Inphi Corp
Q1 2015 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Inphi Corporation First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode, later we’ll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Deborah Stapleton, Investor Relations. You may begin.

[Deborah Stapleton:]

Thank you Kevin and good afternoon everyone. Thank you for joining us today for the Inphi call to discuss the financial results for the first quarter of 2015. Speaking today will be John Edmunds, Chief Financial Officer; and Ford Tamer, our Chief Executive Officer. John will begin with the Safe Harbor and Ford will give you an overview of our business; after that John will provide a financial summary of Q1 and the outlook for the second quarter of 2015; then we’ll be happy to take your questions. John?

[John Edmunds:]

Thanks Deborah. Please note that during the course of this conference call, we may make projections or other forward-looking statements. These forward-looking statements and all other statements made on this call, which are not historical facts, are subject to a number of risks and uncertainties that may cause actual results to differ materially. These forward-looking statements speak only as of today’s call. We do not undertake any obligation to provide updates after this conference call. For further information regarding Risk Factors for our business, please refer to our registration statements on Form S-1, as well as our most recent annual and quarterly reports on Forms 10-K and 10-Q, all filed with the Securities and Exchange Commission, accessible at www.sec.gov. Please refer, in particular, to the sections entitled Risk Factors. We encourage you to read these documents. Also during the course of this conference call, we may make reference to non-GAAP financial information. A reconciliation of this information is included in the press release and on our website, which is available at www.inphi.com. This information is not a substitute for GAAP and should only be used to evaluate the company’s results in conjunction with corresponding GAAP measures. Now to begin our review of the quarter, let me turn the call over to our CEO, Ford Tamer. Ford?

[Ford Tamer:]

Good afternoon everyone and thank you for joining us for our Q1 2015 earnings call. Once again, I am pleased to report that we’ve delivered results ahead of the mid-point of our forecast. We continue to focus and deliver on what is now a three-year track record of on target quarterly reports. This quarter, I am particularly pleased to report non-GAAP Q1 revenue of $59.6 million at the high end of our projected revenue range. On a year-over-year basis, this represents top-line growth of 90% from last year’s $31.2 million. While the Cortina contribution to this growth was significant, we also saw significant year-over-year organic growth from traditional Inphi products. And because we now operate as one company, we’d be no longer reporting separate Inphi Cortina segment results. On an earnings per share basis, the news was even better. Earnings for the first quarter of 2015 were $0.23 per share, a 150% increase over the $0.09 we achieved in this quarter last year. This result also falls at the high-end of our earnings guidance for the quarter. We are delivering the strong financial results while continuing to invest in new products for moving even more big data faster and farther. We are confident this will result in increased top and bottom-line in the quarters and years ahead. Now, let me make a few comments about our Q1 accomplishments. Our customer base and orders continue to grow as we enable high-speed data delivery for our customers serving service providers and data centers. At Inphi, we have been working on this ever expanding cloud market opportunity for years. And we couldn’t be happier with how the integration of Cortina Systems has turbocharged our business. We continue to be very pleased with the top flight team and on target financial contributions from the new product lines, now that we’ve completed the very smooth integration process. Our business performance in Q1 marks the start of what we expected to be a very strong EPS year in 2015. Our recently acquired 10 gigabit and 40 gigabit core communication products are well positioned and growing as anticipated. Additionally, our 100 gigabit core communication products are helping our customers accommodate massive increases in bandwidth from cloud data centers. This includes our amplifiers, drivers and SerDes which continue to grow at increasing rates of bandwidth and capacity. All our product families performed on track in the first quarter of 2015. While our business performance was on track, our design win discussions have been very strong. At the recent Optical Fiber Conference, we announced we are sampling a new 45 gigabaud linear and coherent driver. This driver extends the reach of 200 gigabit coherent transmission for long haul applications. It should also help our customers by enabling a single set of hardware to serve, both the long haul and metro market segment, with flexible modulation format for 200 and 400 gigabit coherent systems. With this new product, we continue to raise the bar of technical performance while bringing down the associated system cost and enabling an acceleration of adoption of our customer systems. At the same, OFC show we also demonstrated 56 gigabaud Pulse Amplitude Modulation or PAM transmission across 10 kilometers of single mode fiber. This technology enables cost effective 100 gigabit bandwidth using a single laser. Beyond that we have a roadmap to 400 gigabit for intra and inter-data center connectivity. PAM leverages DSP based CMOS electronics to reduce optics complexity. Customers can deploy PAM based modules at 4x bandwidth improvement using one quarter of the power of today’s module at projected cost that is one quarter or less than today’s existing solutions. Based on interactions at OFC, we expect that this will be very well received by data center interconnect customers. ACG research estimates this data center interconnect market would grow from $400 million in 2013 to $4 billion by 2019. New architectures will be needed to accommodate the growth of data centers from tens of thousands of server to hundreds of thousands of server. We are working closely with our customers to rethink the data center of tomorrow by supporting the following architecture changes

