on the conference call which led to a larger move up.
  • Revenue in the fourth quarter of 2009 was $32.1 million, a 24% sequential increase from the $25.9 million reported for the third quarter of 2009 and an increase of 45% from the $22.2 million reported for the fourth quarter of last year. Our results for the fourth quarter were slightly favorable to the positive pre-announcement we made on December 17, 2009 regarding expectations for the quarter.
GAAP data (which everyone ignores)
  • Net loss for the fourth quarter of 2009, on a GAAP basis, was $4.5 million, or $0.11 per share, compared to a net loss of $4.2 million, or $0.10 per share in the third quarter of 2009, and net loss of $4.4 million, or $0.11 per diluted share in the fourth quarter of last year.
  • Gross margins were 51.5% in the fourth quarter of 2009 compared to 51.5% in the third quarter of 2009 and 49.8% in the fourth quarter of 2008.
Non-GAAP (i.e. wink wink Wall Street numbers)
  • Net income for the fourth quarter of 2009, on a non-GAAP basis, was $3.8 million, or $0.08 per diluted share, compared with non-GAAP net income of $0.8 million, or $0.02 per share in the third quarter of 2009 and net income of $0.7 million, or $0.02 per diluted share in the fourth quarter of last year.
  • Gross margins, on a non-GAAP basis, were 58.9% in the fourth quarter of 2009 compared to 55.7% in the third quarter of 2009.
  • Non-GAAP operating margins increased from 4% in the third quarter to 12% this quarter.
  • Non-GAAP financial measures in the fourth quarter of 2009 exclude expenses totaling $8.3 million related to stock-based compensation and related payroll expense, amortization of acquired intangible assets and acquisition related compensation expense and other acquisition related expenses.
  • Sales at network equipment maker Cisco, Cavium's top customer, rose 49 percent sequentially.
  • The share of enterprise and data center segment rose to 61 percent of revenue from 51 percent in the third quarter.

Management talk:
  • "We had record sales this quarter due to growth across multiple markets, especially in the enterprise and data center markets. We had record bookings and design wins during the quarter. New product ramps are in early stages at a number of tier-1 customers and this is driving higher revenue and growth rates for us."
No guidance in the earnings release (why???) Instead it was on the conference call.
  • ....the company on its post-earnings conference call said it sees Q1 profits of 11-12 cents a share, well above the Street, which had been looking for 7 cents.
  • Cavium expects its adjusted gross margins to improve to 61 percent to 62 percent from the current 58.9 percent.

I like the growth metrics here but the stock is quite expensive and we have similar names we've been in which have similar or better growth metrics but are cheaper.  That said, I like it's positioning in the market and will continue to consider it - at a lower price it would be more appealing.  Perhaps if the market continues to correct we can snag it at the "gap" near $22.

No position

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