Inphi Corp
Q1 2013 Earnings Call Transcript

Published: 2 May 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Inphi Corporation First Quarter 2013 Earnings Call. My name is Regina and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there’ll be a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. John Edmunds, Chief Financial Officer. Please proceed, Sir.

[John Edmunds:]

Good afternoon everyone. After the close of the market today, we announced Inphi’s results for the first quarter of 2013, ended this past March 31. If you’ve not received a copy of the press release, you can find it on our website at www.inphi.com. We would like to thank you for joining us today for our quarterly earnings call to discuss our Q1 financial results and business outlook. I’m John Edmunds, CFO for Inphi Corporation and with me today is Ford Tamer, our Chief Executive. First, I’ll read the Safe Harbor; then Ford will give you an overview of our business; after that, I’ll give you a financial summary and an outlook for the first quarter of 2013; and then we’ll be happy to take your questions. Before we begin today, 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 section entitled Risk Factors. We encourage you to read these documents. Also during the course of the conference call today, 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, I will hand you over to our Chief Executive Officer, Ford Tamer. Ford?

[Ford Tamer:]

Good afternoon. And thank you for joining us. We are pleased with the progress we are making here at Inphi. We are regaining momentum in the first half of this year and building upon this momentum as we move in the second half of this year and on into 2014. We are delivering right on or actually slightly ahead of the track we laid out for you when we last spoke. Before John goes into a detailed financial discussion, let me highlight our three key messages for this quarter. First, we are doing what we said we would do. This quarter we delivered ahead of plan and our future guidance reflects further improvement. Second, our momentum in the 100 gigabit market is growing as we are testing and deploying our products with an increasing number of communication customers. We expect this acceleration would be reflected in increased revenue in the second half of this year and 2014. Third, based on marketplace feedback, we are increasingly confident about our new server products and outlook. We expect to see the first revenue from LRDIMM and Ivy Bridge in the second half of this year. And based on solid early testing of our next generation DDR4 server product, we anticipate strong topline contribution from DDR4 when it transfers in the second of 2014. Again three positive messages; delivering as we promised, accelerating momentum in 100-gigabit communication products and positive market feedback in new server products. Now let’s look more closely at each. First, regarding our financial performance this quarter, we are making progress as planned. We have focused on the topline and kept our past in line producing tangible results. We are happy to report Q1 revenue of $22.6 million ahead of our previously communicating target of $21.5 million, and up 8% year-over-year. While the good top line ahead of plan we kept our bottom line earnings right on target. Looking ahead, we are guiding future revenue to $24 million and 7% sequential gain and ahead of current consensus expectations. Also, as we stated previously, we are determined to deliver earnings leverage as planned in the second half of 2013 and 2014. Second, in the market for next generation 100 gigabyte components, we told you that we were targeting 50% market share and I am very pleased to report that we have achieved that goal as we told you we would. We have secured more than 50% market share for our next generation TIA and long haul, metro and datacenters. More than 50% of available design wins for our new linear drivers and more than 50% market share for our SerDes and CDR product in both CFP and CFP2 modules. We are also in a good position for next generation SerDes socket as they move from modules to switch and router line cards. We are achieving these gains, thanks to continued strategic alignment with our Tier 1 customers and partners and by supplying them differentiated products closely aligned with their needs. We expect both service providers and datacenters will continue to upgrade their infrastructure to support 100 gigabyte speeds and beyond. A recent example is the Q1 announcement by service providers of the first available 400 gigabit [mix] worldwide, which are being enabled by the new entire linear driver. As optical margins evolves to support the smaller size and lower power requirements of next generation datacenter. we are also in a good position to support partners offering both silicon photonics and risk embedded solutions. We expect this progress to position us to be able to deliver more than $100 million in annual revenue for our communication products by 2015. Third, in the server market we are excited about the positive impact of Ivy Bridge on LRDIMM in the second half of this year and the launch of DDR4 products in 2014. Our latest benchmarks show up to 37% more bandwidth with LRDIMM and Ivy Bridge compared to Sandy Bridge. In turn, we believe this can result in increased attach rate and potentially a growing market for LRDIMM in the second half of this year. We are also listing closely and are very encouraged as we continue to receive positive feedback from the sampling of our DDR4 products through partners and customers. We have applied the continuous learning of the past nine years in LRDIMM and our earned position in LRDIMM. We deliver the lowest power and highest performance DDR4 products. This should make a positive impact to our server business with the DDR4 launch in 2014. We also expect the developments to result in more than a $100 million in annual revenue for our server products by 2015. Our strategy of focusing on layer one interconnect from fiber to memory has been proven right, allowing us to align closely with customers now and in the future. For instance, for our TIA and driver product, we are growing our strategy from long haul and metro to now include the datacenter. For our CDR and SerDes products, we are evolving a roadmap from 1.2 terabyte line cards to 2.4 terabyte line cards, which will be critical for stealing future datacenters and cloud computing platforms. And for our memory product, we are excited about our expanded market with LRDIMM and Ivy Bridge and with DDR4. In summary, this quarter we delivered as we promised. So, accelerating momentum in the 100-gigabyte communication market and are pleased by the positive market feedback for our next generation server products. We are focused on growing our revenue, our products are performing as planned in the market and our longer term opportunity remains very bright. With that, I will turn the call over to John for the financial details of Inphi’s first quarter 2013 and to speak about our expectations for the rest of the year. John, please?

