10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-33435

CAVIUM, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE	77-0558625
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2315 N. First Street San Jose, California	95131
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (408) 943-7100

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

The number of shares of the Registrant’s Common Stock, $0.001 par value, outstanding as of April 29, 2014 was: 52,837,888

CAVIUM, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013	3
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	25
PART II. OTHER INFORMATION		25
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 5.	Other Information	42
Item 6.	Exhibits	42

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CAVIUM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

	As of March 31, 2014			As of December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	124,106		$	127,763
Accounts receivable, net of allowances of $996 and $933, respectively		56,819			43,636
Inventories		49,048			45,768
Prepaid expenses and other current assets		5,834			6,491
Total current assets		235,807			223,658
Property and equipment, net		28,562			28,494
Intangible assets, net		41,453			43,240
Goodwill		71,478			71,478
Deferred tax assets		61			61
Other assets		1,035			1,054
Total assets	$	378,396		$	367,985
Liabilities and Equity
Current liabilities:
Accounts payable	$	24,060		$	23,467
Other accrued expenses and other current liabilities		9,519			9,836
Deferred revenue		8,475			8,669
Notes payable and other		15,770			13,512
Capital lease and technology license obligations		14,227			17,103
Total current liabilities		72,051			72,587
Capital lease and technology license obligations, net of current portion		15,297			16,292
Deferred tax liability		2,365			1,931
Other non-current liabilities		2,437			2,344
Total liabilities		92,150			93,154
Commitments and contingencies (Note 11)
Equity
Common stock, par value $0.001:
200,000,000 shares authorized; 52,835,888 and 52,221,251 shares issued and outstanding, respectively		53			53
Additional paid-in capital		456,758			443,588
Accumulated deficit		(154,710	)		(157,057	)
Total stockholders' equity attributable to the Company		302,101			286,584
Non-controlling interest		(15,855	)		(11,753	)
Total equity		286,246			274,831
Total liabilities and equity	$	378,396		$	367,985

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

CAVIUM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended March 31,
	2014			2013
Net revenue	$	83,241		$	69,530
Cost of revenue		30,350			26,159
Gross profit		52,891			43,371
Operating expenses:
Research and development		37,289			32,415
Sales, general and administrative		15,932			15,240
Total operating expenses		53,221			47,655
Loss from operations		(330	)		(4,284	)
Other income (expense), net:
Interest expense		(459	)		(342	)
Change in estimated fair value of notes payable and other		(858	)		-
Other, net		135			(261	)
Total other expense, net		(1,182	)		(603	)
Loss before income taxes		(1,512	)		(4,887	)
Provision for income taxes		243			426
Net loss		(1,755	)		(5,313	)
Net loss attributable to non-controlling interest		(4,102	)		(2,129	)
Net income (loss) attributable to the Company	$	2,347		$	(3,184	)
Earnings per share attributable to the Company:
Net income (loss ) per common share, basic	$	0.04		$	(0.06	)
Shares used in computing basic net income (loss) per common share		52,550			51,001
Net income (loss) per common share, diluted	$	0.04		$	(0.06	)
Shares used in computing diluted net income (loss) per common share		54,221			51,001

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

CAVIUM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2014			2013
Cash flows from operating activities:
Net loss	$	(1,755	)	$	(5,313	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock-based compensation expense		9,587			8,274
Depreciation and amortization		7,851			9,324
Deferred income taxes		198			193
Gain on sale of held for sale assets		-			(747	)
Gain on disposition of certain consumer product assets		(250	)		(250	)
Change in estimated fair value of notes payable and other		858			-
Changes in assets and liabilities:
Accounts receivable, net		(13,183	)		(2,560	)
Inventories		(3,286	)		5,099
Prepaid expenses and other current assets		659			1,698
Other assets		18			(338	)
Accounts payable		(1,127	)		(4,307	)
Deferred revenue		(194	)		(2,287	)
Accrued expenses and other current and non-current liabilities		(242	)		(629	)
Net cash (used in) provided by operating activities		(866	)		8,157
Cash flows from investing activities:
Purchases of property and equipment		(2,145	)		(670	)
Purchases of intangible assets		(1,231	)		(2,343	)
Proceeds received from sale of held for sale assets		-			3,350
Proceeds received from disposition of certain consumer product assets		250			250
Net cash (used in) provided by investing activities		(3,126	)		587
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of options		3,589			6,845
Principal payment of capital lease and technology license obligations		(4,908	)		(6,362	)
Proceeds from notes payable from non-controlling interest of the VIE		1,400			500
Tax withholdings for stock option exercises on behalf of employees		254			-
Net cash provided by financing activities		335			983
Net increase (decrease) in cash and cash equivalents		(3,657	)		9,727
Cash and cash equivalents, beginning of period		127,763			76,784
Cash and cash equivalents, end of period	$	124,106		$	86,511
Supplemental disclosure of cash flows from investing activities
Property and equipment and intangible assets acquired included in accounts payable, other accrued expense and other current liabilities		1,984			1,198
Supplemental disclosure of cash flow from financing activities:
Property and equipment and intangible assets acquired included in capital lease and technology license obligations		984			-

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

CAVIUM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Basis of Presentation

Organization

Cavium, Inc., (the “Company”), was incorporated in the state of California on November 21, 2000 and was reincorporated in the state of Delaware effective February 6, 2007. The Company designs, develops and markets semiconductor processors for intelligent and secure networks.

Basis of Presentation

The condensed consolidated financial statements include the accounts of Cavium, Inc., its wholly owned subsidiaries, and a variable interest entity, or VIE, of which the Company is the primary beneficiary. Under the accounting principles generally accepted in the United States of America, or US GAAP, a VIE is required to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. See Note 5 of Notes to Condensed Consolidated Financial Statements for detailed discussions of the VIE. All significant intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements have been prepared in accordance with US GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by US GAAP for annual financial statements. For further information, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K (File No. 001-33435) on file with the SEC for the year ended December 31, 2013.

The condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to state fairly the Company’s condensed consolidated financial position at March 31, 2014, and the condensed consolidated results of its operations for the three months ended March 31, 2014 and 2013, and condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by US GAAP. Certain reclassifications have been made to prior period amounts in the condensed consolidated statements of cash flows to conform to current period presentation.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. There had been no material changes to these accounting policies.

2. Net Income (Loss) Per Common Share

The following table sets forth the computation of net income (loss) per share:

	Three Months Ended March 31,
	2014		2013
	(in thousands, except per share data)
Net income (loss) attributable to the Company	$	2,347	$	(3,184	)
Weighted average common shares outstanding - basic		52,550		51,001
Dilutive effect of employee stock plans		1,671		-
Weighted average common shares outstanding - diluted		54,221		51,001
Net income (loss ) per common share, basic	$	0.04	$	(0.06	)
Net income (loss) per common share, diluted	$	0.04	$	(0.06	)

6

The following outstanding options and restricted stock units were excluded from the computation of diluted net income (loss) per common share for the periods presented because including them would have had an anti-dilutive effect:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Options to purchase common stock		610		3,834
Restricted stock units		-		2,230

3. Fair Value Measurements

At March 31, 2014 and December 31, 2013, all of the Company’s investments were classified as cash equivalents and are comprised of an investment in a money market fund. In accordance with the guidance for fair value measurements and disclosures, the Company determined the fair value hierarchy of its money market fund as Level 1, which approximated $94.2 million and $94.2 million as of March 31, 2014 and December 31, 2013, respectively. The carrying amount of the Company’s accounts receivable, accounts payable and accrued expenses approximate fair value due to their short term maturities.

The notes payable and other are carried at fair value and are a Level 3 measurement. See Note 5 of the Notes to Condensed Consolidated Financial Statements for further discussion of the fair value measurements.

4. Balance Sheet Components

Inventories

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
Work-in-process	$	36,334	$	35,027
Finished goods		12,714		10,741
	$	49,048	$	45,768

Property and equipment, net

	As of March 31, 2014			As of December 31, 2013
	(in thousands)
Test equipment and mask costs	$	37,021		$	34,457
Software, computer and other equipment		36,428			34,945
Furniture, office equipment and leasehold improvements		1,077			938
		74,526			70,340
Less: accumulated depreciation and amortization		(45,964	)		(41,846	)
	$	28,562		$	28,494

Depreciation and amortization expense was $4.2 million and $4.5 million for the three months ended March 31, 2014 and 2013, respectively.

The Company leases certain design tools under capital lease and certain financing arrangements which are included in property and equipment, which total cost, net of accumulated amortization amounted to $15.3 and $16.2 million at March 31, 2014 and December 31, 2013, respectively. Amortization expense related to assets recorded under capital lease and certain financing agreements was $2.0 million and $1.6 million for the three months ended March 31, 2014 and 2013, respectively.

7

Other accrued expenses and other current liabilities

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
Accrued compensation and related benefits	$	4,912	$	4,262
Professional fees		1,405		1,536
Customer deposits		911		1,470
Income tax payable		308		544
Deferred tax liability		41		277
Other		1,942		1,747
	$	9,519	$	9,836

Warranty Accrual

The following table presents a reconciliation of the warranty liability, which is included within other accrued expenses and other current liabilities above:

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Beginning balance	$	167		$	440
Accruals and adjustments		97			85
Settlements		(92	)		(155	)
Ending balance	$	172		$	370

Deferred revenue

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
Services/support and maintenance	$	4,755	$	5,326
Software license/subscription		1,410		1,176
Distributor deferred margin		2,310		2,167
	$	8,475	$	8,669

5. Business Combinations and Divestitures

Variable Interest Entity

Between May 2012 and March 2014, the Company entered into several note purchase agreements with a VIE to provide cash advances. The Company has a purchase option to acquire the assets of the VIE on terms specified in one of the note purchase agreements. As of March 31, 2014, the Company had made cash advances of $10.0 million under seven convertible notes receivable which, as amended, mature on August 31, 2014. In addition, third party investors (“non-controlling interest”) had made cash advances of $13.0 million under fifteen convertible notes receivable which mature on August 31, 2014. All the convertible notes bear interest at a rate of 6%, payable at maturity. Two of the convertible notes held by a third party investor with a principal amount of $1.0 million matured and were paid by the VIE in December 2013. Two of the convertible notes held by the Company are collateralized by a lien on the VIE’s assets. Pursuant to the convertible notes, in the event of a corporate transaction, as defined in the convertible notes, the holders of the convertible notes will be entitled to receive the principal plus a fixed return on their investment, while in case of a qualified equity financing of the VIE, as defined in the convertible notes, the outstanding principal balance plus the accrued interest on the convertible notes will be automatically converted into convertible preferred stock of the VIE at a discounted price.

8

In December 2013, a third party investor exchanged its convertible note with a principal of $1.4 million and invested additional cash of $1.5 million with the VIE for a $2.9 million convertible security which has the same features as the convertible notes, with the exception of the requirement for repayment, interest and maturity. The Company has determined that for accounting purposes, the convertible security has derivative features, and as such, the Company estimated the fair value of the derivative features based on market approach using Level 3 inputs. The assumptions used in the fair value estimate are related to the probability of the aforementioned capital scenarios. The assumptions used in the fair value estimate are based, in part, on significant uncertainties, are difficult to predict and could differ materially in the future. Based on the most reasonable assumptions determined by management, the fair value of the derivative feature of the convertible security as of the issuance date is approximately the same as the principal amount. Accordingly, the Company classified the $2.9 million convertible security as derivative liability within notes payable and other on the condensed consolidated balance sheets.  

All of the convertible notes and derivative feature of convertible security are classified as Level 3 liability due to the above mentioned features and therefore they are all measured and presented at fair value in the condensed consolidated financial statements.  The convertible notes and the derivative feature of the convertible security are remeasured at each reporting period and, depending on the probability of the occurrence of the features mentioned above, the valuation of these instruments could range from their current fair value to approximately two times the principal amount of the convertible notes and the convertible security. As of March 31, 2014, the Company estimated the fair value of the convertible notes and derivative feature of the convertible security included in the condensed consolidated financial statements using the same fair value measurement model. Based on the Company’s assessment, there have been no changes in the probability scenarios that could significantly change the fair value of the convertible notes and derivative features of convertible security from December 31, 2013 to March 31, 2014, with the exception of a change in fair value due to the time value of money, which was recorded as a change in estimated fair value of notes and other in the statements of operations in the three months ended March 31, 2014. The table below summarizes the change in the value of the convertible notes and derivative features of the convertible security for the three months ended March 31, 2014:

	As of December 31, 2013		Additions		Change in estimated fair value recognized in statements of operations		As of March 31, 2014
	(in thousands)
Convertible notes	$	10,612	$	1,400	$	670	$	12,682
Derivative feature of convertible security		2,900		-		188		3,088
Total notes payable and other	$	13,512	$	1,400	$	858	$	15,770

In April 2014, the Company made an additional cash advance of $3.0 million to the VIE under a promissory note that bears an annual interest rate of 6% and matures on the first anniversary date of the promissory note.

The Company has concluded that it is the primary beneficiary of the VIE due to the Company’s involvement with the VIE and the purchase option to acquire the assets of the VIE. As such, the Company has included the accounts of the VIE in the condensed consolidated financial statements. The significant components of the VIE’s financial statements included in the Company’s condensed consolidated financial statements as of March 31, 2014 include cash of $0.9 million; property and equipment and intangible assets of $7.2 million; accounts payable and accrued expenses of $2.5 million; notes payable and other of $15.8 million; capital lease and technology license obligations of $6.0 million and non-controlling interest of $15.9 million. As of December 31, 2013, the significant component of the VIE’s financial statements included in the Company’s condensed consolidated financial statements include cash of $1.9 million; property and equipment and intangible assets of $6.7 million; accounts payable and accrued expenses of $3.4 million; notes payable and other of $13.5 million; capital lease and technology license obligations of $6.3 million and non-controlling interest of $11.8 million. For the three months ended March 31, 2014 and 2013, the Company’s portion of the net loss of the VIE was $2.2 million and $1.6 million, respectively.

9

Disposition of Certain Consumer Product Assets

In September 2012, the Company completed the sale of certain consumer product assets to a third party company. The consumer product assets that were sold originated from the acquisition of Star Semiconductor Corporation in fiscal year 2008 and had been further developed by the Company. Under an asset purchase agreement, the Company agreed to transfer certain assets such as property and equipment and intangible assets to the third party company for an aggregate cash consideration of $2.4 million, payable in installments starting from January 10, 2013 through January 10, 2015. The Company determined that the payment terms were not fixed and determinable and as such the Company treated this transaction as disposition of assets and will recognize the future payments as a credit to sales, general and administrative expenses when the payments are due. The carrying value of the assets related to the sale of $2.7 million was recognized as a loss on disposition of certain consumer product assets within sales, general and administrative expenses during the third quarter of 2012. During the three months ended March 31, 2014 and 2013, the Company received total installment cash consideration of $0.3 million and $0.3 million, respectively, which were recognized as credits within sales, general and administrative expenses.

Sale of Held for Sale Assets

In January 2013, the Company completed the sale of certain assets to a third-party company. The assets sold originated from the acquisition of MontaVista Software, Inc. in fiscal year 2009. Under the asset purchase agreement, the Company agreed to transfer certain assets for an aggregate cash consideration of $3.3 million and the carrying value of the assets held for sale was approximately $2.6 million. The difference between the sale consideration and the carrying value of the assets held for sale of $0.7 million was recognized as a gain on sale of held for sale assets within sales, general and administrative expenses during the three months ended March 31, 2013.

6. Goodwill and Intangible Assets, Net

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The carrying value of the goodwill as of March 31, 2014 was $71.5 million, unchanged from the balance at December 31, 2013.

Intangible assets, net

	As of March 31, 2014
	Gross		Accumulated Amortization			Net		Weighted average remaining amortization period (years)
	(in thousands)
Technology licenses	$	70,120	$	(34,443	)	$	35,677		7.64
Existing and core technology - product		42,084		(36,796	)		5,288		1.49
Customer contracts and relationships		8,991		(8,862	)		129		1.08
Trade name		2,296		(1,937	)		359		0.86
Order backlog		640		(640	)		-	-
Total amortizable intangible assets	$	124,131	$	(82,678	)	$	41,453		6.79

	As of December 31, 2013
	Gross		Accumulated Amortization			Net		Weighted average remaining amortization period (years)
	(in thousands)
Technology licenses	$	68,175	$	(32,015	)	$	36,160		7.88
Existing and core technology - product		42,086		(35,637	)		6,449		1.68
Customer contracts and relationships		8,991		(8,827	)		164		1.30
Trade name		2,296		(1,829	)		467		1.10
Order backlog		640		(640	)		-	-
Total amortizable intangible assets	$	122,188	$	(78,948	)	$	43,240		6.87

10

Amortization expense was $3.7 million and $4.8 million for the three months ended March 31, 2014 and 2013, respectively. The estimated future amortization expense from amortizable intangible assets is as follows (in thousands):

Remainder of 2014	$	9,977
2015		7,124
2016		5,016
2017		3,216
2018		3,057
2019 and thereafter		13,063
	$	41,453

7. Restructuring Accrual

The excess facility related restructuring accrual at the beginning of 2014 relates to the unused leased facility in Canada. The lease expired in March 2014.

In connection with a workforce reduction during the three months ended March 31, 2014, the Company incurred and paid $0.6 million related to severance and other related benefits.

A summary of the accrued restructuring liabilities including related activities during the three months ended March 31, 2014, is as follows:

	Severance and other benefits			Excess Facility Related Cost			Total
	(in thousands)
Balance at December 31, 2013	$	-		$	57		$	57
Additions		570			-			570
Cash payments and other non-cash adjustments		(570	)		(57	)		(627	)
Balance at March 31, 2014	$	-		$	-		$	-

8. Equity

Equity Incentive Plans

The following table summarizes the details related to stock options granted and outstanding under the 2007 Equity Incentive Plan and 2001 Stock Incentive Plan for the three months ended March 31, 2014:

	Number of Shares Outstanding			Weighted Average Exercise Price
Balance as of December 31, 2013		3,552,216			17.79
Options granted		153,000			37.83
Options exercised		(310,488	)		11.56
Options cancelled and forfeited		(2,000	)		0.30
Balance as of March 31, 2014		3,392,728			19.28

The fair value of each option grants for the three months ended March 31, 2014 and 2013 were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended March 31,
	2014		2013
Risk-free interest rate		1.47%		0.32%
Expected life	4.53 years		4.53 years
Dividend yield		0%		0%
Volatility		43.8%		49.6%

The estimated weighted-average grant date fair value of options granted for the three months ended March 31, 2014 and 2013 were $14.37 per share and $15.30 per share, respectively.

11

As of March 31, 2014, there is $6.6 million of unrecognized compensation costs, net of estimated forfeitures, related to stock options granted under the Company’s 2007 Equity Incentive Plan and 2001 Stock Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.66 years.

The following table summarizes the details related to restricted stock units, or RSUs, granted and outstanding under the 2007 Equity Incentive Plan for the three months ended March 31, 2014:

	Number of Shares			Weighted-Average Grant Date Fair Value Per Share
Balance as of December 31, 2013		1,776,170			35.64
Granted		1,016,955			37.54
Issued and released		(304,148	)		33.65
Cancelled and forfeited		(16,331	)		36.21
Balance as of March 31, 2014		2,472,646			36.66

For restricted stock units, or RSUs, stock-based compensation expense is calculated based on the market price of the Company’s common stock on the date of grant, multiplied by the number of RSUs granted. The grant date fair value of RSUs, less estimated forfeitures, is recorded on a straight-line basis, over the vesting period.

In February 2014, the Company granted one-year performance-based RSU’s. During the three months ended March 31, 2014, the Company evaluated the probability of achieving the milestone and determined that the fair value of these performance RSU’s was $2.1 million. The Company recorded the related stock-based compensation expense for the three months ended March 31, 2014 and continues to evaluate the probability of achieving the milestone at each reporting period and adjust any RSU expense which is included in stock-based compensation expense.

As of March 31, 2014, there was $73.9 million of unrecognized compensation costs, net of estimated forfeitures related to RSUs granted under the Company’s 2007 Equity Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.87 years.

Stock-Based Compensation

The following table presents the detail of stock-based compensation expense amounts included in the condensed consolidated statement of operations for each of the periods presented:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Cost of revenue	$	247	$	287
Research and development		5,404		3,906
Sales, general and administrative		3,936		4,081
	$	9,587	$	8,274

The total stock-based compensation cost capitalized as part of inventory as of March 31, 2014 and December 31, 2013 was not significant.

12

Changes in equity

A reconciliation of the changes in equity for the three months ended March 31, 2014 is presented below:

	Attributable to the Company		Attributable to non-controlling interest			Total equity
	(in thousands)
Balance at December 31, 2013	$	286,584	$	(11,753	)	$	274,831
Common stock issued in connection with exercises of stock options		3,589		-			3,589
Stock-based compensation		9,581		-			9,581
Net income (loss)		2,347		(4,102	)		(1,755	)
Balance at March 31, 2014	$	302,101	$	(15,855	)	$	286,246

9. Income Taxes

The quarterly provision for income taxes is based on the estimated annual effective tax rate, plus any discrete items. The Company updates its estimate of its annual effective tax rate at the end of each quarterly period. The estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and interpretations of tax laws and the possible outcomes of current and future audits.

The following table presents the provision for income taxes and the effective tax rates for the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Loss before income taxes	$	(1,512	)	$	(4,887	)
Provision for income taxes		243			426
Effective tax rate		-16.1	%		-8.7	%

The provision for income taxes for the three months ended March 31, 2014 was primarily related to earnings in foreign jurisdictions. The difference between the benefit from income taxes that would be derived by applying the statutory rate to the Company’s loss before income taxes and the provision for income taxes recorded for the three months ended March 31, 2014 was primarily attributable to the difference in foreign tax rates and an increase in indefinite lived intangible related deferred tax liability. The provision for income taxes for the three months ended March 31, 2013 was primarily related to earnings in foreign jurisdictions. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to the Company’s loss before income taxes and the provision for income taxes recorded for March 31, 2013 was primarily attributable to the impact of losses that are not benefited, the difference in foreign tax rates and an increase in indefinite lived intangible related deferred tax liability.

The Company’s net deferred tax assets relate predominantly to its United States tax jurisdiction. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both negative and positive evidence to assess the recoverability of the Company’s net deferred tax assets during the fourth quarter of 2012, the Company determined that it was more-likely-than-not it would not realize the full value of its federal and state deferred tax assets. As such, the Company determined that as of December 31, 2012, a full valuation allowance was required on its net federal and state deferred tax assets. Adjustments could be required in the future if the Company concludes that it is more-likely-than-not that these net deferred tax assets are recoverable. A release of the valuation allowance could have the effect of decreasing the income tax provision in the period the valuation allowance is released. The Company continues to monitor the likelihood that it will be able to recover its deferred tax assets. As of March 31, 2014, the Company believes that it is not more likely than not that it will be able to fully realize its United States federal and state deferred tax assets and, as such, the Company continues to provide a full valuation allowance on those deferred tax assets.

As of March 31, 2014 and December 31, 2013, the Company had unrecognized tax benefits for income taxes associated with uncertain tax positions of $14.8 million and $14.6 million, respectively. If all of these unrecognized tax benefits were recognized, $0.7 million would reduce the Company’s effective tax rate. The Company is not anticipating any significant changes in unrecognized tax benefits in the next 12 months.

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The Company’s major tax jurisdictions are the United States federal government, the states of California and Massachusetts, Japan, India, China and Singapore. The Company files income tax returns in the United States federal jurisdiction, the states of California and Massachusetts, various other states, and foreign jurisdictions in which it has a subsidiary or branch operations. The United States federal corporation income tax returns beginning with the 2000 tax year remain subject to examination by the Internal Revenue Service, or IRS. The California corporation income tax returns beginning with the 2000 tax year remain subject to examination by the California Franchise Tax Board. As of March 31, 2014, there are no on-going tax audits in the major tax jurisdictions other than India. The India tax audit is for the tax years 2010 and 2011, and the Company does not expect any significant tax adjustments.

The federal research and development credits regulation, which was extended for two years under The American Taxpayer Relief Act of 2012, expired at the end of 2013.  As a result, the quarterly provision and the annual effective tax rate did not consider the effects of the federal research and development credits.  

10. Segment and Geographic Information

Operating segments are based on components of the Company that engage in business activity that earn revenue and incur expenses and (a) whose operating results are regularly reviewed by the Company’s chief operating decision maker, or CODM, to make decisions about resource allocation and performance and (b) for which discrete financial information is available. The Company manages and operates as one reporting segment.

The Company’s revenue consists primarily of sale of semiconductor products to network equipment providers and data centers and their contract manufacturers and distributors and also derives revenue from licensing software and related maintenance and support. The revenue from these sources is classified by the Company as product revenue. The Company also generates revenue from professional service arrangements which is categorized as service revenue. The total service revenue is less than 10% of the Company’s total revenue for the three months ended March 31, 2014 and 2013. As a result, the financial information used to produce the Company’s general-purpose financial statements does not report this service revenue separately.

The following table is based on the geographic location of the original equipment manufacturers, the contract manufacturers or the distributors who purchased the Company’s products. For sales to the distributors, their geographic location may be different from the geographic locations of the ultimate end customers.

Sales by geography for the periods indicated were as follows:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
United States	$	30,077	$	22,651
China		22,004		16,820
Korea		3,664		7,035
Mexico		4,650		4,150
Finland		7,712		2,455
Taiwan		6,198		5,891
Malaysia		2,834		3,465
Other countries		6,102		7,063
Total	$	83,241	$	69,530

The following table sets forth long lived assets, which consist of property and equipment, net by geographic regions:

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
United States	$	24,164	$	25,160
All other countries		4,398		3,334
Total	$	28,562	$	28,494

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11. Commitments and Contingencies

The Company is not currently a party to any legal proceedings and outcome of which, if determined adversely to the Company, would have a material adverse effect on the condensed consolidated financial position, condensed results of operations or condensed cash flows of the Company.