[John Edmunds:]

Thanks, Ford. Now let me recap the key financial results for Q1. As Ford mentioned, in the first quarter of 2015, Inphi reported non-GAAP revenues of $59.6 million, which was up year-over-year by more than 90%. While this was due in part to the fourth quarter acquisition of Cortina, the communications business grew organically by more than 50% year-over-year and the high-speed memory business also grew by low single-digits. As expected, the quarter was driven by sequential growth in core communications as well as sequential growth in the high-speed memory area offset to some degree by an expected decline in legacy communications and transport revenues, all of which resulted in 2% sequential growth for the quarter. We define core communications as amplifiers, drivers and 10, 40 and 100 gig layer -- physical layer products. Our communications business again represented approximately 75% of our total revenues in Q1. This is expected to grow as a percentage and exit the year at 80% of our total revenue. The core communications products represented more than 60% and are on track to grow by more than 50% this year. The legacy communications products are on track and should decline by roughly 15% year-over-year on a run rate basis to about $55 million for 2015 as expected. Q1 sales of product into high-speed memory applications were up both sequentially and year-over-year, continuing at approximately 25% of non-GAAP revenues. Sales of our DDR4 products increased this quarter and were driving the majority of the sequential growth. DDR3 products also remained strong through Q1. Gross margins on a non-GAAP basis came in at 66.6%, slightly ahead of where we expected based on mix and included approximately $0.5 million of IP licensing revenue in the quarter. We do expect incremental IP licensing and NRE revenue throughout the balance of 2015 which will raise our gross margins about 200 basis points, resulting in a forecasted range of gross margin of 68% to 68.6% on average for the balance of the year. On a GAAP basis, we incurred a net loss in the fourth quarter of $9.7 million, or a loss of $0.26 per share. The delta between GAAP and non-GAAP is approximately $19 million, made up of five basic adjustments. As discussed previously, GAAP excluded $400,000 of revenue or about $300,000 of gross margin that had been deferred as of the acquisition day. In addition, the GAAP loss includes stock compensation expense of $6.4 million. Acquisition transition expenses, mostly legal and accounting costs of $600,000 and purchase accounting related adjustments totaling $9.4 million as well as the related tax effects netting to an additional income tax expense of approximately $2.4 million. The GAAP based loss in Q1 2015 of $9.7 million or $0.26 per share compares to a GAAP net loss of $1 million or $0.03 per share in Q1 2014. Now to help clarify, let’s turn to some additional non-GAAP measures. On a non-GAAP basis, net income for the first quarter was approximately $9.3 million or $0.23 per diluted share, which was up compared with a non-GAAP net income of $2.9 million or $0.09 per diluted share for the same quarter one year ago. This represents an improvement in non-GAAP net income of 3.2 times and an improvement in non-GAAP EPS by 2.6 times. Non-GAAP operating expense for the quarter totaled $28.6 million, this was up $0.4 million from the previous quarter due to a variety of spending differences but primarily from higher payroll taxes in Q1. In Q2, gross operating spending will be down by about $1 million but because we happen to have less NRE offsets scheduled in Q2, the net operating spending will be up about $1.3 million to $1.5 million, mostly in R&D. In Q3 and Q4, we anticipate reverting back to a higher level of NRE offset. In Q1, we were able to deliver an operating income margin of 18.7%. In Q2 with higher gross margins and higher operating spending, we believe we can continue to deliver an operating income margin at 18.7% or potentially up 40 basis points from there. With regard to the non-GAAP tax provision in Q1, we’re currently expecting approximately 18% which does not include the benefit of the federal R&D tax credit. In fiscal 2014, with the R&D tax credit restored, our non-GAAP effective tax rate for the year was 13.2%. Other income in Q1 was slightly up at approximately $0.16 million coming mainly from interest income. Now turning to the balance sheet, overall cash was up $8.9 million in quarter from $69.3 million to $78.2 million. This was due to a strong cash flow from operations in Q1 of $12.3 million consistent with a comparable generation of core operating cash flow in Q4. The company has also had capital expenditures of $3.4 million in Q1, somewhat less than we had forecast. Due to higher mass cost in the future, we do expect CapEx to average about $5 million per quarter in the subsequent quarters of 2015. We generated an $8.9 million in free cash flow in the first quarter and we believe we can repeat or beat this performance through the balance of 2015. This is in contrast to one year ago when our free cash flow was a negative $5.3 million. Accounts receivable came in at $36.7 million or 56 days and compared with $36.9 million or 57 days outstanding at the end of December. Inventory on the balance sheet was $23.3 million which included $1.9 million acquisition accounting related step up in inventory value which was still on hand at March 31, 2015. Excluding the $1.9 million step up in inventory and the $7.5 million similar step up at 12/31, the inventory days were approximately 97 days or about 3.7 turns as of March 31st, which was up from the approximately 91 days or 3.9 turns per year in Q4. In March, the company received approximately $3.4 million influx of inventory for a specific last time buy of a widely used framer product. This was based on the supplier no longer offering to make or supply that part. Absent this purchase, the balance of inventory would have been down to 82 days and turns would have improved to 4.4 times. Payables increased from $7.9 million or 37 days in December to $8.2 million or 37 days at the end of March. Now let me recap the business outlook for Q2. I’ll remind everyone again that the following statements are based on current expectations as of today and include forward-looking statements. Actual results may differ materially. We do not plan to update, nor do we take on any obligation to update this outlook in the future. As a range of guidance for Q2, we forecast revenues to be in a range of approximately flat to up 2% or $59.6 million to $60.8 million. We expect GAAP gross margins to be in a range of 68.1% to 68.6%. We expect non-GAAP operating expense to be in a range of $29.9 million to $30.1 million. We are currently estimating non-GAAP effective tax rate to be 18% for the year. We are confident these components should then align, resulting in a non-GAAP operating margin of between 18.2% and 19.2%. This should then lead to non-GAAP net income of between $8.9 million and $9.7 million, which on approximately 40.9 million estimated diluted shares would result in estimated non-GAAP earnings of between $0.22 and $0.24 per diluted share. We also estimate stock-based compensation expense to be between $7 million and $7.4 million. In addition, we expect about $3.2 million from purchase accounting based adjustments. In Q2, we also have one more quarter of an additional flow through of the stepped up inventory value of $1.9 million, this would imply our GAAP net loss in the range of $1 million to $1.75 million. GAAP loss per share would then be in a loss in the range of $0.03 to $0.05 per share. A more complete reconciliation of the Q1 GAAP net income forecast is attached to the last page of the press release. We will not update this outlook during the quarter until the time of the next quarterly earnings release, unless Inphi publishes a notice stating otherwise. So please ask any questions you have today and during the general Q&A period. And now we’d be happy to take your questions.

