Inphi Corp
Q1 2020 Earnings Call Transcript

Published: 9 May 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to Inphi's First Quarter 2020 Conference Call. As a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Vern Essi, Senior Director of Investor Relations and Corporate Development. You may begin.

[Vern Essi:]

Good afternoon, everyone, and thank you for joining us today to discuss the financial results for the first quarter of 2020. A copy of today's press release can be found in the Investor Relations portion of Inphi's website at inphi.com/investors.

[Ford Tamer:]

Thanks, Vern, and thank you for joining us for Inphi's First Quarter 2020 Earnings Update. Before I begin, let me take a few moments to discuss the unprecedented global impact of COVID-19. First, to thank the true heroes of the past few months. The medical professionals, first responders, emergency personnel and law enforcement officers who put themselves in jeopardy on the front line every day in their relentless effort to keep the rest of us safe. Every last one of them is a hero, and every last one deserves all the gratitude and appreciation we can demonstrate. We pray for their well-being.

[John Edmunds:]

Thanks, Ford. Now let me recap the financial results. In the first quarter of 2020, Inphi reported revenue of $139.4 million, which was up 35.5% sequentially and up 70% year-over-year. This Q1 result was also $7 million or 5.3% better than the midpoint of our guidance given on February 4. Roughly half the sequential growth and approximately 70% of the year-over-year growth was organic. And the balance was due to the eSilicon acquisition that closed on January 10. To address the growth in more detail, our Cloud products, including PAM DSPs and retimers, companion TiAs and drivers, COLORZ and eSilicon data center ASICs comprised 56% of total revenues in Q1. This represented growth of 18% sequentially and 112% year-over-year. About 70% of our sequential and 90% of our year-over-year cloud growth was driven by organic products, both 200-gig and 400-gig PAM inside data centers and COLORZ between data centers. The other 30% was from the acquired data center ASICs from eSilicon.

[Operator:]

Your first question comes from the line of Tom O'Malley with Barclays.

[Tom O'Malley:]

Hey, guys. Thanks for taking my question and congratulations on the really nice results. I just want to start with the PAM opportunity. Clearly, Ford, you described an environment which your spend is robust in the Cloud. Can you talk about what you see that TAM at for 2020? Has that expanded? And then can you talk about your share of that TAM? Do you see yourself being more successful in that market than, say, three months ago?

[Ford Tamer:]

Thank you, Tom. So it's early in the year. This is still Q1. So we're not yet ready to announce a new market size. So we're still going to stick to our 300-or-so market size for the year. Our share is slightly better than we had discussed in the past. So right now, we would probably be more confident to discuss a 65% share in that market. And this is not a market where you're going to see a sole source vendor. This is a market where you're going to see multiple competitors. It's too large for one company, and multiple competitors are being qualified as we speak. So we do expect to maintain a majority share, and we're quite happy with where we are in our share at this point in time.

[Tom O'Malley:]

Great. And then the second question is really related to your caution around inventory stocking and such at some of your customers. There's some concern that there are some build in China particularly related with the 5G product. Can you talk about how you're looking at the rest of the year? How much of that additional 5G from customers like Huawei is coming in, in Q2? And then when you're looking at your outlook, are you taking Huawei back out of the model? Or what do you think are the right run rate is for them looking on a go-forward basis?

[Ford Tamer:]