The Company leases its facilities under non-cancelable operating leases, which contain renewal options and escalation clauses, and expire on various dates ending in October 2022. The Company also acquires certain assets under capital leases.

The capital lease and technology license obligations include future cash payments payable primarily for license agreements with various outside vendors. For license agreements which qualify under capital lease and where installment payments extend beyond one year, the present value of the future installment payments are capitalized and included as part of intangible assets or property and equipment which is amortized over the estimated useful lives of the related licenses.

Minimum commitments under non-cancelable operating and capital lease agreements as of March 31, 2014 are as follows:

	Capital lease and technology license obligations		Operating leases		Total
	(in thousands)
Remainder of 2014	$	13,716	$	4,165	$	17,881
2015		12,103		6,928		19,031
2016		5,150		8,680		13,830
2017		-		8,731		8,731
2018		-		8,929		8,929
2019 thereafter		-		31,983		31,983
	$	30,969	$	69,416	$	100,385
Less: Interest component (3.75% annual rate)		1,445
Present value of minimum lease payment		29,524
Current portion of the obligations	$	14,227
Long-term portion of obligations	$	15,297

Rent expense incurred under operating leases was $1.4 million and $1.3 million for the three months ended March 31, 2014 and 2013, respectively.

In September 2013, the VIE entered into a purchase agreement with a third party vendor to purchase certain test equipment amounting to $6.1 million, payable in installments over two years. The equipment was received and recorded in the fourth quarter of 2013. In January 2014, the VIE purchased and recorded additional parts to the test equipment amounting to $1.0 million, payable in installment over two years. The Company has an agreement with the VIE and third party vendor, whereby the Company guaranteed the payment of the test equipment in the event the VIE defaults such payment obligation.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this document.

The information in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “estimate,” “project,” “predict,” “potential,” “continue,” “strategy,” “believe,” “anticipate,” “plan,” “expect,” “intend” and similar expression intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

OCTEON^®, OCTEON^® Plus^TM, OCTEON Fusion^®, FusionStack^TM, NITROX^®, NEURON^TM, Celestial^TM , ECONA^®, PureVu^® and WiVu^TM are trademarks or registered trademarks of Cavium, Inc.

16

Overview

We are a provider of highly integrated semiconductor processors that enable intelligent processing for networking, communications, storage, wireless, security, video and connected home and office applications. Our product allows our customers to develop networking, wireless, storage and electronic equipment that is application-aware and content-aware and securely processes voice, video and data traffic at high speeds. Our products are systems on a chip, or SoCs, which incorporate single or multiple processor cores, a highly integrated architecture and customizable software that is based on a broad range of standard operating systems. We focus our resources on the design, sales and marketing of our products, and outsource the manufacturing of our products. Following summarizes our product timeline introduction throughout the period:

Timeline		History
2000 through 2003	—	We were incorporated and commenced product development.
	—	We began shipping NITROX security processors commercially.
2004	—	We introduced and commenced commercial shipments of NITROX Soho.
2006	—	We commenced our first commercial shipments of OCTEON multi-core processors.
2007	—	We introduced our new line of OCTEON based storage services processors designed to address the specific needs in the storage market, as well as other new products in the OCTEON and NITROX families.
2008	—	We expanded our OCTEON and NITROX product families with new products including wireless services processors to address the needs for wireless infrastructure equipment.
2009	—	We announced the OCTEON II Internet Application Processor, or IAP, family multi-core MIPS64 processors.
	—	We acquired MontaVista Software, Inc. in December 2009. This acquisition complemented our broad portfolio of multi-core processors to deliver integrated and optimized embedded solutions to the market.
2010	—	We announced the next generation NITROX III, a processor family with 16 to 64-cores that delivers security and compression processors for application delivery, cloud computing and wide area network optimization.
2011	—	We introduced NEURON, a new search processor product family that targets a wide range of high performance, L2-L4 network search applications in enterprise and service provider infrastructure equipment.
	—	We also introduced another new product family, the OCTEON Fusion, a single chip SoCs with up to 6x MIPS64 cores and up to 8x LTE/3G baseband DSP cores which enable macro base station class features for small cell base stations.
2012	—	We introduced OCTEON III, Cavium’s 48-core 2.5GHz multi-core processor family that can deliver up to 100Gbps of application processing, up to 120GHz of 64-bit compute processing per chip and can be connected in multi-chip configurations.
	—	We announced Project Thunder, the development of a new family of 64-bit ARMv8 scalable multi-core processors for cloud and datacenter applications.
2013	—	We introduced the LiquidIO family of 10 Gigabit Server Adapters which provide high-performance, programmable adapter platform to enable software defined networks for cloud service providers and datacenters.

The following summarizes our acquisitions in the last five years:

— We acquired MontaVista Software, Inc. in December 2009. This acquisition complemented our broad portfolio of multi-core processors to deliver integrated and optimized embedded solutions to the market.

— We acquired Celestial Systems, Inc. in October 2010. With the acquisition of Celestial Systems, we gained additional professional services such as Digital Media product development and Android commercialization and support.

— We completed the acquisition of substantially all of the assets and assumed certain liabilities of Wavesat Inc. in January 2011. This acquisition added multicore wireless digital system processing to our embedded processor product line.  

— We completed the acquisition of substantially all of the assets and assumed certain liabilities of Celestial Semiconductor, Ltd. in March 2011. With the acquisition of Celestial Semiconductor, we added capabilities to enable a processor family targeted for the large and growing market of converged media, gateway and wireless display applications.

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Since inception, we have invested heavily in new product development and our net revenue has grown from $7.4 million in 2004 to $304.0 million in 2013 driven primarily by demand in the enterprise network and data center markets and increased demand in the broadband and consumer markets. We expect sales of our products for use in the enterprise network and data center markets to continue to represent a significant portion of our revenue in the foreseeable future, however, we do expect growth in the broadband and consumer as well as the access and servicer provider markets.

We primarily sell our products to OEMs, either directly or through their contract manufacturers. Contract manufacturers purchase our products only when an OEM incorporates our product into the OEM’s product, not as commercial off-the-shelf products. Our customers’ products are complex and require significant time to define, design and ramp to volume production. Accordingly, our sales cycle is long. This cycle begins with our technical marketing, sales and field application engineers engaging with our customers’ system designers and management, which is typically a multi-month process. If we are successful, a customer will decide to incorporate our product in its product, which we refer to as a design win. Because the sales cycles for our products are long, we incur expenses to develop and sell our products, regardless of whether we achieve the design win and well in advance of generating revenue, if any, from those expenditures. We do not have long-term purchase commitments from any of our customers, as sales of our products are generally made under individual purchase orders. However, once one of our products is incorporated into a customer’s design, it is likely to remain designed in for the life cycle of the product. We believe this to be the case because a redesign would generally be time consuming and expensive. We have experienced revenue growth due to an increase in the number of our products, an expansion of our customer base, an increase in the number of average design wins within any one customer and an increase in the average revenue per design win.

We also earn revenue from the sale of software subscriptions of embedded Linux operating system, related development tools, support and professional services. The net revenue for our software and services operations are primarily derived from the sale of time-based software licenses, software maintenance and support, and from professional services arrangements and training.

Key Business Metrics

Design Wins. We closely monitor design wins by customer and end market on a periodic basis. We consider design wins to be a key ingredient in our future success, although the revenue generated by each design win can vary significantly. Our long-term sales expectations are based on internal forecasts from specific customer design wins based upon the expected time to market for end customer products deploying our products and associated revenue potential.

Pricing and Margins. Pricing and margins depend on the features of the products we provide to our customers. In general, products with more complex configurations and higher performance tend to be priced higher and have higher gross margins. These configurations tend to be used in high performance applications that are focused on the enterprise network, data center, and access and service provider markets. We tend to experience price decreases over the life cycle of our products, which can vary by market and application.

Sales Volume. A typical design win can generate a wide range of sales volumes for our products, depending on the end market demand for our customers’ products. This can depend on several factors, including the reputation, market penetration, the size of the end market that the product addresses, and the marketing and sales effectiveness of our customer. In general, our customers with greater market penetration and better branding tend to develop products that generate larger volumes over the product life cycle. In addition, some markets generate large volumes if the end market product is adopted by the mass market.

Customer Product Life Cycle. We typically commence commercial shipments from nine months to three years following a design win. Once our product is in production, revenue from a particular customer may continue for several years. We estimate our customers’ product life cycles based on the customer, type of product and end market. In general, products that go into the enterprise network and data center take longer to reach volume production but tend to have longer lives. Products for other markets, such as broadband and consumer, tend to ramp relatively quickly, but generally have shorter life cycles. We estimate these life cycles based on our management’s experience with network equipment providers and data centers as well as the semiconductor market as a whole.

18

Results of Operations

Our net revenue, cost of revenue, gross profit and gross margin for the periods presented were:

	Three Months Ended March 31,
	2014			2013			change			%
	(in thousands)
Net revenue	$	83,241		$	69,530		$	13,711			19.7	%
Cost of revenue		30,350			26,159			4,191			16.0	%
Gross Profit	$	52,891		$	43,371		$	9,520			22.0	%
Gross Margin		63.5	%		62.4	%		1.1	%

Net Revenue. Our net revenue consists primarily of sales of our semiconductor products to network equipment providers and data centers and their contract manufacturers and distributors. Initial sales of our products for a new design are usually made directly to network equipment providers and data centers as they design and develop their product. Once their design enters production, they often outsource their manufacturing to contract manufacturers that purchase our products directly from us or from our distributors. We price our products based on market and competitive conditions and periodically reduce the price of our products, as market and competitive conditions change, and as manufacturing costs are reduced. We do not experience different margins on direct sales to network equipment providers and data centers and indirect sales through contract manufacturers because in all cases we negotiate product pricing directly with the network equipment providers and data centers. To date, substantially all of our revenue has been denominated in U.S. dollars.

Three customers together accounted for 41.8% of our net revenue for the three months ended March 31, 2014 and one customer accounted for 18.9% of our net revenue for the three months ended March 31, 2013. No other customer accounted for more than 10% of our revenues for the three months ended March 31, 2014 and 2013.

Revenue and costs relating to sales to distributors are deferred if we grant more than limited rights of returns and price credits or if we cannot reasonably estimate the level of returns and credits issuable. We have an existing agreement with a distributor to distribute our products primarily in the United States. Given the terms of the distribution agreement, for sales to this distributor, we defer revenue and costs until products are sold to its end customers. For the three months ended March 31, 2014 and 2013, 4.3% and 5.9%, respectively, of our net revenues were from products sold by this distributor. Revenue recognition depends on notification from this distributor that product has been sold to its end customers.

We use our distributors, other than the distributor discussed above, primarily to support international sale logistics in Asia, including importation and credit management. Total net revenue through these distributors accounted for 27.9% and 30.8% of net revenue for the three months ended March 31, 2014 and 2013, respectively. The inventory at these distributors at the end of the period may fluctuate from time to time mainly due to the OEM production ramps or new customer demands. While we have purchase agreements with our distributors, the distributors do not have long-term contracts with any of the equipment providers. Our distributor agreements limit the distributor’s ability to return product up to a portion of purchases in the preceding quarter. Given our experience, along with our distributors’ limited contractual return rights, we believe we can reasonably estimate expected returns from our distributors. Accordingly, we recognize sales through distributors at the time of shipment, reduced by our estimate of expected returns.

Our net revenue increased by $13.7 million or 19.7% in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The increase in net revenue was attributable mainly to the increase in sales in our enterprise network; data center and access and service provider markets, combined of $17.4 million which was partially offset by the decrease in sales in our broadband and consumer market of $3.7 million. The overall increase in sales in our enterprise networks; data center; and access and service provider markets was mainly due to the fluctuation in demand for our products in those respective markets, as a result of the timing of our customers’ volume production of our design wins. The decrease in sales of our broadband and consumer market was mainly due to the fluctuation in demand for our products in those respective markets and to a certain extent, due to lesser focus on certain consumer product markets.

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The following table is based on the geographic location of our customers including the original equipment manufacturers, contract manufacturers or the distributors who purchased our products and services. For sales to our distributors, their geographic location may be different from the geographic locations of the ultimate end customers. Sales by geography for the periods presented were:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
United States	$	30,077	$	22,651
China		22,004		16,820
Korea		3,664		7,035
Mexico		4,650		4,150
Finland		7,712		2,455
Taiwan		6,198		5,891
Malaysia		2,834		3,465
Other countries		6,102		7,063
Total	$	83,241	$	69,530

Cost of Revenue and Gross Margin. We outsource wafer fabrication, assembly and test functions of our products. A significant portion of our cost of revenue consists of payments for the purchase of wafers and for assembly and test services, amortization of acquired intangibles and amortization related to capitalized mask costs. To a lesser extent, cost of revenue includes expenses relating to our internal operations that manage our contractors, stock-based compensation, the cost of shipping and logistics, royalties, inventory valuation expenses for excess and obsolete inventories, warranty costs and changes in product cost due to changes in sort, assembly and test yields. In general, our cost of revenue associated with a particular product declines over time as a result of yield improvements, primarily associated with design and test enhancements.

We use third-party foundries and assembly and test contractors, which are primarily located in Asia, to manufacture, assemble and test our semiconductor products. We purchase processed wafers on a per wafer basis from our fabrication suppliers, which are currently Samsung, TSMC, Global Foundries, and Fujitsu. We also outsource the sort, assembly, final testing and other processing of our product to third-party contractors, primarily ASE Electronics in Taiwan, Malaysia and Singapore, as well as ISE Labs, Inc., in the United States. We negotiate wafer fabrication on a purchase order basis. There are no long-term agreements with any of these third-party contractors. A significant disruption in the operations of one or more of these third-party contractors would impact the production of our products for a substantial period of time, which could have a material adverse effect on our business, financial condition and results of operations.

Our gross margin has been and will continue to be affected by a variety of factors, including the product mix, average sales prices of our products, the amortization expense associated with the acquired intangible assets, the timing of cost reductions for fabricated wafers and assembly and test service costs, inventory valuation charges, the cost of fabrication masks that are capitalized and amortized, and the timing and changes in sort, assembly and test yields. Overall gross margin is impacted by the mix between higher performance, higher margin products and services and lower performance, lower margin products and services. In addition, we typically experience lower yields and higher associated costs on new products, which improve as production volumes increase.

Cost of revenue increased by $4.2 million or 16.0% in the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to the increase in net revenue. Gross margin increased by 1.1 percentage point from 62.4% in the three months ended March 31, 2013 to 63.5% in the three months ended March 31, 2014. The increase in the overall gross margin was mainly due to overall increases in revenue, which was partially offset by the shifts of product sales mix of our higher and lower performance products. Higher performance products yields higher gross margins compared to our lower performance products.

Research and Development Expenses. Research and development expenses primarily include personnel costs, engineering design development software and hardware tools, allocated facilities expenses and depreciation of equipment used in research and development and stock-based compensation. We expect research and development expenses to continue to increase in total dollars to support the development of new products and improvement of existing products. Additionally, as a percentage of revenue, these costs fluctuate from one period to another. Total research and development expenses for the periods presented were:

	Three Months Ended March 31,
	2014			2013			change			%
	(in thousands)
Research and development expenses	$	37,289		$	32,415		$	4,874			15.0	%
Percent of total net revenue		44.8	%		46.6	%		-1.8	%

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Research and development expenses increased by $4.9 million or 15.0% in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Research and development expense in the three months ended March 31, 2014 and 2013 included $4.2 million and $3.6 million, respectively, from a variable interest entity, or VIE. The remaining research and development expense increased by $4.3 million or 14.9%.

The increase was mainly due to increase in salaries and employee benefits of $2.5 million and stock-based compensation expense and related taxes of $2.0 million, mainly resulting from the increase in research and development headcount and increase in stock option and RSU grants. The other increase of $1.2 million was due to increase in facilities expense, design tools and other miscellaneous research and development, as a result of the increase in research and development activities to support the development of our new products. The increases as discussed above were partially offset by the decrease in outsourced product development cost mainly in our consumer related products of $0.7 million and decrease in depreciation and amortization expense of $0.7 million mainly due to the acceleration of estimated useful life of certain intangible assets in the first and fourth quarter of 2013. Research and development headcount was 631 at March 31, 2014 compared to 534 at March 31, 2013.

Sales, General and Administrative Expenses. Sales, general and administrative expenses primarily include personnel costs, accounting and legal fees, information systems, sales commissions, trade shows, marketing programs, depreciation, allocated facilities expenses and stock-based compensation. We expect sales, general and administrative expenses to increase in absolute dollars to support our growing sales and marketing activities resulting from our expanded product portfolio. Total sales, general and administrative costs for the periods presented were:

	Three Months Ended March 31,
	2014			2013			change			%
	(in thousands)
Sales, general and administrative expenses	$	15,932		$	15,240		$	692			4.5	%
Percent of total net revenue		19.1	%		21.9	%		-2.8	%

Sales, general and administrative expenses increased by $0.7 million or 4.5% in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Sales, general and administrative expenses in the three months ended March 31, 2014 included $0.3 million from a VIE. The remaining sales, general and administrative expenses increased by $0.4 million or 2.8%. Salaries and employee benefits increased by $0.4 million and facilities expense and other miscellaneous sales, general and administrative expenses, combined increased by $0.1 million mainly due to the increase in headcount. In the three months ended March 31, 2013, we recorded credits of $0.7 million associated with the gain on sale of held for sale assets. The increases in sales, general and administrative expenses as discussed above were partially offset by the decrease in the cost incurred for severance and other benefits of $0.6 million related to restructuring activities during the three months ended March 31, 2014 and 2013, and the decrease in depreciation and amortization expense of $0.2 million mainly due to the acceleration of amortization of certain acquired intangible asset in the fourth quarter of 2013. Sales, general and administrative headcount was 171 at March 31, 2014 compared to 154 at March 31, 2013.

Other income (expense), net. Other income (expense), net primarily includes interest income on cash and cash equivalents, foreign currency gains and losses, financing expenses, change in the estimated fair value of notes payable and other, interest expense associated with capital lease and technology license obligations and interest expense associated with the notes payable of the VIE. Total other income (expense), net for the periods presented were:

	Three Months Ended March 31,
	2014			2013			change			%
	(in thousands)
Interest expense	$	(459	)	$	(342	)	$	(117	)		34.2	%
Change in estimated fair value of notes payable and other		(858	)		-			(858	)		-100.0	%
Other, net		135			(261	)		396			-151.7	%
Total other expense, net	$	(1,182	)	$	(603	)	$	(579	)		96.0	%

Other expense, net, increased by $0.6 million in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The increase was due to the increase in interest expense associated with notes payable of the VIE and long-term capital and technology license obligations and recognition of the change in estimated fair value of notes payable and other. These increases were partially offset by other, net which consists mainly of foreign exchange gains in the three months ended March 31, 2014 compared to foreign exchange losses in the three months ended March 31, 2013.

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Provision for Income Taxes. For the three months ended March 31, 2014 and 2013, the provision for income taxes was based on our estimated annual effective tax rate, plus any discrete items, and taking into account valuation allowance, as necessary, in compliance with applicable guidance. We update our estimate of our annual effective tax rate at the end of each quarterly period. Our estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and our interpretations of tax laws and the possible outcomes of current and future audits.

The following table presents the provision for income taxes and the effective tax rates for the respective periods presented:

	Three Months Ended March 31,
	2014			2013			change			%
	(in thousands)
Loss before income taxes	$	(1,512	)	$	(4,887	)	$	3,375			-69.1	%
Provision for income taxes		243			426			(183	)		-43.0	%
Effective tax rate		-16.1	%		-8.7	%		-7.4	%

The provision for income taxes for the three months ended March 31, 2014 was primarily related to earnings in foreign jurisdictions. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to our loss before income taxes and the provision for income taxes recorded for the three months ended March 31, 2014 was primarily attributable to the difference in foreign tax rates and increase in indefinite lived intangible related deferred tax liability. The provision for income taxes for the three months ended March 31, 2013 was primarily related to earnings in foreign jurisdictions. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to our loss before income taxes and the provision for income taxes recorded for March 31, 2013 was primarily attributable to the impact of losses that are not benefited, the difference in foreign tax rates and increase in indefinite lived intangible related deferred tax liability.

Liquidity and Capital Resources

Following is a summary of our working capital and cash and cash equivalents as of the periods presented:

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
Working capital	$	163,756	$	151,071
Cash and cash equivalents		124,106		127,763

Following is a summary of our cash flows from operating activities, investing activities and financing activities for the periods presented:

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Net cash (used in) provided by operating activities	$	(866	)	$	8,157
Net cash (used in) provided by investing activities		(3,126	)		587
Net cash provided by financing activities		335			983

Cash Flows from Operating Activities

Net cash flows from operating activities decreased by $9.1 million from net cash provided by operating activities of $8.2 million in the three months ended March 31, 2013 to net cash used in operating activities of $0.9 million in the three months ended March 31, 2014. Total cash inflow from income after adjustment of non-cash items in the three months ended March 31, 2014 and 2013 were $16.5 million and $11.5 million, respectively. The increase resulted mainly from higher net revenue which generated higher income from operations. Changes in assets and liabilities resulted in net cash outflow of $17.4 million in the three months ended March 31, 2014 compared to a cash inflow of $3.3 million in the three months ended March 31, 2013. The significant changes in assets and liabilities in three months ended March 31, 2014 were higher accounts receivable resulting from higher revenue and timing of collections from customers and higher inventories due to the timing of inventory build-up. The significant changes in assets and liabilities in the three months ended March 31, 2013 were mainly due to lower accounts payable and accrued expenses due to the timing of payments to vendors, lower deferred revenue resulted from lower subscription licenses and professional service billings to customers and higher receivable resulted from the timing of collections from customers.

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Cash Flows from Investing Activities

Net cash used in investing activities in the three months ended March 31, 2014 was $3.1 million compared to net cash provided by investing activities of $0.6 million in the three months ended March 31, 2013. Net cash used in investing activities in the three months ended March 31, 2014 resulted from the cash payments made to purchase property and equipment of $2.1 million and intangible assets of $1.2 million, which was partially offset by the proceeds received from the disposition of certain consumer product assets of $0.3 million.

Net cash provided by investing activities in the three months ended March 31, 2013 resulted from the receipt of cash proceeds related to the sale of certain held for sale assets of $3.3 million and proceeds from disposition of certain consumer product assets of $0.3 million, which was partially offset by the cash payments made to purchase intangible assets of $2.3 million and property and equipment of $0.7 million.

Cash Flows from Financing Activities

Net cash provided by financing activities in the three months ended March 31, 2014 was $0.3 million compared to $1.0 million in the three months ended March 31, 2013. Net cash provided by financing activities in the three months ended March 31, 2014 resulted mainly from the proceeds received from issuance of common stock upon the exercise of options of $3.6 million, proceeds from notes payable of the non-controlling interest of the VIE of $1.4 million and tax withholdings for stock option exercises on behalf of employees remitted to the government in succeeding quarter of $0.3 million, which were partially offset by the principal payments of capital lease and technology license obligations of $4.9 million. Net cash provided by financing activities in the three months ended March 31, 2013 resulted from the proceeds received from issuance of common stock upon exercise of options of $6.8 million and proceeds from notes payable of the non-controlling interest of the VIE of $0.5 million, partially offset by the principal payments of capital lease and technology license obligations of $6.4 million.

Capital Resources

Cash equivalents consist of an investment in a money market fund. We believe that our $124.1 million of cash and cash equivalents at March 31, 2014, and expected cash flow from operations, if any, will be sufficient to fund our projected operating requirements for at least 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our engineering, sales and marketing activities, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products and the continuing market acceptance of our products. Although we currently are not a party to any agreement with respect to potential material investments in, or acquisitions of, complementary businesses, services or technologies, other than disclosed in Note 5 of Notes to Condensed Consolidated Financial Statements, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Indemnities

In the ordinary course of business, we have entered into agreements with customers that include indemnity provisions. Based on historical experience and information known through the filing of this report, we believe our exposure related to the above indemnities of March 31, 2014, is not material. We also enter into indemnification agreements with our officers and directors and our certificate of incorporation and bylaws include similar indemnification obligations to our officers and directors. It is not possible to determine the amount of our liability related to these indemnification agreements and obligations to our officers and directors due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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Contractual Obligations

The following table describes our commitments to settle contractual obligations in cash as of March 31, 2014:

	Payments Due By Period
	Total		Remainder of 2014		1 to 3 Years		3 to 5 Years		More Than 5 Years
	(in thousands)
Operating lease obligations	$	69,416	$	4,165	$	15,608	$	17,660	$	31,983
Capital lease and technology license obligations		30,969		13,716		17,253		-		-
Total	$	100,385	$	17,881	$	32,861	$	17,660	$	31,983

As of March 31, 2014, the liability for uncertain tax positions was $0.7 million. The timing of any payments which could result from these unrecognized tax benefits will depend upon a number of factors. Accordingly, the timing of payment cannot be estimated.

In September 2013, the VIE entered into a purchase agreement with a third party vendor to purchase certain test equipment amounting to $6.1 million, payable in installments over two years. The equipment was received and recorded in the fourth quarter of 2013. In January 2014, the VIE purchased and recorded additional parts to the test equipment amounting to $1.0 million, payable in installment over two years. We have an agreement with the VIE and third party vendor, whereby we guaranteed the payment and will assume the ownership of the test equipment in the event the VIE defaults such payment obligation.