[Operator:]

[Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank.

[Ross Seymore:]

Ford, the first one for you, just have a bigger picture question. There has been a lot of choppiness in the comps, infrastructure demand side and the service provider. The data center side has been a little bit stronger. Overall, can you just give us an update on what you’re seeing from bookings behavior from your customers on both of those two ends of the spectrum?

[Ford Tamer:]

We have taken a bit of a more conservative view on our guidance in Q2 to account for this choppiness, Ross. We see increased visibility in the second half of the year. We see some major service provider making decisions on their CapEx for the second half in the year -- in the June-July timeframe which should give us additional visibility in the service provider segment. We continue to be very bullish on the uptake in the metro segment. Our estimate is that metro will overtake long haul from a revenue point of view towards the end of the year, sometime in the second half this year. And we expect metro to continue to grow to represent about two-third of the traffic between long haul and metro end of 2018 timeframe. In the data center market, we do expect increased interest in our product towards end of the year and definitely in 2016 as data centers start rolling out the new 25 gigabit switches from different commercial switch providers. And as we get into the third quarter and fourth quarter, we should have a lot more visibility and the uptick for 2016, Ross.

[Ross Seymore:]

Then quickly one for John. Lots of moving parts on the profitability side I think, can you talk about a little bit about where the IP revenues are coming from, why that was a surprise and if those continue into 2016 and then similarly on the OpEx side of things, can you help us size what you think OpEx is likely to do in the back half of this year as that NRE offset comes back into the equation?

[John Edmunds:]

The IP revenues we had in the first quarter here were for some particular IP that come from Cortina, we were able to package and license. And we have a couple of more opportunities like that through the balance of the year. And so, I think as a result, we do expect to have that be part of the revenue mix and as I mentioned, improve the gross margin profile overall. In terms of the NRE offset, the co-funding from customers on some projects we’ve had, we just happen to have a little bit of the gap here in Q2, but we do expect that will resource itself in Q3 and Q4 based on what’s been scheduled in terms of milestone achievement and what we’d expect to come in, in those quarters. So I don’t really expect a large perturbation [ph] or change in the OpEx outlook. We do expect relatively flat operating spending -- net operating spending of around $30 million in the third quarter and fourth quarters this year, just based on developments coming together.

