Apr 26, 2017
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 Vivek Arya - Bank of America Merrill Lynch Vinayak Rao - Morgan Stanley & Co. LLC Srini Pajjuri - Macquarie Capital (USA), Inc.
John J. Donnelly - Stifel, Nicolaus & Co., Inc.
Joshua Buchalter - Oppenheimer & Co., Inc. Christopher Rolland - Susquehanna Financial Group LLLP Gary Mobley - The Benchmark Co.
LLC Matthew D. Ramsay - Canaccord Genuity, Inc.
Harlan Sur - JPMorgan Securities LLC
Operator
Good day, and welcome to the Cavium, Incorporated Q1 2017 Earnings Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Angel Atondo, Senior MarCom Manager. Please go ahead.
Angel Atondo - Cavium, Inc.
Thank you. Good afternoon, everyone.
And welcome to Cavium's first quarter 2017 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 make on this call will constitute forward-looking statements for the purpose of the Safe Harbor provisions 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. In brief, Cavium's first quarter revenue was $229.6 million, up 2% sequentially.
Non-GAAP gross margins were 65.7%, and non-GAAP net income was $41.7 million or $0.58 per share. Art will discuss our Q1 financial results along with Q2 guidance in more detail shortly.
From Q1 2017, we will break up our revenues into two main infrastructure markets. The first is the enterprise and service provider markets.
This will include wired and wireless networking and communications, enterprise storage, enterprise security and the broadband markets. The second segment will cover the data center, which primarily includes data center servers, Ethernet switches, Ethernet mix, and data center security.
Q1 is a seasonally softer growth quarter for the infrastructure business. In Q1, sales were up in both segments.
In the enterprise and service provider markets, we saw continued strength in the wireless infrastructure market, while other markets in the segment were stable to up. Sales into the data center were also up.
Art will discuss in more detail in his section the breakdown. Now as usual, I will go into the highlights of our product traction in the quarter.
We continue to win significant designs for both our MIPS-based OCTEON and ARM-based OCTEON TX processor product lines. During Q1, we won several high end OCTEON III designs in the firewall and network security area.
During Q1, we increased our penetration in both the mid ranged 8 to 24 core and the lower end two to four core markets as our ARM-based OCTEON TX line gained design win traction. A highlight of the quarter were the first ARM-based OCTEON TX processor design wins in 5G base station and storage for control plane applications.
Our OCTEON Fusion-M 75xx shipments remain strong and ahead of our expectations. Our lead customer has continued to gain market share and access to new markets.
At MWC, we introduced the CNF 73xx, the baby Fusion-M which is a scaled down version targeting significantly lower price points but with full macro base station features. Target Markets include smaller towns in developing countries, rural areas, fixed wireless broadband, and urban in-field deployments.
We are currently working with a few lead customers for this particular product. With the impeding 5G transition, we are seeing increasing interest in our OCTEON, OCTEON Fusion-M and ThunderX product lines, as operators move to virtualize their existing networks.
In order to highlight the broad solutions that we are providing to address this trend, we showcase the full ON.Lab M-CORD, NFV, SDN fabric and the radio access network application running entirely on ARM ThunderX servers and OCTEON Fusion-M at the MWC show in Barcelona. Our LiquidSecurity and NITROX security products continue to perform well.
We have further increased our LiquidSecurity engagements in the Hyperscale cloud markets with evals at two more cloud service providers. The benefits our LiquidSecurity products provide are highly differentiated and extremely valuable for several usage models in cloud security.
Overall, we have a strong pipeline of customers at various stages of eval. Our NITROX products continue to win designs in cloud security applications as well as in our traditional application controller and security gateway segments across multiple geographies.
Overall, we continue to see strong need for encryption and authentication across data center and OEM customers. Our LiquidIO II revenues continue to grow.
We expect higher growth starting in the second half of 2017 with the production deployment of the 25 Gb LiquidIO II card. We further continue to strengthen our pipeline of engagements by adding several customers in the Telco and hyperscale cloud provider markets.
Now, moving on to the XPliant switch product line. In Q1 XPliant was awarded The Linley Group's Analysts' Choice Award for Best Networking Chip of 2016.
Cavium's XPliant Ethernet switch was selected as winner due to its customer programmability, which enables customers to differentiate their products through unique features and also enables in field upgradeability. In addition, Cavium announced a collaboration with Microsoft to showcase its SONiC network operating system compatibility at the OCP U.S.
summit. At OCP, SONiC was demonstrated running on XPliant-powered 32/100g platform from Edgecore Networks.
We expect revenues to continue growing as our lead customer Arista ramps this year. In addition, the second announced customer Brocade, which will become part of Extreme Networks also started shipments.
Finally, in Q1 2017, there were a number of news worthy items regarding ThunderX product line. We have started sampling ThunderX2 silicon and reference systems to select public, private cloud, and HPC cloud customers.