[John Edmunds:]

Thanks Ford. Now I will briefly recap the key financial results for Q1. As Ford stated, for the first quarter of 2013, we reported revenue of $22.6 million, which was above the midpoint of our guidance of $21.5 million and represented an 8% year-over-year increase from the $20.9 million reported on a non-GAAP in the first quarter one year ago. Our mix of business in Q1 continue to move toward communications with an approximate 55/45 server-communication mix. We did ship more 100 gig SerDes product, but recognized about 600 K less in SerDes NRE. So our total for the 100 gig SerDes revenues is only up slightly in the quarter. Overall communications was relatively flat or server was down slightly or approximately 2%. Net income in the quarter on a GAAP basis was a loss of $7.7 million or a loss of $0.27 per diluted share. This including stock compensation expense of $2.6 million net of the tax effect, and GAAP driven tax expenses of some additional $5 million related to differences and inter period tax allocation as well as differences in credits that could be recognized for non-GAAP, but not for GAAP purposes. Net loss in Q1 2013 compares to a net loss of $1.5 million or $0.05 per diluted share in the same quarter one year ago. To give you more detail on comparing numbers, I will provide some additional non-GAAP measures. On a non-GAAP basis, net income for the first quarter was approximately 31,000 or basically break-even on earnings per share, which matched the midpoint of our guidance. This also compares with non-GAAP net income of $1 million or $0.03 per diluted share for the same quarter one year ago. Non-GAAP gross margin for the first quarter of 2013 was 64.3%, which was down a 110 basis points from the 65.4% in the fourth quarter and also down 90 basis points from the 65.3% we experienced in the first quarter of 2012. With regard to the fourth quarter of 2012, 90 of the 110 basis point decline has to do with the absence in Q1 of approximately 600,000 of NRE revenue, which we recognized in Q4. The product base gross margins have declined a little less than 20 basis points per quarter on average over the last four quarters. Non-GAAP operating expenses for the quarter totalled $14.7 million. This was up approximately $0.5 million, slightly less than our guidance and was primarily due to 300,000 higher R&D costs. We added additional personnel in Q1 and along with their payroll tax reset lead to higher spending in Q1. As a company, we are continuing to make measured investments to drive quality, productize our current commitments to customers and develop new products. These investments are important as they continue to drive our ability to respond to increasing customer interests in our new products, which will drive our growth as a company. We again expect our Q2 operating and expanding to rise in the range of $0.5 million to $1 million principally due to additional personnel and product qualification activities and R&D. Although we are still working on a relatively small scale today, in the future as we continue to generate more significant levels of revenue growth, we will also be in a better position to deliver more optimal levels of earnings leverage. With regard to the non-GAAP pro forma tax division in the first quarter, our effective tax rate is currently estimated to be approximately 27%. Other income in Q1 was approximately $0.2 million coming mainly from interest income consistent with Q4. Now turning to the balance sheet, cash and investments in marketable securities increased by 400,000 for the quarter from $121.2 million to $121.6 million, which represents approximately $4 per diluted share at March 31st. This positive cash flow was a result of approximately $3.4 million coming from non-GAAP cash flow from operations and 800,000 net cash coming from stock programs, as well as $3.7 million being used for property, plant and equipment purchases, a little less than half of which was invested in new masks at the foundry. The $3.4 million from operations was primarily the result of adding back to non-GAAP net income, depreciation and amortization of $1.7 million, amortization of premiums on securities of 300,000, other items for 100,000, as well as net additions to working capital of approximately $1.2 million, driven primarily by [declines] and receivables. Our working capital in general has continued to stay efficient in Q1, accounts receivables decreased $1.8 million from $13.7 million to $11.9 million due to linearity of shipments in the quarter, as well as improved collection efforts. The level of receivables represented 48 day sales outstanding down from the 55 days reported at the end of December. With regard to inventory, we were down from 55 days on hand, which implied a turnkey number of approximately 6.5 to 54 days on hand, which implies an improved turns number of 6.7, again due to tighter management and improvement linearity of shipments in the quarter. Total inventory increased by only 100,000 from $4.9 million to a very lean $5 million at the end of March. Payables also increased $3 million and days payable outstanding moved up from 76 days at the end of December to 107 days at the end of March. This is primarily due to an accrual for payment for a large bulk purchase of approximately – of additional lab equipment. Now for the business outlook for the March quarter. Again, I would like to remind everyone 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. In light of the increasing ramp of new products, we are expanding our range of guidance for Q2 revenues to be up sequentially in a range of 3% to 10%, or $24 million at the midpoint, plus or minus $800,000. Non-GAAP gross margins are expected to be relatively steady and remain in the 63% to 65% range. While an increase in operating expense will be offset by ongoing saving activities, due to hiring and new product qualification expenses, we do expect a net increase in non-GAAP operating expenses in a range of $0.5 million to $1 million in the quarter. We are currently estimating the non-GAAP effective tax rate to be 27% for the year. We are confident these components have been aligned and non-GAAP net income of between break-even and $500,000, which on approximately 30.5 million shares, would result in estimated non-GAAP earnings per diluted share of between break-even and $0.02. We also estimate non-cash stock compensation expense to be in a range of $4.2 million to $4.5 million. This would imply a GAAP net loss in a range of $5.5 million to $6 million for the quarter, or a loss of $0.19 to $0.21 per common share. This outlook will not be updated during the quarter and up until the time of the next quarterly earnings release unless Inphi publishes a notice stating otherwise. So please ask your questions today during the general Q&A period. And now, we'll be happy to answer any questions you might have.