In addition, we have other obligations for goods and services entered into in the normal course of business. These obligations, however, are either not enforceable or legally binding or are subject to change based on our business decisions.

Critical Accounting Policies and Estimates

The preparation of our financial statements and accompanying disclosures in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and the accompanying notes. The SEC has defined a company’s critical accounting policies as policies that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified our most critical accounting policies and estimates to be as follows: (1) revenue recognition; (2) stock-based compensation; (3) inventory valuation; (4) accounting for income taxes; (5) mask costs; (6) business combinations and (7) valuation of goodwill and purchased intangible assets and related estimated useful lives of intangible assets. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information not presently available. Actual results may differ significantly from these estimates if the assumptions, judgments and conditions upon which they are based turn out to be inaccurate. Management believes that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 24, 2014.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

During the three months ended March 31, 2014, there were no material changes to our quantitative and qualitative disclosures about market risk related to our investment activities as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the SEC on February 24, 2014.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of March 31, 2014. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2014 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

This information is included in Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, is incorporated herein by reference.

Item 1A. Risk Factors

The following risks and uncertainties may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment.

We have marked with an asterisk (*) those risks described below that reflect substantive changes from the risks described under “Item 1A. Risk Factors” included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2014.

Risks Related to Our Business and Industry

*We have a limited history of profitability, and we may not achieve or sustain profitability in the future, on a quarterly or annual basis.

We incurred a net loss attributable to the Company in the fourth quarter of 2011, and for each of the quarters since then through the second quarter of 2013. As of March 31, 2014, our accumulated deficit was $154.7 million. We expect to make significant expenditures related to the development of our products and expansion of our business, including research and development and sales and administrative expenses. Additionally, we may encounter unforeseen difficulties, complications, product delays and other unknown factors that may require additional expenditures. As a result of these expenditures, we may not generate sufficient revenue to achieve profitability. Our revenue growth trend in 2013 may not be sustainable, and accordingly, we may incur losses in the future.

We expect our operating results to fluctuate, which could adversely affect the price of our common stock.

We expect our revenues and expense levels to vary in the future, making it difficult to predict our future operating results. In particular, we experience variability in demand for our products as our customers manage their product introduction dates and their inventories. Given the current global economic uncertainty, the demand for our products may be more varied and difficult to ascertain in a timely and efficient manner.

Factors that could cause our results to fluctuate include, among other things:

— fluctuations in demand, sales cycles, product mix and prices for our products;

— the variability in lead time between the time when a customer begins to design in one of our products and the time when the customer’s end system goes into production and they begin purchasing our products;

— the forecasting, scheduling, rescheduling or cancellation of orders by our customers;

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— the timing of our new product introductions;

— our dependence on a few significant customers, which may vary the size of their orders;

— our ability to retain, recruit and hire key executives, technical personnel and other employees in the positions and numbers, and with the experience and capabilities that we need;

— our ability to successfully define, design and release new products in a timely manner that meet our customers’ needs;

— changes in manufacturing costs, including wafer, test and assembly costs, mask costs, manufacturing yields and product quality and reliability;

— the timing and availability of adequate manufacturing capacity from our manufacturing suppliers;

— the timing of announcements by our competitors or us;

— future accounting pronouncements and changes in accounting policies;

— volatility in our stock price, which may lead to higher stock compensation expenses;

— general economic and political conditions in the countries in which we operate or our products are sold or used;

— costs associated with litigation, especially related to intellectual property; and

— productivity and growth of our sales and marketing force.

Unfavorable changes in any of the above factors, most of which are beyond our control, could significantly harm our business and results of operations, and therefore our stock price.

We may have difficulty accurately predicting our future revenues for the purpose of appropriately budgeting and adjusting our expenses, which could adversely affect our operating results.

The dynamic and rapidly evolving market in which we sell our products, our dependence on a limited number of customers, as well as numerous other factors beyond our control, including general market conditions, impede our ability to forecast quarterly and annual revenues accurately. As a result, we could experience budgeting and cash flow management problems, unexpected fluctuations in our results of operations and other difficulties, any of which could make it difficult for us to attain and maintain profitability and could increase the volatility of the market price of our common stock.

We face intense competition and expect competition to increase in the future, which could reduce our revenues, gross margin and/or customer base.

The market for our products is highly competitive and we expect competition to intensify in the future. This competition could make it more difficult for us to sell our products, and result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share or expected market share, any of which would likely seriously harm our business, operating results and financial condition. For instance, semiconductor products have a history of declining prices as the cost of production is reduced. However, if market prices decrease faster than product costs, gross and operating margins can be adversely affected. Currently, in the enterprise, datacenter, service provider, and broadband and consumer markets we face competition from a number of established companies, including Broadcom Corporation, Freescale Semiconductor, Inc., Intel Corporation and Marvell Technology Group Ltd. In addition, in the datacenter server markets, we consider our competition to be Applied Micro Circuits Corporation and Intel Corporation.  

A few of our current competitors operate their own fabrication facilities and have, and some of our potential competitors could have, longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we have. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features.

In the embedded commercial Linux operating system and professional services markets, we consider the primary competitors for our software products to be Wind River Systems, Inc., a subsidiary of Intel Corporation, and, to a lesser extent, Canonical Programming, Inc. and Mentor Graphics Corporation.

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We expect increased competition from other established and emerging companies both domestically and internationally. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties. If so, new competitors or alliances that include our competitors may emerge that could acquire significant market share. In the future, further development by our competitors, and development by our potential competitors, could cause our products to become obsolete. Our ability to compete depends on a number of factors, including:

— our success in identifying new and emerging markets, applications and technologies and developing products for these markets;

— our products’ performance and cost effectiveness relative to that of our competitors’ products;

— our ability to deliver products in large volume on a timely basis at a competitive price;

— our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace;

— our ability to recruit design and application engineers and sales and marketing personnel; and

— our ability to protect our intellectual property.

In addition, we cannot assure you that existing customers or potential customers will not develop their own products, purchase competitive products or acquire companies that use alternative methods to enable networking, communication or security applications to facilitate network-aware processing in their systems. Any of these competitive threats, alone or in combination with others, could seriously harm our business, operating results and financial condition.

Our customers may cancel their orders, change production quantities or delay production, and if we fail to forecast demand for our products accurately, we may incur product shortages, delays in product shipments or excess or insufficient product inventory.

We generally do not obtain firm, long-term purchase commitments from our customers. Because production lead times often exceed the amount of time required to fulfill orders, we often must build in advance of orders, relying on an imperfect demand forecast to project volumes and product mix.

Our demand forecast accuracy can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, adverse changes in our product order mix and demand for our customers’ products. Even after an order is received, our customers may cancel these orders or request a decrease in production quantities. Any such cancellation or decrease subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory which we may be unable to sell to other customers. Alternatively, if we project customer requirements to be less than the demand that materializes, we may not build enough products, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. In the past, we have had customers dramatically increase their requested production quantities with little or no advance notice. Either underestimating or overestimating demand could lead to insufficient, excess or obsolete inventory, which could harm our operating results, cash flow and financial condition, as well as our relationships with our customers.

Adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect our operating results.

As our business has grown to both customers located in the United States as well as customers located outside of the United States, we have become increasingly subject to the risks arising from adverse changes in both the domestic and global economic and political conditions. If economic growth in the United States and other countries’ economies continues to slow, the demand for our customer’s products could decline, which would then decrease demand for our products. Furthermore, if economic conditions in the countries into which our customers sell their products continue to deteriorate, some of our customers may decide to postpone or delay some of their development programs, which would then delay their need to purchase our products. This could result in a reduction in sales of our products or in a reduction in the growth of our product sales. Any of these events would likely harm investors’ view of our business, financial condition, and results of operations.

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*We receive a substantial portion of our revenues from a limited number of customers, and the loss of, or a significant reduction in, orders from one or a few of our major customers would adversely affect our operations and financial condition.

We receive a substantial portion of our revenues from a limited number of customers. We received an aggregate of approximately 55.0% and 49.3% of our net revenue from our top five customers for the three months ended March 31, 2014 and 2013, respectively. Three customers together accounted for 41.8% of our net revenue for the three months ended March 31, 2014 and one customer accounted for 18.9% of our net revenue for the three months ended March 31, 2013. No other customer accounted for more than 10% of our revenues for the three months ended March 31, 2014 and 2013. We anticipate that we will continue to be dependent on a limited number of customers for a significant portion of our revenues in the immediate future and that the portion of our revenues attributable to some of these customers may increase in the future. However, we may not be able to maintain or increase sales to some of our top customers for a variety of reasons, including the following:

— our agreements with our customers do not require them to purchase a minimum quantity of our products;

— some of our customers can stop incorporating our products into their own products with limited notice to us and suffer little or no penalty; and

— many of our customers have pre-existing or concurrent relationships with our current or potential competitors that may affect the customers’ decisions to purchase our products.

In the past, we have relied in significant part on our relationships with customers that are technology leaders in our target markets. We intend to continue expanding these relationships and forming new relationships but we cannot assure you that we will be able to do so. These relationships often require us to develop new products that may involve significant technological challenges. Our customers frequently place considerable pressure on us to meet their tight development schedules. Accordingly, we may need to devote a substantial amount of our resources to our relationships, which could detract from or delay our completion of other important development projects. Delays in development could impair our relationships with our other large customers and negatively impact sales of the products under development. Moreover, it is possible that our customers may develop their own product or adopt a competitor’s solution for products that they currently buy from us. If that happens, our sales would decline and our business, financial condition and results of operations could be materially and adversely affected.

In addition, our relationships with some customers may also deter other potential customers who compete with these customers from buying our products. To attract new customers or retain existing customers, we may offer some customers favorable prices on our products. In that event, our average selling prices and gross margins would decline. The loss of a key customer, a reduction in sales to any key customer or our inability to attract new significant customers could seriously impact our revenue and materially and adversely affect our business, financial condition, and results of operations.

We may be unsuccessful in developing and selling new products or in penetrating new markets.

We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. Our competitiveness and future success depend on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost effective basis. A fundamental shift in technologies in any of our product markets could harm our competitive position within these markets. Our failure to anticipate these shifts, to develop new technologies or to react to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenues and a loss of design wins to our competitors. The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as a variety of specific implementation factors, including:

— timely and efficient completion of process design and transfer to manufacturing, assembly and test processes;

— the quality, performance and reliability of the product; and

— effective marketing, sales and service.

If we fail to introduce new products that meet the demand of our customers or penetrate new markets in which we expend significant resources, our revenues will likely decrease over time and our financial condition could suffer. Additionally, if we concentrate resources on a new market that does not prove profitable or sustainable, our financial condition could decline.

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The average selling prices of products in our markets have historically decreased over time and will likely do so in the future, which could harm our revenues and gross profits.

Average selling prices of semiconductor products in the markets we serve have historically decreased over time. Our gross profits and financial results will suffer if we are unable to offset any reductions in our average selling prices by reducing our costs, developing new or enhanced products on a timely basis with higher selling prices or gross profits, or increasing our sales volumes. Additionally, because we do not operate our own manufacturing, assembly or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities, and our costs may even increase, which could also reduce our margins.

Fluctuations in the mix of products sold may adversely affect our financial results.

Because of the wide price differences among our processors, the mix and types of performance capabilities of processors sold affect the average selling price of our products and have a substantial impact on our revenue. Generally, sales of higher performance products have higher gross margins than sales of lower performance products. We currently offer both higher and lower performance products in our NITROX, OCTEON, ECONA, NEURON and PureVu product families. If the sales mix shifts towards lower performance, lower margin products, our overall gross margins will be negatively affected. Fluctuations in the mix and types of our products may also affect the extent to which we are able to recover our fixed costs and investments that are associated with a particular product, and as a result can negatively impact our financial results.

The semiconductor and communications industries have historically experienced significant fluctuations with prolonged downturns, which could impact our operating results, financial condition and cash flows

The semiconductor industry has historically exhibited cyclical behavior, which at various times has included significant downturns in customer demand, including in late 2008 through 2009. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenues. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition. Furthermore, the semiconductor industry has periodically experienced periods of increased demand and production constraints. If this happens in the future, we may not be able to produce sufficient quantities of our products to meet the increased demand. We may also have difficulty in obtaining sufficient wafer, assembly and test resources from our subcontract manufacturers. Any factor adversely affecting the semiconductor industry in general, or the particular segments of the industry that our products target, may adversely affect our ability to generate revenue and could negatively impact our operating results.

The communications industry has, in the past, experienced pronounced downturns, and these cycles may continue in the future. To respond to a downturn, many networking equipment providers may slow their research and development activities, cancel or delay new product development, reduce their inventories and take a cautious approach to acquiring our products, which would have a significant negative impact on our business. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition. In the future, any of these trends may also cause our operating results to fluctuate significantly from year to year, which may increase the volatility of the price of our stock.

Our products must meet exact specifications, and defects and failures may occur, which may cause customers to return or stop buying our products.

Our customers generally establish demanding specifications for quality, performance and reliability that our products must meet. However, our products are highly complex and may contain defects and failures when they are first introduced or as new versions are released. If defects and failures occur in our products during or after the design phase, we could experience lost revenues, increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, product returns or discounts, diversion of management resources or damage to our reputation and brand equity, and in some cases consequential damages, any of which would harm our operating results. In addition, delays in our ability to fill product orders as a result of quality control issues may negatively impact our relationship with our customers.

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We rely on our customers to design our products into their systems, and the nature of the design process requires us to incur expenses prior to customer commitments to use our products or recognizing revenues associated with those expenses which may adversely affect our financial results.

One of our primary focuses is on winning competitive bid selection processes, known as “design wins,” to develop products for use in our customers’ products. We devote significant time and resources in working with our customers’ system designers to understand their future needs and to provide products that we believe will meet those needs and these bid selection processes can be lengthy. If a customer’s system designer initially chooses a competitor’s product, it becomes significantly more difficult for us to sell our products for use in that system because changing suppliers can involve significant cost, time, effort and risk for our customers. Thus, our failure to win a competitive bid can result in our foregoing revenues from a given customer’s product line for the life of that product. In addition, design opportunities may be infrequent or may be delayed. Our ability to compete in the future will depend, in large part, on our ability to design products to ensure compliance with our customers’ and potential customers’ specifications. We expect to invest significant time and resources and to incur significant expenses to design our products to ensure compliance with relevant specifications.

We often incur significant expenditures in the development of a new product without any assurance that our customers’ system designers will select our product for use in their applications. We often are required to anticipate which product designs will generate demand in advance of our customers expressly indicating a need for that particular design. Even if our customers’ system designers select our products, a substantial period of time will elapse before we generate revenues related to the significant expenses we have incurred.

The reasons for this delay generally include the following elements of our product sales and development cycle timeline and related influences:

— our customers usually require a comprehensive technical evaluation of our products before they incorporate them into their designs;

— it can take from nine months to three years from the time our products are selected to commence commercial shipments; and

— our customers may experience changed market conditions or product development issues.

The resources devoted to product development and sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory if we have produced product in anticipation of expected demand. We may spend resources on the development of products that our customers may not adopt. If we incur significant expenses and investments in inventory in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed.

Additionally, even if system designers use our products in their systems, we cannot assure you that these systems will be commercially successful or that we will receive significant revenue from the sales of processors for those systems. As a result, we may be unable to accurately forecast the volume and timing of our orders and revenues associated with any new product introductions.

In the event one of our distributor arrangements terminates, it could lead to a loss of revenues and possible product returns.

A portion of our sales is made through third-party distribution agreements. Termination of a distributor relationship, either by us or by the distributor, could result in a temporary loss of revenues until a replacement distributor can be established to service the affected end-user customers, or a permanent loss of revenues if no replacement can be established. We may not be successful in finding suitable alternative distributors on satisfactory terms or at all and this could adversely affect our ability to sell in some locations or to some end-user customers. Additionally, if we terminate our relationship with a distributor, we may be obligated to repurchase unsold products. We record a reserve for estimated returns and price credits. If actual returns and credits exceed our estimates, our operating results could be harmed.

We rely on our ecosystem partners to enhance our product offerings and our inability to continue to develop or maintain these relationships in the future would harm our ability to remain competitive.

We have developed relationships with third parties, which we refer to as ecosystem partners, which provide operating systems, tool support, reference designs and other services designed for specific uses with our SoCs. We believe that these relationships enhance our customers’ ability to get their products to market quickly. If we are unable to continue to develop or maintain these relationships, we may not be able to enhance our customers’ ability to commercialize their products in a timely fashion and our ability to remain competitive would be harmed, which would negatively impact our ability to generate revenue and our operating results.

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The loss of any of our key personnel could seriously harm our business, and our failure to attract or retain specialized technical, management or sales and marketing talent could impair our ability to grow our business.

We believe our future success will depend in large part upon our ability to attract, retain and motivate highly skilled managerial, engineering, sales and marketing personnel. The loss of any key employees or the inability to attract, retain or motivate qualified personnel, including engineers and sales and marketing personnel could delay the development and introduction of, and harm our ability to sell our products which would materially and adversely affect our business, financial condition and results of operations. For instance, if any of these individuals were to leave our company unexpectedly, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity during the search for and while any successor is integrated into our business and operations.

There is currently a shortage of qualified technical personnel with significant experience in the design, development, manufacturing, marketing and sales of integrated circuits. In particular, there is a shortage of engineers who are familiar with the intricacies of the design and manufacture of multi-core networking processors, and competition for these engineers is intense. Our key technical personnel represent a significant asset and serve as the source of our technological and product innovations. We may not be successful in attracting, retaining and motivating sufficient numbers of technical personnel to support our anticipated growth.

To date, we have relied primarily on our direct marketing and sales force to drive new customer design wins and to sell our products. Because we are looking to expand our customer base and grow our sales to existing customers, we will need to hire additional qualified sales personnel in the near term and beyond if we are to achieve revenue growth. The competition for qualified marketing and sales personnel in our industry, and particularly in Silicon Valley, is very intense. If we are unable to hire, train, deploy and manage qualified sales personnel in a timely manner, our ability to grow our business will be impaired. In addition, if we are unable to retain our existing sales personnel, our ability to maintain or grow our current level of revenues will be adversely affected. Further, if we are unable to integrate and retain personnel acquired through our various acquisitions, we may not be able to fully capitalize on such acquisitions.

We rely on stock-based awards as one means for recruiting, motivating and retaining highly skilled talent. If the value of the stock awards does not appreciate as measured by the performance of the price of our common stock or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees could be weakened, which could harm our business, financial condition and results of operations.

Some of our operations and a significant portion of our customers and contract manufacturers are located outside of the United States, which subjects us to additional risks, including increased complexity and costs of managing international operations and geopolitical instability.

We have international sales offices and research and development facilities and we conduct, and expect to continue to conduct, a significant amount of our business with companies located outside the United States, particularly in Asia and Europe. Even customers based in the United States often use contract manufacturers based in Asia to manufacture their systems, and it is the contract manufacturers that purchase products directly from us. As a result of our international focus, we face numerous challenges, including:

— increased complexity and costs of managing international operations;

— longer and more difficult collection of receivables;

— difficulties in enforcing contracts generally;

— geopolitical and economic instability and military conflicts;

— limited protection of our intellectual property and other assets;

— compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations;

— trade and foreign exchange restrictions and higher tariffs;

— travel restrictions;

— timing and availability of import and export licenses and other governmental approvals, permits and licenses, including export classification requirements;

— foreign currency exchange fluctuations relating to our international operating activities;

— transportation delays and limited local infrastructure and disruptions, such as large scale outages or interruptions of service from utilities or telecommunications providers;

— difficulties in staffing international operations;

— heightened risk of terrorism;

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— local business and cultural factors that differ from our normal standards and practices;

— differing employment practices and labor issues;

— regional health issues and natural disasters; and

— work stoppages.

We are subject to governmental export and import controls that may adversely affect our business.

We and our customers are subject to various import and export laws and regulations. Government export regulations apply to the encryption or other features contained in some of our products. Although our processes and procedures are designed to maintain compliance, we cannot assure you that we have been or will be at all times in complete compliance with these laws and regulations. If we fail to receive licenses or otherwise comply with these regulations, we may be unable to manufacture the affected products at foreign foundries or ship these products to some customers, or we may incur penalties or fines and civil and criminal liabilities or other sanctions. In addition, changes in import or export laws and regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products or cause decreased use of our products by customers with international operations, each of which would adversely affect our business and results of operations.

New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the Securities and Exchange Commission has adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements will require companies to diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. The implementation of these new requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of semiconductor devices, including our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.

We outsource our wafer fabrication, assembly, testing, warehousing and shipping operations to third parties, and rely on these parties to produce and deliver our products according to requested demands in specification, quantity, cost and time.

We rely on third parties for substantially all of our manufacturing operations, including wafer fabrication, assembly, testing, warehousing and shipping. We depend on these parties to supply us with material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. We do not have any long-term supply agreements with our manufacturing suppliers. Any problems with our manufacturing supply chain could adversely impact our ability to ship our products to our customers on time and in the quantity required, which in turn could cause an unanticipated decline in our sales and possibly damage our customer relationships.

The fabrication of integrated circuits is a complex and technically demanding process. Our foundries could, from time to time, experience manufacturing defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundries could result in lower than anticipated manufacturing yields or unacceptable performance. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. In addition, our manufacturing processes with our foundries are unique and not within the customary manufacturing processes of these foundries, which may lead to manufacturing defects, reduced manufacturing yields and/or increases in manufacturing costs.

Poor yields from our foundries, or defects, integration issues or other performance problems in our products could cause us significant customer relations and business reputation problems, harm our financial results and result in financial or other damages to our customers. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.

In addition, a significant portion of our sales are to customers that practice just-in-time order management from their suppliers, which gives us a very limited amount of time in which to process and complete these orders. As a result, delays in our production or shipping by the parties to whom we outsource these functions could reduce our sales, damage our customer relationships and damage our reputation in the marketplace, any of which could harm our business, financial condition and results of operations.

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Our products are manufactured at a limited number of locations and if we experience manufacturing problems at a particular location, we could experience a delay in obtaining our manufactured products, which could harm our business and reputation.

Although we use several independent foundries to manufacture substantially all of our semiconductor products, most of our components are not manufactured at more than one foundry at any given time, and our products typically are designed to be manufactured in a specific process at only one of these foundries. Accordingly, if one of our foundries is unable to provide us with components as needed, we could experience significant delays in securing sufficient supplies of those components from other sources. Converting or transferring manufacturing from a primary location or supplier to a backup fabrication facility could be expensive and could take one to two quarters. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that can be modified to the required product specifications. We do not seek to maintain sufficient inventory to address a lengthy transition period because we believe it is uneconomical to keep more than minimal inventory on hand. As a result, we may not be able to meet customer needs during such a transition, which could delay shipments, cause a production delay or stoppage for our customers, result in a decline in our sales and damage our customer relationships. We cannot assure you that any of our existing or new foundries will be able to produce integrated circuits with acceptable manufacturing yields, or that our foundries will be able to deliver enough semiconductor devices to us on a timely basis, or at reasonable prices. These and other related factors could impair our ability to meet our customers’ needs and have a material and adverse effect on our operating results.

If we experience delays or loss of manufacturing availability when demand is high, we would experience a delay in obtaining our manufactured products, which could harm our business and reputation.

We have no long-term supply contracts with the foundries with which we work. Availability of foundry capacity has in the recent past been reduced due to strong demand. The ability of each foundry to provide us with semiconductor devices is limited by its available capacity and existing obligations. Foundry capacity may not be available when we need it or at reasonable prices which could cause us to be unable to meet customer needs, delay shipments, because a production delay or stoppage for our customers, result in a decline in our sales and harm our financial results. Further, some of our competitors may be better financed than we are, may have long-term agreements with our main foundries and may induce our foundries to reallocate capacity to those customers. This reallocation could impair our ability to secure the supply of components that we need.

To secure sufficient foundry capacity when demand is high and mitigate the risks described in the foregoing paragraph, we may enter into various arrangements with suppliers that could be costly and harm our operating results, such as nonrefundable deposits with or loans to foundries in exchange for capacity commitments and contracts that commit us to purchase specified quantities of integrated circuits over extended periods. We may not be able to make any such arrangement in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility, and not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligated to use all of that capacity or incur penalties. These penalties may be expensive and could harm our financial results.

Any increase in the manufacturing cost of our products could reduce our gross margins and operating profit.

The semiconductor business experiences ongoing competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our products, whether by adverse purchase price variances or adverse manufacturing cost variances, may not be able to be passed on to our customers and we may experience reduced gross margins and operating profit. We do not have any long-term supply agreements with our manufacturing suppliers and we typically negotiate pricing on a purchase order by purchase order basis. Consequently, we may not be able to obtain price reductions or anticipate or prevent future price increases from our suppliers.

*Our failure to protect our intellectual property rights adequately could impair our ability to compete effectively or to defend ourselves from litigation, which could harm our business, financial condition and results of operations.

We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and nondisclosure agreements and other methods, to protect our proprietary technologies and know-how.

The failure of our patents and other intellectual property protections to adequately protect our technology might make it easier for our competitors to offer similar products or technologies, which would harm our business. We have been issued 63 patents in the United States and 30 patents in foreign countries and have an additional 161 patent applications pending in the United States and 48 patent applications pending in foreign countries as of March 31, 2014. Even if the pending patent applications are granted, the rights granted to us may not be meaningful or provide us with any commercial advantage. For example, these patents could be opposed, contested, circumvented or designed around by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. Our foreign patent protection is generally not as comprehensive as our U.S. patent protection and may not protect our intellectual property in some countries where our products are sold or may be sold in the future. Many U.S.-based companies have encountered substantial intellectual property infringement in foreign countries, including countries where we sell products. Even if foreign patents are granted, effective enforcement in foreign countries may not be available.

