Nov 2, 2016
Executives
Angel Atondo - Cavium, Inc. Syed Basharat Ali - Cavium, Inc.
Arthur D. Chadwick - Cavium, Inc.
Analysts
Blayne Curtis - Barclays Capital, Inc. Anil Kumar Doradla - William Blair & Co.
LLC Harlan Sur - JPMorgan Securities LLC Joshua Buchalter - Oppenheimer & Co., Inc. (Broker) J.
Steven Smigie - Raymond James & Associates, Inc. Matthew D.
Ramsay - Canaccord Genuity, Inc. Christopher Adam Jackson Rolland - Susquehanna Financial Group LLLP Kevin E.
Cassidy - Stifel, Nicolaus & Co., Inc. Quinn Bolton - Needham & Co.
LLC Vivek Arya - Bank of America Merrill Lynch Brian Alger - ROTH Capital Partners LLC Joseph Moore - Morgan Stanley & Co. LLC
Operator
Good day, and welcome to the Cavium, Inc. Q3 2016 Earnings Conference Call.
Today's conference is being recorded. At this time, I would like to turn the conference over to Angel Atondo, Senior Mark-Comm Manager.
Please go ahead.
Angel Atondo - Cavium, Inc.
Thank you. Good afternoon, everyone, and welcome to Cavium's Third Quarter 2016 Financial Results Conference Call.
Leading the call today are Mr. Syed Ali, President and CEO of the company; and Art Chadwick, Vice President and Chief Financial Officer.
Before we begin, I would like to remind you that various remarks that we will make on this call will constitute forward-looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act and will be based on information currently available to us. We disclaim any obligation to update these forward-looking statements.
These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. We refer you to our most recent Form 10-K and Form 10-Q filed with the SEC.
In particular, to the section entitled risk factors and to other reports that we may file from time to time with the SEC for additional information on these risks and uncertainties that could cause actual results to differ materially from our current expectations. In addition, during this call we will discuss non-GAAP financial measures.
Reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued earlier today, and we ask that you review it in conjunction with this call. I will now turn the call over to Syed.
Syed?
Syed Basharat Ali - Cavium, Inc.
Thanks, Angel, and thanks to everyone for joining us today. Q3 is our first quarter that includes a full quarter of Cavium organic revenues along with a partial quarter of QLogic revenues.
In brief, Cavium's third quarter revenue was $168.1 million, up 56% sequentially. Cavium organic revenues were up 8% sequentially.
Non-GAAP gross margins were 64%, and non-GAAP net income was $28 million or $0.43 per share. Art will discuss our Q3 financial results including revenue breakout details between Cavium organic and QLogic along with our Q4 guidance in more detail shortly.
Q3 organic revenue came in at the upper end of our expectations. Sales into our core infrastructure markets were up.
Sales into the access and service provider market were up as OCTEON Fusion-M started to ramp sharply in the wireless infrastructure markets. Sales into the enterprise and data center markets were also up driven by ramping sales of OCTEON III, a strong rebound of LiquidIO I products at our lead customer, plus an additional customer, and continued strong new product sales.
Sales into broadband were also up sequentially driven by sales of our entry level 2 to 4-core OCTEON III products. QLogic revenues also came in at the upper end of our expectations.
Now, as usual, I will go into the highlights of our product traction in this quarter. Design win traction for our OCTEON and OCTEON TX product lines was very strong during Q3 with major wins with traditional customers in enterprise and service provider and security as well as new customers that we are now addressing with the ARMv8 based OCTEON TX.
The production ramp of our OCTEON III product line continued accelerating with several customers reaching full qualification of their systems. The mid range 8 to 24-core CN83XX and CN82XX families of our OCTEON TX online is expected to start sampling this quarter.
These products address a whole range of features, IO and performance points not addressed by alternative embedded ARM SOC solutions. They also deliver compelling performance per watt and performance per dollar value proposition versus the x86 solutions historically used in many control plane applications.
In Q3, we continued to see strong design win activity with our NITROX product line in the traditional application delivery control market, as well as in the cloud data center. Our lead design in one of the large cloud data center customers has just started shipping in production.
Additional designs at other data centers are in the final stages of evaluation and integration. We see this as a new revenue opportunity for NITROX V as encryption needs increase within the data center and across data centers.
Moving on to ThunderX, we continue to see steady increases in customer deployments for ThunderX production platforms with several customers deploying and running production workloads. ThunderX based platforms are now at five data centers in Asia and in the U.S.
These are at various stages at these customers, including deployment, late stage testing for specific applications and development platforms for porting targeted applications. Our Mega Scale Data Center customer in Asia continues to deploy additional ThunderX servers for running production workloads while continuing to evaluate the platform for additional workloads.
At another Mega Scale Data Center in Asia, we are in the final phases of a large-scale rack-level deployment for two applications. Additionally, multiple Tier 2 data center customers in U.S.
and Europe completed their rack-level proof of concepts in Q3 and have placed orders for production systems for deployment in Q4. A bare metal cloud service based on ThunderX servers is being launched by a cloud service provider in the U.S.
in Q4. In the HPC space, our HPC OEMs continue to deliver HPC racks to their customers.
Lenovo, Hartree UK and Cavium will be jointly presenting a paper on Hartree's application performance with the ThunderX based Lenovo HPC server platform at Super Computing 2016 later on this quarter. ThunderX continues to be the lead vehicle for ecosystem partners, with many running their production build, test, release environments for ARMv8 on ThunderX based infrastructure.
ThunderX is now classified as Ubuntu certified server hardware for the 16.04 LTS release from Canonical. And it is the first ARMv8 server to achieve this milestone.