We also kicked off multiple ODM production server platforms based upon ThunderX2. In January 2017, Bull, a leading HPC server vendor in Europe announced that they are building a sequana blade based on ThunderX2 for their Mont-Blanc 3 HPC program.
This program is part of the European Union's excess scale initiative and positions ThunderX2 as a viable alternative to X86 servers even for excess scale computing. In March 2017 at the Open Compute Summit, Cavium and Microsoft announced a collaboration to enable ThunderX2 based platforms for Microsoft Azure cloud internal infrastructure.
At the event, Cavium and Microsoft demonstrated a ThunderX 2-based ODM server platform running a Bing search workload on Windows Server developed for Microsoft Azure's internal use. Microsoft and Cavium have been working together for the past 18 months to enable Windows Server on our platforms.
Microsoft announced a long-term collaboration on current and future ThunderX products. They also indicated that with high-performance server processors like the ThunderX2, which are very competitive with the latest generation of incumbent x86 processors, that they believe it can target a significant portion of their infrastructure, including applications such as high-performance storage, search, big data, machine learning, and platform-as-a-service initiatives within the Azure cloud.
This could not have been addressed by the first-generation of ARM processors. We see this announcement as a strong validation of the potential of ARM servers in the cloud market.
I would now like to provide an update on the businesses acquired from QLogic. With our second full quarter of operations behind us, the businesses are operating extremely well and the product teams are continuing their focus on market and technological leadership, serving the connectivity needs of top enterprise and data center customers worldwide.
We continue to hold a strong position with all the world's major enterprise server, storage, and storage OEMs and are strengthening our position across Cavium's cloud, enterprise, and OEM customer base. The storage products that include both market leading Fibre Channel and Ethernet connectivity solutions see continued success in new design wins and existing designs going into production at major OEMs.
In the March quarter we racked up 18 new design wins; two-thirds of the wins were in storage system connectivity and one-third were in server connectivity. We are seeing high activity and design win success in the storage system connectivity side of the market driven by all flash arrays and faster connectivity options such as 32 Gb Fibre Channel and 25 Gb, 50 Gb and 100 Gb Ethernet.
The new design wins are expected to start contributing to revenues in 2018. Our Ethernet FastLinQ products have continued to gain market traction at major OEMs in Q1.
We won several new designs at major server OEMs. Our engagements in the hyperscale cloud, Telco cloud, private and hybrid cloud and networking OEMs have increased significantly across all applications, given our broad and feature-rich product family across 10 Gb, 25 Gb and 100 Gb speeds.
Our recent HPE and Microsoft Windows premium certifications announcements highlight the traction that we are experiencing in the Ethernet mid-market. Now, I would like to move on and give a brief outlook on the market environment that we are seeing for Q2.
In Q2, we see a strengthening demand environment across our products. We expect the enterprise and service provider markets to be up with broad-based growth, along with accelerating demand trends in wireless infrastructure.
We also expect the data center markets to be up in Q2, driven by new product ramps in our broad product line. On that note, I would now like to turn the call over to Art Chadwick, who will provide a detailed discussion of Q1 financial results and guidance for Q2 2017.
Art?
Arthur D. Chadwick - Cavium, Inc.
Great. Thanks, Syed, and thanks to all of you for joining us today.
I'll first go through Q1 financial highlights and then provide guidance for the second quarter of 2017. First of all, Q1 was a truly excellent quarter with record revenue and record non-GAAP earnings.
Revenue in the first quarter was $229.6 million, up 2% sequentially and up 125% over the same quarter last year due to both Cavium organic growth as well as the addition of QLogic. Sales into the enterprise and service provider market accounted for 77% of sales this quarter while sales into the data center were 23% of sales.
And to provide some context that sales split was almost exactly the same in Q4. Non-GAAP gross margins continued on an upward trend and were 65.7%, up 70 basis points from Q4.
Non-GAAP operating expenses were $100.2 million, up 2% sequentially due primarily to beginning of the year employee raises and employment taxes. Non-GAAP operating income was $50.6 million, up 3% from Q4.
Operating margins were 22.0%, up 40 basis points from Q4. Net non-GAAP interest and other non-operating expenses were $7.6 million.
In March, we refinanced our term debt, which reduced the interest rate by 75 basis points. The original debt at a rate of LIBOR plus 300 basis points.
The refinanced debt now has a rate of LIBOR plus 225 basis points. Income tax expense for the quarter was $1.3 million or about 3% of non-GAAP income.
The GAAP net loss for the quarter was $50.5 million or $0.75 per share. The non-GAAP net income was $41.7 million or $0.58 per share, up 5% sequentially.
For the detail reconciliation between our GAAP and non-GAAP results I'd like to refer you to the press release we issued earlier today. But in summary our non-GAAP results exclude $92.2 million in non-GAAP adjustments, which includes $29.0 million in acquisition-related amortization, $25.8 million in acquisition and product rationalization inventory charges, $25.7 million for employee stock-based compensation expense which includes stock issued by Cavium as well as stock assumed from QLogic, $9.0 million in realignment and acquisition-related charges and $2.7 million in acquisition-related debt refinancing costs.