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We enter into confidentiality agreements with our employees, consultants and strategic partners. We also control access to and distribution of our technologies, documentation and other proprietary information. However, internal or external parties may copy, disclose, obtain or use our proprietary information without our authorization. Further, current or former employees or third parties may attempt to misappropriate our proprietary information.

Monitoring unauthorized use of our intellectual property and the intellectual property of our customers and strategic partners is difficult and costly. It is possible that unauthorized use of our intellectual property may have occurred or may occur without our knowledge. We cannot assure you that the steps we have taken will prevent unauthorized use of our intellectual property.

Our failure to effectively protect our intellectual property could reduce the value of our technology in licensing arrangements or in cross-licensing negotiations, and could harm our business, financial condition, and results of operations. We may in the future need to initiate infringement claims or litigation to defend or enforce our intellectual property rights. Litigation, whether we are a plaintiff or a defendant, can be expensive, time consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination favorable to us.

A breach of our security systems may have a material adverse effect on our business.

Our security systems are designed to maintain the physical security of our facilities and protect our customers’, suppliers’ and employees’ confidential information. However, we are also dependent on a number of third-party “cloud-based” service providers of critical corporate infrastructure services relating to, among other things, human resources, electronic communication services and some finance functions, and we are, of necessity, dependent on the security systems of these providers. Accidental or willful security breaches or other unauthorized access by third parties to our facilities, our information systems or the systems of our cloud-based service providers or the existence of computer viruses in our or their data or software could expose us to a risk of information loss and misappropriation of proprietary and confidential information. Any theft or misuse of this information could result in, among other things, unfavorable publicity, damage to our reputation, difficulty in marketing our products, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for liabilities and damages related to the theft or misuse of this information, any of which could have a material adverse effect on our business, profitability and financial condition. Since the techniques used to obtain unauthorized access or to sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

Assertions by third parties of infringement by us of their intellectual property rights could result in significant costs and cause our operating results to suffer.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. From time to time we receive communications that allege we have infringed specified patents, trade secrets or other intellectual property rights owned by others. Any of these allegations, regardless of merit, could cause us to incur significant costs in responding to, defending and resolving these allegations. Any lawsuits resulting from these allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

— stop selling products or using technology that contain the allegedly infringing intellectual property;

— lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others;

— incur significant legal expenses;

— pay substantial damages to a third-party if we are found to be infringing;

— redesign those products that contain the allegedly infringing intellectual property; or

— attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.

Any significant impairment of our intellectual property rights from any litigation we face could harm our business and our ability to compete.

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Our customers have in the past and may in the future also become the target of allegations of infringement or litigation relating to the patent and other intellectual property rights of others. This could trigger technical support and indemnification obligations in some of our licenses or customer agreements. These obligations could result in substantial expenses, including the payment by us of costs and damages relating to claims of intellectual property infringement. In addition to the time and expense required for us to provide support or indemnification to our customers, litigation could disrupt the businesses of our customers, which in turn could hurt our relationships with our customers and cause the sale of our products to decrease. We cannot assure you that claims for indemnification will not be made or that if made, the claims would not have a material adverse effect on our business, operating results or financial conditions.

If we do not manage the risks associated with our large professional service contracts properly, our revenue and customer base could be adversely affected.

The pricing and other terms of some of our larger professional services agreements require us to make estimates and assumptions at the time we enter into these contracts that could differ from actual results. Any increased or unexpected costs or unanticipated delays in connection with the performance of these engagements, including delays caused by factors outside our control, could make these agreements less profitable or unprofitable, which would have an adverse effect on the profit margin of our software and services business and adversely affect our operating results. In addition, changes in costs or a delay in connection with the performance of our large professional service agreements may harm our relationships with these customers.

Because a significant portion of our software and licenses revenues is derived from subscription-based software licenses, we are dependent upon the ability of our customers to develop and penetrate new markets successfully, and to develop new products for existing markets.

Our subscription-based license revenues depend both upon our ability to successfully negotiate license agreements with our customers and, in turn, upon our customers’ successful commercialization of their underlying products. As our open source business grows, we may not be able to rely on receiving per unit fees from our customers. For our open source business, we may instead need to rely on other fees to compensate for the subscription-based license fees that we have traditionally received for our proprietary products. Also, we derive significant revenues from customers that develop products in highly competitive and technologically complex markets such as the internet infrastructure, server and storage, digital consumer, aerospace and defense, industrial control, medical equipment, gaming, and office automation. If these customers sell fewer products or otherwise face significant economic difficulties, particularly in the current global economic recession, our software and license revenues may decline.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management and our independent registered public accounting firm to evaluate and assess the effectiveness of our internal control over financial reporting. These Sarbanes-Oxley Act requirements may be modified, supplemented or amended from time to time. Implementing these changes may take a significant amount of time and may require specific compliance training of our personnel. In the future, we may discover areas of our internal controls that need improvement. If our independent registered public accounting firm or we discover a material weakness, the disclosure of that fact, even if quickly remediated, could reduce the market’s confidence in our financial statements and harm our stock price. We may not be able to effectively and timely implement necessary control changes and employee training to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and reporting requirements. Our rapid growth in recent years, including through numerous acquisitions and our possible future expansion through acquisitions, present challenges to maintain the internal control and disclosure control standards applicable to public companies. If we fail to maintain effective internal controls, we could be subject to regulatory scrutiny and sanctions and investors could lose confidence in the accuracy and completeness of our financial reports.

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Our acquisition, disposition and investment strategies may result in unanticipated accounting charges or otherwise adversely affect our business, financial condition and results of operations.

Since May 2008, we have acquired two companies and acquired assets of, and assumed liabilities of, five other companies. We also made advances to a third-party company, which was considered a variable interest entity, for convertible notes receivable. We expect that we will in the future continue to acquire companies or assets of companies or invest in third-party companies that we believe to be complementary to our business, including for the purpose of expanding our new product design capacity, introducing new design, market or application skills or enhancing and expanding our existing product lines. In connection with any such future acquisitions or investments, we may need to use a significant portion of our available cash, issue additional equity securities that would dilute current stockholders’ percentage ownership and incur substantial debt or contingent liabilities. These actions could adversely impact our operating results and the market price of our common stock. In addition, acquisitions of companies exposes us to risks, including:

— difficulties may occur in assimilating and integrating the operations, personnel, technologies, and products of acquired companies or businesses;

— key personnel of an acquired company may decide not to work for us;

— to the extent we acquire a company with existing products; those products may have lower gross margins than our customary products, which could adversely affect our gross margin and operating results;

— if an acquired company also has inventory that we assume, we will be required to write up the carrying value of that inventory to fair value, and when that inventory is sold, the gross margins for those products will be reduced and our gross margins for that period would be negatively affected; and

— the purchase price of any acquired businesses may exceed the current fair values of the net tangible assets of the acquired businesses, in which case we would be required to record material amounts of goodwill, and acquired in-process research and development charges and other intangible assets, which could result in significant impairment and acquired in-process research and development charges and amortization expense in future periods, which charges, in addition to the results of operations of the acquired businesses and potential restructuring costs associated with an acquisition, could have a material adverse effect on our business, financial condition and results of operations. We cannot forecast the number, timing or size of future acquisitions, or the effect that any acquisitions might have on our operating or financial results.

We rely on third-party technologies for the development of our products and our inability to use these technologies in the future would harm our ability to remain competitive.

We rely on third parties for technologies that are integrated into our products, such as wafer fabrication and assembly and test technologies used by our contract manufacturers, as well as licensed MIPS and ARM architecture technologies. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed, which could harm our business, financial condition and results of operations. In addition, if we are unable to successfully license technology from third parties to develop future products, we may not be able to develop such products in a timely manner or at all.

Our open source business could be seriously harmed by the outcome of lawsuits challenging the use and distribution of Linux-based software products.

We rely on Linux system software as the basis of our software products. Several lawsuits have been filed challenging the right to use and/or distribute Linux system software and software applications based on Linux. Although we are not a party to or directly involved in any of the lawsuits relating to Linux, we expect that further lawsuits could be filed against Linux in the future which would challenge the use and distribution of our Linux-based software products. It is impossible to estimate or anticipate all of the financial or other impacts the results of these litigation matters could have on our business. Success by a plaintiff in one or more of these lawsuits could have a material adverse effect on our open source business.

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Legal uncertainty surrounding the use and distribution of open source software may cause the market for Linux-based products to disappear, fail to further develop or fail to develop at a rate sufficient to sustain our business.

The majority of our open source software products are licensed from third parties under the General Public License, or GPL, and similar open source licenses. There remains some significant confusion among our customers about the scope of their obligations and rights with respect to using and distributing Linux-based products. One element of this confusion is whether the GPL and other open source licenses require customers to (i) make all of the source code for their products available to the public, and/or (ii) license all of the code underlying such products under an open source license. There is little or no legal precedent for interpreting the terms of the GPL and similar open source licenses, including the determination of which types of programs or products would be considered derived works and thus potentially subject to the terms of such open source licenses. If this confusion remains, increases or is prolonged by litigation, the market for Linux-based products may disappear, fail to further develop or fail to develop at a rate sufficient to sustain our open source business.

Our open source business depends on Linux developers to continue to improve Linux and Linux-based applications that are incorporated into our open source products.

Our ability to release major upgrades of MontaVista Linux is largely dependent upon the release of new versions of the Linux kernel. The Linux kernel is the heart of the Linux system software. Linus Torvalds and a small group of engineers are primarily responsible for the development, evolution and maintenance of the Linux kernel. In addition, other individuals and small groups of developers are largely responsible for Linux programs tailored to specific tasks or computer architectures. If Mr. Torvalds or other key developers fail to further develop the Linux kernel or other programs on which we rely, we will need to either develop them ourselves or rely on another party for development. This development effort could be costly and time consuming, and could delay or entirely prevent our open source product release and upgrade schedule.

We may be unsuccessful in marketing our open source products because we encounter widespread negative perceptions about Linux and open source software in general.

Some people still incorrectly believe that anyone who writes a software program that runs on Linux will necessarily need to publicly disclose the source code for that software. If a potential customer believes their source code will need to be made public if they use our open source product, they may be less likely to purchase our open source product. We devote substantial time and attention helping potential customers understands the legal implications of using our open source products, including that fact that in most instances, applications developed to run on Linux may be distributed under a proprietary license. In many cases, we are required to address these issues at different levels across an organization (such as at the engineering, managerial and executive levels), which can be very time consuming. We are sometimes unsuccessful at convincing a potential customer that using Linux-based system software will not have negative consequences for that customer. Furthermore, many potential customers believe that they should not be required to pay for our open source products, since our open-source products are based on open source (also sometimes called “free”) software. They believe that open source products are all publicly available at no charge. There is also the misconception that distributors of Linux software cannot offer warranties or indemnifications with respect to Linux software. Each of these customers’ fears or misperceptions could cause us to lose potential orders or cause our customers to delay purchase decisions, which could significantly lengthen our sales cycle. These misperceptions could cause the market for Linux-based products to disappear, fail to further develop, or fail to develop at a rate sufficient to sustain our open source business.

Our open source software may contain errors or defects that could delay introduction of new products, result in costly remedial expenditures or cause disputes with customers.

Most of the open source software that we sell and distribute is developed by third parties with whom we have no business relationship, including thousands of individual software programmers. To successfully release our open source products, we must assemble and test software developed by thousands of disparate sources. Despite our efforts, errors have been and may continue to be found in our open source products. If errors are discovered, we may not be able to successfully correct them in a timely manner or at all. Errors and failures in our open source products could result in a loss of, or delay in, market acceptance of our open-source products and could damage our reputation and our ability to convince commercial users of the benefits of Linux-based systems software and other open source software products. In addition, we may need to make significant expenditures of capital resources to reduce errors and failures.

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We face intense competition related to our open source products, and expect competition to increase in the future, which could reduce our open source-related revenue and customer base.

The market for Linux-based systems software is highly competitive, and we expect competition to intensify in the future. We consider the primary competitors for our MontaVista software products to be Wind River Systems, Inc., a subsidiary of Intel Corporation and, to a lesser extent, Canonical Programming, Inc. and Mentor Graphics Corporation. In addition, potential customers for our open source products may believe that they can build their own open source product cheaper or more efficiently than purchasing our products.

In addition to competitors in the business of distributing a commercial Linux-based operating system, we face competition from some hardware companies who offer Linux-based operating systems and related software components at little or no charge. We also face competition from Linux-based software distributions provided by new and emerging consortiums and software stacks such as Meego, Linaro, Moblin and Android. And because, apart from such hardware vendors and consortiums, there is a large Linux code base generally available at no charge, certain customers or potential customers have made, and will continue to make, efforts to develop their own Linux-based operating system without purchasing or otherwise obtaining it from a third-party vendor. To the extent that the quality and availability of non-commercial Linux-based operating system software continues to improve, it could have a material adverse effect on our ability to sell open source software.

Our third-party contractors are concentrated primarily in Asia, an area subject to earthquake and other risks. Any disruption to the operations of these contractors could cause significant delays in the production or shipment of our products.

Substantially all of our products are manufactured by third-party contractors located in Taiwan and to a lesser extent manufactured by third-party contractors located in Japan, Malaysia and Korea. The risk of an earthquake in any of those countries or elsewhere in Asia is significant due to the proximity of major earthquake fault lines to the facilities of our foundries and assembly and test subcontractors. For example, several major earthquakes have occurred in Taiwan and Japan since our incorporation in 2000, the most recent being the major earthquake and tsunami that occurred in March 2011 in Japan. Although our third-party contractors did not suffer any significant damage as a result of these most recent earthquakes, the occurrence of additional earthquakes, other natural disasters or other events causing closures could result in the disruption of our foundry or assembly and test capacity. Any disruption resulting from such events could cause significant delays in the production or shipment of our products until we are able to shift our manufacturing, assembling or testing from the affected contractor to another third-party vendor. We may not be able to obtain alternate capacity on favorable terms, if at all.

We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify our designs to work with the manufacturing processes of our foundries. We periodically evaluate the benefits, on a product-by-product basis, of migrating to new process technologies to reduce cost and improve performance. We may face difficulties, delays and expenses as we continue to transition our products to new processes. We are dependent on our relationships with our foundry contractors to transition to new processes successfully. We cannot assure you that the foundries that we use will be able to effectively manage the transition or that we will be able to maintain our existing foundry relationships or develop new ones. If any of our foundry contractors or we experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations. As new processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third-party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis.

We may need to raise additional capital, which might not be available or which, if available, may be on terms that are not favorable to use.

We believe our existing cash and cash equivalent balances and cash expected to be generated from our operations will be sufficient to meet our working capital, capital expenditures and other needs for at least the next 12 months. In the future, we may seek to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we issue equity securities to raise additional funds, the ownership percentage of our stockholders would be reduced, and the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If we borrow money, we may incur significant interest charges, which could harm our profitability. Holders of debt would also have rights, preferences or privileges senior to those of existing holders of our common stock. If we cannot raise needed funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could harm our business, operating results and financial condition.

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We may incur impairments to goodwill or long-lived assets.

We review our long-lived assets, including goodwill and other intangible assets, for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In the fourth quarter of 2012, we recorded goodwill and intangible asset impairment charges of $27.7 million and $5.6 million, respectively.

Significant negative industry or economic trends, including a significant decline in the market price of our common stock, reduced estimates of future cash flows for our reporting units or disruptions to our business could lead to an impairment charge of our long-lived assets, including goodwill and other intangible assets.

Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. If our actual results, or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from results. Additionally, if our analysis results in impairment to our goodwill, we may be required to record a charge to earnings in our financial statements during a period in which such impairment is determined to exist, which may negatively impact our business, financial condition and results of operations.

The complexity of accounting regulations and related interpretations and policies, particularly those related to revenue recognition, could materially affect our financial results for a given period.

Although we use standardized agreements designed to meet current revenue recognition criteria under generally accepted accounting principles, we might negotiate and revise terms and conditions of these standardized agreements, particularly in multi-element license and services transactions. As we increase our transactions to more complex multi-element transactions, negotiation of mutually acceptable terms and conditions may require us to defer recognition of revenue on such licenses. We believe that we are in compliance with the guidance as provided under multiple element arrangements; however, bigger and more complex, multi-element transactions may require additional accounting analysis to account for them accurately. Errors in such analysis in any period could lead to unanticipated changes in our revenue accounting practices and may affect the timing of revenue recognition, which could adversely affect our financial results. If we later discover that we have interpreted and applied revenue recognition rules differently than prescribed by generally accepted accounting principles in the U.S., we could be required to devote significant management resources, and incur the expense associated with an audit, restatement or other examination of our financial statements.

*Features of debt financings of a variable interest entity that is included in our consolidated financial statements may create accounting charges that could reduce profitability.

As of March 31, 2014, we made cash advances of $10.0 million for several convertible notes receivable with a variable interest entity, or VIE. We concluded that we are the primary beneficiary of the VIE due to our involvement with the VIE and our purchase option to acquire the assets of the VIE and therefore we have included the accounts of the VIE in our consolidated financial statements.  As of March 31, 2014, in addition to the cash advances from us, the VIE received $13.0 million from third party investors for several convertible notes receivable and $2.9 million for a convertible security. All of the convertible notes contain a convertible feature in the event of a qualified equity financing of the VIE as defined in the convertible notes. In the event of a corporate transaction, as defined in the convertible notes, the holders of the convertible notes will be entitled to receive the principal of the notes plus a fixed return on their investment. The convertible security has the same features as the convertible notes, with the exception of the requirement for repayment and interest. We determined that for accounting purposes, the convertible security has derivative features. All of the convertible notes and the derivative feature of the convertible security are presented at fair value in our consolidated financial statements following the authoritative guidance of fair value measurement and disclosure. Therefore, we estimate the fair value of the convertible notes and the derivative feature of the convertible security at each reporting period. The assumptions used in the fair value estimate include the probability of a qualified equity financing or a corporate transaction of the VIE. The assumptions used in the fair value estimate are based, in part, on significant uncertainties, are difficult to predict and could differ materially in the future. The fair value of the convertible notes and derivative feature of the convertible security could increase to up to two times the principal amount and the accrued interest of the convertible notes and the principal amount of the convertible security in future reporting periods which would require us to record expense in our consolidated financial statements, which could reduce our profitability. As of and for the three months ended March 31, 2014, we estimated the fair value of the convertible notes and derivative feature of the convertible security and recorded a $0.9 million charge for the change in the fair value of the related instruments in our statements of operations. The VIE may issue additional notes on similar terms in the future, which could increase the expense we would have to record in our consolidated financial statements, which could reduce our profitability.

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Our future effective tax rates could be affected by the allocation of our income among different geographic regions, which could affect our future operating results, financial condition and cash flows.

As a global company, we are subject to taxation in the United States and various other countries and states. Significant judgment is required to determine and estimate worldwide tax liabilities. We may further expand our international operations and staff to better support our international markets. As a result, we anticipate that our consolidated pre-tax income will be subject to tax at relatively lower tax rates when compared to the United States federal statutory tax rate. Further, because we have established valuation allowance against our deferred tax assets in the United States, combined with lower foreign tax rates, our effective income tax rate is expected to be lower than the United States federal statutory rate. Our future effective income tax rates could be adversely affected if tax authorities were to successfully challenge our international tax structure or if the relative mix of United States and international income changes for any reason, or United States or foreign tax laws were to change. Accordingly, there can be no assurance that our income tax rate will continue to be less than the United States federal statutory rate.

Any significant change in our future effective tax rates could adversely impact our consolidated financial position, results of operations and cash flows. Our future effective tax rates may be adversely affected by a number of factors including:

— changes in tax laws in the countries in which we operate or the interpretation of such laws;

— increase in expenses not deductible for tax purposes;

— changes in share-based compensation expense;

— change in the mix of income among different taxing jurisdictions;

— audit examinations with adverse outcomes;

— changes in generally accepted accounting principles; and

— our ability to use tax attributes such as research and development tax credits and net operating losses.

Although we reserve for uncertain tax positions, including related penalties and interest, the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to record additional income tax expense or establish an additional valuation allowance, which could materially impact our financial position and results of operations. (See Note 9 of the Notes to Condensed Consolidated Financial Statements).

Changes in valuation allowance of deferred tax assets may affect our future operating results

We record a valuation allowance to reduce our net deferred tax assets to the amount that we believe is more-likely-than-not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practical tax planning strategies. On a periodic basis we evaluate our deferred tax asset balance for realizability. To the extent we believe it is more-likely-than-not that some portion of our deferred tax assets will not be realized, we will increase the valuation allowance against the deferred tax assets. Realization of our deferred tax assets is dependent primarily upon future taxable income in related tax jurisdictions. If our assumptions and consequently our estimates change in the future, the valuation allowances may be increased or decreased, resulting in a respective increase or decrease in income tax expense.

We assessed that it was more-likely-than-not that we will not realize our federal and state deferred tax assets based on the absence of sufficient positive objective evidence that we would generate sufficient taxable income in our United States tax jurisdiction to realize the deferred tax assets. Accordingly, we recorded a valuation allowance on our federal and state deferred tax assets during the fourth quarter of 2012 and continue to maintain a valuation allowance on our federal and state deferred tax assets at the end of 2013 and as of March 31, 2014.

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Risks Related to our Common Stock

The market price of our common stock may be volatile, which could cause the value of your investment to decline.

The trading prices of the securities of technology companies have been highly volatile. Further, our common stock has a limited trading history. Since our initial public offering in May 2007 through March 2014, our stock price has fluctuated from a low of $7.61 to a high of $47.60. We cannot predict the extent to which the trading market will continue to develop or how liquid the market may become. The trading price of our common stock is therefore likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:

— quarterly variations in our results of operations or those of our competitors;

— general economic conditions and slow or negative growth of related markets;

— announcements by us or our competitors of design wins, acquisitions, new products, significant contracts, commercial relationships or capital commitments;

— our ability to develop and market new and enhanced products on a timely basis;

— commencement of, or our involvement in, litigation;

— disruption to our operations;

— the emergence of new sales channels in which we are unable to compete effectively;

— any major change in our board of directors or management;

— changes in financial estimates including our ability to meet our future revenue and operating profit or loss projections;

— changes in governmental regulations; and

— changes in earnings estimates or recommendations by securities analysts.

Furthermore, the stock market in general, and the market for semiconductor and other technology companies in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance. These trading price fluctuations may also make it more difficult for us to use our common stock as a means to make acquisitions or to use options to purchase our common stock to attract and retain employees. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Delaware law and our amended and restated certificate of incorporation and bylaws contain provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

— the division of our board of directors into three classes;

— the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or due to the resignation or departure of an existing board member;

— the prohibition of cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

— the requirement for the advance notice of nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

— the ability of our board of directors to alter our bylaws without obtaining stockholder approval;

— the ability of the board of directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of our common stock;

— the elimination of the rights of stockholders to call a special meeting of stockholders and to take action by written consent in lieu of a meeting;

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— the required approval of at least 66 2/3% of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors and the inability of stockholders to take action by written consent in lieu of a meeting; and

— the required approval of at least a majority of the shares entitled to vote at an election of directors to remove directors without cause.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, particularly those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our amended and restated certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts, could reduce the price that investors are willing to pay for shares of our common stock in the future and could potentially result in the market price being lower than they would without these provisions.

Item 5. Other Information

None

Item 6. Exhibits

See the Exhibit Index which follows the signature page of this Quarterly Report on Form 10-Q, which is incorporated here by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CAVIUM, INC.
Date: May 2, 2014	By:	/S/ ARTHUR D. CHADWICK
		Arthur D. Chadwick
		Chief Financial Officer and Vice President of Finance and Administration

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EXHIBIT INDEX

Exhibit Number	Description
3.1	Restated Certificate of Incorporation of the Registrant (1)
3.2	Amended and Restated Bylaws of the Registrant(2)
4.1	Reference is made to Exhibits 3.1 and 3.2
4.2	Form of the Registrant’s Common Stock Certificate (3)
10.1†	Amended 2007 Equity Incentive Plan
31.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Syed B. Ali, President and Chief Executive Officer
31.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Arthur D. Chadwick, Chief Financial Officer
32.1*	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Syed B. Ali, President and Chief Executive Officer and Arthur D. Chadwick, Chief Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
(1)	Filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (No. 001-33435), filed with the SEC on June 20, 2011, and incorporated herein by reference.
(2)	Filed as Exhibit 3.5 to the Registrant’s registration statement on Form S-1/A (No. 333-140660), filed with the SEC on April 13, 2007, as amended, and incorporated herein by reference.
(3)	Filed as Exhibit 4.2 to the Registrant’s registration statement on Form S-1/A (No. 333-140660), filed with the SEC on April 24, 2007, as amended, and incorporated herein by reference.
†	Management contract or compensatory plan or arrangement.
*	This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

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EX-10

Exhibit 10.1

CAVIUM, INC.

2007 EQUITY INCENTIVE PLAN

APPROVED BY BOARD: FEBRUARY 1, 2007

APPROVED BY STOCKHOLDERS: APRIL 12, 2007

TERMINATION DATE: JANUARY 31, 2017

AMENDED BY BOARD: APRIL 27, 2012

AMENDED BY BOARD: MARCH 22, 2013

AMENDED BY BOARD: MARCH 13, 2014

1. GENERAL.

(a) Eligible Award Recipients. The persons eligible to receive Awards are Employees, Directors and Consultants.