[Ross Seymore:]

One final part and I’ll go away. For the gross margin, the IT side of things, are these streams that go in perpetuity or beyond 2015 or is there some end date to them as far as what you’ve currently agreed upon?

[Ford Tamer:]

Well, there is different opportunity representing themselves. And so in general, we do one-time licenses but there are multiple opportunities ahead of us right now. So, it may become little bit cottage [ph] industry that you’ll see us involved with as we move forward.

[Operator:]

Our next question comes from Tore Svanberg with Stifel.

[Tore Svanberg:]

Few questions, maybe to follow up on Ross’s question on the NRE. Is this -- are these projects related to data center or is it still related to Cortina or is it both?

[Ford Tamer:]

Most of it is related to communications; in general, there are some on both sides of business, so there are some that are also related to memory that may come in later in the year but the particular one we’re talking about from Q1 was a communications related project.

[Tore Svanberg:]

And John, you didn’t mention what we should expect for memory and optics revenue this year, can you give us an update there, please?

[John Edmunds:]

Well, I think we have been fairly clear that it’s become about 20% of the business as we exit the year. We will have some decline we anticipate in the DDR3 area but we also anticipate growth in DDR4. So net, I think we are looking to be down maybe about $5 million in revenue this year, could be better than that, we just have to wait and see back half comes; we’re making good progress in that business, so we’re optimistic.

[Tore Svanberg:]

And then question for Ford. Ford, you talked about your meetings at OFC. There has been a lot of discussion about QSFP28 and how well positioned Inphi is there. So sort of in more layman terms, could you just let us know why QSFP28 is so important for Inphi especially as you start to look at 2016 revenue?

[Ford Tamer:]

The high level answer is that the QSFP28 100 gigabit is the enabler for a deployment of 25 gigabit switches. We have our customer OEMs and data center coming to us telling us that the majority of the cost of the deployment of these 25 gigabit switches comes from these optical interconnect module. At a point where optical interconnect cost is dwarfing the cost of the switch, we’re looking at a cost of optical interconnect modules at two to three times of the switch. So that is really going to hamper and slow down the deployment of the switches unless you come up with a more cost effective solution. And fundamentally what Inphi is providing is a solution that’s about a quarter of the cost of the modules that are today. And our PAM solution would still probably come in at half of the cost of comparable non-PAM or what we call NRZ type of solutions. The simple reason why is we cut the number of optics required by half. So, PAM fundamentally enables the deployment of cost effective optics and module because it cuts the number of optics by half and enables the deployment of these 25 gig switches in a cost effective manner.

[Tore Svanberg:]

One last question, Ford, if I may. In your answer to Ross’s question about the second half, you mentioned metro overtaking long haul. Is that sort of a market commentary or is that for Inphi revenue? And if it is for Inphi revenue, would we expect growth coming from both, meaning your long haul business would still grow but obviously metro would see a significant ramp?

[Ford Tamer:]

I think it’s for both, the market and Inphi. So we do expect the markets for metro to grow faster than long haul, long haul will continue to grow but metro growth will overtake long haul. And it’s largely driven by data center to data center interconnect. And for Inphi, it’s hard for us to have an exact breakdown of long haul versus metro, because we shift the same component that can go into either long haul or metro. But our discussion with customers indicate that what is growing for them is really metro. And we continue to expect that growth to continue through the second half of 2015 and 2016 as new types of modules get shipped. So for example in 2015, most of our service provider customer will deploy what’s called CFP module. In 2016 we expect the deployment of CFP2 which should provide incremental growth to what we’re seeing in 2015. So this is where we’re pretty bullish on metro.

[Operator:]

Our next question comes from Jay Srivatsa with Chardan Capital Markets.

[Jay Srivatsa:]

Ford, can you give us an update on where in the cycle we’re in terms of server I/O upgrade from 1 gig to 10 gig?

[Ford Tamer:]

So, the server upgrade in enterprise environment is being upgraded from 1 gig to 10 gig. In cloud environment, we’re seeing an upgrade from 10 gig to 25 gig. So, depending on whether we’re talking about traditional enterprise, we’re seeing an uptick for 10 gig that will happen in the latter part of this year, sort of second half ‘15 and early ‘16. And that’s about the same timeframe for the upgrade in cloud environment from 10 gig to 25 gig. And Jay, this is why we are more bullish in the second half and in 2016 because in addition to our traditional Inphi, 100 gig solution which will be going alongside the cloud upgrade to 25 gig server, we also would benefit from an upgrade on traditional enterprise from 1 gig to 10 gig server which will drive 40 gig -- 10 and 40 gig physical layer products which should be acquired physical layer product we got from Cortina.