To provide some insight into Q2 non-GAAP expenses, we expect acquisition-related amortization and stock-based compensation expense will be relatively flat quarter to quarter, but inventory charges will decrease substantially. When we acquired QLogic the accounting rules required that we step-up the value of the acquired inventory and expense that stepped up amount as the inventory was sold.
Now that most acquired QLogic inventory has been substantially sold through, inventory charges in Q2 will be nominal. The quarter end AR balance was $136.5 million, up from $125.7 million in Q4.
DSOs were 55 days, up from 51 days in Q4, but still below our long term model of 60 days plus or minus. Inventory at the end of the quarter was $100.5 million.
This was down from $119.7 million in Q4, but due primarily to the non-cash inventory charge this quarter. In Q1, we paid down $86 million of our acquisition-related debt and plan to pay down additional debt in Q2.
During the quarter, we generated $32.2 million in positive non-GAAP cash flow from operations. We made payments of $21.2 million towards PP&E and intangible assets and $14.0 million in net other payment.
We finished the quarter with $132.4 million in cash. I would now like to provide more specific guidance for the second quarter of 2017.
We expect sales in Q2 will increase to between $237 million and $241 million, which at the midpoint would be just over 4% sequential growth. Non-GAAP gross margins should expand by between 20 and 40 basis points, which at midpoint would be approximately 66%.
We expect non-GAAP operating expenses will increase between 1% and 2% sequentially to approximately $102 million. Interest and other non-operating expenses are expected to be approximately $7 million.
Income taxes in Q2 are expected to be approximately $1.5 million increasing to between 3% and 5% of non-GAAP income in the second half of this year and to between 6% and 10% of non-GAAP income in 2018. The Q2 non-GAAP share count is expected to be approximately 73 million shares and based on those assumptions, we expect Q2 non-GAAP EPS will be between $0.64 and $0.66 per share.
And on that note, I'd like to hand the call back to the operator for our Q&A. Operator?
Operator
Thank you. And we'll take our first question from Blayne Curtis with Barclays.
Blayne Curtis - Barclays Capital, Inc.
Hey, guys. Thanks for taking my question and nice results.
Syed, on the service provider, you've obviously had a very strong ramp with Fusion-M. As you look into June, I was curious the comment, is that more broad based or is it just a continuing ramp on Fusion-M?
Syed Basharat Ali - Cavium, Inc.
No this is pretty broad-based which includes our second large customer and couple of other smaller ones too.
Blayne Curtis - Barclays Capital, Inc.
Got you. And then I just wanted to understand, you mentioned design wins with FastLinQ on the Ethernet side, what's the right trajectory to think about, would those wins be revenue this year, or is it really more next year when you would see Ethernet ramping?
Syed Basharat Ali - Cavium, Inc.
Yeah, I think some of those – some of the wins especially on the Ethernet side will start generating revenue along with the purely (19:54) cycle, which starts I think in Q3 timeframe, I think somewhere in the August/September timeframe. So there'll be a start of revenue for those designs in the back half of this year.
Blayne Curtis - Barclays Capital, Inc.
Okay. That's all.
Syed Basharat Ali - Cavium, Inc.
Thanks.
Arthur D. Chadwick - Cavium, Inc.
Thanks, Blayne.
Operator
Thank you. We'll take our next question from Anil Doradla with William Blair.
Anil Kumar Doradla - William Blair & Co. LLC
Hey, guys. Congrats from my side too.
Just a couple questions. Syed, you talked about Microsoft.
You saw – we saw the press release from the recent conference. Can you share with us over the next 12 to 24 months, what kind of workloads would your solutions be employed for, because there's – is it for internal IT, is it for the Azure system?
Microsoft is talking about up to 50% being ARM servers. So could you kind of rationalize some of that commentary that Microsoft is giving with respect to your – with your solution?
Syed Basharat Ali - Cavium, Inc.
I think, Anil, if you look at the press release itself, and if you look at the presentations made, it pretty much covers all the questions you've asked. What are the type of workloads, I've also mentioned that in the script which fit well.
So other than that – other than what we have said in the press, there's not a whole lot more to add at this point due to NDA and competitive reasons, but as we get more visibility, we will let investors know that.
Anil Kumar Doradla - William Blair & Co. LLC
All right. I was hoping to get something more, but that's okay.
Now, given Microsoft's announcement of partnering with you, can you help us understand whether that has had a ripple effect with other vendors in North America, perhaps accelerating their level of interest and speeding up their level of interest in terms of engagement with you guys?
Syed Basharat Ali - Cavium, Inc.