[Operator:]

(Operator Instructions) And your first question today comes from the line of Quinn Bolton with Needham & Company.

[Quinn Bolton:]

Hi, guys. Congratulations on the nice results and strong outlook let’s say on the optical side. I wanted to start on the comp side of the business and was wondering if you could give us some split between your 40-gig and 100-gig business, it sounds like 100-gig is where the fair amount of the growth is coming from, but was wondering if you could sort of size those, you know the revenue streams currently?

[Ford Tamer:]

Yeah Quinn we’re not going to split the 40-gig and 100-gig, but as you alluded to 100-gig is getting strong growth we are encouraged by the growth across the Board actually in long haul and beginning of metro and in datacenters. So we’re seeing this come from LTE, from Cloud and additional deployments in TDLT in China. So we're encouraged by 100-gig for sure.

[Quinn Bolton:]

Okay. Just sort of following up on the 100-gig Ford you mentioned that you had increased shipments of the CDRs and SerDes I think for CFP and CFP2 modules, wondering if that's still all sort of prototype or preproduction revenue or you’re actually starting to see some of those modules go to production? And then a follow-on question, just you had mentioned about seeing those parts moving from optical modules to line cards, wondering where we are in that process? When do you think you will start to see the line card based solution shipping into the market?

[Ford Tamer:]

So production on CFP, CFP2 will be – CFP will be mid this year and CFP2 will be second half of this year. Currently the shipments are prototype and testing and qualification. Line card starts in 2014.

[Quinn Bolton:]

Okay, great. And then, I guess, turning to the server business quickly, obviously, we’ve got the Ivy Bridge refresh with various skews of that processor in Q3 and Q4. I guess my question is, you know, in past server generations we've sometimes seen a ramp down of the current version ahead of the launch of the new version and I am wondering as you look into the second half of the year, you know, have you sort of forecast or do you anticipate that kind of pattern where the Sandy Bridge volumes may decline before Ivy Bridge volumes ramp up. Thank you.

[Ford Tamer:]

We are currently forecasting our server business to grow sequentially every quarter this year. So that's the current view that we have based on the market data.

[Quinn Bolton:]

Okay. Thank you.

[Operator:]

Your next question is from the line of Sundeep Bajikar with Jefferies.

[Sundeep Bajikar:]

Hey, guys. Thanks for taking my question and nice job on the quarter. You've laid out very interesting guidance for the longer-term both for the communications business as well as servers. Would you be able to offer us an appropriate framework to think about the constituents of the communications revenues of $100 million that you expect by 2015, either in terms of the components making it up or by end market?

[Ford Tamer:]

So we do expect the -- we do expect to get to this run rate of $100 million by 2015, and the current split would be at high level 60% from sort of TIA and driver and 40% from the SerDes, CDR type of product, Sundeep and it would be -- on the SerDes, CDR, its mostly -- these are [hybrid] products, so they'll be driven by 10 and 40, as well as 100, but obviously 100 is where the action is and on the -- TIA and driver, we do expect the driver to be a significant portion of the revenue moving forward.