SUSE publicly announced SUSE Linux Enterprise Server for ARM with full commercial support for ThunderX along with support for SUSE Enterprise Storage. The FreeBSD Foundation also announced completion of the FreeBSD 11 release with full support for ARMv8 and ThunderX as the primary reference platform.
Moving on, in Q3 we also entered volume production for the OCTEON Fusion-M products. We have seen significant volume demand from this product from our lead OEM customer who's aggressively deploying systems in a very large LTE rollout.
We expect continued ramp for the remainder of the year and into 2017. We have also recently secured additional design wins with a couple of smaller OEMs which will start to ramp in late 2017 to early 2018.
After initial trials earlier this year, service providers started to ramp volumes in Q3 for a variety of product segments ranging from macro BTS to VRAM with advanced MIMO and Beam Forming. Based on industry standard performance metrics, OCTEON Fusion-M is delivering a unique price performance combination which is a key driver for the growth of this segment.
Moving on to our LiquidIO II products, we have mentioned in previous calls that we are working closely with two large lead data center customers one in the U.S. and one in Asia.
In Q3, we shipped initial production quantities to both customers. One of our lead customers is starting a sharp ramp in volume this quarter.
We also have active engagements at several other customers worldwide including major hyperscale and telco cloud providers. Now moving on to the XPliant switch product line, as we discussed last quarter, we have received our first volume production orders for shipment in Q3.
We are pleased to announce that we have achieved full production status on our XP 80 family of products and successfully fulfilled these production orders in Q3 and we now expect strong growth in Q4. We expect our additional stream of Tier 1 OEM customers to achieve production and GA over the next few quarters.
I will now move to our LiquidSecurity products. We have made good progress with our lead customer this quarter.
We will ship our first revenue of LiquidSecurity in the financial market segment also in this quarter. This builds on our already very strong traction in the cloud data center where we have several lead customers doing integration work and several other engagements ongoing.
LiquidSecurity products have market-leading features for cloud deployments that require multi-domain and multi-tenant support along with high performance key management and large key storage. We expect revenues for this product line to also start ramping this quarter.
I would now like to provide a quick update on the QLogic acquisition. The integration is in full swing and has gone exceptionally well.
The personnel integration has been done, and the systems integration is in full swing. The acquired businesses have been fully integrated into the Cavium family.
These product teams are continuing their focus on market and technological leadership serving the connectivity needs of top enterprise and data center customers worldwide. Our QLogic storage products which include both Fibre Channel and Ethernet connectivity products maintain market leadership position, with various new design wins and existing designs going into production at major OEMs.
We continue to see strong new design activities for connectivity solutions for all-flash array storage as well as value-added Fibre Channel storage solutions. Our continued commitment to that leadership is highlighted by two key news items released since the acquisition.
In late August, we showcased multiple virtualization and flash storage technologies at VMworld. further underscoring our server virtualization and network and storage connectivity leadership.
In conjunction with our industry partners, we demonstrated a wide array of NVME flash storage optimization, Virtual Machine Identification, and intelligent storage offload technologies. These important technologies increase the end user value of our products.
In late September, we announced broad support for Microsoft Windows Server 2016. Our QLogic portfolio of Fibre Channel and storage adapters are now fully qualified for the new operating system, enabling public, private, and hybrid cloud capabilities.
With a renewed focus on the storage market, we are now offering additional end to end value-added solutions combining QLogic products along with Cavium processors. On our QLogic FastLinQ Ethernet adapter product side, since the close of the QLogic acquisition, we have rapidly expanded our customer engagements worldwide across all market segments including hyper scale cloud, telco cloud, private cloud and networking OEMs.
In addition, due to the manufacturing cost synergies, we are now addressing volume segments like LAN on board, entry level L2 Basic NICs, in addition to the high feature converged NIC market addressing the converged networking and storage offload functionality. Customers are evaluating both our ASIC as well as our vast offerings of adapter form factors.
We are pleased to have gotten our first design wins post close for 10 gig and 25 gig in both LOM and card form factors in both Asia and the U.S. We expect several of our new engagements to turn into wins in Q4 and beyond and expect revenues from the new wins to start contributing in the second half of 2017.
We already have a strong position with all the world's major enterprise server and storage OEMs and expect to further strengthen it in the coming quarters across Cavium's cloud, enterprise and OEM customer base. Now, I would like to move on and give a brief outlook on the market environment that we are seeing for Q4.
Q4 has been historically a softer quarter seasonally for Cavium organic business. However, we have had an exceptionally strong bookings quarter in Q3.
We now expect growth across all our organic segments driven by ramping OCTEON III along with strong growth across our newer product segments. We will also have our first full quarter of QLogic sales.
On that note, I would now like to turn the call over to Art Chadwick who will provide a detailed discussion of Q3 financial results and guidance for Q4 2016. Art?
Arthur D. Chadwick - Cavium, Inc.
Great. Thanks, Syed, and thanks to all of you for joining us today.
As Syed mentioned, I'll first go through our Q3 financial highlights and then provide guidance for the fourth quarter of 2016. First of all, Q3 was an excellent quarter on many levels.
We completed the acquisition of QLogic on August 16. Our Q3 financial results, therefore, include Cavium results for the full quarter plus QLogic results from August 16 through the end of the quarter.
Concurrent with the acquisition, we secured a $700 million term loan which we plan to pay down using cash generated from operations over the next few years. In addition, we secured a $50 million interim loan to support short-term acquisition related cash needs.
The interim loan was paid back in full on October 14. As an update, integration of QLogic has gone very well.