[Jay Srivatsa:]

In terms of the LRDIMM market, can you give us an update where things are at with the LRDIMM DDR3 market and then also an update on where you see the transition from DDR3 to DDR4 happening?

[Ford Tamer:]

We actually were comparing notes internally about this, we have moved the transition from DDR3 to DDR4 from what we though previously was mid this year to end of this year. So, this is good news for Inphi. The transition from DDR3 to DDR4 is taking longer than expected. And that’s a big benefit for us, because we have a larger market share in DDR3. So hopefully that answers the question.

[Jay Srivatsa:]

In terms of the LRDIMM adoption DDR3?

[Ford Tamer:]

DDR3 LRDIMM adoption is still strong and hasn’t seen a major difference from where it used to be.

[Jay Srivatsa:]

And related to Cortina, there has been some reports related to how the 4G LTE backhaul business might be slowing down specifically in China. Does that affect you guys at all or where do you see that market going near-term?

[Ford Tamer:]

For that market, we have continued to see growth. We actually are expecting that overall acquired physical layer product to grow nicely in the second half of this year. And so, we’re not forecasting any slowdown in 2015 for the adoption. Actually I am looking at the numbers here and we’re seeing quarter-on-quarter sequential growth for every quarter this year was a pretty nice ramp exiting 2015 for that business.

[Jay Srivatsa:]

John, in terms of the gross margin guidance, it looks like that there is a nice jump up here and you guys are pretty bullishly for second half. Where is the incremental margins coming from?

[John Edmunds:]

Well, there are mix of things. Our product margins are actually stronger now with Cortina in the mix and then we also have, as I mentioned earlier, started to do some IP licensing with some elements of the technology that we have acquired from Cortina and may do so with some other things that we have. So, it’s just that mix of IP licensing revenue in the overall revenue stream that’s giving rise to the forecasted increase in gross margins here up to the 68% sort of threshold.

[Jay Srivatsa:]

And last question for me, it looks like you still have an additional flow through in the inventory value, when does that go away and what type of revenue run rate are you projecting to get to GAAP profitable?

[John Edmunds:]

The flow through should go away this quarter. It should have all flowed through in the fourth quarter, we just had a little bit less, so we had the less 400,000 that had to come through. I would expect, we could get profitable by the end of the calendar year actually.

[Operator:]

Our next question comes from Doug Freedman with RBC.

[Doug Freedman:]

Ford, when we hear you talk about lowering the cost of the solutions available for driving these higher speeds, can you talk to your content; how much of the growth is predicated on port growth versus your ability to grow content and the solutions you’re delivering?

[Ford Tamer:]

I think it’s a mix of both, Doug. So, if you look at the growth in ports, we have in the updated corporate presentation post on our website reporting the -- in phonetics number that expect the market to be about 1.7 million ports in 2017. And this is consistent with some of our OEM customers who have been pretty public about the fact that in their estimate there will be about 2 million ports of 100 gig in 2017 growing to potentially 4 million in 2018. So, I think there is going to be some really significant port growth and this is as you mentioned, one factor. The second factor is delivering, not only PAM transceiver chip, but also delivering the TIA and driver that go along with that to make up a solution along with partner optics. And those TIA and driver need to be linear TIA driver, they need to be low power. And so, we would be delivering a chipset in these markets that are working closely with our partner optics. And so, we would definitely see an increase in the content that we would be delivering in those modules as well. It’s a combination Doug of both, increased port and increased ASP.

[Doug Freedman:]

When I look over at the memory market, there is a transition expected to take place in the back half of year from 32 gig modules to 64. Can you give us an update on it, if that opens the door out, there is an opportunity for you guys to participate and maybe shift market share at all as a result of that transition; where does that stand?

[Ford Tamer:]

So, I think for the memory business, we are in the middle of qualification for the next cycle right now and we’re working closely with different memory module partners. We do expect our market share to grow in 2016 and grow again in 2017, as predicated on our next generation products coming to market which we’re making good progress on Doug. So we’re in the middle of that qualification cycle right now.

[Doug Freedman:]

And if I could just my last one, maybe jump back over to the optics market, you talked about your PAM4 solution. When I talk to some investors in the market place, there is definitely different transmission techniques that are being talked about as options for the next generation networks and there is a bunch of non-standard solutions out there. How do we feel or do we get a handle on whether PAM4 is the adoption that’s going to be standard and how important is it for that to be selected as the standard or can it be successful as sort of a unique differentiated product in the market?