Yes. Very good question, Tom. So let me start and then turn it over to John to offer more detail. First, I think to put things in perspective, 5G for us right now is about 10% of our Cloud revenue. So if I were – 5G is obviously right now classified in Telecom. So the Cloud PAM business, about 10x the size of the 5G business for PAM. So to put things in perspective. So if there is a bit of a hoarding in 5G going on, it's not going to be material as compared to the overall Cloud numbers that we're seeing for the year. Tom, I would point you to what happened in 2017, 2018. Been there, done that. We – us and the rest of the industry did not see the inventory correction coming end of 2017, early 2018. So since then, we have instituted very aggressive marketing and sales checks with our customer partners, customer customers to make sure that we have a good pulse on the inventory. And we do believe we've got a very good view right now of what's going on. And yes, there is a bit of hoarding and inventory build up, but nothing to speak of that we're not going to be able to take care of in the rest of the ramp. So we're very early. We're in the early innings of this ramp. It's a ramp that's going to take quite a few years. 5G becomes bigger next year. The cloud is going to get bigger as we go through the year into next year because we're going to have some new cloud customers in both U.S. and China add themselves to that ramp. So we're still very optimistic that the second half will be better than the first half and that 2021 will be stronger than 2020. Regarding the Huawei question. Huawei has been kind of flat from Q4 to Q1. And what we've done in our guidance is we've taken a lot of that out of the Q2 guidance, and we'll take it a quarter at a time. So we will take the revenue as it comes. So we feel like we've done a good job staying somewhat conservative on our views moving forward. John, do you want to offer more detail here?

[John Edmunds:]

I don't – Tom, I think Ford covered everything, did he not? Is there something else?

[Tom O'Malley:]

I think he did. Thanks for the comment guys, and congrats.

[John Edmunds:]

Yes, sure.

[Operator:]

Your next question comes from the line of Harlan Sur with JPMorgan.

[Harlan Sur:]

Good afternoon, guys, and congratulations on the solid execution and strong first half performance. Ford, coming into this year, you were pretty confident given your design win pipeline that the team could grow quarter-over-quarter every single quarter this year. It's certainly playing out that way. And I know that there's a lot of uncertainty out there. But at the same time, it seems like you have confidence on PAM4 continuing to expand into the second half. So from where you sit today, I wanted to get your confidence level on sequential growth in Q3 and Q4 for the entire business, just given what you see in your pipeline and the significant pickup in data traffic that we've seen just through the first half of this year?

[Ford Tamer:]

So Harlan, as a short answer, we're confident we're going to continue to grow quarter-on-quarter, every quarter this year.

[Harlan Sur:]

Great. And then on the timing of the Cloud and hyperscale customers making the move to 200-gig or 400-gig, wondering if the COVID-19 pandemic has actually accelerated the adoption of your solutions, just given the significant step-up in compute and data traffic activity, as you pointed out in your recent blog? I know that you had anticipated that beyond your twoexisting cloud customers, you would have one additional U.S., one additional China customer firing this year with all of the top seven cloud guys firing next year. But is that still your view or might we see some pull-ins of some of these deployments?

[Ford Tamer:]

So two good questions, Harlan. So first, the trends that we discussed in the blog I published in April 22, we have further expanded on those. And I'd recommend if you have a minute to read the blog published by Loi Nguyen, our co-founder, about Internet 3.0, we see a bunch of new applications that are being developed that could increase the bandwidth around the world as we see it today. We were on the phone with a customer just a few days ago, and he was talking about Factory 2.0. So people are trying to reinvent how you actually have an experience to even do some of these virtual conferences. So a lot of innovation is starting to happen around new applications that we do believe are going to come to market over the next few months that could reinvent some of the way we do things that make us even more excited about what Loi calls Internet 3.0. So the best way to increase bandwidth is to increase bandwidth. And so fundamentally, what PAM and coherent technologies do is they do exactly that, allow you to double or even allot more with coherent, put a lot more bits per the same fiber with coherent. And so we're seeing a acceleration on both PAM and coherent. And we're still on track to have the same customers deploy second half this year and next year. Trying to move these customers faster is harder, but the customers that are already deploying PAM are accelerating the deployments of PAM because of the – some of them are seeing need to increase the bandwidth inside their data center. So we may see a pull in, although we don't really need to pull in right now. I think if we continue to grow as stated with another U.S. customer, our China customer in second half this year and all seven going on the PAM bandwagon next year, the market will grow very nicely for everyone.