(b) Available Awards. The Plan provides for the grant of the following Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Restricted Stock Awards, (iv) Restricted Stock Unit Awards, (v) Stock Appreciation Rights, (vi) Performance Stock Awards, (vii) Performance Cash Awards, and (viii) Other Stock Awards.

(c) General Purpose. The Company, by means of the Plan, seeks to secure and retain the services of the group of persons eligible to receive Awards as set forth in Section 1(a), to provide incentives for such persons to exert maximum efforts for the success of the Company and any Affiliate and to provide a means by which such eligible recipients may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Stock Awards.

2. ADMINISTRATION.

(a) Administration by Board. The Board shall administer the Plan unless and until the Board delegates administration of the Plan to a Committee or Committees, as provided in Section 2(c).

(b) Powers of Board. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

(i) To determine from time to time (A) which of the persons eligible under the Plan shall be granted Awards; (B) when and how each Award shall be granted; (C) what type or combination of types of Award shall be granted; (D) the provisions of each Award granted (which need not be identical), including the time or times when a person shall be permitted to receive cash or Common Stock pursuant to a Stock Award; and (E) the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person.

(ii) To construe and interpret the Plan and Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement or in the written terms of a Performance Cash Award, in a manner and to the extent it shall deem necessary or expedient to make the Plan or Award fully effective.

(iii) To settle all controversies regarding the Plan and Awards granted under it.

(iv) To accelerate the time at which a Stock Award may first be exercised or the time during which an Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Award stating the time at which it may first be exercised or the time during which it will vest.

(v) To suspend or terminate the Plan at any time. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the affected Participant.

(vi) To amend the Plan in any respect the Board deems necessary or advisable, including, without limitation, relating to Incentive Stock Options and certain nonqualified deferred compensation under Section 409A of the Code and/or to bring the Plan or Stock Awards granted under the Plan into compliance therewith, subject to the limitations, if any, of applicable law. However, except as provided in Section 10(a) relating to Capitalization Adjustments, stockholder approval shall be required for any amendment of the Plan that either (A) materially increases the number of shares of Common Stock available for issuance under the Plan, (B) materially expands the class of individuals eligible to receive Awards under the Plan, (C) materially increases the benefits accruing to Participants under the Plan or materially reduces the price at which shares of Common Stock may be issued or purchased under the Plan, (D) materially extends the term of the Plan, or (E) expands the types of Awards available for issuance under the Plan, but only to the extent required by applicable law or listing requirements. Except as provided above, rights under any Award granted before

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amendment of the Plan shall not be impaired by any amendment of the Plan unless (1) the Company requests the consent of the affected Participant, and (2) such Participant consents in writing.

(vii) To submit any amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of (i) Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to Covered Employees, (ii) Section 422 of the Code regarding Incentive Stock Options or (iii) Rule 16b-3.

(viii) To approve forms of Award Agreements for use under the Plan and to amend the terms of any one or more Awards, including, but not limited to, amendments to provide terms more favorable to the Participant than previously provided in the Award Agreement, subject to any specified limits in the Plan that are not subject to Board discretion; provided however, that, the Participant’s rights under any Award shall not be impaired by any such amendment unless (A) the Company requests the consent of the affected Participant, and (B) such Participant consents in writing. Notwithstanding the foregoing, subject to the limitations of applicable law, if any, and without the affected Participant’s consent, the Board may amend the terms of any one or more Awards if necessary to maintain the qualified status of the Award as an Incentive Stock Option or to bring the Award into compliance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued or amended after the Effective Date.

(ix) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan or Awards.

(x) To adopt such procedures and sub-plans as are necessary or appropriate to permit or facilitate participation in the Plan by Employees, Directors or Consultants who are foreign nationals or employed outside the United States.

(xi) To effect, at any time and from time to time, with the consent of any adversely affected Optionholder, (A) the reduction of the exercise price of any outstanding Option under the Plan, (B) the cancellation of any outstanding Option under the Plan and the grant in substitution therefor of (1) a new Option under the Plan or another equity plan of the Company covering the same or a different number of shares of Common Stock, (2) a Restricted Stock Award (including a stock bonus), (3) a Stock Appreciation Right, (4) Restricted Stock Unit, (5) an Other Stock Award, (6) cash and/or (7) other valuable consideration (as determined by the Board, in its sole discretion), or (C) any other action that is treated as a repricing under generally accepted accounting principles.

(c) Delegation to Committee.

(i) General. The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If administration of the Plan is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee of the Committee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated.

(ii) Section 162(m) and Rule 16b-3 Compliance. In the sole discretion of the Board, the Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. In addition, the Board or the Committee, in its sole discretion, may (A) delegate to a Committee of Directors who need not be Outside Directors the authority to grant Awards to eligible persons who are either (1) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award, or (2) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code, or (B) delegate to a Committee of Directors who need not be Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act.

(d) Delegation to an Officer. The Board may delegate to one or more Officers the authority to do one or both of the following (i) designate Employees who are not Officers to be recipients of Options (and, to the extent permitted by applicable law, other Stock Awards) and the terms thereof, and (ii) determine the number of shares of Common Stock to be subject to such Stock Awards granted to such Employees; provided, however, that the Board resolutions regarding such delegation shall specify the total number of shares of Common Stock that may be subject to the Stock Awards granted by such Officer and that such Officer may not grant a Stock Award to himself or herself. Notwithstanding anything to the contrary in this Section 2(d), the Board may not delegate to an Officer authority to determine the Fair Market Value pursuant to Section 14(w)(ii) below.

(e) Effect of Board’s Decision. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons.

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3. SHARES SUBJECTTOTHE PLAN.

(a) Share Reserve. Subject to the provisions of Section 10(a) relating to Capitalization Adjustments, the aggregate number of shares of common stock of the Company that may be issued pursuant to Stock Awards after the Effective Date shall not exceed five million (5,000,000) shares, plus an annual increase to be added on January 1^st each year for a period of ten (10) years, commencing on January 1, 2008 and ending on (and including) January 1, 2017 (each such day, a “Calculation Date”), equal to the lesser of (i) five percent (5%) of the shares of Common Stock outstanding on each such Calculation Date (rounded down to the nearest whole share); or (ii) five million (5,000,000) shares of Common Stock. Notwithstanding the foregoing, the Board may act, prior to the first day of any fiscal year of the Company, to increase the share reserve by such number of shares of Common Stock as the Board shall determine, which number shall be less than each of (i) and (ii). For clarity, the limitation in this Section 3(a) is a limitation in the number of shares of the Company’s common stock that may be issued pursuant to the Plan. Accordingly, this Section 3(a) does not limit the granting of Stock Awards except as provided in Section 8(a). Shares may be issued in connection with a merger or acquisition as permitted by NASD Rule 4350(i)(1)(A)(iii) or, if applicable, NYSE Listed Company Manual Section 303A.08, or AMEX Company Guide Section 711 and such issuance shall not reduce the number of shares available for issuance under the Plan. Furthermore, if a Stock Award (A) expires or otherwise terminates without having been exercised in full or (B) is settled in cash (i.e., the holder of the Stock Award receives cash rather than stock), such expiration, termination or settlement shall not reduce (or otherwise offset) the number of shares of the Company’s common stock that may be issued pursuant to the Plan.

(b) If any shares of common stock issued pursuant to a Stock Award are forfeited back to the Company because of the failure to meet a contingency or condition required to vest such shares in the Participant, then the shares which are forfeited shall revert to and again become available for issuance under the Plan. Also, any shares reacquired by the Company pursuant to Section 9(g) or as consideration for the exercise of an Option shall again become available for issuance under the Plan. Notwithstanding the provisions of this Section 3(b), any such shares shall not be subsequently issued pursuant to the exercise of Incentive Stock Options.

(c) Incentive Stock Option Limit. Notwithstanding anything to the contrary in this Section 3, subject to the provisions of Section 10(a) relating to Capitalization Adjustments, the aggregate maximum number of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options shall be ten million (10,000,000) shares of Common Stock.

(d) Section 162(m) Limitation on Annual Grants. Subject to the provisions of Section 10(a) relating to Capitalization Adjustments, at such time as the Company may be subject to the applicable provisions of Section 162(m) of the Code, no Employee shall be eligible to be granted during any calendar year Stock Awards whose value is determined by reference to an increase over an exercise or strike price of at least one hundred percent (100%) of the Fair Market Value of the Common Stock on the date the Stock Award is granted covering more than ten million (10,000,000) shares of Common Stock.

(e) Source of Shares. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the market or otherwise.

4. ELIGIBILITY.

(a) Eligibility for Specific Stock Awards. Incentive Stock Options may be granted only to employees of the Company or a parent corporation or subsidiary corporation (as such terms are defined in Code Sections 424(e) and (f)). Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants.

(b) Ten Percent Stockholders. A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.

(c) Consultants. A Consultant shall be eligible for the grant of a Stock Award only if, at the time of grant, a Form S-8 Registration Statement under the Securities Act (“Form S-8”) is available to register either the offer or the sale of the Company’s securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, because the Consultant is a natural person, or because of any other rule governing the use of Form S-8.

5. OPTION PROVISIONS.

Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates shall be issued for shares of Common Stock purchased on exercise of each type of Option. If an Option is not specifically designated as an Incentive Stock Option, then the Option shall be a Nonstatutory Stock Option. The provisions of separate Options need not be identical; provided, however, that each Option Agreement shall include (through incorporation of provisions hereof by reference in the Option Agreement or otherwise) the substance of each of the following provisions:

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(a) Term. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, no Option shall be exercisable after the expiration of ten (10) years from the date of its grant or such shorter period specified in the Option Agreement.

(b) Exercise Price. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, the exercise price of each Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option may be granted with an exercise price lower than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option if such Option is granted pursuant to an assumption or substitution for another option in a manner consistent with the provisions of Section 424(a) of the Code (whether or not such options are Incentive Stock Options).

(c) Consideration. The purchase price of Common Stock acquired pursuant to the exercise of an Option shall be paid, to the extent permitted by applicable law and as determined by the Board in its sole discretion, by any combination of the methods of payment set forth below. The Board shall have the authority to grant Options that do not permit all of the following methods of payment (or otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the Company to utilize a particular method of payment. The methods of payment permitted by this Section 5(c) are:

(i) by cash, check, bank draft or money order payable to the Company;

(ii) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of the stock subject to the Option, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds;

(iii) by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock;

(iv) by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Common Stock issued upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that the Company shall accept a cash or other payment from the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued; provided, further, that shares of Common Stock will no longer be outstanding under an Option and will not be exercisable thereafter to the extent that (A) shares are used to pay the exercise price pursuant to the “net exercise,” (B) shares are delivered to the Participant as a result of such exercise, and (C) shares are withheld to satisfy tax withholding obligations; or

(v) in any other form of legal consideration that may be acceptable to the Board.

(d) Transferability of Options. The Board may, in its sole discretion, impose such limitations on the transferability of Options as the Board shall determine. In the absence of such a determination by the Board to the contrary, the following restrictions on the transferability of Options shall apply:

(i) Restrictions on Transfer. An Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder; provided, however, that the Board may, in its sole discretion, permit transfer of the Option in a manner consistent with applicable tax and securities laws upon the Optionholder’s request.

(ii) Domestic Relations Orders. Notwithstanding the foregoing, an Option may be transferred pursuant to a domestic relations order; provided, however, that an Incentive Stock Option may be deemed to be a Nonqualified Stock Option as a result of such transfer.

(iii) Beneficiary Designation. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.

(e) Vesting Generally. The total number of shares of Common Stock subject to an Option may vest and therefore become exercisable in periodic installments that may or may not be equal. The Option may be subject to such other terms and conditions on the time or times when it may or may not be exercised (which may be based on the satisfaction of Performance Goals or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this Section 5(e) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised.

(f) Termination of Continuous Service. Except as otherwise provided in the applicable Option Agreement or other agreement between the Optionholder and the Company, in the event that an Optionholder’s Continuous Service terminates (other than upon the Optionholder’s death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled

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to exercise such Option as of the date of termination of Continuous Service) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder’s Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.

(g) Extension of Termination Date. An Optionholder’s Option Agreement may provide that if the exercise of the Option following the termination of the Optionholder’s Continuous Service (other than upon the Optionholder’s death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of a period of three (3) months after the termination of the Optionholder’s Continuous Service during which the exercise of the Option would not be in violation of such registration requirements, or (ii) the expiration of the term of the Option as set forth in the Option Agreement.

(h) Disability of Optionholder. In the event that an Optionholder’s Continuous Service terminates as a result of the Optionholder’s Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination of Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.

(i) Death of Optionholder. In the event that (i) an Optionholder’s Continuous Service terminates as a result of the Optionholder’s death, or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder’s Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder’s estate, by a person who acquired the right to exercise the Option by bequest or inheritance or, if applicable, by a person designated as the beneficiary of the option upon the Optionholder’s death, but only within the period ending on the earlier of (A) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (B) the expiration of the term of such Option as set forth in the Option Agreement. If, after the Optionholder’s death, the Option is not exercised within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.

(j) Non-Exempt Employees. No Option granted to an Employee that is a non-exempt employee for purposes of the Fair Labor Standards Act shall be first exercisable for any shares of Common Stock until at least six months following the date of grant of the Option. The foregoing provision is intended to operate so that any income derived by a non-exempt employee in connection with the exercise or vesting of an Option will be exempt from his or her regular rate of pay.

6. PROVISIONSOF STOCK AWARDSOTHERTHAN OPTIONS.

(a) Restricted Stock Awards. Each Restricted Stock Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. To the extent consistent with the Company’s Bylaws, at the Board’s election, shares of Common Stock may be (x) held in book entry form subject to the Company’s instructions until any restrictions relating to the Restricted Stock Award lapse; or (y) evidenced by a certificate, which certificate shall be held in such form and manner as determined by the Board. The terms and conditions of Restricted Stock Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Award Agreements need not be identical, provided, however, that each Restricted Stock Award Agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:

(i) Consideration. A Restricted Stock Award may be awarded in consideration for (A) past or future services actually or to be rendered to the Company or an Affiliate, or (B) any other form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.

(ii) Vesting. Shares of Common Stock awarded under the Restricted Stock Award Agreement may be subject to forfeiture to the Company in accordance with a vesting schedule to be determined by the Board.

(iii) Termination of Participant’s Continuous Service. In the event a Participant’s Continuous Service terminates, the Company may receive via a forfeiture condition, any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination of Continuous Service under the terms of the Restricted Stock Award Agreement.

(iv)Transferability. Rights to acquire shares of Common Stock under the Restricted Stock Award Agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the Restricted Stock Award Agreement, as the

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Board shall determine in its sole discretion, so long as Common Stock awarded under the Restricted Stock Award Agreement remains subject to the terms of the Restricted Stock Award Agreement.

(b) Restricted Stock Unit Awards. Each Restricted Stock Unit Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of Restricted Stock Unit Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Unit Award Agreements need not be identical, provided, however, that each Restricted Stock Unit Award Agreement shall include (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance of each of the following provisions:

(i) Consideration. At the time of grant of a Restricted Stock Unit Award, the Board will determine the consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to the Restricted Stock Unit Award. The consideration to be paid (if any) by the Participant for each share of Common Stock subject to a Restricted Stock Unit Award may be paid in any form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.

(ii) Vesting. At the time of the grant of a Restricted Stock Unit Award, the Board may impose such restrictions or conditions to the vesting of the Restricted Stock Unit Award as it, in its sole discretion, deems appropriate.

(iii) Payment. A Restricted Stock Unit Award may be settled by the delivery of shares of Common Stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the Board and contained in the Restricted Stock Unit Award Agreement.

(iv) Additional Restrictions. At the time of the grant of a Restricted Stock Unit Award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of Common Stock (or their cash equivalent) subject to a Restricted Stock Unit Award to a time after the vesting of such Restricted Stock Unit Award.

(v) Dividend Equivalents. Dividend equivalents may be credited in respect of shares of Common Stock covered by a Restricted Stock Unit Award, as determined by the Board and contained in the Restricted Stock Unit Award Agreement. At the sole discretion of the Board, such dividend equivalents may be converted into additional shares of Common Stock covered by the Restricted Stock Unit Award in such manner as determined by the Board. Any additional shares covered by the Restricted Stock Unit Award credited by reason of such dividend equivalents will be subject to all the terms and conditions of the underlying Restricted Stock Unit Award Agreement to which they relate.

(vi)Termination of Participant’s Continuous Service. Except as otherwise provided in the applicable Restricted Stock Unit Award Agreement, such portion of the Restricted Stock Unit Award that has not vested will be forfeited upon the Participant’s termination of Continuous Service.

(vii) Compliance with Section 409A of the Code. Notwithstanding anything to the contrary set forth herein, any Restricted Stock Unit Award granted under the Plan that is not exempt from the requirements of Section 409A of the Code shall contain such provisions so that such Restricted Stock Unit Award will comply with the requirements of Section 409A of the Code. Such restrictions, if any, shall be determined by the Board and contained in the Restricted Stock Unit Award Agreement evidencing such Restricted Stock Unit Award. For example, such restrictions may include, without limitation, a requirement that any Common Stock that is to be issued in a year following the year in which the Restricted Stock Unit Award vests must be issued in accordance with a fixed pre-determined schedule.

(c) Stock Appreciation Rights. Each Stock Appreciation Right Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. Stock Appreciation Rights may be granted as stand-alone Stock Awards or in tandem with other Stock Awards. The terms and conditions of Stock Appreciation Right Agreements may change from time to time, and the terms and conditions of separate Stock Appreciation Right Agreements need not be identical; provided, however, that each Stock Appreciation Right Agreement shall include (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance of each of the following provisions:

(i) Term. No Stock Appreciation Right shall be exercisable after the expiration of ten (10) years from the date of its grant or such shorter period specified in the Stock Appreciation Right Agreement.

(ii) Strike Price. Each Stock Appreciation Right will be denominated in shares of Common Stock equivalents. The strike price of each Stock Appreciation Right shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock equivalents subject to the Stock Appreciation Right on the date of grant.

(iii) Calculation of Appreciation. The appreciation distribution payable on the exercise of a Stock Appreciation Right will be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Stock Appreciation Right) of a number of shares of Common Stock equal to the number of shares of Common Stock equivalents in which

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the Participant is vested under such Stock Appreciation Right, and with respect to which the Participant is exercising the Stock Appreciation Right on such date, over (B) the strike price that will be determined by the Board at the time of grant of the Stock Appreciation Right.

(iv) Vesting. At the time of the grant of a Stock Appreciation Right, the Board may impose such restrictions or conditions to the vesting of such Stock Appreciation Right as it, in its sole discretion, deems appropriate.

(v) Exercise. To exercise any outstanding Stock Appreciation Right, the Participant must provide written notice of exercise to the Company in compliance with the provisions of the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.

(vi) Payment. The appreciation distribution in respect to a Stock Appreciation Right may be paid in Common Stock, in cash, in any combination of the two or in any other form of consideration, as determined by the Board and contained in the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.

(vii) Termination of Continuous Service. In the event that a Participant’s Continuous Service terminates, the Participant may exercise his or her Stock Appreciation Right (to the extent that the Participant was entitled to exercise such Stock Appreciation Right as of the date of termination) but only within such period of time ending on the earlier of (A) the date three (3) months following the termination of the Participant’s Continuous Service (or such longer or shorter period specified in the Stock Appreciation Right Agreement), or (B) the expiration of the term of the Stock Appreciation Right as set forth in the Stock Appreciation Right Agreement. If, after termination, the Participant does not exercise his or her Stock Appreciation Right within the time specified herein or in the Stock Appreciation Right Agreement (as applicable), the Stock Appreciation Right shall terminate.

(viii) Compliance with Section 409A of the Code. Notwithstanding anything to the contrary set forth herein, any Stock Appreciation Rights granted under the Plan that are not exempt from the requirements of Section 409A of the Code shall contain such provisions so that such Stock Appreciation Rights will comply with the requirements of Section 409A of the Code. Such restrictions, if any, shall be determined by the Board and contained in the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right. For example, such restrictions may include, without limitation, a requirement that a Stock Appreciation Right that is to be paid wholly or partly in cash must be exercised and paid in accordance with a fixed pre-determined schedule.

(d) Performance Awards.

(i) Performance Stock Awards. A Performance Stock Award is a Stock Award that may be granted, may vest, or may be exercised based upon the attainment during a Performance Period of certain Performance Goals. A Performance Stock Award may, but need not, require the completion of a specified period of Continuous Service. The length of any Performance Period, the Performance Goals to be achieved during the Performance Period, and the measure of whether and to what degree such Performance Goals have been attained shall be conclusively determined by the Committee in its sole discretion. The maximum number of fully vested shares that may be issued to any Participant in a calendar year attributable to Stock Awards described in this Section 6(d)(i) shall not exceed ten million (10,000,000) shares of Common Stock. In addition, to the extent permitted by applicable law and the applicable Award Agreement, the Board may determine that cash may be used in payment of Performance Stock Awards.

(ii) Performance Cash Awards. A Performance Cash Award is a cash award that may be granted upon the attainment during a Performance Period of certain Performance Goals. A Performance Cash Award may also require the completion of a specified period of Continuous Service. The length of any Performance Period, the Performance Goals to be achieved during the Performance Period, and the measure of whether and to what degree such Performance Goals have been attained shall be conclusively determined by the Committee in its sole discretion. The maximum amount that may be paid to any Participant in a calendar year attributable to cash awards described in this Section 6(d)(ii) shall not exceed ten million dollars ($10,000,000). The Board may provide for or, subject to such terms and conditions as the Board may specify, may permit a Participant to elect for, the payment of any Performance Cash Award to be deferred to a specified date or event. The Committee may specify the form of payment of Performance Cash Awards, which may be cash or other property, or may provide for a Participant to have the option for his or her Performance Cash Award, or such portion thereof as the Board may specify, to be paid in whole or in part in cash or other property. In addition, to the extent permitted by applicable law and the applicable Award Agreement, the Board may determine that Common Stock authorized under this Plan may be used in payment of Performance Cash Awards, including additional shares in excess of the Performance Cash Award as an inducement to hold shares of Common Stock.

(e) Other Stock Awards. Other forms of Stock Awards valued in whole or in part by reference to, or otherwise based on, Common Stock may be granted either alone or in addition to Stock Awards provided for under Section 5 and the preceding provisions of this Section 6. Subject to the provisions of the Plan, the Board shall have sole and complete authority to determine the persons to whom and the time or times at which such Other Stock Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such Other Stock Awards and all other terms and conditions of such Other Stock Awards.

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7. NON-DISCRETIONARY GRANTSTO ELIGIBLE DIRECTORS.

(a) Initial Grants. Without any further action of the Board, each person who is elected or appointed for the first time to be a Non-Employee Director on or after March 22, 2013, automatically shall, upon the date of his or her initial election or appointment to be a Non-Employee Director, as applicable, be granted an Initial Grant as described in Section 7(c) below.

(b) Annual Grants. Without any further action of the Board, on the date of each Annual Meeting, commencing on the date of the Annual Meeting in 2013, each person who is then a Non-Employee Director automatically shall be granted an Annual Grant as described in Section 7(c) below, if as of such date, he or she will have served on the Board for at least the preceding six (6) months.

(c) Form of Initial and Annual Grants. On or before the end of the Company’s fiscal year, the Board shall determine if all Initial and Annual Grants to be granted in the subsequent fiscal year shall be in the form of (i) Options described in Section 5 and Restricted Stock Unit Awards described in Section 6(b) (subject to Sections 7(c)(i) and 7(c)(ii) below), (ii) Restricted Stock Awards described in Section 6(a), (iii) Stock Appreciation Rights described in Section 6(c), or (iv) Performance Stock Awards described in Section 6(d). If the Board does not make such a determination on or before the end of the Company’s fiscal year, all Initial and Annual Grants to be granted in the subsequent fiscal year shall be in the form of Options described in Section 5 and Restricted Stock Unit Awards described in Section 6(b) (subject to Sections 7(c)(i) and 7(c)(ii) below).

(i) Initial Grants. With respect to Initial Grants granted on or after March 22, 2013, if the Initial Grant is in the form of an Option and Restricted Stock Unit Award, the Initial Grant shall consist of (A) a Nonstatutory Stock Option to purchase twenty-five thousand (25,000) shares of Common Stock on the terms and conditions set forth in Section 5 and (B) a Restricted Stock Unit Award covering ten thousand (10,000) shares of Common Stock on the terms and conditions set forth in Section 6(b), provided that the shares subject to such Option shall vest (and be exercisable) as follows: 1/48^th of the shares shall vest monthly over four years from the date of grant, and the shares subject to the Restricted Stock Unit Award shall vest as follows: 1/4^th of the shares shall vest annually over four years on the last day of the first month of a calendar quarter which last day next occurs after the one year anniversary of the date of grant.

(ii) Annual Grants. With respect to Annual Grants granted on or after the date of the Annual Meeting in 2014, if the Annual Grant is in the form of an Option and Restricted Stock Unit Award, the Annual Grant shall consist of (A) a Nonstatutory Stock Option to purchase three thousand (3,000) shares of Common Stock on the terms and conditions set forth in Section 5 and (B) a Restricted Stock Unit Award covering five thousand five hundred (5,500) shares of Common Stock on the terms and conditions set forth in Section 6(b), provided that the shares subject to such Option shall vest (and be exercisable) as follows: 1/12^th of the shares shall vest monthly over one year from the date of grant, and the shares subject to such Restricted Stock Unit Award shall vest as follows: all shares shall vest on April 30^th in the year following the year of the date of grant.

(iii) Other Types of Stock Awards. If the Initial or Annual Grant is in the form of a Restricted Stock Award, Stock Appreciation Right or Performance Stock Award, the number of shares of Common Stock subject to such Initial or Annual Grant shall be determined by the Board in its sole discretion.