[Ford Tamer:]

So, we are taking PAM to an MSA, so it will become a standard. And we’re not the only one who are pushing PAM; we’ve got other vendors that are working on PAM, including large companies like Broadcom. So, recently ,the IEEE standard task force agreed to use PAM technology for 50 gigabit electrical interface. And so that’s going to increase the momentum industry adoption for this interface. And we’re going to continue to work towards an MSA for 100 gigabit. And we expect in the end that there will be a transition from early days of that market which we’ll deliver sort of revenue in end of this year, early next year as a four laser type of solution. And we participate in that market with our low power CDR as well as our limiting TIA and driver offerings. So we have -- the first generation modules will include CDR as well as TIA driver from Inphi. To our second generation which will be two laser type of solution and that will include again our PAM, TIA driver and there will be other vendors in that market to eventually I think what people are talking about is one laser type of solution to enable that 100 gig interface but we expect that to be in 2017. So, I think it’s a transition. We have offering for all three generations. So, we already have a four laser type of offering; we’ll have a two laser type of offering this year which would sampling this year and we’ll have a one laser type offering in 2017, which we’ll be sampling in 2016. So they will be competing other solutions that will be trying to offer the same power and cost but we do believe that the PAM will be superior from a power and cost point of view. And there is probably a longer discussion Doug, we’d be happy to have.

[Operator:]

Our next question comes from Quinn Bolton with Needham.

[Quinn Bolton:]

Just wanted to follow up on Doug’s question there on the PAM4; first off the MSA. Can you comment, is OFC 2016 a likely timeframe when we might start to see some of the PAM4 modules being introduced?

[Ford Tamer:]

I think you will see the PAM4 module sampling this year in 2015. You’ll probably start to see the PAM4 modules nearing production at OFC next year.

[Quinn Bolton:]

And then, you talked about the first generation NRZ QSFP28 modules transitioning to PAM4, second generation. Could you give us some sense for the CDR, the limiting driver in TIAs and Gen1 and as you step up to a PAM4 module? What’s the dollar content step up for Inphi, is that a factor of 2

[Ford Tamer:]

So, I think what I would say is our end customers, the customers of our customers, the large data centers do not really -- are not really asking for NRZ versus PAM versus any type of favor; they’re asking for lower cost. So, the way to think about the content for Inphi is probably constant. So our content would probably be the same whether it’s a four laser or two laser. What is different is the module cost will come down because you’re going from four laser assemblies to two laser assemblies. So reducing the cost of optics dramatically and making alignment easier. And so you’d end up with a lower module cost from four laser to two laser just because of the reduced cost of optics. The cost of electronics is probably constant. What I also would say is in the field of four laser which is what is playing out in sort of 2015 and early 2016, it’s a very crowded field. So, you probably have quite a few competitors to Inphi. Our customers probably have quite a few competitor to their own modules. So it’s a very crowded field, you’ll see probably a dozen module vendor where a whole bunch of people supplying semiconductor and optic solutions for that. The good news for us as we move to PAM is the field becomes dramatically smaller as far as provider of electronic that can provide those electronics in those module. And really it comes down to Broadcom and Inphi on the electronics and Maycom and Inphi on the TIA and driver. So the sort of electronic provider is dramatically smaller as far as number of provider who can really provide these more complex, more advanced solutions.

[Quinn Bolton:]

And then just wanted to move over the memory interface side of the market quickly. I think you had previously talked about designing the second generation data buffer, hoping to take that out soon. Could you just tell us, are you kind of on track with that second generation data buffer as you purchase a Broadwell qualification cycle?

[Ford Tamer:]

We are on track for our Gen 2 product. We do believe to enable us to capture a leadership position in DDR4. We have sampled or registered the device and expect to sample our data buffer solution in the coming three months.

[Operator:]

Our next question comes from Sundeep Bajikar with Jefferies.

[Sundeep Bajikar:]

First one, just if you could help us understand how we should think of the sequence of events starting from the arrival of new 3.2 terabyte 100 gigs switches in the second half of this year up 100 gig module shipments for Inphi? Just help us understand the timeline if possible and if you see any risk of delays at any stage?

[Ford Tamer:]

The switches will ship and our customers will ship those systems end of this year. And end of this year Sundeep, they will go as we discussed with four laser or we are also calling it four lambda or four laser type of modules. And the PAM type of modules we expect to be really first-half to mid next year is the sequence of event. So, the switches have to ship regardless of what modules are available. They will ship first to as this higher cost first generation four laser type of modules and eventually for cost reduction could go to this PAM based technology.