[Harlan Sur:]

Great execution. Thank you.

[Ford Tamer:]

Thank you, Harlan.

[Operator:]

Your next question comes from the line of Quinn Bolton with Needham & Company.

[Quinn Bolton:]

Hey, guys, congratulations on the nice results and outlook in a challenging environment. Ford, I wanted to – clearly you haven't seen longer lead times affecting the business today. But I think Broadcom has sort of published the fact that it's lengthened its lead times to as long as six months. Obviously, they're the volume leader in the Ethernet switch market. Wondering if longer lead times at Broadcom is changing the availability of some of these high-speed data center switches. And is that – could that have any impact as you look into the second half on sort of some of the ramps at either existing hyperscalers or some of the new hyperscalers Harlan just mentioned?

[Ford Tamer:]

Thank you, Quinn. We are seeing exactly the same trends. The lead times right now are anywhere from six months to 12 months. If you look at the substrate right now, it's a huge issue where some suppliers are quoting you 52 weeks to get substrate. So the lead times are extremely long. We gave a warning to all our customers and we've been giving warning to customers for the past few months about this. So yes, the lead times are very long. We're working very closely with our suppliers. We've been working with our suppliers since January when we saw the beginning of this crisis to put buffer in place at multiple places in the supply chain. So we do believe we'll do as good as anybody in this, but it's definitely a very big challenge, not just for us, but the whole industry. We do not expect this to, at this point, change the outlook on the second half. We're still on track as far as, as you know. There'll be challenges, and we're going to continue to work with customers to overcome those challenges at our suppliers.

[Quinn Bolton:]

And then, I guess, maybe a follow-up. To the extent that everybody in the supply chain has seen lead times stretch, obviously, your orders have been very strong, and maybe that reflects the stretching out of lead times. Can you talk to us at all about the orders, maybe a book-to-bill? I mean, obviously, it sounds like you're trying to be conservative with the second quarter guidance. But I mean, were orders even much stronger than the second quarter level that makes you think that – take since there has been some double ordering, you're not – you may not be able to fulfill some of that demand. And so it sort of naturally resolves itself?

[Ford Tamer:]

John, you want to take this?

[John Edmunds:]

Yes. I think, in general, Quinn, orders are strong right now, and we are trying to sort through and understand what's behind those and make sure that this is not double booking or not hoarding per se of inventory. They're not always obvious. We just – we try to be good suppliers and make sure we're in good close communication with our customers. But I think we do see robust demand, and that's reflected, I think, in the guidance we're giving for the quarter. But as you asked, we do have good, strong interest in growth in – but at the same time, we're trying to remain cautious about it.

[Quinn Bolton:]

That’s it. Thank you.

[Operator:]

Your next question comes from the line of Ross Seymore of Deutsche Bank.

[Ross Seymore:]

Hi guys. Thanks for letting me ask question, and congrats on the strong results. I want to stick on that conservatism theme. Ford, at the end of your comments on this call, you mentioned that the second quarter guide, you're still injecting a healthy amount of conservatism. And I think in answering a question on Huawei, you said that you were pretty much removing them from the second quarter. Is that the area where the most conservatism is being injected in? And I'm not really asking you to size what your guidance would be if you didn't inject that conservatism. But what are the areas where you think that conservatism is most warranted?

[Ford Tamer:]

Yes. Thank you, Ross. We haven't really removed one or another – one of those vectors. I think we've injected some conservatism that would allow us to withstand one of those vectors not having some issues. So whether hoarding or whether a China impact or whether double booking or whether another macro unforeseen event, we put all that in the basket, Ross, and took a conservative look at our Q2 guidance, which we believe is warranted, given the very volatile and uncertain environment we're currently in. So that's really – it could be conservative, it could be a realism. I mean nobody knows right now, right, in this environment. So we do believe we're doing the right thing here.