Anil, I think the first and foremost point that this announcement has shown is that ARM servers are now very competitive. The current generation of ARM servers are very competitive with the incumbent X86 even at the high end, and this validation, I think, will help get some of the other cloud vendors and other big customers to very seriously evaluate it.
Anil Kumar Doradla - William Blair & Co. LLC
Very good. And finally, one quick clarification, so we're seeing a couple of guys talking about some weakness in China, some optical weakness.
Obviously, you guys are talking about wireless strength and wireless. Can you talk about what you guys are seeing in China and obviously India has been very strong so wanted to understand a little bit on that.
Thank you.
Syed Basharat Ali - Cavium, Inc.
Yeah, regarding China, we're seeing reasonably healthy trends. One of the things to look at for us in China is that our major revenues there are on the enterprise side, both at customers such as Huawei, and Huawei 3Com, for example, H3C, and other customers there.
A significant portion of our revenue is on the enterprise side and that – and there are multiple new OCTEON III product cycles starting there, so essentially we are seeing decent growth trends in that particular area. The other area is security, which of course, is also doing pretty well, and on the big iron wired infrastructure, we do have some content but not a whole lot of content.
So overall China, and of course, Fibre Channel is pretty strong in China also and growing very nicely. So, overall China for us when we look into Q2, looks reasonably healthy and will grow.
Anil Kumar Doradla - William Blair & Co. LLC
Very good, and congrats once again from my end.
Syed Basharat Ali - Cavium, Inc.
Thanks.
Arthur D. Chadwick - Cavium, Inc.
Thanks, Anil.
Operator
We next go to Vivek Arya with Bank of America.
Vivek Arya - Bank of America Merrill Lynch
Thank you for taking my question and good job on the quarter and guidance. First question is on QLogic, now that you have had it for a little bit more time.
I had – part A of the question is on the sales trajectory. Are you still comfortable with the assumption, Syed that you had made when you acquired the asset, if you could talk a little bit more about customer traction and how we should be thinking about the sales trajectory?
And then part B of the question perhaps for Art is on the gross margin contribution, now that you have taken over the manufacturing side from Broadcom, how should we think about the gross margin contribution from the QLogic side?
Syed Basharat Ali - Cavium, Inc.
Vivek, yes, this is Syed. So overall, when we take a look at the market, when we had done the acquisition, what we had said would be our primary growth drivers were Ethernet and the storage controllers, for things like all-flash arrays, and at this point in time when it was seven, eight months into the acquisition, we actually see that, the overall progress has been better than our expectations.
So overall from what kind of direction we had given for growth in terms of QLogic, we think that in 2017 we will exceed that. So, we are pretty pleased with how things are going.
On the Fibre Channel side it's stable but actually, we are seeing some decent trends there that are showing a little bit of growth there too. So overall, it has come in at, or above, our expectations eight months into the acquisition.
Art can you take over the...
Arthur D. Chadwick - Cavium, Inc.
Sure. And on the gross margin, yes when we acquired QLogic as you know we exercised the manufacturing rights.
That allowed us to reduce the product costs there. Some of that cost reduction has gone to more aggressive pricing, which is helping us with market share and some is falling to the bottom line, but you'll see that our blended gross margins have actually increased pretty nicely since the time we acquired QLogic.
If you go back to Q3 of last year, our gross margins on a non-GAAP basis, of course, were 64%. If you take it through, by Q2 guidance, it will have gone up 200 basis points in those three quarters.
And some of that comes from improvement at QLogic, some comes from Cavium, and we said further gross margin improvement in the back half of the year, probably about 0.5 basis point a quarter, give or take. So we're seeing that improvement flow through and we feel very good about that.
Syed Basharat Ali - Cavium, Inc.
You mean 50 basis points.
Arthur D. Chadwick - Cavium, Inc.
50 basis points. What did I say?
Syed Basharat Ali - Cavium, Inc.
0.5 point.
Arthur D. Chadwick - Cavium, Inc.
I'm sorry. 50 basis points.
My bad.
Vivek Arya - Bank of America Merrill Lynch
Got it. And as my follow-up, Syed, what is the potential to gain further share at Freescale, for example?
I know you gave us some color about the OCTEON TX. Can you discuss, what is the help that it can provide in terms of gaining more share from customers who are still using a lot of older Freescale PowerPC type architecture?
Syed Basharat Ali - Cavium, Inc.
Yeah, Vivek, in the embedded market itself obviously PowerPC has a pretty big market, but most of the market is in kind of the lower end 2 to 4 core. And for the next generation, they will move to ARM, primarily to ARM.
Some of them have moved to our MIPS-based OCTEON, but I think a majority of them will move to ARM as we look forward. So, as these come up for redesign sockets, that is where we'll have the opportunity to gain more designs for our OCTEON TX line, which we already have now from 2 core to 24 core.
Vivek Arya - Bank of America Merrill Lynch
All right. And just one last quick one.