[Sundeep Bajikar:]

And just to help us understand also how we should think of Inphi’s market share over time I guess over the next 18 months, 24 months in data center 100 gig modules?

[Ford Tamer:]

Our market share should increase because today as I said, the number of people that can do simple CDRs and simple limiting TIA and driver is -- there are quite a few players that are buying for that market-share. As you go to DSP ADC based PAM which is a step up in complexity of analog and digital type of technology, as you go from limiting TIA and driver to linear TIA and driver or needed to drive PAM, as you go from simple NRZ technology to technologies where you need complex fact and to drive longer distances inside of data center, the field of technology provider, we could provide these more complex technologies, signs out dramatically. And so our market share really expands over the next 18 months, as a result of less vendor paying in that space.

[Sundeep Bajikar:]

And on the Cortina side, can you talk about the relevance of new 25 gig and 50 gig server side standards, how will Inphi participate in that business and what does the timeline look like?

[Ford Tamer:]

So, we have strong wins in that space. The most recent show has been at the Open Compute Summit in March, Facebook announced Mono Lake platform and that was a public announcement. It will ship and start ramping in Q1 of next year and it was demonstrated in exhibit area with two physical layer products one from Symtech, [ph] one from Inphi. So inside that Facebook Mono Lake platform, you’ve got a 40 gigabit physical layer product and it was demonstrated Inphi was one of the two vendor in that workshop. Also quite a few additional exhibitors were present and that Open Compute and quite a few of them showed demonstration boards along with the Inphi physical layer device 10 gigabit and 40 gig physical layer device. And so, we were pretty excited about some of these design wins. We do expect this to be a major growth vector for us in the second half of 2015 and first quarter of 2016 timeframe.

[Sundeep Bajikar:]

And then last one for me is if you could just give us an update on OTN, what is driving growth and how should we think of Inphi’s market share through the Cortina side of the business?

[Ford Tamer:]

So, we had also some excellent meetings at OFC around Optical Transport Network or OTN and we are big believers in OTN in the following fashion, either or OTN for physical layer or OTN as a way to transport Ethernet over OTN. It was also becoming clear as OTN switching is not happening. So, all the indications working closely with all the big service provider is that OTN switch has been delayed and delayed and very questionable in the long-term over it happens or not; it reminds me of ATM desktop, I was doing ATM in 1998 and the big talk was ATM desktop never happened. So this OTN switches are very complex, very power hungry and they are not scalable. What the data center wants, they really want to be able to scale to 1.2 terabyte and beyond with very low OpEx and CapEx. And so, they are coming to us and asking for OTN transponder, muxponder which is exactly what Cortina brought to the table. And so, we’re very excited about where the next generation Cortina could go. And this all will be around OTN transport and Ethernet and not about OTN switching for sure.

[Operator:]

Our next question comes from Srini Sundararajan with Summit.

[Srini Sundararajan:]

Could you give me an indication of how you guys might be doing on the memory related chip that you have in the second part of the year, I think if you can give me some indication, not the guidance actually?

[Ford Tamer:]

So, we have two customer shipping us on DDR4 and we do expect our memory business to be stable in the second half of the year. What is going to happen is you’ll see a decline in DDR3 that was offset by increase in revenue in DDR4. So at this point as we look into the second half of the year, we look at the second half being stable basically steady for us in the second half, Sri.

[Operator:]

And our next question comes from Richard Shannon with Craig-Hallum.

[Richard Shannon:]

I guess just a couple for me, maybe going back to the metro opportunity. One of your earlier questions, you talked about the shift from CFP to this year to CFP -- or CFP this year to CFP2. Can you give us a sense of how your share looks as we get into CFP2 next year compared to current generation?

[Ford Tamer:]

Richard, what I will tell us is on CFP2 going into next year, we definitely have a strong competitor in Maycom. And so they have done a nice job on CFP2. We are coming back at it with a different product and a different approach that I’d rather not discuss publicly. But we have some of the same module vendors who have been working with us all along. They would be adopting Inphi in the next generation CFP2. And we’re still very bullish about our new approach and where it could take us against the competition. But we definitely are facing a strong competitor with Maycom there.

[Richard Shannon:]

Following up on a few of your last questions in the data center regarding PAM4 and mentioning Broadcom is your primary competitor there. Any thoughts on how the share might flush out over time there? Obviously Broadcom is determined and much larger competitor. Where do you think you can get there on share?