[Ross Seymore:]

Great. And I guess as my follow-up, you had mentioned those three dynamics that would be changing coming out this COVID pandemic, and you talked about the Edge computing side. Can you just go a little bit deeper into the ZR and the COLORZ II opportunity in that? And how is Edge computing, whether it's a dollar item or a competitive dynamic where your solutions are better. Just dive a little bit deeper into that opportunity because I think it's a relatively newer evolution for people to think about.

[Ford Tamer:]

Yes. Thank you, Ross. So given the nature of the applications today, where there's a lot more local, if you wish, collaboration, streaming, metro access and Edge computing has seen a big increase in demand. And that's mainly linked under 100 kilometers. So whereas before, some of our customers were more worried about having a transport box because they still had a fair amount of long hauling, where you go into some of these scenarios now where you're going to be predominantly worried about less than 100-kilometer lengths. The new ZR standard actually calls for 120 kilometers, which we support. We also, in that same offering, could support up to 400 kilometers. And so that's going to take care of the majority, 90% plus of these customers' needs. And so when you go into a scenario where 90% of your needs could be fulfilled, it will be much more cost effective, much lower power solution that is going to free up space in your data center where you could put some more servers, especially in an environment today where the fastest way to add drivers would be to plug in a module in an existing switch or router box supplied by your favorite vendor or by a white box maker in Taiwan. If you look at these dynamics, this is going to be favoring ZR. And we're seeing a lot more interest in ZR post-COVID than pre-COVID, especially in cloud provider type of environments. Obviously, when it comes to Telecom, Telecom is going to be still much slower to move and it's going to be still dominated by the larger transport folks and design. And we'll respect their ability to compete there. But we see the Cloud moving to ZR in a bigger way post-COVID than pre COVID.

[Ross Seymore:]

Thank you.

[Operator:]

Your next question comes from the line of Tore Svanberg of Stifel.

[Tore Svanberg:]

Yes, thank you and congratulations on the results. Ford, on the 50 gig versus 100-gig PAM market, has there been any changes there lately? Obviously, you have very, very high share in 50 gig. Just wondering if there's been any changes from your customers' decisions to go one way or the other?

[Ford Tamer:]

There's a couple of changes, Tore. The first one is, as – where three months ago, there was some controversy on whether 400 gig was going to market or not. When you look at our numbers, there is no doubt. And there's no controversy anymore that 400 gig has gone production, okay? So our customers in the cloud are ramping for 400 gig and there's no doubt that this is happening anymore, okay? So the numbers don't lie. As far as the mix between 200 and 400, I think it's still pretty much equal. And as the year progresses, we'd probably see more customers add on the 200. So the 200 could end up being stronger. And the 50G PAM has been – what has been the workhorse on 5G cellular. So you end up with that Polaris, which is the 50G being used for both 5G applications as well as 200 gig inside the data center. So it has a bit of an edge. But as far as share, we still stick to what we said, which is there'll be a couple of other DSP vendors in the 400 gig that we're going to be competing against and a couple of analog guys in the 50G – 50 gig space that we compete against, but nothing to – no changes at this point.

[Tore Svanberg:]

Very good. And just a follow-up on the ZR question. So I know you're sampling right now. You've talked about ZR kind of becoming a more material revenue middle of next year. Is it safe to say that, that is not getting a little bit pulled in? Or is that still the time line for material ZR revenue?

[Ford Tamer:]

It's being pulled in, Tore.

[Tore Svanberg:]

Okay, thank you very much and congrats again.

[Operator:]

Your next question comes from the line of Vivek Arya of Bank of America Securities.

[Adam Gonzalez:]

Yes, hi. This is Adam Gonzalez on for Vivek. My first one, I was just wondering if you can give us a sense for what your overall China revenue exposure is now, and if you see any of the new restrictions issued by the Department of Commerce last week as having an impact on your business moving forward?

[Ford Tamer:]

John?