(d) Change in Control. In the event that a Non-Employee Director is required to resign his or her position as a Non-Employee Director as a condition of a Change in Control or a Non-Employee Director is removed from his or her position as a Non-Employee Director in connection with a Change in Control, then the outstanding Options and Restricted Stock Unit Awards as well as any Restricted Stock Awards, Stock Appreciation Rights and Performance Stock Awards held by such Non-Employee Director shall become fully vested (and, as applicable, exercisable) immediately prior to the effectiveness of such resignation or removal (and contingent upon the effectiveness of the Change in Control).

8. COVENANTSOFTHE COMPANY.

(a) Availability of Shares. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock reasonably required to satisfy such Stock Awards.

(b) Securities Law Compliance. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained.

(c) No Obligation to Notify. The Company shall have no duty or obligation to any holder of a Stock Award to advise such holder as to the time or manner of exercising such Stock Award. Furthermore, the Company shall have no duty or obligation to warn

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or otherwise advise such holder of a pending termination or expiration of a Stock Award or a possible period in which the Stock Award may not be exercised. The Company has no duty or obligation to minimize the tax consequences of a Stock Award to the holder of such Stock Award.

9. MISCELLANEOUS.

(a) Use of Proceeds from Sales of Common Stock. Proceeds from the sale of shares of Common Stock pursuant to Stock Awards shall constitute general funds of the Company.

(b) Corporate Action Constituting Grant of Stock Awards. Corporate action constituting a grant by the Company of a Stock Award to any Participant shall be deemed completed as of the date of such corporate action, unless otherwise determined by the Board, regardless of when the instrument, certificate, or letter evidencing the Stock Award is communicated to, or actually received or accepted by, the Participant.

(c) Stockholder Rights. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until such Participant has exercised the Stock Award pursuant to its terms and the Participant shall not be deemed to be a stockholder of record until the issuance of the Common Stock pursuant to such exercise has been entered into the books and records of the Company.

(d) No Employment or Other Service Rights. Nothing in the Plan, any Stock Award Agreement or other instrument executed thereunder or in connection with any Award granted pursuant to the Plan shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant’s agreement with the Company or an Affiliate, or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be.

(e) Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and any Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the applicable Option Agreement(s).

(f) Investment Assurances. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant’s knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant’s own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (A) the issuance of the shares upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (B) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.

(g) Withholding Obligations. Unless prohibited by the terms of a Stock Award Agreement, the Company may, in its sole discretion, satisfy any federal, state or local tax withholding obligation relating to an Award by any of the following means (in addition to the Company’s right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with the Award; (iii) withholding cash from an Award settled in cash; or (iv) by such other method as may be set forth in the Award Agreement.

(h) Electronic Delivery. Any reference herein to a “written” agreement or document shall include any agreement or document delivered electronically or posted on the Company’s intranet.

(i) Deferrals. To the extent permitted by applicable law, the Board, in its sole discretion, may determine that the delivery of Common Stock or the payment of cash, upon the exercise, vesting or settlement of all or a portion of any Award may be deferred and may establish programs and procedures for deferral elections to be made by Participants. Deferrals by Participants will be made in accordance with Section 409A of the Code. Consistent with Section 409A of the Code, the Board may provide for distributions while

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a Participant is still an employee. The Board is authorized to make deferrals of Stock Awards and determine when, and in what annual percentages, Participants may receive payments, including lump sum payments, following the Participant’s termination of employment or retirement, and implement such other terms and conditions consistent with the provisions of the Plan and in accordance with applicable law.

(j) Compliance with Section of 409A of the Code. To the extent that the Board determines that any Award granted under the Plan is subject to Section 409A of the Code, the Award Agreement evidencing such Award shall incorporate the terms and conditions necessary to avoid the consequences specified in Section 409A(a)(1) of the Code. To the extent applicable, the Plan and Award Agreements shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued or amended after the Effective Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Board determines that any Award may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the Effective Date), the Board may adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Board determines are necessary or appropriate to (i) exempt the Award from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (2) comply with the requirements of Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued or amended after the Effective Date.

10. ADJUSTMENTSUPON CHANGESIN COMMON STOCK; OTHER CORPORATE EVENTS.

(a) Capitalization Adjustments. In the event of a Capitalization Adjustment, the Board shall appropriately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and maximum number of securities that may be issued pursuant to the exercise of Incentive Stock Options pursuant to Section 3(c), (iii) the class(es) and maximum number of securities that may be awarded to any person pursuant to Section 3(d) and 6(d)(i), (iv) the class(es) and number of securities that may be awarded to Non-Employee Directors pursuant to Section 7, and (v) the class(es) and number of securities and price per share of stock subject to outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive.

(b) Dissolution or Liquidation. Except as otherwise provided in the Stock Award Agreement, in the event of a dissolution or liquidation of the Company, all outstanding Stock Awards (other than Stock Awards consisting of vested and outstanding shares of Common Stock not subject to the Company’s right of repurchase) shall terminate immediately prior to the completion of such dissolution or liquidation, and the shares of Common Stock subject to the Company’s repurchase option may be repurchased by the Company notwithstanding the fact that the holder of such Stock Award is providing Continuous Service, provided, however, that the Board may, in its sole discretion, cause some or all Stock Awards to become fully vested, exercisable and/or no longer subject to repurchase or forfeiture (to the extent such Stock Awards have not previously expired or terminated) before the dissolution or liquidation is completed but contingent on its completion.

(c) Corporate Transaction. The following provisions shall apply to Stock Awards in the event of a Corporate Transaction unless otherwise provided in the instrument evidencing the Stock Award or any other written agreement between the Company or any Affiliate and the holder of the Stock Award or unless otherwise expressly provided by the Board at the time of grant of a Stock Award. Except as otherwise stated in the Stock Award Agreement, in the event of a Corporate Transaction, then, notwithstanding any other provision of the Plan, the Board shall take one or more of the following actions with respect to Stock Awards, contingent upon the closing or completion of the Corporate Transaction:

(i) arrange for the surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) to assume or continue the Stock Award or to substitute a similar stock award for the Stock Award (including, but not limited to, an award to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction);

(ii) arrange for the assignment of any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to the Stock Award to the surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company);

(iii) accelerate the vesting of the Stock Award (and, if applicable, the time at which the Stock Award may be exercised) to a date prior to the effective time of such Corporate Transaction as the Board shall determine (or, if the Board shall not determine such a date, to the date that is five (5) days prior to the effective date of the Corporate Transaction), with such Stock Award terminating if not exercised (if applicable) at or prior to the effective time of the Corporate Transaction;

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(iv) arrange for the lapse of any reacquisition or repurchase rights held by the Company with respect to the Stock Award; and

(v) cancel or arrange for the cancellation of the Stock Award, to the extent not vested or not exercised prior to the effective time of the Corporate Transaction, in exchange for such cash consideration as the Board, in its sole discretion, may consider appropriate.

The Board need not take the same action with respect to all Stock Awards or with respect to all Participants.

(d) Change in Control.

(i) In General. A Stock Award may be subject to additional acceleration of vesting and exercisability upon or after a Change in Control as may be provided in the Stock Award Agreement for such Stock Award or as may be provided in any other written agreement between the Company or any Affiliate and the Participant, but in the absence of such provision, no such acceleration shall occur.

(ii) Parachute Provisions.

(1) If any payment or benefit a Participant would receive pursuant to a Change in Control from the Company or otherwise (“Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then such Payment shall be equal to the Reduced Amount. The “Reduced Amount” shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax, or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in the Participant’s receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting “parachute payments” is necessary so that the Payment equals the Reduced Amount, reduction shall occur in a manner necessary to provide the Participant with the greatest economic benefit. If more than one manner of reduction of payments or benefits necessary to arrive at the Reduced Amount yields the greatest economic benefit, the payments and benefits shall be reduced pro rata.

(2) The accounting firm engaged by the Company for general tax purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder.

(3) The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Participant and the Company within fifteen (15) calendar days after the date on which the Participant’s right to a Payment is triggered (if requested at that time by the Participant or the Company) or such other time as requested by the Participant or the Company. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish the Participant and the Company with an opinion reasonably acceptable to the Participant that no Excise Tax will be imposed with respect to such Payment. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon the Participant and the Company.

11. TERMINATIONOR SUSPENSIONOFTHE PLAN.

(a) Plan Term. Unless sooner terminated by the Board pursuant to Section 2, the Plan shall automatically terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Awards may be granted under the Plan while the Plan is suspended or after it is terminated.

(b) No Impairment of Rights. Termination of the Plan shall not impair rights and obligations under any Award granted while the Plan is in effect except with the written consent of the affected Participant.

12. EFFECTIVE DATEOF PLAN.

The Plan shall become effective on the IPO Date, but no Stock Award shall be exercised (or, in the case of a Restricted Stock Award, Restricted Stock Unit Award, or Other Stock Award, shall be granted) unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board.

11

13. CHOICEOF LAW.

The law of the State of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state’s conflict of laws rules.

14. DEFINITIONS. As used in the Plan, the definitions contained in this Section 14 shall apply to the capitalized terms indicated below:

(a) “Affiliate” means, at the time of determination, any “parent” or “subsidiary” of the Company as such terms are defined in Rule 405 of the Securities Act. The Board shall have the authority to determine the time or times at which “parent” or “subsidiary” status is determined within the foregoing definition.

(b) “Annual Grant” means a Stock Award granted annually to a Non-Employee Director who meets the specified criteria pursuant to Section 7(b) of the Plan.

(c) “Annual Meeting” means the annual meeting of the stockholders of the Company.

(d) “Award” means a Stock Award or a Performance Cash Award.

(e) “Board” means the Board of Directors of the Company.

(f) “Capitalization Adjustment” means any change that is made in, or other events that occur with respect to, the Common Stock subject to the Plan or subject to any Stock Award after the Effective Date without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company. Notwithstanding the foregoing, the conversion of any convertible securities of the Company shall not be treated as a transaction “without receipt of consideration” by the Company.

(g) “Change in Control” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of the acquisition of securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person from the Company in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Company through the issuance of equity securities or (B) solely because the level of Ownership held by any Exchange Act Person (the “Subject Person”) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control shall be deemed to occur;

(ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such transaction;

(iii) the stockholders of the Company approve or the Board approves a plan of complete dissolution or liquidation of the Company, or a complete dissolution or liquidation of the Company shall otherwise occur, except for a liquidation into a parent corporation;

(iv) there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such sale, lease, license or other disposition; or

12

(v) individuals who, on the date this Plan is adopted by the Board, are members of the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the members of the Board; (provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board).

The term Change in Control shall not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company.

Notwithstanding the foregoing or any other provision of this Plan, the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant shall supersede the foregoing definition with respect to Awards subject to such agreement; provided, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition shall apply.

(h) “Code” means the Internal Revenue Code of 1986, as amended.

(i) “Committee” means a committee of one (1) or more Directors to whom authority has been delegated by the Board in accordance with Section 2(c).

(j) “Common Stock” means the common stock of the Company.

(k) “Company” means Cavium, Inc., a Delaware corporation.

(l) “Consultant” means any person, including an advisor, who is (i) engaged by the Company or an Affiliate to render consulting or advisory services and is compensated for such services, or (ii) serving as a member of the board of directors of an Affiliate and is compensated for such services. However, service solely as a Director, or payment of a fee for such service, shall not cause a Director to be considered a “Consultant” for purposes of the Plan.

(m) “Continuous Service” means that the Participant’s service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant’s service with the Company or an Affiliate, shall not terminate a Participant’s Continuous Service. For example, a change in status from an employee of the Company to a consultant to an Affiliate or to a Director shall not constitute an interruption of Continuous Service. To the extent permitted by law, the Board or the chief executive officer of the Company, in that party’s sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the Company’s leave of absence policy, in the written terms of any leave of absence agreement or policy applicable to the Participant, or as otherwise required by law.

(n) “Corporate Transaction” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i) a sale or other disposition of all or substantially all, as determined by the Board in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;

(ii) a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company;

(iii) the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or

(iv) the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.

(o) “Covered Employee” shall have the meaning provided in Section 162(m)(3) of the Code and the regulations promulgated thereunder.

(p) “Director” means a member of the Board.

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(q) “Disability” means, with respect to a Participant, the inability of such Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, as provided in Sections 22(e)(3) and 409A(a)(2)(c)(i) of the Code.

(r) “Effective Date” means the effective date of the Plan as set forth in Section 12.

(s) “Employee” means any person employed by the Company or an Affiliate. However, service solely as a Director, or payment of a fee for such services, shall not cause a Director to be considered an “Employee” for purposes of the Plan.

(t) “Entity” means a corporation, partnership, limited liability company or other entity.

(u) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(v) “Exchange Act Person” means any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” shall not include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the Effective Date of the Plan as set forth in Section 12, is the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities.

(w) “Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange (or the exchange with the greatest volume of trading in the Common Stock) on the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. Unless otherwise provided by the Board, if there is no closing sales price (or closing bid if no sales were reported) for the Common Stock on the date of determination, then the Fair Market Value shall be the closing sales price (or closing bid if no sales were reported) on the last preceding date for which such quotation exists.

(ii) In the absence of such market for the Common Stock, the Fair Market Value shall be determined by the Board in good faith.

(x) “Incentive Stock Option” means an Option granted pursuant to Section 5 of the Plan that is intended to be, and qualifies as, an “incentive stock option” within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(y) “Initial Grant” means a Stock Award granted to a Non-Employee Director who meets the specified criteria pursuant to Section 7(a) of the Plan.

(z) “IPO Date” means the date of the underwriting agreement between the Company and the underwriter(s) managing the initial public offering of the Common Stock, pursuant to which the Common Stock is priced for the initial public offering.

(aa) “Non-Employee Director” means a Director who either (i) is not a current employee or officer of the Company or an Affiliate, does not receive compensation, either directly or indirectly, from the Company or an Affiliate for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act (“Regulation S-K”)), does not possess an interest in any other transaction for which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered a “non-employee director” for purposes of Rule 16b-3.

(bb) “Nonstatutory Stock Option” means any Option granted pursuant to Section 5 of the Plan that does not qualify as an Incentive Stock Option.

(cc) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(dd) “Option” means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan.

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(ee) “Option Agreement” means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.

(ff) “Optionholder” means a person to whom an Option is granted pursuant to the Plan or, if permitted under the terms of this Plan, such other person who holds an outstanding Option.

(gg) “Other Stock Award” means an award based in whole or in part by reference to the Common Stock which is granted pursuant to the terms and conditions of Section 6(e).

(hh) “Other Stock Award Agreement” means a written agreement between the Company and a holder of an Other Stock Award evidencing the terms and conditions of an Other Stock Award grant. Each Other Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(ii) “Outside Director” means a Director who either (i) is not a current employee of the Company or an “affiliated corporation” (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an “affiliated corporation” who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, has not been an officer of the Company or an “affiliated corporation,” and does not receive remuneration from the Company or an “affiliated corporation,” either directly or indirectly, in any capacity other than as a Director, or (ii) is otherwise considered an “outside director” for purposes of Section 162(m) of the Code.

(jj) “Own,” “Owned,” “Owner,” “Ownership”A person or Entity shall be deemed to “Own,” to have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.

(kk) “Participant” means a person to whom an Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award.

(ll) “Performance Cash Award” means an award of cash granted pursuant to the terms and conditions of Section 6(d)(ii).

(mm) “Performance Criteria” means the one or more criteria that the Board shall select for purposes of establishing the Performance Goals for a Performance Period. The Performance Criteria that shall be used to establish such Performance Goals may be based on any one of, or combination of, the following: (i) earnings per share; (ii) earnings before interest, taxes and depreciation; (iii) earnings before interest, taxes, depreciation and amortization; (iv) total stockholder return; (v) return on equity; (vi) return on assets, investment, or capital employed; (vii) operating margin; (viii) gross margin; (ix) operating income; (x) net income (before or after taxes); (xi) net operating income; (xii) net operating income after tax; (xiii) pre-tax profit; (xiv) operating cash flow; (xv) sales or revenue targets; (xvi) increases in revenue or product revenue; (xvii) expenses and cost reduction goals; (xviii) improvement in or attainment of working capital levels; (xix) economic value added (or an equivalent metric); (xx) market share; (xxi) cash flow; (xxii) cash flow per share; (xxiii) share price performance; (xxiv) debt reduction; (xxv) implementation or completion of projects or processes; (xxvi) customer satisfaction; (xxvii) stockholders’ equity; and (xxviii) to the extent that an Award is not intended to comply with Section 162(m) of the Code, other measures of performance selected by the Board. Partial achievement of the specified criteria may result in the payment or vesting corresponding to the degree of achievement as specified in the Stock Award Agreement or the written terms of a Performance Cash Award. The Board shall, in its sole discretion, define the manner of calculating the Performance Criteria it selects to use for such Performance Period.

(nn) “Performance Goals” means, for a Performance Period, the one or more goals established by the Board for the Performance Period based upon the Performance Criteria. Performance Goals may be based on a Company-wide basis, with respect to one or more business units, divisions, Affiliates, or business segments, and in either absolute terms or relative to the performance of one or more comparable companies or the performance of one or more relevant indices. At the time of the grant of any Award, the Board is authorized to determine whether, when calculating the attainment of Performance Goals for a Performance Period: (i) to exclude restructuring and/or other nonrecurring charges; (ii) to exclude exchange rate effects, as applicable, for non-U.S. dollar denominated net sales and operating earnings; (iii) to exclude the effects of changes to generally accepted accounting standards required by the Financial Accounting Standards Board; (iv) to exclude the effects of any statutory adjustments to corporate tax rates; and (v) to exclude the effects of any “extraordinary items” as determined under generally accepted accounting principles. In addition, the Board retains the discretion to reduce or eliminate the compensation or economic benefit due upon attainment of Performance Goals.

(oo) “Performance Period” means the period of time selected by the Board over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to and the payment of a Stock Award or a Performance Cash Award. Performance Periods may be of varying and overlapping duration, at the sole discretion of the Board.

15

(pp) “Performance Stock Award” means a Stock Award granted under the terms and conditions of Section 6(d)(i).

(qq) “Plan” means this Cavium, Inc. 2007 Equity Incentive Plan.

(rr) “Restricted Stock Award” means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 6(a).

(ss) “Restricted Stock Award Agreement” means a written agreement between the Company and a holder of a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock Award grant. Each Restricted Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(tt) “Restricted Stock Unit Award” means an unfunded right to receive shares of Common Stock at a future date which is granted pursuant to the terms and conditions of Section 6(b).

(uu) “Restricted Stock Unit Award Agreement” means a written agreement between the Company and a holder of a Restricted Stock Unit Award evidencing the terms and conditions of a Restricted Stock Unit Award grant. Each Restricted Stock Unit Award Agreement shall be subject to the terms and conditions of the Plan.

(vv) “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time.

(ww) “Securities Act” means the Securities Act of 1933, as amended.

(xx) “Stock Appreciation Right” means a right to receive the appreciation on Common Stock that is granted pursuant to the terms and conditions of Section 6(c).

(yy) “Stock Appreciation Right Agreement” means a written agreement between the Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock Appreciation Right grant. Each Stock Appreciation Right Agreement shall be subject to the terms and conditions of the Plan.

(zz) “Stock Award” means any right to receive Common Stock granted under the Plan, including an Incentive Stock Option, a Nonstatutory Stock Option, a Restricted Stock Award, a Restricted Stock Unit Award, a Stock Appreciation Right, a Performance Stock Award or any Other Stock Award.

(aaa) “Stock Award Agreement” means a written agreement between the Company and a Participant evidencing the terms and conditions of a Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(bbb) “Subsidiary” means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%) .

(ccc) “Ten Percent Stockholder” means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Affiliate.

16

EX-31

Exhibit 31.1

CERTIFICATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Syed B. Ali, certify that:

1.	I have reviewed this Form 10-Q of Cavium, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 2, 2014	By:	/s/ SYED B. ALI
		Syed B. Ali
		President, Chief Executive Officer and
		Director (Principal Executive Officer)

EX-31

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Arthur D. Chadwick, certify that:

1.	I have reviewed this Form 10-Q of Cavium, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 2, 2014	By:	/s/ ARTHUR D. CHADWICK
		Arthur D. Chadwick
		Chief Financial Officer, Vice President of Finance and Administration (Principal Financial officer)

EX-32

Exhibit 32.1

STATEMENT OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Syed B. Ali, Chief Executive Officer of Cavium, Inc. (the “Company”), and Arthur D. Chadwick, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:

(1) The Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2014 (the “Periodic Report”), to which this Certification is attached as Exhibit 32.1, fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act;

and

(2) The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of the 2nd day of May 2014.

/s/ SYED B. ALI	/s/ ARTHUR D. CHADWICK
Syed B. Ali	Arthur D. Chadwick
President, Chief Executive Officer and	Chief Financial Officer, Vice President of Finance and
Director	Administration
(Principal Executive Officer)	(Principal Financial Officer)

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Cavium, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

XML

Goodwill and Intangible Assets, Net (Intangible Assets, Net) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	$ 124,131	$ 122,188
Finite-lived intangible assets, Accumulated Amortization	(82,678)	(78,948)
Finite-lived intangible assets, Net	41,453	43,240
Weighted average remaining amortization period (years)	6 years 9 months 15 days	6 years 10 months 13 days
Technology licenses
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	70,120	68,175
Finite-lived intangible assets, Accumulated Amortization	(34,443)	(32,015)
Finite-lived intangible assets, Net	35,677	36,160
Weighted average remaining amortization period (years)	7 years 7 months 21 days	7 years 10 months 17 days
Existing and core technology - product
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	42,084	42,086
Finite-lived intangible assets, Accumulated Amortization	(36,796)	(35,637)
Finite-lived intangible assets, Net	5,288	6,449
Weighted average remaining amortization period (years)	1 year 5 months 27 days	1 year 8 months 5 days
Customer contracts and relationships
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	8,991	8,991
Finite-lived intangible assets, Accumulated Amortization	(8,862)	(8,827)
Finite-lived intangible assets, Net	129	164
Weighted average remaining amortization period (years)	1 year 29 days	1 year 3 months 18 days
Trade name
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	2,296	2,296
Finite-lived intangible assets, Accumulated Amortization	(1,937)	(1,829)
Finite-lived intangible assets, Net	359	467
Weighted average remaining amortization period (years)	10 months 10 days	1 year 1 month 6 days
Order backlog
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	640	640
Finite-lived intangible assets, Accumulated Amortization	(640)	(640)
Finite-lived intangible assets, Net
Weighted average remaining amortization period (years)

XML

Commitments and Contingencies (Narrative) (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		1 Months Ended	9 Months Ended	1 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Jan. 31, 2014 VIE	Sep. 30, 2013 VIE	Nov. 30, 2013 New San Jose California Lease	Nov. 30, 2013 San Jose California
Disclosure Commitments And Contingencies Narrative Detail [Line Items]
Lease expiration period	Mar. 31, 2014				Oct. 01, 2022	Oct. 01, 2022
Operating leases, rent expense	$ 1.4	$ 1.3
Long-term purchase commitment, amount			$ 1.0	$ 6.1
Settlement agreement payment frequency installment period			2 years	2 years

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Equity (Reconciliation of Changes in Equity) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Changes In Stockholders Equity [Line Items]
Equity Attributable to the Company, Balance beginning	$ 286,584
Attributable to non-controlling interest, Balance beginning	(11,753)
Total Equity, Balance beginning	274,831
Common stock issued in connection with exercises of stock options	3,589
Stock-based compensation	9,581
Net income (loss) attributable to the Company	2,347	(3,184)
Net income (loss) Attributable to non-controlling interest	(4,102)	(2,129)
Net income (loss)	(1,755)	(5,313)
Equity Attributable to the Company, Balance Ending	302,101
Attributable to non-controlling interest, Balance Ending	(15,855)
Total Equity Balance, Ending	286,246
Equity Attributable To Parent
Changes In Stockholders Equity [Line Items]
Common stock issued in connection with exercises of stock options	3,589
Stock-based compensation	$ 9,581

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Commitments and Contingencies (Minimum Commitments Under Non-Cancelable Capital and Operating Lease Agreements) (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Capital Leased Assets [Line Items]
Capital lease and technology license obligations	$ 14,227	$ 17,103
Long-term portion of obligations	15,297	16,292
Remainder of 2014	17,881
2015	19,031
2016	13,830
2017	8,731
2018	8,929
2019 thereafter	31,983
Total	100,385
Capital Lease and Technology License Obligations
Capital Leased Assets [Line Items]
Remainder of 2014	13,716
2015	12,103
2016	5,150
2017
2018
2019 thereafter
Total	30,969
Less: Interest component (3.75% annual rate)	1,445
Present value of minimum lease payment	29,524
Capital lease and technology license obligations	14,227
Long-term portion of obligations	15,297
Operating Leases
Capital Leased Assets [Line Items]
Remainder of 2014	4,165
2015	6,928
2016	8,680
2017	8,731
2018	8,929
2019 thereafter	31,983
Total	$ 69,416

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Equity (Summary of Activity of Restricted Stock) (Detail) (2007 Stock Incentive Plan, USD $)	3 Months Ended
	Mar. 31, 2014
2007 Stock Incentive Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of Shares, Beginning balance	1,776,170
Number of Shares, Granted	1,016,955
Number of Shares, Issued and released	(304,148)
Number of Shares, Cancelled and forfeited	(16,331)
Number of Shares, Ending balance	2,472,646
Weighted-Average Grant Date Fair Value Per Share, Beginning balance	$ 35.64
Weighted-Average Grant Date Fair Value Per Share, Granted	$ 37.54
Weighted-Average Grant Date Fair Value Per Share, Issued and released	$ 33.65
Weighted-Average Grant Date Fair Value Per Share, Cancelled and forfeited	$ 36.21
Weighted-Average Grant Date Fair Value Per Share, Ending balance	$ 36.66