We are ahead of our internal plan in regards to integrating the organizations and eliminating redundant expenses. In addition, we have streamlined the QLogic product portfolio by discontinuing certain legacy and other non-strategic products including Fibre Channel switch products.
And we're on track towards integrating our business systems, operations, and facilities over the next few quarters. During the quarter, we exercised the manufacturing rights to certain QLogic chip designs which will allow us to purchase wafers directly at cost rather than purchase QLogic chips through a third-party ASIC vendor.
The full benefit of these reduced costs will flow through cost of sales within the next few quarters. Revenue in the third quarter was $168.1 million, up 57% sequentially.
Sales from Cavium branded products were $115.3 million, up 8% sequentially driven by strength in our core business and increasing new product sales. Sales of QLogic branded products were $52.8 million.
Non-GAAP gross margins were 64.0%, impacted by QLogic and certain inventory charges. Non-GAAP operating expenses were $75.3 million, up from $54.3 million in Q2 due to the addition of QLogic.
Cavium expenses, excluding QLogic, increased 3% sequentially. Non-GAAP operating income was $32.4 million, up 82% sequentially from $17.8 million in Q2 due to strong growth in Cavium's organic business plus accretion from QLogic.
Operating margins increased 260 basis points sequentially from 16.6% in Q2 to 19.2% in Q3. As a result of the acquisition, we reported an $84.8 million income tax benefit during the quarter.
The non-GAAP income tax expense was $700,000. The net GAAP loss for the quarter was $14.4 million impacted in large part by acquisition related charges.
Non-GAAP net income was $28.1 million or $0.43 per share. This is up 63% sequentially from $17.2 million or $0.29 per share in Q2.
Non-GAAP results exclude $42.3 million in net non-GAAP adjustments comprised of $17.5 million in non-acquisition related stock compensation, $109.7 million in total acquisition related charges, partially offset by the $84.8 million acquisition related income tax benefit. Our press release provides more detail on the reconciliation between our GAAP and our non-GAAP results.
In regards to the balance sheet, we ended the quarter with $192.4 million in cash, up from $140.4 million at the end of Q2. The quarter end AR balance was $144.9 million, up from $82.1 million in Q2 due to higher Cavium branded sales as well as the addition of QLogic.
For comparison purposes, DSOs for Cavium branded sales were 67 days, down from 70 days in Q2. Inventory was $118.9 million up from $52.7 million in Q2 due to the addition of QLogic.
Acquisition accounting requires that acquired inventory be written up to market value. As a result, our ending inventory includes a $19.7 million write-up which will be amortized through cost of sales over the next few quarters.
I would now like to provide more guidance for the fourth quarter of 2016. We expect sales in Q4 will be between $223 million and $226 million driven by increasing Cavium branded sales and a full quarter of QLogic.
Cavium branded sales are expected to be approximately $124 million plus or minus driven by continued OCTEON III ramps and increasing new product sales. At that level, Cavium branded sales in Q4 would be up approximately 8% sequentially and 23% year-over-year.
Non-GAAP gross margins are expected to increase to between 65% and 66%. Non-GAAP operating expenses will increase due to the addition of a full quarter of QLogic and are expected to be between $98 million and $99 million.
Interest expense in the quarter will be approximately $8 million. Income taxes in Q4 are expected to be between 4% and 6% of non-GAAP income which, at the midpoint, would be approximately $2.4 million.
Taxes are expected to increase to approximately 10% of non-GAAP income in 2017. The Q4 non-GAAP share count is expected to be approximately 70 million shares.
And based on those assumptions, we expect Q4 non-GAAP EPS will be between $0.53 and $0.55 per share. And on that note, I would like to hand the call back to the operator so we can begin our Q&A.
Operator
Certainly. Our first question comes from Blayne Curtis with Barclays.
Please go ahead.
Blayne Curtis - Barclays Capital, Inc.
Hey, guys. Thanks for taking my question, and nice results.
Syed, you mentioned seasonality being down but you doing better. I was wondering if you could talk about two of those areas.
Fusion-M, can you talk about your visibility and what stage you are in that ramp and maybe you can talk about the deployments, which regions and kind of any color would be helpful. And then just on OCTEON III, similar question.
What stage are you in that ramp and there was some questions at one point about the core business growing. There was a transition there.
Do you expect the core OCTEON business to continue to grow going forward?
Syed Basharat Ali - Cavium, Inc.
That's about four questions, Blayne. But I'll try to answer them.
The first thing is, yeah, normally if you take a look at Cavium organic or Cavium classic results, generally Q2 and Q3 have been our best quarters. Q4 has lower growth, and Q1 was kind of flattish if you take a look at the last few years of our results.
But this year Q4 obviously, as I talked about and Art talked about, our organic business is expected to grow roughly 8% sequentially, which is probably one of the strongest Q4 quarters we have had in many, many years. And essentially the reason there again is kind of a rebounding base business which includes OCTEON and NITROX and in addition the new products overlays on top of that.
Regarding the Fusion-M, we have started a pretty sharp ramp right now in terms of our lead customer, and though a significant portion of the deployments are going to one geography in Asia, there are also shipments to other geographies including Japan and Korea already that are starting to be done in Q3 and Q4. So it's kind of a mixture of geographies with one geography being the single largest portion of that total pie.
And regarding again, I think I've already answered this, on the OCTEON III business, we are in the early stages of the ramp. And we feel pretty good about growth rates getting into 2017 and for full-year 2017 as the platforms go into production.
Blayne Curtis - Barclays Capital, Inc.
Thank you. I'll step aside and ask more.
Thanks.
