Is This Cisco Supplier a Good Bet Going Into Earnings?

Cisco (NASDAQ: CSCO  ) supplier Cavium (NASDAQ: CAVM  ) is one of 2014's successful comeback stories. After an indifferent 2013, Cavium has successfully turned the corner and is up almost 50% 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 previous quarter, Cavium delivered a solid year-over-year revenue jump of 20%, along with a whopping 58% increase in earnings. 

A repeat is in the cards
Now, when Cavium reports its second-quarter results on July 30, it is expected to deliver terrific growth once again. The company's revenue is expected to jump 21.3% year over year to $90 million. Earnings are expected to shoot up to $0.33 per share from $0.23 in the prior-year period. The estimates are in line with Cavium's own expectations for the quarter.

Moreover, Cavium had turned profitable on a GAAP basis in the first quarter. Since it is on track to grow at a robust pace once again, the bottom line looks set to get better. However, it is the outlook that will matter the most going forward, and there's a good chance that Cavium can deliver on this count as well.

IoT security: A key catalyst
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 encouraging 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 prospects
Cavium is also making impressive moves in small cells. Recently, it entered into a partnership with Quortus to 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.

The bottom line
Cavium looks set to come out with another outstanding quarterly report later this month, adding to the 50% gains that it has delivered so far this year. The company's long-term prospects look sound, as it is on track to benefit from the Internet of Things and small cells. It will be a good idea to remain invested in Cavium going into earnings, as the stock can break beyond its 52-week highs with another terrific performance.

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