[Ford Tamer:]

I think if you look at what we’ve done on the sort of Gearbox and CDR against the Broadcom offering, we got a very strong share in the Gearbox and CDR. So, we probably split the market right now 50-50 with Broadcom on the 100 gig sort of CDR and Gearbox. So, we do expect a similar split. If you look at the market right now, we’ve got some but strong design wins. So at OFC and post OFC, our design win discussions have been extremely strong. We have had quite a few pair sign up to our PAM offerings. There is obviously people signing up to Broadcom. So we do expect it will end up in a more 50-50 type situation. If you look at our funnel right now overall for the company, our funnel is extremely strong from a design win and forward looking point of view. So just to give you some carry and some qualitative view of the funnel, from the PAM I joined Inphi three years ago to where we are today, our funnel grew three times in size. And so that is indication of a pretty strong design win momentum that we are having.

[Richard Shannon:]

Related to the licensing that is popping in this year, could you give us a sense of where that’s going to; is it OEM type customers or potential maybe even data center operators and is there a potential for royalties down the road?

[Ford Tamer:]

It’s mostly going into OEM type customers; in some cases it’s also carrier cross customer but generally one-time licenses that we’re entering into. So, we’re not trying to create annuities here; we’re trying to collect these in one time, one shot licenses.

[Operator:]

Our next question comes from Srini Sundararajan with Summit.

[Srini Sundararajan:]

I just had one other question. If you look at TIA and Altera and Xilinx, they all had issues regarding the communication part of their revenues. So, how do you explain for example that you guys do not have as much problems regarding either your guidance or the performance in the current quarter?

[Ford Tamer:]

If you look at our guidance, we’ve taken a conservative view of our guidance. So, I wouldn’t say we don’t have any problem. Our guidance is relatively conservative compared to where we had expected to be.

[Srini Sundararajan:]

Could you elaborate on this a little bit, if you don’t mind?

[Ford Tamer:]

We still are bullish on the second half of the year being pretty strong. We see a little bit of a slowdown in Q2 which is what we resulted in the guidance we have. We still are very comfortable and confident that our core communication business will grow 50% year-on-year. So, if you look at our core communication business that’s comprised of 100 gigabit, amplifier, driver and SerDes product in addition to really the 10 gigabit and 40 gigabit physical layer product that we acquired with the Cortina acquisition. So that’s what we’re classifying today as our core communication product and we’re still very confident that that class of product grow 50% year-on-year. And the reason I think we’re seeing this Srini is really driven by cycles, upgrade cycles and the enterprise data center as we talked about from 1 gigabit to 10 gigabit server and the class data center from 10 gigabit server to 25 gigabit server and from sort of 40 gigabit uplink switches to 100 gigabit uplink switches, so which is the 25 gig switches that we’ve been talking about. So I think we’re -- and then finally and metro going from 40 to 100 and 200 gigabit. So, we’re benefitting from multiple upgrade cycles in all our markets and that’s probably what’s making us a bit stronger than the rest of the industry.

[Srini Sundararajan:]

And could you focus a little bit on the metro market and how that -- how is the linearity of those revenues between the first-half and the second half?

[Ford Tamer:]

So, in the metro market, we have CFP solution really shipping in 2015 and 2016 will have CFP2. And our amplifier products are shipping across the board; our CFP2 business as the prior question estimated, the driver business for that CFP2 is probably split between us and Maycom. And since that we are coming at it from Inphi heritage has been in the high performance gold box, really high integrity type of packaging, best performance in the market. Maycom is coming at it from a low cost S&P type of packaging and we’re meeting both into that metro space. So, we’ll probably end up splitting that metro space as Maycom. On a high level in these markets 100 gigabit is mainstream today; 200 gigabit started launching last year and we’re getting the revenue this year; and the 400 gigabit is in development today, and we’re sampling it and will be launching next year with revenue in 2017. So that’s sort of the progression in all of these markets. I am not sure if I am answering your question. Did I answer your question?

[Srini Sundararajan:]

Pretty much, I mean I was just looking at linearity between first half and second half but maybe that is asking for too much detail. So, you did answer my question.

[Ford Tamer:]

The second half should be stronger, Srini.

[Operator:]

This ends the question-and-answer portion of today’s conference. I would like to turn the call back over to John Edmunds for closing remarks.

[John Edmunds:]

Thank you. Inphi plans on attending the Deutsche bank Semiconductor one-on-one conference in San Francisco on May 12th. We’ll be at the Jefferies Conference in Miami on May 14th and we’ll attend the Craig-Hallum Investor Day in Minneapolis on May 27th. Ford and Deborah and I would like to thank you for joining us today. And we look forward to speaking with you again in future.

[Operator:]

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect. And have a wonderful day.