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Balance Sheet Components (Other Accrued Expenses and Other Current Liabilities) (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Payables and Accruals [Abstract]
Accrued compensation and related benefits	$ 4,912	$ 4,262
Professional fees	1,405	1,536
Customer deposits	911	1,470
Income tax payable	308	544
Deferred tax liability	41	277
Other	1,942	1,747
Accrued expenses and other current liabilities	$ 9,519	$ 9,836

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Segment and Geographic Information (Tables)

3 Months Ended

Mar. 31, 2014

Sales by Geography

Sales by geography for the periods indicated were as follows:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
United States	$	30,077	$	22,651
China		22,004		16,820
Korea		3,664		7,035
Mexico		4,650		4,150
Finland		7,712		2,455
Taiwan		6,198		5,891
Malaysia		2,834		3,465
Other countries		6,102		7,063
Total	$	83,241	$	69,530

Long Lived Assets

The following table sets forth long lived assets, which consist of property and equipment, net by geographic regions:

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
United States	$	24,164	$	25,160
All other countries		4,398		3,334
Total	$	28,562	$	28,494

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Income Taxes (Narrative) (Detail) (USD $) In Millions, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Income Tax Disclosure [Line Items]
Unrecognized tax benefits for income taxes	$ 14.8	$ 14.6
Unrecognized tax benefit that would impact effective tax rate	$ 0.7

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Restructuring Accrual (Accrued Restructuring Liabilities Including Related Activities) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014
Restructuring Cost And Reserve [Line Items]
Accrued restructuring at beginning of the year	$ 57
Additions	570
Cash payments and other non-cash adjustments	(627)
Accrued restructuring at end of the year	0
Severance and other benefits
Restructuring Cost And Reserve [Line Items]
Accrued restructuring at beginning of the year
Additions	570
Cash payments and other non-cash adjustments	(570)
Accrued restructuring at end of the year
Excess Facility Related Costs
Restructuring Cost And Reserve [Line Items]
Accrued restructuring at beginning of the year	57
Additions
Cash payments and other non-cash adjustments	(57)
Accrued restructuring at end of the year	$ 0

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Business Combinations and Divestitures (Summary of Change in Value of Convertible Notes and Derivative Features of Convertible Security) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014
Variable Interest Entity [Line Items]
Beginning balance	$ 13,512
Additions	1,400
Change in estimated fair value of notes payable and other	858
Ending balance	15,770
Convertible Notes
Variable Interest Entity [Line Items]
Beginning balance	10,612
Additions	1,400
Change in estimated fair value of notes payable and other	670
Ending balance	12,682
Derivative Feature of Convertible Security
Variable Interest Entity [Line Items]
Beginning balance	2,900
Additions
Change in estimated fair value of notes payable and other	188
Ending balance	$ 3,088

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Segment and Geographic Information (Sales by Geography) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Segment Reporting Information [Line Items]
Total sales	$ 83,241	$ 69,530
United States
Segment Reporting Information [Line Items]
Total sales	30,077	22,651
China
Segment Reporting Information [Line Items]
Total sales	22,004	16,820
Korea
Segment Reporting Information [Line Items]
Total sales	3,664	7,035
Mexico
Segment Reporting Information [Line Items]
Total sales	4,650	4,150
Finland
Segment Reporting Information [Line Items]
Total sales	7,712	2,455
Taiwan
Segment Reporting Information [Line Items]
Total sales	6,198	5,891
Malaysia
Segment Reporting Information [Line Items]
Total sales	2,834	3,465
Other Countries
Segment Reporting Information [Line Items]
Total sales	$ 6,102	$ 7,063

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Equity (Detail of Stock-Based Compensation Expense) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 9,587	$ 8,274
Cost of revenue
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	247	287
Research and development
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	5,404	3,906
Sales, general and administrative
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 3,936	$ 4,081

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Balance Sheet Components

3 Months Ended

Mar. 31, 2014

Balance Sheet Components

4. Balance Sheet Components

Inventories

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
Work-in-process	$	36,334	$	35,027
Finished goods		12,714		10,741
	$	49,048	$	45,768

Property and equipment, net

	As of March 31, 2014			As of December 31, 2013
	(in thousands)
Test equipment and mask costs	$	37,021		$	34,457
Software, computer and other equipment		36,428			34,945
Furniture, office equipment and leasehold improvements		1,077			938
		74,526			70,340
Less: accumulated depreciation and amortization		(45,964	)		(41,846	)
	$	28,562		$	28,494

Depreciation and amortization expense was $4.2 million and $4.5 million for the three months ended March 31, 2014 and 2013, respectively.

The Company leases certain design tools under capital lease and certain financing arrangements which are included in property and equipment, which total cost, net of accumulated amortization amounted to $15.3 and $16.2 million at March 31, 2014 and December 31, 2013, respectively. Amortization expense related to assets recorded under capital lease and certain financing agreements was $2.0 million and $1.6 million for the three months ended March 31, 2014 and 2013, respectively.

Other accrued expenses and other current liabilities

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
Accrued compensation and related benefits	$	4,912	$	4,262
Professional fees		1,405		1,536
Customer deposits		911		1,470
Income tax payable		308		544
Deferred tax liability		41		277
Other		1,942		1,747
	$	9,519	$	9,836

Warranty Accrual

The following table presents a reconciliation of the warranty liability, which is included within other accrued expenses and other current liabilities above:

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Beginning balance	$	167		$	440
Accruals and adjustments		97			85
Settlements		(92	)		(155	)
Ending balance	$	172		$	370

Deferred revenue

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
Services/support and maintenance	$	4,755	$	5,326
Software license/subscription		1,410		1,176
Distributor deferred margin		2,310		2,167
	$	8,475	$	8,669

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Equity (Summary of Stock Options Granted and Outstanding) (Detail) (2007 Equity Incentive Plan and 2001 Stock Incentive Plan, USD $)	3 Months Ended
	Mar. 31, 2014
2007 Equity Incentive Plan and 2001 Stock Incentive Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of Shares Outstanding, Beginning balance	3,552,216
Number of Shares Outstanding, Options granted	153,000
Number of Shares Outstanding, Options exercised	(310,488)
Number of Shares Outstanding, Options cancelled and forfeited	(2,000)
Number of Shares Outstanding, Ending balance	3,392,728
Weighted Average Exercise Price, Beginning balance	$ 17.79
Weighted Average Exercise Price, Options granted	$ 37.83
Weighted Average Exercise Price, Options exercised	$ 11.56
Weighted Average Exercise Price, Options cancelled and forfeited	$ 0.30
Weighted Average Exercise Price, Ending balance	$ 19.28

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Fair Value Measurements (Narrative) (Detail) (Fair Value, Inputs, Level 1, USD $) In Millions, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Fair Value, Inputs, Level 1
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Cash equivalents	$ 94.2	$ 94.2

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Net Income (Loss) Per Common Share (Summary of Outstanding Options and Restricted Stock Units Excluded from Computation of Diluted Net Income (Loss) Per Common Share) (Detail) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Options To Purchase Common Stock
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from the computation of diluted net income (loss) per common share	610	3,834
Restricted Stock Units
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from the computation of diluted net income (loss) per common share		2,230

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Commitments and Contingencies (Minimum Commitments Under Non-Cancelable Capital and Operating Lease Agreements) (Parenthetical) (Detail)	Mar. 31, 2014
Capital Leased Assets [Line Items]
Interest component	3.75%

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Equity (Assumptions of Fair Value of Employee Option Grant Using Black-Scholes Option Pricing Model) (Detail)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Risk-free interest rate	1.47%	0.32%
Expected life, years	4 years 6 months 11 days	4 years 6 months 11 days
Dividend yield	0.00%	0.00%
Volatility	43.80%	49.60%

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Balance Sheet Components (Inventories) (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Inventory Disclosure [Abstract]
Work-in-process	$ 36,334	$ 35,027
Finished goods	12,714	10,741
Inventories	$ 49,048	$ 45,768

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Balance Sheet Components (Property and Equipment, Net) (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 74,526	$ 70,340
Less: accumulated depreciation and amortization	(45,964)	(41,846)
Property and equipment, net	28,562	28,494
Test Equipment and Mask Costs
Property Plant And Equipment [Line Items]
Property and equipment, gross	37,021	34,457
Software, Computer and Other Equipment
Property Plant And Equipment [Line Items]
Property and equipment, gross	36,428	34,945
Furniture, Office Equipment and Leasehold Improvements
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 1,077	$ 938

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Fair Value Measurements

3 Months Ended

Mar. 31, 2014

Fair Value Measurements

3. Fair Value Measurements

At March 31, 2014 and December 31, 2013, all of the Company’s investments were classified as cash equivalents and are comprised of an investment in a money market fund. In accordance with the guidance for fair value measurements and disclosures, the Company determined the fair value hierarchy of its money market fund as Level 1, which approximated $94.2 million and $94.2 million as of March 31, 2014 and December 31, 2013, respectively. The carrying amount of the Company’s accounts receivable, accounts payable and accrued expenses approximate fair value due to their short term maturities.

The notes payable and other are carried at fair value and are a Level 3 measurement. See Note 5 of the Notes to Condensed Consolidated Financial Statements for further discussion of the fair value measurements.

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Balance Sheet Components (Narrative) (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Disclosure Balance Sheet Components Narrative Detail [Line Items]
Depreciation and amortization expense	$ 4.2	$ 4.5
Capital lease and certain financing arrangements	15.3		16.2
Amortization expense related to assets under capital lease and certain financing arrangements	$ 2.0	$ 1.6

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Goodwill and Intangible Assets, Net (Estimated Future Amortization Expense from Amortizable Intangible Assets) (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Disclosure Goodwill And Intangible Assets Net Estimated Future Amortization Expense From Amortizable Intangible Assets Detail [Line Items]
Remainder of 2014	$ 9,977
2015	7,124
2016	5,016
2017	3,216
2018	3,057
2019 and thereafter	13,063
Finite-lived intangible assets, Net	$ 41,453	$ 43,240

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Segment and Geographic Information (Long Lived Assets) (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Segment Reporting Information [Line Items]
Property and equipment, net	$ 28,562	$ 28,494
United States
Segment Reporting Information [Line Items]
Property and equipment, net	24,164	25,160
All Other Countries
Segment Reporting Information [Line Items]
Property and equipment, net	$ 4,398	$ 3,334

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 124,106	$ 127,763
Accounts receivable, net of allowances of $996 and $933, respectively	56,819	43,636
Inventories	49,048	45,768
Prepaid expenses and other current assets	5,834	6,491
Total current assets	235,807	223,658
Property and equipment, net	28,562	28,494
Intangible assets, net	41,453	43,240
Goodwill	71,478	71,478
Deferred tax assets	61	61
Other assets	1,035	1,054
Total assets	378,396	367,985
Current liabilities:
Accounts payable	24,060	23,467
Other accrued expenses and other current liabilities	9,519	9,836
Deferred revenue	8,475	8,669
Notes payable and other	15,770	13,512
Capital lease and technology license obligations	14,227	17,103
Total current liabilities	72,051	72,587
Capital lease and technology license obligations, net of current portion	15,297	16,292
Deferred tax liability	2,365	1,931
Other non-current liabilities	2,437	2,344
Total liabilities	92,150	93,154
Commitments and contingencies (Note 11)
Equity
Common stock, par value $0.001: 200,000,000 shares authorized; 52,835,888 and 52,221,251 shares issued and outstanding, respectively	53	53
Additional paid-in capital	456,758	443,588
Accumulated deficit	(154,710)	(157,057)
Total stockholders' equity attributable to the Company	302,101	286,584
Non-controlling interest	(15,855)	(11,753)
Total equity	286,246	274,831
Total liabilities and equity	$ 378,396	$ 367,985

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Equity (Narrative) (Detail) (USD $) In Millions, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Estimated weighted-average grant date fair value of options granted	$ 14.37	$ 15.30
RSU's granted	$ 2.1
RSU's performance period	1 year
Stock Options
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Unrecognized compensation cost, net of estimated forfeitures	6.6
Unrecognized compensation cost expected to be recognized over weighted average period (in years)	2 years 7 months 28 days
Restricted Stock Units
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Unrecognized compensation cost, net of estimated forfeitures	$ 73.9
Unrecognized compensation cost expected to be recognized over weighted average period (in years)	2 years 10 months 13 days

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Organization and Basis of Presentation

3 Months Ended

Mar. 31, 2014

Organization and Basis of Presentation

1. Organization and Basis of Presentation

Organization

Cavium, Inc., (the “Company”), was incorporated in the state of California on November 21, 2000 and was reincorporated in the state of Delaware effective February 6, 2007. The Company designs, develops and markets semiconductor processors for intelligent and secure networks.

Basis of Presentation

The condensed consolidated financial statements include the accounts of Cavium, Inc., its wholly owned subsidiaries, and a variable interest entity, or VIE, of which the Company is the primary beneficiary. Under the accounting principles generally accepted in the United States of America, or US GAAP, a VIE is required to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. See Note 5 of Notes to Condensed Consolidated Financial Statements for detailed discussions of the VIE. All significant intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements have been prepared in accordance with US GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by US GAAP for annual financial statements. For further information, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K (File No. 001-33435) on file with the SEC for the year ended December 31, 2013.

The condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to state fairly the Company’s condensed consolidated financial position at March 31, 2014, and the condensed consolidated results of its operations for the three months ended March 31, 2014 and 2013, and condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by US GAAP. Certain reclassifications have been made to prior period amounts in the condensed consolidated statements of cash flows to conform to current period presentation.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. There had been no material changes to these accounting policies.

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Balance Sheet Components (Deferred Revenue) (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Deferred Revenue Arrangement [Line Items]
Deferred revenue	$ 8,475	$ 8,669
Service / Support and Maintenance
Deferred Revenue Arrangement [Line Items]
Deferred revenue	4,755	5,326
Software License / Subscription
Deferred Revenue Arrangement [Line Items]
Deferred revenue	1,410	1,176
Distributor Deferred Margin
Deferred Revenue Arrangement [Line Items]
Deferred revenue	$ 2,310	$ 2,167

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Restructuring Accrual (Tables)

3 Months Ended

Mar. 31, 2014

Accrued Restructuring Liabilities Including Related Activities

A summary of the accrued restructuring liabilities including related activities during the three months ended March 31, 2014, is as follows:

	Severance and other benefits			Excess Facility Related Cost			Total
	(in thousands)
Balance at December 31, 2013	$	-		$	57		$	57
Additions		570			-			570
Cash payments and other non-cash adjustments		(570	)		(57	)		(627	)
Balance at March 31, 2014	$	-		$	-		$	-

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Business Combinations and Divestitures (Narrative) (Detail) (USD $)	1 Months Ended	3 Months Ended		9 Months Ended	12 Months Ended
	Jan. 31, 2013	Mar. 31, 2014	Mar. 31, 2013	Sep. 30, 2012	Dec. 31, 2013
Business Acquisition [Line Items]
Convertible notes receivable		$ 10,000,000
Interest rate on notes receivable		6.00%
Convertible notes exchanged					1,400,000
Cash proceeds from convertible debt					1,500,000
Notes payable and other		15,770,000			13,512,000
Non-controlling interest		(15,855,000)			(11,753,000)
Net income (loss) attributable to the Company		2,347,000	(3,184,000)
Aggregate cash consideration on sale	3,300,000	300,000	300,000	2,400,000
Gain (loss) on disposition of certain consumer product assets		250,000	250,000	(2,700,000)
Net book value of assets held for sale	2,600,000
Gain on sale of held for sale assets			747,000
Convertible Debt Securities
Business Acquisition [Line Items]
Convertible security					2,900,000
Variable Interest Entity
Business Acquisition [Line Items]
Interest rate on notes receivable		6.00%
Convertible note to third party investor paid by Variable Interest Entity					1,000,000
Variable Interest Entity, cash		900,000			1,900,000
Variable Interest Entity, property and equipment and intangible assets		7,200,000			6,700,000
Variable Interest Entity, accounts payable and accrued expenses		2,500,000			3,400,000
Notes payable and other		15,770,000			13,512,000
Non-controlling interest		15,900,000			11,800,000
Net income (loss) attributable to the Company		2,200,000	1,600,000
Capital lease and technology license obligations		6,000,000			6,300,000
Payment for Purchase of Promissory Notes Receivable		3,000,000
Variable Interest Entity | Convertible Debt Securities
Business Acquisition [Line Items]
Convertible security					2,900,000
Four Convertible Notes Receivable
Business Acquisition [Line Items]
Convertible notes receivable maturity date		Aug. 31, 2014
Thirteen Convertible Notes Receivable
Business Acquisition [Line Items]
Convertible notes receivable maturity date		Aug. 31, 2014
Noncontrolling Interest
Business Acquisition [Line Items]
Convertible notes receivable		$ 13,000,000

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Income Taxes (Tables)

3 Months Ended

Mar. 31, 2014

Provision for Income Taxes and Effective Tax Rates

The following table presents the provision for income taxes and the effective tax rates for the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Loss before income taxes	$	(1,512	)	$	(4,887	)
Provision for income taxes		243			426
Effective tax rate		-16.1	%		-8.7	%

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Net Income (Loss) Per Common Share

3 Months Ended

Mar. 31, 2014

Net Income (Loss) Per Common Share

2. Net Income (Loss) Per Common Share

The following table sets forth the computation of net income (loss) per share:

	Three Months Ended March 31,
	2014		2013
	(in thousands, except per share data)
Net income (loss) attributable to the Company	$	2,347	$	(3,184	)
Weighted average common shares outstanding - basic		52,550		51,001
Dilutive effect of employee stock plans		1,671		-
Weighted average common shares outstanding - diluted		54,221		51,001
Net income (loss ) per common share, basic	$	0.04	$	(0.06	)
Net income (loss) per common share, diluted	$	0.04	$	(0.06	)

The following outstanding options and restricted stock units were excluded from the computation of diluted net income (loss) per common share for the periods presented because including them would have had an anti-dilutive effect:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Options to purchase common stock		610		3,834
Restricted stock units		-		2,230

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Allowances for accounts receivable	$ 996	$ 933
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	52,835,888	52,835,888
Common stock, shares outstanding	52,221,251	52,221,251

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Organization and Basis of Presentation (Policies)

3 Months Ended

Mar. 31, 2014

Organization

Organization

Cavium, Inc., (the “Company”), was incorporated in the state of California on November 21, 2000 and was reincorporated in the state of Delaware effective February 6, 2007. The Company designs, develops and markets semiconductor processors for intelligent and secure networks.

Basis of Presentation

Basis of Presentation

The condensed consolidated financial statements include the accounts of Cavium, Inc., its wholly owned subsidiaries, and a variable interest entity, or VIE, of which the Company is the primary beneficiary. Under the accounting principles generally accepted in the United States of America, or US GAAP, a VIE is required to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. See Note 5 of Notes to Condensed Consolidated Financial Statements for detailed discussions of the VIE. All significant intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements have been prepared in accordance with US GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by US GAAP for annual financial statements. For further information, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K (File No. 001-33435) on file with the SEC for the year ended December 31, 2013.

The condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to state fairly the Company’s condensed consolidated financial position at March 31, 2014, and the condensed consolidated results of its operations for the three months ended March 31, 2014 and 2013, and condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by US GAAP. Certain reclassifications have been made to prior period amounts in the condensed consolidated statements of cash flows to conform to current period presentation.

Significant Accounting Policies

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. There had been no material changes to these accounting policies.

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Document and Entity Information	3 Months Ended
	Mar. 31, 2014	Apr. 29, 2014
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1
Trading Symbol	CAVM
Entity Registrant Name	CAVIUM, INC.
Entity Central Index Key	0001175609
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		52,837,888

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Net Income (Loss) Per Common Share (Tables)

3 Months Ended

Mar. 31, 2014

Basic and Diluted Net Income (Loss) Per Common Share

The following table sets forth the computation of net income (loss) per share:

	Three Months Ended March 31,
	2014		2013
	(in thousands, except per share data)
Net income (loss) attributable to the Company	$	2,347	$	(3,184	)
Weighted average common shares outstanding - basic		52,550		51,001
Dilutive effect of employee stock plans		1,671		-
Weighted average common shares outstanding - diluted		54,221		51,001
Net income (loss ) per common share, basic	$	0.04	$	(0.06	)
Net income (loss) per common share, diluted	$	0.04	$	(0.06	)

Summary of Outstanding Options and Restricted Stock Units Excluded from Computation of Diluted Net Income (Loss) Per Common Share

The following outstanding options and restricted stock units were excluded from the computation of diluted net income (loss) per common share for the periods presented because including them would have had an anti-dilutive effect:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Options to purchase common stock		610		3,834
Restricted stock units		-		2,230

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Condensed Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Net revenue	$ 83,241	$ 69,530
Cost of revenue	30,350	26,159
Gross profit	52,891	43,371
Operating expenses:
Research and development	37,289	32,415
Sales, general and administrative	15,932	15,240
Total operating expenses	53,221	47,655
Loss from operations	(330)	(4,284)
Other income (expense), net:
Interest expense	(459)	(342)
Change in estimated fair value of notes payable and other	(858)
Other, net	135	(261)
Total other expense, net	(1,182)	(603)
Loss before income taxes	(1,512)	(4,887)
Provision for income taxes	243	426
Net loss	(1,755)	(5,313)
Net loss attributable to non-controlling interest	(4,102)	(2,129)
Net income (loss) attributable to the Company	$ 2,347	$ (3,184)
Earnings per share attributable to the Company:
Net income (loss ) per common share, basic	$ 0.04	$ (0.06)
Shares used in computing basic net income (loss) per common share	52,550	51,001
Net income (loss) per common share, diluted	$ 0.04	$ (0.06)
Shares used in computing diluted net income (loss) per common share	54,221	51,001

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Restructuring Accrual

3 Months Ended

Mar. 31, 2014

Restructuring Accrual

7. Restructuring Accrual

The excess facility related restructuring accrual at the beginning of 2014 relates to the unused leased facility in Canada. The lease expired in March 2014.

In connection with a workforce reduction during the three months ended March 31, 2014, the Company incurred and paid $0.6 million related to severance and other related benefits.

A summary of the accrued restructuring liabilities including related activities during the three months ended March 31, 2014, is as follows:

	Severance and other benefits			Excess Facility Related Cost			Total
	(in thousands)
Balance at December 31, 2013	$	-		$	57		$	57
Additions		570			-			570
Cash payments and other non-cash adjustments		(570	)		(57	)		(627	)
Balance at March 31, 2014	$	-		$	-		$	-

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Goodwill and Intangible Assets, Net

3 Months Ended

Mar. 31, 2014

Goodwill and Intangible Assets, Net

6. Goodwill and Intangible Assets, Net

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The carrying value of the goodwill as of March 31, 2014 was $71.5 million, unchanged from the balance at December 31, 2013.