You mentioned 5G. I realize it's pretty early to start thinking about the revenue contribution from 5G, but when do you think that it can start helping in terms of revenue?
Is it a back half of next year kind of contribution? Do you see more engagement from telcos?
Or you still think that they are trying to maximize their LTE footprints and 5G is still some ways away?
Syed Basharat Ali - Cavium, Inc.
Regarding 5G, Vivek, I think there will be like almost three phases of deployment. We think the first phase will be actually fixed wireless, and as you can see that – announcements have been done by I think Verizon and AT&T that they are testing currently fixed wireless broadband in a number of cities in the U.S.
So we expect fixed wireless to be kind of the first deployment, starting I would say kind of mid-2018-ish. And then the more classical handset, 5G-based handsets and the classical wireless market is probably a 2019 to 2020 event.
And then the third phase of the market, which has to do with things like autonomous driving when there's a lot of data needs to be exchanged between automotive, between different cars on the road, and IoT, will probably be a year or two behind that. So, there'll be phases, the first phase starting obviously like I said – I would say mid-2018 to second half of 2018 and then accelerating 2019, 2020, 2021 for the next few years.
Vivek Arya - Bank of America Merrill Lynch
Thank you.
Syed Basharat Ali - Cavium, Inc.
Thanks.
Arthur D. Chadwick - Cavium, Inc.
Thanks, Vivek.
Operator
Thank you. We'll now go to Joseph Moore with Morgan Stanley.
Vinayak Rao - Morgan Stanley & Co. LLC
Hi, this is Vinayak calling in for Joe. I wanted to ask a question on Thunder.
Syed Basharat Ali - Cavium, Inc.
Yes.
Vinayak Rao - Morgan Stanley & Co. LLC
You guys have seen some initial traction in China, right, with ThunderX, but those guys have some domestic effort as well. So, how do you feel about your competitive positioning there, and how should we think about the revenue opportunity for you over the next couple of years?
Syed Basharat Ali - Cavium, Inc.
Yeah, regarding the ARM server (29:50) opportunity, whether it's in Asia or whether it's in the U.S., the primary larger volume of deployment is dual socket ARM, and we are the only dual socket ARM in production today. The domestic efforts are more focused on single-socket up 'til this point, so whatever we have in play we'll continue in that play and then there is ThunderX2 coming online over the next few quarters, which should accelerate that deployment.
Vinayak Rao - Morgan Stanley & Co. LLC
Got it. That's helpful.
And for my follow-up, I wanted to talk about the Fibre Channel business. Like can you touch upon some of the growth drivers you're seeing there as you move from 8 to 16 GB and any update you have on 32 GB, that would be helpful?
Syed Basharat Ali - Cavium, Inc.
Yeah, so right now when you take a look at the Fibre Channel market, like I said it's stable to slightly up, and this year, we are in the transition from 8 GB to 16 GB and right now, I would say in 2017, the estimate is probably close to 50% 8 GB, 40%, 45% 16 GB and 5% 32 GB, and then so, three generations are shipping at the same time if you will. And as we go into 2018, those percentages obviously are going to change, 8 GB will drop a little bit, 16 GB will increase and 32 GB will also increase, so there is also an ASP uplift that happens as these transitions go from one generation to the other.
Vinayak Rao - Morgan Stanley & Co. LLC
Got it. Thanks for the color and congrats on a good quarter.
Arthur D. Chadwick - Cavium, Inc.
Great, thank you.
Operator
Thank you. We'll next go to Srini Pajjuri with Macquarie Securities.
Srini Pajjuri - Macquarie Capital (USA), Inc.
Thank you. Hi, guys.
Just a question on the data center side. You said you're expecting new product ramps to drive growth in DC.
I'm just curious as to which products are ramping that are helping Q2. And also if you look out to the next couple of quarters in the year, can you kind of rank order which product you expect to contribute the most in terms of the new product?
Syed Basharat Ali - Cavium, Inc.
Yeah. As with all new product ramps, right, it's difficult to predict which specific one will be a little bit more or a little bit less, but we expect over the year that every one of our product lines, our new products, should grow nicely from Q2 right through the year, so there will be contributions from every one of them, and meaningful contributions.
Srini Pajjuri - Macquarie Capital (USA), Inc.
Okay. Got it.
And then, Syed, you talked a little bit about 5G there and I saw an announcement from AT&T talking about so-called 5G network, they're calling it 5G Evolution. One thing that's interesting is that they're highlighting the use of small cells.
I'm just curious as to understand your exposure to small cells and what product do you actually sell into small cells and if you can also talk about the competitive environment within small cells, that would be helpful. Thank you.
Syed Basharat Ali - Cavium, Inc.
Yeah. Small cells deployments have been small.
I think what AT&T is more referring to is micro base stations. So if you take a look at the type of products that we announced at MWC, which is a baby Fusion-M which is a single-chip solution, it is lower user count base station but it has all the full features of the base station.