[John Edmunds:]

Yes. Thanks, Adam. So we're generally up in the 40% range of shipping into China. And I think we're slightly higher than we were in Q4. And the bulk of that is really for data center, actually. So it's coming back to Google or Amazon. And the Huawei numbers, for instance, are maybe 1/5 of that overall number. They're not a big piece and they've been relatively flat from Q4 to Q1. In terms of your question about the Commerce Department, the – we're not impacted by the latest new ruling. It's primarily focused on RF kinds of transmissions and so it doesn't – based on what we – our understanding of the new rule, it didn't look like it will impact us. And so we'll just continue under the current Export Administration Regulation rules. So those allow some de minimis shipping and so forth. And so for the time being, things will continue the way they are.

[Adam Gonzalez:]

Great. And then for my follow-up on eSilicon. With that business coming in ahead of your expectations in the quarter, I was wondering if maybe you'd had any change to your outlook for the full year for that business versus the range you had identified before?

[John Edmunds:]

Well, I think we're still comfortable with the – I think you're speaking about the expectation for about $100 million of revenues this year from eSilicon. And we're still comfortable with that number. We're not looking to change guidance around that right now. It does look good and robust and certainly able to hit that particular threshold.

[Adam Gonzalez:]

Thank you.

[Operator:]

Your next question comes from the line of Richard Shannon of Craig-Hallum.

[Richard Shannon:]

Okay. Thanks for taking my questions. John, maybe a quick question on the guidance here. In the press release, you talked about looking for both organic and inorganic growth here. Wondering if you could kind of discuss from a – just from a dollar growth point of view, whether it's more organic or from eSilicon.

[John Edmunds:]

We're not really breaking the expected growth up. I just gave you an indication of what we thought eSilicon would be for the year, which is kind of what we've said in the past. And so we are thinking that we have growth potential on both sides of the business. And we're, I guess, bullish about the opportunities in both sides.

[Richard Shannon:]

Okay. Fair enough. Second question for Ford. Ford, when you talked about the acquisition of eSilicon, you talked about the need for more custom work here. As you look out a year or two, whatever time frame you'd like to, how important will custom work be? I know you've done some for many years in the past, but is this going to be a majority piece of your business within both – collectively within Cloud and 5G/Telco networks? Or you can give us some understanding of the importance of that dynamic in your business?

[Ford Tamer:]

Very good question, Richard. We are already seeing the need for this. So we already are working hard at work at delivering some custom DSP for our customers. Not all Cloud are created equal and not all Telecom are created equal, and they all have different architectures. And so ideally, they all have slight different tweaks and slight different features that they'd like to have. And our ability to customize those offerings for them by incorporating some of their own IP into our offerings to provide them interoperability with what they have in the field is becoming a weapon for us to compete. And so yes, we're seeing that need increase and very excited about it. And stay tuned. We'll have hopefully more announcement in the future along those lines.

[Richard Shannon:]

Okay, great. We look forward to hear from that. That’s all my questions.

[Operator:]

And your final question comes from the line of Joe Moore with Morgan Stanley.

[John Edmunds:]

You're having trouble with that line.

[Ford Tamer:]

Joe, we're having a hard time hearing you.

[Joe Moore:]

Okay. Sorry, I'll just .

[John Edmunds:]

Andrea, I think we can't hear him. Sorry about that.

[Operator:]

And that question has been withdrawn. I'd like to turn it back over to Mr. Edmunds for any closing remarks.

[John Edmunds:]

Thank you, Andrea. Inphi plans on attending the virtual JPMorgan Conference on May 12; the Cowen Virtual conference on May 26; the Craig-Hallum Virtual Conference on May 27; the Bank of America Merrill Lynch Virtual Conference on June 2nd; and finally, the Stifel Virtual Conference on June 8th. Ford and Vern and I look forward to talking with you in the future. And I want to thank you for joining us today.

[Operator:]

Thank you for your participation. This concludes today's call. You may now disconnect.