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Cavium Networks Inc. Reports Operating Results (10-Q)

August 03, 2012 | About:
10qk

10qk

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Cavium Networks Inc. (CAVM) filed Quarterly Report for the period ended 2012-06-30.

Cavium Inc has a market cap of $1.37 billion; its shares were traded at around $30.925 with a P/E ratio of 130.8 and P/S ratio of 5.3.

Highlight of Business Operations:

Our distributors, other than the distributor discussed above, are used primarily to support international sale logistics in Asia, including importation and credit management. Total net revenue through these distributors was $18.6 million and $21.7 million for the three months ended June 30, 2012 and 2011, respectively, which accounted for 33.7% and 30.3% of net revenue, respectively, and $36.3 million and $39.1 million for the six months ended June 30, 2012 and 2011, respectively, which accounted for 33.6% and 28.9% of net revenue, respectively. The inventory at these distributors at the end of the period may fluctuate from time to time mainly due to the OEM production ramps and new customer demands. While we have purchase agreements with our distributors, the distributors do not have long-term contracts with any of the equipment providers. Our distributor agreements limit the distributors ability to return product up to a portion of purchases in the preceding quarter. Given our experience, along with our distributors limited contractual return rights, we believe we can reasonably estimate expected returns from our distributors. Accordingly, we recognize sales through distributors at the time of shipment, reduced by our estimate of expected returns.

Our net revenue decreased by $16.3 million or 22.8% and $27.2 million or 20.1% in the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decrease in net revenue was attributable to the decrease in sales of $8.1 million and $14.1 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011, from our enterprise network; data center; and access and service provider markets, combined, and the decrease of $4.1 million and $8.7 million in net revenue for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011 from our software and services. The decrease in sales in our enterprise networks; data center; and access and service provider markets was mainly due to the decline in demand for our products from our top 20 customers which was generally impacted by the timing of these customers volume production of our design wins. The decrease in net revenue from our software and services was mainly driven by the timing of completion of existing large professional service agreements as well as a decrease in the rate of execution of new professional service contracts. In addition, net revenue in broadband and consumer markets decreased by $4.1 million and $4.4 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011 due mainly to lower customers demand.

Gross margin decreased from 59.9% in the three months ended June 30, 2011 to 55.2% in the three months ended June 30, 2012, a decrease of 4.7% and a decrease from 60.4% in the six months ended June 30, 2011 to 51.2% in the six months ended June 30, 2012, a decrease of 9.2%. The decrease in the overall gross margin percentage for the three months ended June 30, 2012 compared to the same period in 2011 was mainly due to overall decrease in revenue and shift of product sales mix of our semiconductor product as we sold more of our lower performance products, which yields lower gross margins compared to our higher performance products. The decreased in overall gross margin for the six months ended June 30, 2012 compared to the same period in 2011 was primarily due to the overall decrease in revenue and increase in cost of sales due to write-downs of Celestial product inventories of approximately $4.8 million during the first quarter of 2012. In addition, the overall product sales mix contributed, to a lesser extent, to the decrease in the overall gross margin.

Sales, general and administrative expenses increased by $935,000 or 5.3% in the three months ended June 30, 2012, and decreased by $3.5 million or 10.1% in the six months ended June 30, 2012, compared to the same periods in 2011. Excluding the one-time credit of $4.4 million due to the receipt of proceeds from an escrow claim related to Celestial Semiconductor acquisition in the first quarter of 2012, total sales, general and administrative expenses for the six months ended June 30, 2012 increased by $930,000 or 2.7% compared to the same period in 2011. The increase was mainly due to the higher stock-based compensation and related taxes of $1.5 million and $2.8 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011 as a result of additional expense associated with the options and restricted unit grants and vesting acceleration related to a workforce reduction during the second quarter of 2012. Outside services, which includes legal, audit and consulting fees remained flat for the three months ended June 30, 2012 and decreased for the six months ended June 30, 2012 by $2.2 million compared to the same periods in 2011 mainly as a result of the timing of when the costs were incurred generally for acquisition related services. Salaries and employee benefits decreased by $732,000 for the three months ended June 30, 2012 but remained flat for the six months ended June 30, 2012 compared to the same periods in 2011 mainly due to decreased headcount and lower cost incurred for retention and certain bonuses related to acquisition, which was partially or fully offset by severance and other related benefit cost to certain employees affected by a work-force reduction during the second quarter of 2012. Sales, general and administrative headcount decreased to 173 at June 30, 2012 from 185 at June 30, 2011.

Net cash flows from operating activities decreased by $5.4 million from $14.0 million in the six months ended June 30, 2011 compared to $8.6 million in the six months ended June 30, 2012. Net loss after adjustments of non-cash operating items was $4.9 million cash inflow in the six months ended June 30, 2012 compared to net income after adjustments of non-cash operating items of $27.5 million cash inflow in the six months ended June 30, 2011. The decrease resulted mainly from lower net revenue which generated lower income from operations. Changes in assets and liabilities generated net cash inflow of $3.7 million for the six months ended June 30, 2012 compared to a net cash outflow of $13.5 million for the six months ended June 30, 2011. The significant changes in assets and liabilities for the six months ended June 30, 2012 were mainly due to higher accounts payable due to the timing of payments to vendors and higher deferred revenue due to the timing of the receipt of subscription licenses and professional services billings from the customers. Inventory was slightly up mainly due to the timing of inventory build-up in

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