So that is what is more required than a small cell which really doesn't have the macro base station features. So we think we will be very well positioned in that market, because these smaller base stations will be used for in-fill deployments; so where there are holes or where the number of users are very dense instead of throwing up full macro BTSs, a lot of these small or micro BTSs, or you can call them small cells or you can call them micro base stations, they will be deployed into reasonable volume we think.
Srini Pajjuri - Macquarie Capital (USA), Inc.
And then in terms of your exposure and competitive environment please, competitive landscape?
Syed Basharat Ali - Cavium, Inc.
In the micro base station market, we are the only game in town as for the merchant silicon. Obviously, there will be some customers who do their own ASICs.
But this is almost like a new category that we have created. We also have a small cell fusion product that we are already shipping to and have been shipping to for a couple of years, but we think that for 5G the primary deployment will move to micro BTS portion of the market.
Srini Pajjuri - Macquarie Capital (USA), Inc.
All right, thank you.
Syed Basharat Ali - Cavium, Inc.
Thanks.
Arthur D. Chadwick - Cavium, Inc.
Thanks.
Operator
We'll next go to Kevin Cassidy with Stifel.
John J. Donnelly - Stifel, Nicolaus & Co., Inc.
Hi, this is John Donnelly on for Kevin. Could you break down the split between your enterprise customers and cloud service providers, specifically for QLogic, and are you seeing any more pricing pressure in one market versus the other?
Syed Basharat Ali - Cavium, Inc.
Not really. I think we have broad based solutions both on the Cavium side and on the QLogic side for kind of the enterprise and service provider markets.
Obviously, the enterprise is bigger right now, both for us and QLogic, for QLogic's products, but we are seeing so for example, some of the end customers of QLogic, even company's like Reliance and their data center are deploying our QLogic mix. So there are a number of cases where either through servers, a server OEM partners that we have like an HP or a Dell or direct purchase from us, we are seeing increasing deployment in that portion of the market.
John J. Donnelly - Stifel, Nicolaus & Co., Inc.
Great, thanks. I guess also in terms of paying off the debt, do you plan to continue to pay that off beyond the second quarter or is there a specific target that you're looking to reach there?
Arthur D. Chadwick - Cavium, Inc.
So the answer is yes, absolutely. As I mentioned, we've paid down $86 million in Q1.
We plan on paying more down in Q2. I haven't specified the amount yet, but we will pay more down in Q2, and we expect to pay down every single quarter, so we think that we can pay down this debt over the next couple of years.
Syed Basharat Ali - Cavium, Inc.
So I think one of your questions is, are we going to pay and stop at some point? No, we don't have plans to say okay, I have paid down 30%.
I'm going to keep carrying the balance as debt. We would like to continuously keep dragging it down, in some quarters it may be a little bit faster, in some quarters a little bit slower but the ultimate goal for us is to take it to zero.
John J. Donnelly - Stifel, Nicolaus & Co., Inc.
Great, thank you.
Arthur D. Chadwick - Cavium, Inc.
All right. Thanks a lot.
Operator
Thank you. We'll next go to Rick Schafer with Oppenheimer.
Joshua Buchalter - Oppenheimer & Co., Inc.
This is Josh Buchalter on behalf of Rick. Congratulations on the results and thanks for taking my question.
So in your prepared commentary you mentioned LiquidIO was seeing strength at 25 Gb, should we – is there anything we can interpret from your lead customer from this commentary because I believe they're set to make a decision on it in the second quarter?
Syed Basharat Ali - Cavium, Inc.
Obviously, the designs are with our first lead customer, but the key thing in the 25 Gb deployment is our content, obviously, significantly higher. It is I would say more than 50% higher than the 10 Gb type deployments which we have already started over the past couple of quarters.
So just the overall content goes up pretty nicely as we get into the back half of the year.
Joshua Buchalter - Oppenheimer & Co., Inc.
Okay. Thank you.
And then regarding XPliant, how easy is it for your customers to implement your product versus your primary competitor and I guess, what I'm asking, is it primarily your design wins that they've been second sourcing or the new platforms which XPliant is winning on? Thanks.
Syed Basharat Ali - Cavium, Inc.
When you take a look at the products that have been announced by the two announced customers, Arista and Brocade, these are very differentiated and if you kind of go to their website, they actually have presentations and videos that really show and highlight the differences between the XPliant switches and the incumbent switches. So we basically are addressing different pain points, different problems than the incumbent.
And, obviously, at the end of the day we are also a second source, there's no denying that. But the functionality and the programmability and the capabilities are pretty well differentiated between us.
It's not just a me too product which you can ship A or B. Some of the customers will prefer ours when they need more functionality out there.
Joshua Buchalter - Oppenheimer & Co., Inc.
Got it. Thank you so much.
That's very helpful.
Arthur D. Chadwick - Cavium, Inc.
Great, thanks.
Operator
Thank you. We'll next go to Chris Rolland with Susquehanna International Group.