Arthur D. Chadwick - Cavium, Inc.
Yeah. Thanks, Blayne.
Operator
Thank you. Our next question comes from Anil Doradla with William Blair.
Please go head.
Anil Kumar Doradla - William Blair & Co. LLC
Hey, guys. Congrats from my side too.
A couple of questions, I mean a lot of good stuff you talked, a lot of moving parts. But stepping back, Syed when I look at the macro environment, clearly there's been some mixed macro, some saying positive, some saying negative.
We've had a lot of wireless infrastructure commentary all over the map. So I think the question I have is, how do you visualize call it the next three, four quarters given that you've got the OCTEON ramp.
Can you give us a sense of how insulated you guys would be if you are to maybe the uncertain macro demand environment because your OCTEON III product cycle is good enough to offset any of these things?
Syed Basharat Ali - Cavium, Inc.
Yeah, Anil, on the wireless infrastructure side, I'll kind of break it up into two pieces, one being kind of our standard business which is kind of more OCTEON II based and then I'll talk about the Fusion-M portion of things. So overall in the wireless infrastructure side, the combined revenues for these – for the two combined are growing, right.
And in terms of the wireless infrastructure itself, one of the questions that investors have asked me is, hey, how come Cavium is seeing strong growth with Fusion-M in those geographies and nobody else is seeing it. Well, there's a very, very simple reason for it.
We have about 90% of the digital content in those base stations, so there's not much else digital content in that box. So other vendors would not see a corresponding increase in revenues because of those deployments.
So they're traditionally pretty much our products and the RF are what goes into the bottom of the box. So overall I think also we are – the wireless – the long Fusion-M wireless business has been kind of stable plus or minus, but we are starting to hear some initial positive news that deployments in Asia, specifically in China will also start increasing in 2017.
But the jury is out on that, and we have to see as those orders come in. But all in all, the wireless infrastructure market we will do much better in this market because of the huge increase in content of Fusion-M and the additional revenues that we are getting from that.
Anil Kumar Doradla - William Blair & Co. LLC
So, Syed, if I build up on that point, is this tied to one particular customer or is this spread over a handful of significant customers?
Syed Basharat Ali - Cavium, Inc.
Yeah, Fusion-M is right now revenue is from one customer like I talked about it. We have a couple other customers that will probably take a year to go into production.
But it's in multiple geographies.
Anil Kumar Doradla - William Blair & Co. LLC
Very good. Thanks a lot, guys, and congrats.
Arthur D. Chadwick - Cavium, Inc.
Thanks, Anil.
Operator
Thank you. We'll go next to Harlan Sur with JPMorgan.
Please go ahead.
Harlan Sur - JPMorgan Securities LLC
Good afternoon, and congratulations on the strong execution and on the guidance. On your recent press release on the 25 gig NIC card solutions, typically I think the QLogic team has had a pretty strong leadership position with server OEMs within the enterprise market.
But as we all know, most of the 25 gig activity is with cloud and hyperscale guys. Intel is not there.
Broadcom is not there. So clear opportunity for you guys; so I guess the question is what's the traction with cloud and hyperscale customers for your 25 gig NIC solution?
Are you already qualified? Are you already shipping into some of these large cloud deployments?
And if not, when do you expect that ramp to start to happen?
Syed Basharat Ali - Cavium, Inc.
Yeah, so if you take a look at the overall market today and for the next couple of quarters, few quarters, it still is primarily 10 gig, and in the 10 gig CNA market or the converged network adapter market, QLogic had a very, very strong market position. And in the 25 gig type sockets, there's a lot of qualifications being done with their major customer base.
And we think that on the server side of the equation with the purely platform is what is going to drive the significant growth in 25 gig Ethernet NIC cards. So overall we are now engaged, like I said, across not only the QLogic standard customer base but also our cloud, data center and a bunch of other customers too.
And in some of these customers they'd already been qualified but were not competitive due to various reasons, and we are driving to go ahead and change that. So this is definitely a strong growth opportunity for us.
This falls very well into our strong points at Cavium, and the number of engagements has just grown phenomenally. I think we now have over 15 new engagements in something like two months or just about – over two months since the close.
So there's a very, very strong interest in this product.
Harlan Sur - JPMorgan Securities LLC
Great. Thanks for the insights there, Syed.
And then there's been obviously a lot of consolidation in the market. And as a part of that, one of your competitors on both the MIPS and on the ARM embedded processor front recently decided to exit that market.
I think their team was about kind of 250, 300 people globally. I think it was good for them because it wasn't generating much revenues and it's going to improve their profitability profile.
But it also seems good for the Cavium team because obviously you have one less competitor in the market, maybe some opportunity to pick up some engineering talent. Wanted to get your thoughts on this and just views on the overall competitive landscape.
Syed Basharat Ali - Cavium, Inc.
Yeah, I think, Harlan, as you said, the consolidation is going on fiercely in the industry. And when the consolidation happens, obviously there are assets that may or may not meet the requirements of the purchasing company and they're essentially being either sold or shut down.
So as the consolidation occurs, obviously Cavium's position becomes better and better because the number of choices obviously become fewer and fewer. So overall, we see consolidation as a good opportunity for us to increase market share.
Harlan Sur - JPMorgan Securities LLC
Thanks, Syed.
Operator
Thank you. We'll go next to Rick Schafer with Oppenheimer.
Please go ahead.
Joshua Buchalter - Oppenheimer & Co., Inc. (Broker)
Hi. This is Josh Buchalter on behalf of Rick.
Congratulations on getting the deal done and all the progress. With regards to gross margins, obviously it took a step down.
