Cisco (CSCO, Financial) supplier Cavium (CAVM, Financial) is one of 2014's successful comeback stories. After a not-so-great 2013, Cavium has successfully turned the corner and is up almost 60% so far this year. The company's growth is being driven by the increasing adoption of its products in data centers and other wireless applications such as the Internet of Things. In fact, in the first quarter, Cavium delivered a solid year-over-year revenue jump of 20%, along with a whopping 58% increase in earnings.
Solid results in second quarter
Cavium reported its second-quarter results in the month of July wherein it beat the topline growth estimate quite comfortably. Its second-quarter revenue came in at $90.7 million, representing a jump of 22% y-o-y whereas the Street was expecting a jump of 21.3% in revenue. Because of a robust topline growth, the company was able to beat the Street estimates on bottomline as well with an earnings of $0.35 per diluted share thereby exceeding the $0.33 per share estimate.
In Q2, Cavium saw strong growth in our core service provider, enterprise and data center markets. Both the service provider and enterprise data center markets grew sequentially. In the service provider market, sales into wireless infrastructure continued to be extremely strong. Sales into the wireline and telecom were considerable, although the company did see the beginning of a turnaround at certain customers. Growth in the enterprise and data center markets was primarily driven by customers in the data center, enterprise networking, and security markets.
IoT security: A growth driver
Cavium's end-market prospects are strong, and its solid relationship with Cisco is another advantage. Cisco is a 20%-customer of Cavium. The networking giant is aggressively pushing the Internet of Things and is laying special emphasis on the security aspect as it deploys the concept. Earlier this year, Cisco launched a security challenge, inviting developers to submit proposals to secure the Internet of Things.
Software security is an important part of machine-to-machine connectivity, as the lack of it can expose billions of objects to cyber-attacks. Hence, Cisco is pushing developers to patch security flaws in connected appliances, vehicles and devices. On the hardware side, Cisco can utilize Cavium's security hardware to plug gaps in the Internet of Things.
As such, it isn't surprising that Cavium's security products have gained solid traction, as Cisco might already be using them. On the last conference call, management spoke about the growing demand for its security solutions such as NITROX, OCTEON, and FIPS. The need for next-generation firewalls, cloud security, and secure HTTPS Web servers has enabled Cavium to land more design wins in the security market.
Looking ahead, the opportunity in the Internet of Things should continue getting better. Cisco expects that there will be 50 billion connected objects by 2020, creating a $19 trillion market. As a result, Cavium should continue seeing robust adoption of its security products as IoT deployment gains pace.
Small-cell can be a growth area
Cavium is also making impressive moves in small cells. Recently, it entered into a partnership with Quortusto deliver an integrated processor solution for small-cell base stations. Cavium believes that the integration of its OCTEON processor with Quortus' evolved packet core software will help it deliver small cells that are portable enough to be deployed rapidly for various uses.
Cavium's OCTEON is a base station-on-a-chip, which provides hardware acceleration for LTE and 3G small cells. Quortus' software makes networks intelligent and flexible and also reduces the cost of deployment. This hardware-software combination should allow Cavium to benefit from the increasing deployment of small cells, as telcos are using them to improve network efficiency and capacity.
In fact, this market is expected to grow 65% in 2014, attaining a size of $1.3 billion, according to Infonetics. By 2018, Infonetics believes that the small cell market will be worth $2.5 billion. As such, Cavium is making the right moves in the right markets to accelerate its long-term growth.
Takeaway
Cavium has come out with another outstanding quarterly report and is already 60% up year-to-date. The company’s long-term prospects look sound, as it is on track to benefit from the Internet of Things and small cells. At this point in time, it is prudent to put your money in Cavium as it is at the helm of the mega developments that are poised to hit the industry.