Christopher Rolland - Susquehanna Financial Group LLLP
Hi, guys, just a follow-up there on XPliant then. So great wins on Brocade and Arista, but perhaps you guys can talk about where we go from here and what the design win pipeline looks like with some other customers.
Syed Basharat Ali - Cavium, Inc.
Sure. So one of the things you may have seen in the press, I think, it was in Q4, is that HPE, HP Enterprise, will be also OEM-ing the Arista product, so that becomes a third channel which I believe has already started shipping initial samples through that channel also, so that will add-on on top as we speak, if you will.
And then we have a couple of other vendors who are still in development and when they finish development, I'm sure they will announce and the switches – in switch product announcements they typically announce the silicon vendor, so everybody will know when these things get launched. But I think our first two customers will ramp through the year and then, like I said, the HPE channel opens up, a couple of other new guys coming up, so we should have a good growth year from 2016 to 2017.
Christopher Rolland - Susquehanna Financial Group LLLP
Great. It looks like good traction there.
And then on your LiquidIO comments, can you perhaps talk about the split between 10G and 25G? I think you were talking about 60% higher ASPs for 25G.
What's that split going to look like going forward and then ultimately would you expect to sell as many units as 25G as 10G?
Syed Basharat Ali - Cavium, Inc.
Yeah, right now, the market primarily is 10G, right both for LiquidIO type products and for the QLogic Ethernet mix. It's primarily 10 Gb.
25 Gb is starting, I would say this year, is probably, I don't know, 10% of the total ports, obviously, the revenue is higher just because the ASP's obviously are higher. So it's roughly about 10% of the ports, and we expect in 2018 that to become probably 30% of the ports, but also on the other side of the equation, you have 1 Gb deployments today that are moving up to 10 Gb.
So we are looking – we have a very strong position in 10 Gb actually. We are I think a strong number two to Intel in 10 Gb and that 1 Gb to 10 Gb – so our growth will come not only just from the 10 Gb to 25 Gb and 100 Gb.
Our growth would also come from the 1 Gb to 10 Gb transition. So, this we expect should be a very nice growth market for us for the next few years.
Christopher Rolland - Susquehanna Financial Group LLLP
That's great. Very helpful color.
Thanks, Syed.
Syed Basharat Ali - Cavium, Inc.
Thank you.
Operator
We'll next go to Gary Mobley with Benchmark.
Gary Mobley - The Benchmark Co. LLC
Hi, guys. Thanks for taking my question.
Art in the past you've shared with us some metrics – revenue metrics with respect to mix and different organic growth rates for the different product lines. I think if I'm not mistaken you're expecting new product on the Cavium side of the business to represent about 25% of Q1 revenue.
Is that about where you landed and how do you see that unfolding for the balance of the year?
Syed Basharat Ali - Cavium, Inc.
Yeah, I think on the new products as you've seen, right the OCTEON Fusion is a service provider product, so we've kind of put that into the service provider side of the equation and the other products that we have had we have put into the data center side of the equation. But just as a back of the envelope, we are probably ahead of that number.
Gary Mobley - The Benchmark Co. LLC
Okay. And I think you have been quoting a 20% organic growth rate roughly for the year, and I know there were a couple wildcards that were contemplated and appears as though you might be trending maybe slightly above that.
Is it a growth rate you still feel comfortable with, and could you share with us some of the factors that might perhaps drive some upside to that for the balance of the year?
Syed Basharat Ali - Cavium, Inc.
No, I think when we did the QLogic acquisition, we gave kind of rough estimates of what we expect the organic growth rate to be and what QLogic to be, and we are at or – in fact – the current Street numbers actually reflect that, and the fact that we are doing a little bit better than the Street numbers means that we are doing a little bit better on both sides of the house.
Gary Mobley - The Benchmark Co. LLC
Okay. And, Art, I know in the past you've always talked about how you expect your OpEx growth to be about half the revenue growth and that fits with your Q2 guidance, but given the fact that you might have some, perhaps, some additional cost cut, the QLogic side of the business, is that still the axiom that's going to hold for the balance of the year?
Arthur D. Chadwick - Cavium, Inc.
Yeah, for the most part, I think that is true. We have talked about some additional cost savings with the QLogic acquisition.
At this point that's really coming from facilities integration, we're moving them to a more right-sized building mid-year. That will save us some cost.
So OpEx, we firmly believe that we'll keep it below half the top line growth rate and perhaps even a little bit less than that during the back half of this year, because of those additional cost savings.
Gary Mobley - The Benchmark Co. LLC
Okay.
Syed Basharat Ali - Cavium, Inc.
Yeah. And another thing that we are doing is one of the things that has happened now over the past few quarters is that our design win engagements have significantly increased.