And I was just hoping you could help us understand how much of it was driven by QLogic and maybe the relative margins there, and what's contributing to the guide.
Arthur D. Chadwick - Cavium, Inc.
So, Josh, good question. So I think the best thing to look at is our guidance for Q4.
I guided non-GAAP gross margins between 65% and 66%, which I think is a reasonable blend between the expected Cavium margins and expected QLogic margins. I'd also like to point out that, by exercising the manufacturing rights at QLogic, we're going to drive some much more favorable costs as those benefits flow through our income statement.
So that's I think the relevant fact. For Q3, it was a stub period at QLogic and we also had some inventory charges related to some discontinued products and discontinued product SKUs.
So that's the answer for Q3.
Joshua Buchalter - Oppenheimer & Co., Inc. (Broker)
Thank you. That's very helpful.
And then I think you previously mentioned you expected in the fourth quarter new products to be 15% to 18% of revenue for Cavium. Are we still on track for that, and should we expect that trajectory to kind of continue?
I think you had said it was expected to be 12% to 13% in Q3. Thank you.
Syed Basharat Ali - Cavium, Inc.
Yeah, right now we have so many new products. We have Cavium organic new products, we have QLogic new products.
But overall I think the overall growth in our new products is at or higher than at the levels that we have talked about. So we are extremely pleased about that.
Joshua Buchalter - Oppenheimer & Co., Inc. (Broker)
Got it. Thank you.
Arthur D. Chadwick - Cavium, Inc.
Great. Thanks, Josh.
Operator
Thank you. We'll go next to Steve Smigie with Raymond James.
Please go ahead. Your line is open.
J. Steven Smigie - Raymond James & Associates, Inc.
Great. Thanks a lot for the chance to ask a question here.
As you think about QLogic looking forward in terms of revenue, is that tracking about what you had thought in terms of revenue in the coming quarters relative to what you were thinking at the time of the acquisition?
Syed Basharat Ali - Cavium, Inc.
Actually, one of the things you always worry about is when you buy the company, you do a fair amount of due diligence. But always once you can absorb it for two or three months, you get obviously a much more deeper picture.
And one of the things that I have to say is all of the expected revenues for QLogic now in 2017 are at or a bit higher than what we thought, and that direction is definitely the better direction than the other way around. So we are extremely pleased with it.
And like I said on the Ethernet side of the market, we have our work cut out for us. But the number of opportunities that we have are huge, and we certainly are very, very aggressively going after those opportunities.
J. Steven Smigie - Raymond James & Associates, Inc.
Great, definitely better to see the up. Just as a follow up on the new product question, can you talk a little bit about how big ThunderX is as a percentage of the new products at this point?
Syed Basharat Ali - Cavium, Inc.
Yeah, we don't generally give out product by product. We've got so many products right now that – everything by the way, as a percentage, has become approximately half of what it was.
So overall ThunderX is growing, XPliant is growing, LiquidIO II is growing, LiquidIO I has been growing. So we have a lot of growing products right now which is – and the Fusion-M obviously which has a sharp ramp.
So overall, we are extremely pleased with the overall revenue profile of pretty much all of our products.
J. Steven Smigie - Raymond James & Associates, Inc.
Great. Thank you.
Syed Basharat Ali - Cavium, Inc.
Thanks.
Arthur D. Chadwick - Cavium, Inc.
Thanks.
Operator
Thank you. We'll go next to Matt Ramsay with Canaccord Genuity.
Please go ahead.
Matthew D. Ramsay - Canaccord Genuity, Inc.
Thank you very much. Good afternoon.
Syed, I think you mentioned in the answer to the previous question and in your prepared script that the LiquidIO I portfolio reaccelerated at your lead customer. Maybe you could talk about the dynamics there a little bit and what the sustainability of that reacceleration and if it was material to the quarter.
Because I think that's maybe a new trend of reacceleration there that would be interesting to hear more about. Thanks.
Syed Basharat Ali - Cavium, Inc.
Yes, Matt, you're right. It was a meaningful and fairly significant reacceleration.
And our understanding, in the latest discussions we have had that this will keep running. We have had no indications.
Obviously on a quarter by quarter, volumes may be up or down, but we feel much better about the longevity of this product. We have better visibility on the longevity of this product than we had three months to six months ago.
Also, I think maybe you didn't pick it up, there's a second customer that has started to go to production. So the ramps of the second customer is not as sharp.
But when he reaches full production, this will be a meaningful addition to LiquidIO I revenues.
Matthew D. Ramsay - Canaccord Genuity, Inc.
Great. Thank you.
That's helpful. And then as a follow-up on ThunderX the second generation product that will be on FinFET, maybe you could give us a little bit of an update as to how that development is going.
I observed that it's a new core on a new process node so that brings some complications, but also some pretty big opportunities if you guys are able to get it out and yield it. So any update on how that development work is going and the timing of sampling and potential launches would be really helpful.
Thank you.
Syed Basharat Ali - Cavium, Inc.
Yeah, so the development is in very late stages right now, so we are pretty much on schedule for that. So we are expecting to finish the development over the next few months, and then go into fab and then start sampling soon thereafter.
And obviously the interest level is pretty high on this product. It is a brand new core.
The core itself is greater than 2X on a per core basis performance improvement compared to our current generation 1, so it can address a larger set of applications. We expect this market to be a larger market than our ThunderX1 type product.
So we are pretty pleased with the overall status of it.
Matthew D. Ramsay - Canaccord Genuity, Inc.
Thanks, Syed.
Syed Basharat Ali - Cavium, Inc.
Thanks.
Arthur D. Chadwick - Cavium, Inc.
