Please ensure Javascript is enabled for purposes of website accessibility

What to Expect From Cavium’s Q1 Earnings

By Harsh Chauhan - Apr 22, 2017 at 1:18PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors will want to know how the Qlogic acquisition and Microsoft partnership are going.

Shares of semiconductor specialist Cavium (CAVM) have gained over 20% in the past six months, thanks to a couple of strong earnings beats in the last two quarters. The company, which supplies chips for enterprise, data center, and cloud applications, will look to extend its momentum when it releases its first-quarter results on April 26.

Cavium investors will be expecting another quarter of strong growth given its recent partnership with Microsoft (NASDAQ: MSFT). But can the company deliver the goods once again? Here's what investors should look for in Cavium's upcoming earnings report.

Earnings are expected to jump

Wall Street expects Cavium to earn $0.56 per share on revenue of $227 million, which is in line with the company's guidance. By comparison, the company had $0.25 in earnings per share on $102 million in revenue in the prior-year period, indicating that its $1 billion buyout of Qlogic will substantially boost the numbers.

However, Cavium could beat the bottom-line forecast if it can realize the cost benefits of the Qlogic acquisition at a faster pace than expected previously.

Cavium expects $45 million in cost savings this year from the Qlogic buyout, which it said when announcing the acquisition could boost its non-GAAP earnings per share by $0.60 to $0.70 in 2017. What's more, the company has begun paying off the debt that it had taken to fund the purchase, expecting to lower its interest expense by $7.5 million from the preceding quarter.

A strong outlook is in the cards

Qlogic should help Cavium deliver strong guidance once again, with analysts expecting second-quarter revenue growth of 120% from the prior-year period, but investors shouldn't miss the long-term picture. Around 60% of Qlogic's revenue comes from HP, Dell, and IBM -- which control over 52% of the overall server market -- giving Cavium entry into a market that's set to grow at 5% annually through 2021.

On the other hand, the increasing adoption of ARM-based processors in data center servers is going to be a big deal for Cavium. IDC expects a 3.9% jump in ARM server-class microprocessors, outpacing the overall market's growth of 1.3% thanks to their power-efficient nature that could help handle huge workloads in machine learning and big data scenarios.

Cavium is trying to capitalize on this trend through its Thunder X2 server chip that's been recently selected by Microsoft for testing and evaluation, though we don't know how that will turn out.

Cavium's Thunder X2 promotional material, touting a "game-changing family of workload optimized processors for data center and cloud applications."

Image Source: Cavium.

But Microsoft has already developed a Windows server version for the ARM platform, indicating that it could be thinking about deploying Cavium's technology in its data centers. Qualcomm, however, could pose a serious threat for Cavium as it started sampling its ARM-based server processors in December last year.

What's more, Qualcomm is also a part of Microsoft's ARM server chip evaluation along with Cavium, so the latter won't be having a free hand in this space. But what could work in Cavium's favor is that its ARM server processor is already into its second generation, with its first generation chip already enjoying volume shipments.

Cavium's previous generation ThunderX chip is already being used by data centers in Asia, Europe, and the U.S. Qualcomm will take more time in coming to the market as it will start volume shipments of the Centriq 2400 server chips in the second half of the year, giving Cavium an early mover advantage.

Investors should listen in to see what Cavium has to report this week.

 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

MontaVista Software, LLC Stock Quote
MontaVista Software, LLC
CAVM

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.