I would say the total design engagements that we've had so far in 2017 compared to 2018 are maybe even greater than 50% higher. So the fact that we are working with so many potential designs, so many customers, we are also incrementally increasing our software, customer support, applications, that type of function, just because of the total volume of designs for every one of the products, has increased substantially.
Gary Mobley - The Benchmark Co. LLC
Okay. All right.
That's it for me. Thanks, guys.
Arthur D. Chadwick - Cavium, Inc.
Great. Thanks, Gary.
Operator
We'll next go to Matt Ramsay with Canaccord Genuity.
Matthew D. Ramsay - Canaccord Genuity, Inc.
Thank you very much. Congrats and good afternoon.
Syed, it's great to see the commentary on ThunderX2 on a go forward basis with design wins. Obviously, there's now the ThunderX2 ARM core that you guys have developed internally and one that you've recently acquired that I believe are both on the roadmap in the near term.
Maybe you could talk a little bit about the traction of those two independently and how you plan to segment the roadmap on a go forward basis. Thank you.
Syed Basharat Ali - Cavium, Inc.
Yeah. I think we have not publicly shown our kind of roadmap and what we plan to do.
I would just say stay tuned, but we are working on both, so – and they're for different types of applications we'll be targeting. So as we move closer over the next few months we will give some more visibility on that.
Matthew D. Ramsay - Canaccord Genuity, Inc.
All right. Fair enough.
And then with some of the new revenue classifications, I guess, the data center classification is now a little bit shy of a quarter of the business. As you move forward over the next say three years or so, how do you expect growth of the two new segments to play out, and are there implications for gross margin that we should think about depending on which grows faster?
Thanks.
Syed Basharat Ali - Cavium, Inc.
That's a good question in terms of the two segments. We expect the data center segment as a percentage should be the fastest growing segment.
We expect growth in both segments, but the percentage growth is faster in the data center segment. So, for example, we gave you that we had roughly 77% and 23% in Q1 and first stages were similar in Q4.
When we look out into Q2, the growth rates of data centers are higher than the enterprise and service provider growth rates – as a percentage not in absolute dollars because 77% is a lot more dollars than the 23%.
Matthew D. Ramsay - Canaccord Genuity, Inc.
Got it. That's helpful.
Thanks guys.
Arthur D. Chadwick - Cavium, Inc.
Great, thanks.
Operator
Thank you. We'll next go to Harlan Sur with JPMorgan.
Harlan Sur - JPMorgan Securities LLC
Hey, guys nice job on the quarterly execution. This may be a follow-up from the previous question, but on ThunderX with some of the new ARM IP that you've recently acquired, should give you guys a pretty solid performance boost, right, multi-threading technology, I think the acquired technology had good single core performance.
Are you guys thinking about adopting multi-threading, which really hasn't been a part of your architecture previously? And I guess two things; does this push out your ThunderX2 road maps a bit or would this be more kind of ThunderX3 implementation?
Syed Basharat Ali - Cavium, Inc.
I don't want to, again, since we have not publicly announced, I don't want to get into details, but we will have a very competitive ThunderX2 product, and we have both types of cores so each one of them will go and address a certain segment of the market. So we believe that we will have a very comprehensive ThunderX2 product line.
Harlan Sur - JPMorgan Securities LLC
Great. Thanks for that.
And then as we think about the switching business, obviously, you guys have gotten great traction with XPliant and the X80 product and as I think about the competitive environment, which is starting to heat up there both public companies and private companies and it seems that the cadence of new product introductions is kind of every 12 to 18 months. Broadcom already has Tomahawk II out there.
You combine that with the ThunderX platform where the cadence of new technology introductions is sort of maybe again sort of 18 months. As you think about, which to me is maybe a little bit more of an accelerated technology migration cadence than what you've previously seen on some of your embedded products like OCTEON and NITROX.
I guess, I'm wondering what is it – as you think about the resources to continue to drive this kind of cadence, can the team, does the team still feel comfortable about driving the type of OpEx profile at a lower growth rate than revenues on a go forward basis.
Syed Basharat Ali - Cavium, Inc.
Yeah. I think when you take a look at actually cadences and in different technologies, there are announcements and there are real products.
Right? So when you take a look at real products, actually even Intel, I think, when you take a look at Intel and some of the other larger customers, they're actually slowing down the cadence as they move to 10, 7, 5, it's going to be a longer cadence not a 12 to 18 month.
I think right now some of the large competitors are saying 24 months, maybe even 30 months. So, overall, again, we have a number of products and we prioritize which products to get out when.
So we will be able to execute on all products and we will do it based upon our priority.
Harlan Sur - JPMorgan Securities LLC
Thanks for the insights, Syed.
Syed Basharat Ali - Cavium, Inc.
Thanks, Harlan.
Arthur D. Chadwick - Cavium, Inc.
Thanks, Harlan.
Operator
That concludes today's question-and-answer session. This conference will be available for replay after 5:30 PM Pacific today through May 26 at 5:30 PM Pacific.
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Thank you for your participation.