Intangible assets, net

	As of March 31, 2014
	Gross		Accumulated Amortization			Net		Weighted average remaining amortization period (years)
	(in thousands)
Technology licenses	$	70,120	$	(34,443	)	$	35,677		7.64
Existing and core technology - product		42,084		(36,796	)		5,288		1.49
Customer contracts and relationships		8,991		(8,862	)		129		1.08
Trade name		2,296		(1,937	)		359		0.86
Order backlog		640		(640	)		-	-
Total amortizable intangible assets	$	124,131	$	(82,678	)	$	41,453		6.79

	As of December 31, 2013
	Gross		Accumulated Amortization			Net		Weighted average remaining amortization period (years)
	(in thousands)
Technology licenses	$	68,175	$	(32,015	)	$	36,160		7.88
Existing and core technology - product		42,086		(35,637	)		6,449		1.68
Customer contracts and relationships		8,991		(8,827	)		164		1.30
Trade name		2,296		(1,829	)		467		1.10
Order backlog		640		(640	)		-	-
Total amortizable intangible assets	$	122,188	$	(78,948	)	$	43,240		6.87

Amortization expense was $3.7 million and $4.8 million for the three months ended March 31, 2014 and 2013, respectively. The estimated future amortization expense from amortizable intangible assets is as follows (in thousands):

Remainder of 2014	$	9,977
2015		7,124
2016		5,016
2017		3,216
2018		3,057
2019 and thereafter		13,063
	$	41,453

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Equity (Tables)

3 Months Ended

Mar. 31, 2014

Summary of Stock Options Granted and Outstanding

The following table summarizes the details related to stock options granted and outstanding under the 2007 Equity Incentive Plan and 2001 Stock Incentive Plan for the three months ended March 31, 2014:

	Number of Shares Outstanding			Weighted Average Exercise Price
Balance as of December 31, 2013		3,552,216			17.79
Options granted		153,000			37.83
Options exercised		(310,488	)		11.56
Options cancelled and forfeited		(2,000	)		0.30
Balance as of March 31, 2014		3,392,728			19.28

Assumptions of Fair Value of Employee Option Grant Using Black-Scholes Option - Pricing Model

The fair value of each option grants for the three months ended March 31, 2014 and 2013 were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended March 31,
	2014		2013
Risk-free interest rate		1.47%		0.32%
Expected life	4.53 years		4.53 years
Dividend yield		0%		0%
Volatility		43.8%		49.6%

Summary of Activity of Restricted Stock

The following table summarizes the details related to restricted stock units, or RSUs, granted and outstanding under the 2007 Equity Incentive Plan for the three months ended March 31, 2014:

	Number of Shares			Weighted-Average Grant Date Fair Value Per Share
Balance as of December 31, 2013		1,776,170			35.64
Granted		1,016,955			37.54
Issued and released		(304,148	)		33.65
Cancelled and forfeited		(16,331	)		36.21
Balance as of March 31, 2014		2,472,646			36.66

Detail of Stock-Based Compensation Expense

The following table presents the detail of stock-based compensation expense amounts included in the condensed consolidated statement of operations for each of the periods presented:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Cost of revenue	$	247	$	287
Research and development		5,404		3,906
Sales, general and administrative		3,936		4,081
	$	9,587	$	8,274

Reconciliation of Changes in Equity

A reconciliation of the changes in equity for the three months ended March 31, 2014 is presented below:

	Attributable to the Company		Attributable to non-controlling interest			Total equity
	(in thousands)
Balance at December 31, 2013	$	286,584	$	(11,753	)	$	274,831
Common stock issued in connection with exercises of stock options		3,589		-			3,589
Stock-based compensation		9,581		-			9,581
Net income (loss)		2,347		(4,102	)		(1,755	)
Balance at March 31, 2014	$	302,101	$	(15,855	)	$	286,246

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Balance Sheet Components (Tables)

3 Months Ended

Mar. 31, 2014

Inventories

Inventories

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
Work-in-process	$	36,334	$	35,027
Finished goods		12,714		10,741
	$	49,048	$	45,768

Property and Equipment, Net

Property and equipment, net

	As of March 31, 2014			As of December 31, 2013
	(in thousands)
Test equipment and mask costs	$	37,021		$	34,457
Software, computer and other equipment		36,428			34,945
Furniture, office equipment and leasehold improvements		1,077			938
		74,526			70,340
Less: accumulated depreciation and amortization		(45,964	)		(41,846	)
	$	28,562		$	28,494

Other Accrued Expenses And Other Current Liabilities

Other accrued expenses and other current liabilities

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
Accrued compensation and related benefits	$	4,912	$	4,262
Professional fees		1,405		1,536
Customer deposits		911		1,470
Income tax payable		308		544
Deferred tax liability		41		277
Other		1,942		1,747
	$	9,519	$	9,836

Warranty Accrual

The following table presents a reconciliation of the warranty liability, which is included within other accrued expenses and other current liabilities above:

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Beginning balance	$	167		$	440
Accruals and adjustments		97			85
Settlements		(92	)		(155	)
Ending balance	$	172		$	370

Deferred Revenue

Deferred revenue

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
Services/support and maintenance	$	4,755	$	5,326
Software license/subscription		1,410		1,176
Distributor deferred margin		2,310		2,167
	$	8,475	$	8,669

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Segment and Geographic Information

3 Months Ended

Mar. 31, 2014

Segment and Geographic Information

10. Segment and Geographic Information

Operating segments are based on components of the Company that engage in business activity that earn revenue and incur expenses and (a) whose operating results are regularly reviewed by the Company’s chief operating decision maker, or CODM, to make decisions about resource allocation and performance and (b) for which discrete financial information is available. The Company manages and operates as one reporting segment.

The Company’s revenue consists primarily of sale of semiconductor products to network equipment providers and data centers and their contract manufacturers and distributors and also derives revenue from licensing software and related maintenance and support. The revenue from these sources is classified by the Company as product revenue. The Company also generates revenue from professional service arrangements which is categorized as service revenue. The total service revenue is less than 10% of the Company’s total revenue for the three months ended March 31, 2014 and 2013. As a result, the financial information used to produce the Company’s general-purpose financial statements does not report this service revenue separately.

The following table is based on the geographic location of the original equipment manufacturers, the contract manufacturers or the distributors who purchased the Company’s products. For sales to the distributors, their geographic location may be different from the geographic locations of the ultimate end customers.

Sales by geography for the periods indicated were as follows:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
United States	$	30,077	$	22,651
China		22,004		16,820
Korea		3,664		7,035
Mexico		4,650		4,150
Finland		7,712		2,455
Taiwan		6,198		5,891
Malaysia		2,834		3,465
Other countries		6,102		7,063
Total	$	83,241	$	69,530

The following table sets forth long lived assets, which consist of property and equipment, net by geographic regions:

	As of March 31, 2014		As of December 31, 2013
	(in thousands)
United States	$	24,164	$	25,160
All other countries		4,398		3,334
Total	$	28,562	$	28,494

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Equity

3 Months Ended

Mar. 31, 2014

Equity

8. Equity

Equity Incentive Plans

The following table summarizes the details related to stock options granted and outstanding under the 2007 Equity Incentive Plan and 2001 Stock Incentive Plan for the three months ended March 31, 2014:

	Number of Shares Outstanding			Weighted Average Exercise Price
Balance as of December 31, 2013		3,552,216			17.79
Options granted		153,000			37.83
Options exercised		(310,488	)		11.56
Options cancelled and forfeited		(2,000	)		0.30
Balance as of March 31, 2014		3,392,728			19.28

The fair value of each option grants for the three months ended March 31, 2014 and 2013 were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended March 31,
	2014		2013
Risk-free interest rate		1.47%		0.32%
Expected life	4.53 years		4.53 years
Dividend yield		0%		0%
Volatility		43.8%		49.6%

The estimated weighted-average grant date fair value of options granted for the three months ended March 31, 2014 and 2013 were $14.37 per share and $15.30 per share, respectively.

As of March 31, 2014, there is $6.6 million of unrecognized compensation costs, net of estimated forfeitures, related to stock options granted under the Company’s 2007 Equity Incentive Plan and 2001 Stock Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.66 years.

The following table summarizes the details related to restricted stock units, or RSUs, granted and outstanding under the 2007 Equity Incentive Plan for the three months ended March 31, 2014:

	Number of Shares			Weighted-Average Grant Date Fair Value Per Share
Balance as of December 31, 2013		1,776,170			35.64
Granted		1,016,955			37.54
Issued and released		(304,148	)		33.65
Cancelled and forfeited		(16,331	)		36.21
Balance as of March 31, 2014		2,472,646			36.66

For restricted stock units, or RSUs, stock-based compensation expense is calculated based on the market price of the Company’s common stock on the date of grant, multiplied by the number of RSUs granted. The grant date fair value of RSUs, less estimated forfeitures, is recorded on a straight-line basis, over the vesting period.

In February 2014, the Company granted one-year performance-based RSU’s. During the three months ended March 31, 2014, the Company evaluated the probability of achieving the milestone and determined that the fair value of these performance RSU’s was $2.1 million. The Company recorded the related stock-based compensation expense for the three months ended March 31, 2014 and continues to evaluate the probability of achieving the milestone at each reporting period and adjust any RSU expense which is included in stock-based compensation expense.

As of March 31, 2014, there was $73.9 million of unrecognized compensation costs, net of estimated forfeitures related to RSUs granted under the Company’s 2007 Equity Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.87 years.

Stock-Based Compensation

The following table presents the detail of stock-based compensation expense amounts included in the condensed consolidated statement of operations for each of the periods presented:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Cost of revenue	$	247	$	287
Research and development		5,404		3,906
Sales, general and administrative		3,936		4,081
	$	9,587	$	8,274

The total stock-based compensation cost capitalized as part of inventory as of March 31, 2014 and December 31, 2013 was not significant.

Changes in equity

A reconciliation of the changes in equity for the three months ended March 31, 2014 is presented below:

	Attributable to the Company		Attributable to non-controlling interest			Total equity
	(in thousands)
Balance at December 31, 2013	$	286,584	$	(11,753	)	$	274,831
Common stock issued in connection with exercises of stock options		3,589		-			3,589
Stock-based compensation		9,581		-			9,581
Net income (loss)		2,347		(4,102	)		(1,755	)
Balance at March 31, 2014	$	302,101	$	(15,855	)	$	286,246

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Income Taxes

3 Months Ended

Mar. 31, 2014

Income Taxes

9. Income Taxes

The quarterly provision for income taxes is based on the estimated annual effective tax rate, plus any discrete items. The Company updates its estimate of its annual effective tax rate at the end of each quarterly period. The estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and interpretations of tax laws and the possible outcomes of current and future audits.

The following table presents the provision for income taxes and the effective tax rates for the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Loss before income taxes	$	(1,512	)	$	(4,887	)
Provision for income taxes		243			426
Effective tax rate		-16.1	%		-8.7	%

The provision for income taxes for the three months ended March 31, 2014 was primarily related to earnings in foreign jurisdictions. The difference between the benefit from income taxes that would be derived by applying the statutory rate to the Company’s loss before income taxes and the provision for income taxes recorded for the three months ended March 31, 2014 was primarily attributable to the difference in foreign tax rates and an increase in indefinite lived intangible related deferred tax liability. The provision for income taxes for the three months ended March 31, 2013 was primarily related to earnings in foreign jurisdictions. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to the Company’s loss before income taxes and the provision for income taxes recorded for March 31, 2013 was primarily attributable to the impact of losses that are not benefited, the difference in foreign tax rates and an increase in indefinite lived intangible related deferred tax liability.

The Company’s net deferred tax assets relate predominantly to its United States tax jurisdiction. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both negative and positive evidence to assess the recoverability of the Company’s net deferred tax assets during the fourth quarter of 2012, the Company determined that it was more-likely-than-not it would not realize the full value of its federal and state deferred tax assets. As such, the Company determined that as of December 31, 2012, a full valuation allowance was required on its net federal and state deferred tax assets. Adjustments could be required in the future if the Company concludes that it is more-likely-than-not that these net deferred tax assets are recoverable. A release of the valuation allowance could have the effect of decreasing the income tax provision in the period the valuation allowance is released. The Company continues to monitor the likelihood that it will be able to recover its deferred tax assets. As of March 31, 2014, the Company believes that it is not more likely than not that it will be able to fully realize its United States federal and state deferred tax assets and, as such, the Company continues to provide a full valuation allowance on those deferred tax assets.

As of March 31, 2014 and December 31, 2013, the Company had unrecognized tax benefits for income taxes associated with uncertain tax positions of $14.8 million and $14.6 million, respectively. If all of these unrecognized tax benefits were recognized, $0.7 million would reduce the Company’s effective tax rate. The Company is not anticipating any significant changes in unrecognized tax benefits in the next 12 months.

The Company’s major tax jurisdictions are the United States federal government, the states of California and Massachusetts, Japan, India, China and Singapore. The Company files income tax returns in the United States federal jurisdiction, the states of California and Massachusetts, various other states, and foreign jurisdictions in which it has a subsidiary or branch operations. The United States federal corporation income tax returns beginning with the 2000 tax year remain subject to examination by the Internal Revenue Service, or IRS. The California corporation income tax returns beginning with the 2000 tax year remain subject to examination by the California Franchise Tax Board. As of March 31, 2014, there are no on-going tax audits in the major tax jurisdictions other than India. The India tax audit is for the tax years 2010 and 2011, and the Company does not expect any significant tax adjustments.

The federal research and development credits regulation, which was extended for two years under The American Taxpayer Relief Act of 2012, expired at the end of 2013.  As a result, the quarterly provision and the annual effective tax rate did not consider the effects of the federal research and development credits.  

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2014

Commitments and Contingencies

11. Commitments and Contingencies

The Company is not currently a party to any legal proceedings and outcome of which, if determined adversely to the Company, would have a material adverse effect on the condensed consolidated financial position, condensed results of operations or condensed cash flows of the Company.

The Company leases its facilities under non-cancelable operating leases, which contain renewal options and escalation clauses, and expire on various dates ending in October 2022. The Company also acquires certain assets under capital leases.

The capital lease and technology license obligations include future cash payments payable primarily for license agreements with various outside vendors. For license agreements which qualify under capital lease and where installment payments extend beyond one year, the present value of the future installment payments are capitalized and included as part of intangible assets or property and equipment which is amortized over the estimated useful lives of the related licenses.

Minimum commitments under non-cancelable operating and capital lease agreements as of March 31, 2014 are as follows:

	Capital lease and technology license obligations		Operating leases		Total
	(in thousands)
Remainder of 2014	$	13,716	$	4,165	$	17,881
2015		12,103		6,928		19,031
2016		5,150		8,680		13,830
2017		-		8,731		8,731
2018		-		8,929		8,929
2019 thereafter		-		31,983		31,983
	$	30,969	$	69,416	$	100,385
Less: Interest component (3.75% annual rate)		1,445
Present value of minimum lease payment		29,524
Current portion of the obligations	$	14,227
Long-term portion of obligations	$	15,297

Rent expense incurred under operating leases was $1.4 million and $1.3 million for the three months ended March 31, 2014 and 2013, respectively.

In September 2013, the VIE entered into a purchase agreement with a third party vendor to purchase certain test equipment amounting to $6.1 million, payable in installments over two years. The equipment was received and recorded in the fourth quarter of 2013. In January 2014, the VIE purchased and recorded additional parts to the test equipment amounting to $1.0 million, payable in installment over two years. The Company has an agreement with the VIE and third party vendor, whereby the Company guaranteed the payment of the test equipment in the event the VIE defaults such payment obligation.

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Balance Sheet Components (Product Warranty Liability) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Commitments and Contingencies Disclosure [Abstract]
Beginning balance	$ 167	$ 440
Accruals and adjustments	97	85
Settlements	(92)	(155)
Ending balance	$ 172	$ 370

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Segment and Geographic Information - (Narrative) (Detail)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Segment Reporting Information [Line Items]
Service revenue minimum percentage	10.00%	10.00%

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Goodwill and Intangible Assets, Net (Tables)

3 Months Ended

Mar. 31, 2014

Intangible Assets, Net

Intangible assets, net

	As of March 31, 2014
	Gross		Accumulated Amortization			Net		Weighted average remaining amortization period (years)
	(in thousands)
Technology licenses	$	70,120	$	(34,443	)	$	35,677		7.64
Existing and core technology - product		42,084		(36,796	)		5,288		1.49
Customer contracts and relationships		8,991		(8,862	)		129		1.08
Trade name		2,296		(1,937	)		359		0.86
Order backlog		640		(640	)		-	-
Total amortizable intangible assets	$	124,131	$	(82,678	)	$	41,453		6.79

	As of December 31, 2013
	Gross		Accumulated Amortization			Net		Weighted average remaining amortization period (years)
	(in thousands)
Technology licenses	$	68,175	$	(32,015	)	$	36,160		7.88
Existing and core technology - product		42,086		(35,637	)		6,449		1.68
Customer contracts and relationships		8,991		(8,827	)		164		1.30
Trade name		2,296		(1,829	)		467		1.10
Order backlog		640		(640	)		-	-
Total amortizable intangible assets	$	122,188	$	(78,948	)	$	43,240		6.87

Estimated Future Amortization Expense From Amortizable Intangible Assets

Amortization expense was $3.7 million and $4.8 million for the three months ended March 31, 2014 and 2013, respectively. The estimated future amortization expense from amortizable intangible assets is as follows (in thousands):

Remainder of 2014	$	9,977
2015		7,124
2016		5,016
2017		3,216
2018		3,057
2019 and thereafter		13,063
	$	41,453

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Commitments and Contingencies (Tables)

3 Months Ended

Mar. 31, 2014

Minimum Commitments Under Non-Cancelable Capital and Operating Lease Agreements

Minimum commitments under non-cancelable operating and capital lease agreements as of March 31, 2014 are as follows:

	Capital lease and technology license obligations		Operating leases		Total
	(in thousands)
Remainder of 2014	$	13,716	$	4,165	$	17,881
2015		12,103		6,928		19,031
2016		5,150		8,680		13,830
2017		-		8,731		8,731
2018		-		8,929		8,929
2019 thereafter		-		31,983		31,983
	$	30,969	$	69,416	$	100,385
Less: Interest component (3.75% annual rate)		1,445
Present value of minimum lease payment		29,524
Current portion of the obligations	$	14,227
Long-term portion of obligations	$	15,297

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Income Taxes (Provision for Income Taxes and Effective Tax Rates) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Income Tax Disclosure [Line Items]
Loss before income taxes	$ (1,512)	$ (4,887)
Provision for income taxes	$ 243	$ 426
Effective tax rate	(16.10%)	(8.70%)

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Restructuring Accrual (Narrative) (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014
Restructuring Cost And Reserve [Line Items]
Lease expiration period	Mar. 31, 2014
Additional restructuring accrual	$ 0.6

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Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash flows from operating activities:
Net loss	$ (1,755)	$ (5,313)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock-based compensation expense	9,587	8,274
Depreciation and amortization	7,851	9,324
Deferred income taxes	198	193
Gain on sale of held for sale assets		(747)
Gain on disposition of certain consumer product assets	(250)	(250)
Change in estimated fair value of notes payable and other	858
Changes in assets and liabilities:
Accounts receivable, net	(13,183)	(2,560)
Inventories	(3,286)	5,099
Prepaid expenses and other current assets	659	1,698
Other assets	18	(338)
Accounts payable	(1,127)	(4,307)
Deferred revenue	(194)	(2,287)
Accrued expenses and other current and non-current liabilities	(242)	(629)
Net cash (used in) provided by operating activities	(866)	8,157
Cash flows from investing activities:
Purchases of property and equipment	(2,145)	(670)
Purchases of intangible assets	(1,231)	(2,343)
Proceeds received from sale of held for sale assets		3,350
Proceeds received from disposition of certain consumer product assets	250	250
Net cash (used in) provided by investing activities	(3,126)	587
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of options	3,589	6,845
Principal payment of capital lease and technology license obligations	(4,908)	(6,362)
Proceeds from notes payable from non-controlling interest of the VIE	1,400	500
Tax withholdings for stock option exercises on behalf of employees	254
Net cash provided by financing activities	335	983
Net increase (decrease) in cash and cash equivalents	(3,657)	9,727
Cash and cash equivalents, beginning of period	127,763	76,784
Cash and cash equivalents, end of period	124,106	86,511
Supplemental disclosure of cash flows from investing activities
Property and equipment and intangible assets acquired included in accounts payable, other accrued expense and other current liabilities	1,984	1,198
Supplemental disclosure of cash flow from financing activities:
Property and equipment and intangible assets acquired included in capital lease and technology license obligations	$ 984

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Business Combinations and Divestitures

3 Months Ended

Mar. 31, 2014

Business Combinations and Divestitures

5. Business Combinations and Divestitures

Variable Interest Entity

Between May 2012 and March 2014, the Company entered into several note purchase agreements with a VIE to provide cash advances. The Company has a purchase option to acquire the assets of the VIE on terms specified in one of the note purchase agreements. As of March 31, 2014, the Company had made cash advances of $10.0 million under seven convertible notes receivable which, as amended, mature on August 31, 2014. In addition, third party investors (“non-controlling interest”) had made cash advances of $13.0 million under fifteen convertible notes receivable which mature on August 31, 2014. All the convertible notes bear interest at a rate of 6%, payable at maturity. Two of the convertible notes held by a third party investor with a principal amount of $1.0 million matured and were paid by the VIE in December 2013. Two of the convertible notes held by the Company are collateralized by a lien on the VIE’s assets. Pursuant to the convertible notes, in the event of a corporate transaction, as defined in the convertible notes, the holders of the convertible notes will be entitled to receive the principal plus a fixed return on their investment, while in case of a qualified equity financing of the VIE, as defined in the convertible notes, the outstanding principal balance plus the accrued interest on the convertible notes will be automatically converted into convertible preferred stock of the VIE at a discounted price.

In December 2013, a third party investor exchanged its convertible note with a principal of $1.4 million and invested additional cash of $1.5 million with the VIE for a $2.9 million convertible security which has the same features as the convertible notes, with the exception of the requirement for repayment, interest and maturity. The Company has determined that for accounting purposes, the convertible security has derivative features, and as such, the Company estimated the fair value of the derivative features based on market approach using Level 3 inputs. The assumptions used in the fair value estimate are related to the probability of the aforementioned capital scenarios. The assumptions used in the fair value estimate are based, in part, on significant uncertainties, are difficult to predict and could differ materially in the future. Based on the most reasonable assumptions determined by management, the fair value of the derivative feature of the convertible security as of the issuance date is approximately the same as the principal amount. Accordingly, the Company classified the $2.9 million convertible security as derivative liability within notes payable and other on the condensed consolidated balance sheets.  

All of the convertible notes and derivative feature of convertible security are classified as Level 3 liability due to the above mentioned features and therefore they are all measured and presented at fair value in the condensed consolidated financial statements.  The convertible notes and the derivative feature of the convertible security are remeasured at each reporting period and, depending on the probability of the occurrence of the features mentioned above, the valuation of these instruments could range from their current fair value to approximately two times the principal amount of the convertible notes and the convertible security. As of March 31, 2014, the Company estimated the fair value of the convertible notes and derivative feature of the convertible security included in the condensed consolidated financial statements using the same fair value measurement model. Based on the Company’s assessment, there have been no changes in the probability scenarios that could significantly change the fair value of the convertible notes and derivative features of convertible security from December 31, 2013 to March 31, 2014, with the exception of a change in fair value due to the time value of money, which was recorded as a change in estimated fair value of notes and other in the statements of operations in the three months ended March 31, 2014. The table below summarizes the change in the value of the convertible notes and derivative features of the convertible security for the three months ended March 31, 2014:

	As of December 31, 2013		Additions		Change in estimated fair value recognized in statements of operations		As of March 31, 2014
	(in thousands)
Convertible notes	$	10,612	$	1,400	$	670	$	12,682
Derivative feature of convertible security		2,900		-		188		3,088
Total notes payable and other	$	13,512	$	1,400	$	858	$	15,770

In April 2014, the Company made an additional cash advance of $3.0 million to the VIE under a promissory note that bears an annual interest rate of 6% and matures on the first anniversary date of the promissory note.

The Company has concluded that it is the primary beneficiary of the VIE due to the Company’s involvement with the VIE and the purchase option to acquire the assets of the VIE. As such, the Company has included the accounts of the VIE in the condensed consolidated financial statements. The significant components of the VIE’s financial statements included in the Company’s condensed consolidated financial statements as of March 31, 2014 include cash of $0.9 million; property and equipment and intangible assets of $7.2 million; accounts payable and accrued expenses of $2.5 million; notes payable and other of $15.8 million; capital lease and technology license obligations of $6.0 million and non-controlling interest of $15.9 million. As of December 31, 2013, the significant component of the VIE’s financial statements included in the Company’s condensed consolidated financial statements include cash of $1.9 million; property and equipment and intangible assets of $6.7 million; accounts payable and accrued expenses of $3.4 million; notes payable and other of $13.5 million; capital lease and technology license obligations of $6.3 million and non-controlling interest of $11.8 million. For the three months ended March 31, 2014 and 2013, the Company’s portion of the net loss of the VIE was $2.2 million and $1.6 million, respectively.

Disposition of Certain Consumer Product Assets

In September 2012, the Company completed the sale of certain consumer product assets to a third party company. The consumer product assets that were sold originated from the acquisition of Star Semiconductor Corporation in fiscal year 2008 and had been further developed by the Company. Under an asset purchase agreement, the Company agreed to transfer certain assets such as property and equipment and intangible assets to the third party company for an aggregate cash consideration of $2.4 million, payable in installments starting from January 10, 2013 through January 10, 2015. The Company determined that the payment terms were not fixed and determinable and as such the Company treated this transaction as disposition of assets and will recognize the future payments as a credit to sales, general and administrative expenses when the payments are due. The carrying value of the assets related to the sale of $2.7 million was recognized as a loss on disposition of certain consumer product assets within sales, general and administrative expenses during the third quarter of 2012. During the three months ended March 31, 2014 and 2013, the Company received total installment cash consideration of $0.3 million and $0.3 million, respectively, which were recognized as credits within sales, general and administrative expenses.

Sale of Held for Sale Assets

In January 2013, the Company completed the sale of certain assets to a third-party company. The assets sold originated from the acquisition of MontaVista Software, Inc. in fiscal year 2009. Under the asset purchase agreement, the Company agreed to transfer certain assets for an aggregate cash consideration of $3.3 million and the carrying value of the assets held for sale was approximately $2.6 million. The difference between the sale consideration and the carrying value of the assets held for sale of $0.7 million was recognized as a gain on sale of held for sale assets within sales, general and administrative expenses during the three months ended March 31, 2013.

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Net Income (Loss) Per Common Share (Basic and Diluted Net Income (Loss) Per Common Share) (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Disclosure Net Loss Per Common Share Basic And Diluted Net Loss Per Common Share Detail [Line Items]
Net income (loss) attributable to the Company	$ 2,347	$ (3,184)
Weighted average common shares outstanding - basic	52,550	51,001
Dilutive effect of employee stock plans	1,671
Weighted average common shares outstanding - diluted	54,221	51,001
Net income (loss ) per common share, basic	$ 0.04	$ (0.06)
Net income (loss) per common share, diluted	$ 0.04	$ (0.06)

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Goodwill and Intangible Assets, Net (Narrative) (Detail) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Goodwill And Intangible Assets [Line Items]
Goodwill	$ 71,478,000		$ 71,478,000
Amortization expense	$ 3,700,000	$ 4,800,000

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Business Combinations and Divestitures (Tables)

3 Months Ended

Mar. 31, 2014

Summary of Change in Value of Convertible Notes and Derivative Features of Convertible Security

The table below summarizes the change in the value of the convertible notes and derivative features of the convertible security for the three months ended March 31, 2014:

	As of December 31, 2013		Additions		Change in estimated fair value recognized in statements of operations		As of March 31, 2014
	(in thousands)
Convertible notes	$	10,612	$	1,400	$	670	$	12,682
Derivative feature of convertible security		2,900		-		188		3,088
Total notes payable and other	$	13,512	$	1,400	$	858	$	15,770