Thanks, Matt.
Operator
Thank you. We'll go next to Chris Roland with Susquehanna International Group.
Please go ahead.
Christopher Adam Jackson Rolland - Susquehanna Financial Group LLLP
Hey, guys. Thanks for the question.
So you guys touched on it briefly, but perhaps you can talk about the design win ramp for your CN control plane processors and what do you think they could contribute let's say a year out and how should we think about gross margins for the products.
Syed Basharat Ali - Cavium, Inc.
Gross margins for the products will be pretty much right in line with our corporate average. Obviously the lower core count control plane products will have a bit lower gross margins.
If you go to 16 or 24-core, they'll be higher than our corporate average. So gross margins will be kind of right in line with our overall, high 60s type gross margin target.
Our entry level control plane, our 2 to 4-cores, sampled a few quarters ago and we're getting several design wins on it already. The 8-core to 24-core will start sampling this quarter and we already have lead customers lined up for that.
Once we get that silicon out to a bunch of customers, we can start to really close some design wins with that product. So overall I think this market if you look at it, the control plane in the networking and communications market, even if you exclude the extremely low end of it is a $500 million plus market.
So this is a market that primarily has used x86 and a little bit of PowerPC at the low end. And PowerPC obviously has gone through a bunch of consolidation, and so essentially we see ourselves directly competing against x86 for these sockets moving forward.
Christopher Adam Jackson Rolland - Susquehanna Financial Group LLLP
Great. Helpful.
Thank you. And then when might we see a 25 gig LiquidIO, and are you going to take kind of your QLogic 25 gig product and kind of bring it across there?
And then lastly, you submitted your QLogic product to OCP but I don't think you've submitted LiquidIO. How do you kind of determine what you submit and what you don't?
Syed Basharat Ali - Cavium, Inc.
So the way to look at the overall market, right, the overall market is a layered type market. At the top, you have LiquidIO which is really a very intelligent adapter, CPU subsystem on it, with a whole bunch of features and functionality and hardware offloads.
Below that you have the converged NICs, which is where QLogic has been traditionally very strong at and this is both for server connectivity and for storage. Below that you have the L2 Basic NIC which is a fairly basic functionality and then you have the LAN onboard.
So we used to address only the kind of the high end of that pyramid, but now with the QLogic product line and the cost structure that we can bring to bear in this market, we can pretty much address everything from top to bottom. Now, regarding 25 gig, there are two parallel efforts.
We have released or we are sampling a LiquidIO II 25 gig line. And obviously the QLogic 25 gig has already been sampling for a while.
So this will be a twin pronged approach essentially for kind of the hyper-converged and below, QLogic at 25 gig and for the top end the LiquidIO II 25 gig product offering for that range of the market.
Christopher Adam Jackson Rolland - Susquehanna Financial Group LLLP
Great. Thanks.
Syed Basharat Ali - Cavium, Inc.
Thanks.
Operator
Thank you. We'll go next to Kevin Cassidy with Stifel.
Please go ahead.
Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc.
Thank you and congratulations on a good quarter. ThunderX2, do you expect that your current customers for ThunderX to upgrade to the ThunderX2 and is there a larger customer base for ThunderX2 than ThunderX?
Syed Basharat Ali - Cavium, Inc.
Yeah, we think – obviously if we kind of sample it in the first half of the year, it will – to go to production will be the end of this year, so ThunderX1 we're going to run through 2017 at least. And some of the customers will go ahead and upgrade to X2, but then we think we're going to be addressing and bringing a bunch of brand new customers under the tent also.
So that's kind of the overall status.
Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc.
Okay. And on the discontinued products from the QLogic line, did you have any revenue in the quarter, or is it in your forecast?
Arthur D. Chadwick - Cavium, Inc.
Yeah, this is Art. We discontinued those products as I mentioned in Q3.
We had some nominal revenue. Yeah, I think it was a little less than $1 million in Q3 that related to the products that we discontinued.
And going forward, I think it's going to be very nominal and obviously trend to zero.
Syed Basharat Ali - Cavium, Inc.
So when we announced the acquisition in June, we very clearly broadcasted that we're going to end of life these products or discontinue these products. So the market reaction that's been four or five months has been pretty quick since we have given a very, very strong direction to the market in where we are headed with these discontinued products.
So like Art said, it was nominal under Cavium in Q3. QLogic has shipped some during their first half of the quarter, but overall that product I think in a quarter or so it's going to be nominal in Q4 and probably get close to zero or to zero by Q1 of 2017.
Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc.
Okay. Great.
Thank you.
Syed Basharat Ali - Cavium, Inc.
Thanks.
Arthur D. Chadwick - Cavium, Inc.
Thanks, Kevin.
Operator
Thank you. We'll go next to Quinn Bolton with Needham & Company.
Please go ahead.
Quinn Bolton - Needham & Co. LLC
Hi, Syed and Art. Let me add my congratulations.
Syed, just wanted to ask on the new product front, you're obviously, you've got a big ramp coming with Fusion-M. Just kind of wondering, I think in past quarters you sort of thought that ThunderX would probably be the lead product within your new product category and then you'd have kind of a race for second place between Fusion-M, LiquidIO II, and XPliant.
Kind of feels like Fusion-M has pulled ahead and I'm kind of wondering, is Fusion-M so strong that it might actually become the largest new product exiting this year, or do you still think Thunder is the biggest by the December quarter.
Syed Basharat Ali - Cavium, Inc.
Yeah both Fusion-M and ThunderX are significant portions, but getting into Q4, the LiquidIO and XPliant are adding meaningful revenues. And by meaningful revenues, I mean, meaningful revenues into our overall pot.
Now this is just kind of one quarter into it, so let's see how this plays out over the next few quarters. But we expect both to be significant contributors to revenue.
Quinn Bolton - Needham & Co. LLC
Got it. And then just as you look forward, obviously the Fusion-M is being driven by a strong ramp in a particular deployment now.
How long do you think demand for that deployment or that build will last? Is that a kind of a one or two quarter build or do you see demand from that operator continuing at pretty good levels through say calendar 2017?
I mean just how long do you think that ramp or build lasts.
Syed Basharat Ali - Cavium, Inc.
Yeah, so regarding our lead customer, like I said, is obviously the deployment in India is the single largest deployment. But that product is quickly fanning out into other geographies too.
And I think, how integrated our product is. In the previous generation or in products that they are competing with, they have CPUs, they have BSDs, they'll have ASICs, they'll have some FPGAs.
A whole bunch of different components and all of that has been integrated into a single chip. And then you use multiple chips associated to get the user accounts from kind of a micro BTS to a macro BTS to a micro BTS.
So overall, we expect pretty good growth in 2017 driven by this. And then obviously on the other side of the equation, for our other customers, depending upon what new deployments are operating in say China or some other places, that will have some growth associated with it.
So right now this is a pretty long-term deployment. Just to give you an idea of the magnitude of this, is in the first 40 days of the 4G service launch in India, the service provider added 1 million customers per day.
Per day.
Quinn Bolton - Needham & Co. LLC
Wow.
Syed Basharat Ali - Cavium, Inc.
And they say that they'll be adding, in 12 months, they should easily go over a hundred million customers is what they are forecasting. And by the way, a hundred million is still a very small number in the total population of that country.
So this deployment has legs. But again as I said, there are other deployments also in Asia that are important.
Another very interesting kind of statistic I heard from the service provider is that in the first 30 days, this may stay or not stay, because it was an introductory service, the total amount of data consumed in that 30 days was larger than AT&T and Verizon combined for those 30 days.
Quinn Bolton - Needham & Co. LLC
And then just a last question on the NIC side. Not sure if LiquidIO II or the QLogic products support RDMA or RoCE but just wondering how important is that feature, do you support it, especially as you look to penetrate the cloud service providers with 25 gig NICs.
Syed Basharat Ali - Cavium, Inc.
So we absolutely support RDMA and RoCEv2. RDMA is the underlying technology there on our NICs, both the 10 gig and 25 gig NICs.
And we expect that to be a nicely growing segment for us over the next year or so. So we actually – probably when you take a look at the entire hardware offload landscape, when you take a look at our kind of storage Ethernet NICs, you take a look at our converged NICs, you take a look at our iSCSI, we support iWARP.
So when you take a look at the overall different protocols, we have the most complete product line, we believe, compared to any one of our competitors.
Quinn Bolton - Needham & Co. LLC
Great. Thanks, Syed.
Syed Basharat Ali - Cavium, Inc.
Thanks.
Operator
Thank you. We'll go next to Vivek Arya with Bank of America Merrill Lynch.
Please go ahead.
Vivek Arya - Bank of America Merrill Lynch
Thanks for taking my question. Syed, if I look at the last year, you guys had very strong growth in Q3 and you're guiding to good growth in Q4.
But a few quarters before that, things were kind of lumpy. As you look out at next year, I know it's hard to forecast lumpiness, but is there anything in the business whether it's any new product or old product rolling off, anything we should be aware of that could create lumpiness that you might have visibility into right now.
Syed Basharat Ali - Cavium, Inc.
Overall, Vivek, when you take a look at our product lines and our product cycles, one of the things that is really driving growth for us is product cycles, right, whether it's in our base business or whether it's in our newer products. That is what is really driving growth.
So obviously there are some macro issues that crop up. Every company is affected by them a little bit or a lot.
But with the number of products we have in the early ramp phases with very few kind of mature products, we feel pretty good about growth in 2017.
Vivek Arya - Bank of America Merrill Lynch
Got it. And as my follow up, I think in the past, you had spoken about a 20% or so growth opportunity for your organic business next year.
I'm wondering if that is sort of still in the cards. That's certainly the rate you're growing at in Q4.
And as part of that, when I look at Thunder, AMD is also planning to introduce their Zen server and they're also excited about the growth. And I'm curious if there is room in the market for two alternatives to Intel, right, yourselves and AMD.
Syed Basharat Ali - Cavium, Inc.
I think obviously when AMD releases their product, they will be a competitor in this market. And I really think at the end of the day, based upon the end application, we will be better in certain types of applications and AMD will be better in certain types of applications.
So we think there is room for both.
Vivek Arya - Bank of America Merrill Lynch
And are you comfortable with the 20% or so – I think you said 20% organic growth opportunity and perhaps 10% from the QLogic assets. Is that still within the range of possibilities as you look at next year?
Syed Basharat Ali - Cavium, Inc.
No. I think the best thing to look at is Q4 and Q4 as you can clearly see, the combination of our base products and our new products have taken growth to whatever, 23% or so.
And as OCTEON III keeps ramping or our OCTEON III and NITROX base business keeps ranking (52:10) and the new products also which are in the earlier stages of ramp, if that really happens, we should be able to really drive some pretty nice growth rates for the organic business. So we are very pleased about where we sit on the organic business.
And obviously on the QLogic portion of the equation, we really like the opportunity on the Ethernet adapter side and there's plenty of room to grow there too. So when you combine these two, we believe that we will get back to being one of the primary growth semiconductor companies in the U.S.
Vivek Arya - Bank of America Merrill Lynch
Thank you.
Syed Basharat Ali - Cavium, Inc.
Thanks.
Arthur D. Chadwick - Cavium, Inc.
Thanks.
Operator
Thank you. We'll go next to Brian Alger with ROTH Capital Partners.
Please go ahead.
Brian Alger - ROTH Capital Partners LLC
Good afternoon, guys. Thanks for letting the question in here.
A lot of the questions have been asked. I want to follow up a little bit on the Fusion-M, however.
Obviously, a very strong deployment going on in India with the lead customer there and diversifying into different geographies as you've said many times. I'm curious what the pull-through is.
It's kind of a unique product that they're bringing to market today. And Syed, as I think I heard you say, there's obviously follow-on for different types of base stations as you go through the network.
Is there an attach rate that we can kind of think of, as x amount of Fusion-M product is shipped into the market, there's more OCTEON product required?
Syed Basharat Ali - Cavium, Inc.
Yeah, so I think there will be still two types of architectures. One is the Fusion-M style architecture, which is a much more integrated, and then the second architecture has CPUs and then either a DSD or an ASIC doing the modem.
So there'll still be vendors which will have this kind of structure type architecture other than the integrated. So obviously on the Fusion-M, we have a very strong position there with that product with our lead customers deploying in multiple geographies.
But we're getting a significant amount of traction for next generation 5G designs on our ARM OCTEON TX line. So that has a very interesting play for the control and transport portion of the equation.
And we are engaged right now with a couple of customers for the control and transport activity. And we are also engaged with the ThunderX ARM server processor, and obviously when the X2 comes the X2 for the service provider data center in a VRAM or a virtual RAM, virtual cloud RAM type of a deployment.
So we have some very, very good products. When you take a look at Fusion-M, from a single chip all the way to using multiple chips in a station, you have complete software compatibility from a micro base station to a macro BTS to a micro type BTS.
So it's one software footprint and very, very efficient for our OEM to take to market. It is very, very cost effective also and that's probably the reason why they're winning some pretty tough geographies in a very, very handsome way.
And regarding the newer architectures which has Smart Radio Head and more of a VRAM type situation, the Fusion-M I think we have a variant of the Fusion-M that makes it into a very Smart Radio Head. In fact, one of the other OEMs that I said we have a design win with is actually using it in the Smart Radio Head application.
And in the VRAM application actually, two large service providers have ThunderX based systems today in a 5G proof of concept for VRAM.
Brian Alger - ROTH Capital Partners LLC
Thanks. Thank you for that.
And just a quick one for maybe Art here, obviously we're breaking through a little bit of historical seasonality with the growth drivers and the merger and whatnot. Given the kind of early days with all these different products, do we think that we're going to have a seasonal Q1 type of timeframe or is it more important to look at kind of individual product lines and their adoption curves?
Syed Basharat Ali - Cavium, Inc.
Yeah, I think when you take a look at our organic business, we do have seasonality obviously in Q1 when you take a look at several of our years. So we will see some seasonality there for sure.
Now it really depends upon the ramp of the other newer products of whether that is able to overpower that. On the other hand also, QLogic has seasonality in Q1.
Q1 is generally softer. So overall there will be seasonality in Q1 for us.
The key question as we kind of move through this quarter is, what is the trajectory of kind of our newer products as they ramp and what their profile will look like n Q1.
Brian Alger - ROTH Capital Partners LLC
Excellent. Thanks, guys.
Good job.
Arthur D. Chadwick - Cavium, Inc.
Great. Thanks a lot.
Operator
Thank you. We'll go next to Joe Moore with Morgan Stanley.
Please go head.
Joseph Moore - Morgan Stanley & Co. LLC
Great. Thank you.
Sorry if I missed this, but did you guys quantify how much the gross margin savings moving the QLogic ASIC in-house, how much that could be and when you'll start to see those benefits?
Syed Basharat Ali - Cavium, Inc.
Yeah, I think if you look at in the slides that we presented at the time of the acquisition, we had said that QLogic was at about 62% gross margin or so approximately. You can really look at the slides.
I'm just kind of quoting from the numbers there. And we said that, we will be able to increase it to roughly about 65%, so once the manufacturing rights get exercised.
And we feel pretty good about that.
Joseph Moore - Morgan Stanley & Co. LLC
Okay. Great.
And then you talked a little bit about you going after Intel sockets in the control plane. Can you talk a little bit about Intel competing with you with sort of core OCTEON products and they've made a fair amount of noise about that and moving into more of your sphere?
Can you talk about Intel as a competitor?
Syed Basharat Ali - Cavium, Inc.
Intel is a great company. It's a very tough competitor, right.
No doubts about that. And we are competing with them now in several areas, which is kind of good and bad.
The bad is you're competing against Intel. The good is customers are looking for a choice in every one of those areas.
So if you take a look at the networking and communications market and in the security market for that matter, we've done a reasonably good job in competing against them. And as you look out at our new products, I'm pretty sure where there's overlap that we will get our fair share of the business.
Joseph Moore - Morgan Stanley & Co. LLC
Great. Thank you.
Syed Basharat Ali - Cavium, Inc.
Thanks.
Arthur D. Chadwick - Cavium, Inc.
Thanks.
Operator
Thank you. It appears we have no further questions at this time.
And this will conclude today's conference. The call will be available for telephone replay by dialing 888-203-1112 or 719-457-0820 and entering passcode 6213818.
Again, you may access a replay of today's call by dialing 888-203-1112 or 719-457-0820 and entering passcode 6213818. We do appreciate your participation today, and you may disconnect at any time.
Have a great day.