[Sundeep Bajikar:]

Great. Very helpful. And is there a parallel way to think of this in terms of telecom versus datacenter mix of the $100 million revenues?

[Ford Tamer:]

For 2015, on the TIA and driver, that's probably going to be mostly long-haul and metro with the datacenter getting started. We'd have some revenue on the datacenter actually starting 2014 and accelerating in 2015. On the CDR and SerDes, it would be mostly datacenter.

[Sundeep Bajikar:]

Great. And then if I could ask you a similar question on the server side because you have a point to do $100 million in revenues by 2015 there as well. Is there a way to think about register DIMM versus LRDIMM contribution mix or alternatively in terms of DDR3 versus DDR4 mix?

[Ford Tamer:]

DDR4 will be a big impact Sundeep as we discussed in the past and as you know the RDIMM ASP on DDR4 will increase substantially at launch and will follow the same pattern as DDR3, which have been in the market for a number of years. The buffer attach rate will increase with Ivy Bridge launching second half of this year and then will increase further with DDR4. As you know, we're trying to stay away from projecting attach rates at this point, but we do believe that DDR4 will be higher attach rate because the buffer allows you to go to a much higher speed and higher capacity. And with Ivy Bridge, the buffer and LRDIMM and register right now would be at parity from speed and performance. In DDR4, the buffer will give you an advantage from a speed and performance. So we see a increased attach rate for the buffer in the second half this year and increasing further in DDR4.

[Sundeep Bajikar:]

Great. That’s extremely helpful. Nice job again.

[Operator:]

[Operator Instructions] Your next question is from the line of Doug Freedman with RBC Capital Markets.

[Doug Freedman:]

Great. Thanks for taking my question guys and congratulations on the strong revenue results. If I could start off with -- last quarter you gave us a little bit of a reference point on the ASP that you were seeing in the market for the LRDIMM modules. How has that declined in the quarter and is that helping drive attach rates?

[John Edmunds:]

In Q1, it’s been a small decline not as big of a decline as we expected, but we do expect further decline as we go into Q2 and Ivy Bridge launch. So the attach rate, as we commented in the past, will be proportional to the decline. So we are depending on a module price decline in order for the attach rate of LRDIMM to pick up.

[Doug Freedman:]

All right. When I look at the results you just posted and the guidance that you're offering going forward, there is no – to me, my first takeaway is that these numbers are better than we’re hearing out of peers and end markets? Is there any way that you can help us identify where you feel you're gaining share such that it’s allowed you to sort of sidestep what we’re seeing in terms of optical networking weakness, I believe JDSU reported tonight, came up late on their revenue number, but yet you guys are sort of meeting your expectations. How – can you help us understand what you're seeing and why you're putting up better results?

[John Edmunds:]

Yes, for sure, Doug. I think, it’s really our focus on next-generation. We don't have much business in 10-gig and 40-gig. I mean, our business is primarily now driven by 100-gig on the long haul and metro, and then in data center purely really 100-gig on a CDR and SerDes product. So the fact we are based mostly on new generation network, LTE, TDLT cloud is really what's fueling our growth. We don’t have – there is – if you look at our – we don’t break it up, but if you look at our 10-gig revenue has been declining and our 40-gig has been stable so, 100-gig is where the growth is coming from and so really that’s probably a difference between us and some of the other players is are really not focused on 100-gig.

[Doug Freedman:]

Great. Thank you for that color. I asked a question of one of your peers or almost in a way you guys are partners with them, and I said where we are in the 10-gig, 40-gig and 100-gig deployments? Can you offer your perspective on that?

[Ford Tamer:]

We would probably answer differently than some of our peers and we’ve listened to some of these earnings and we are totally in the game for 100 gig. We have been in the game for 100 gig now for a couple of years. So it’s not starting, we’re in the middle of it okay, and you know in TIA we’ve been obviously shipping TIAs now for 100-gig long haul and we are now shipping TIAs sampling and would be accelerating for datacenter. The CDR and SerDes are sampling for datacenters and we see an acceleration in the second half of the year in 2014. So -- and the driver, I think, is -- as I said in my script, is currently being tested in a 400-gig deployment for long haul. So we are positive to see some revenue from a driver later end of this year into 2014 as well. So I wouldn't say we have -- the game hasn't started yet. We probably are at the third inning if you look at where we are in the game.

[Doug Freedman:]

Terrific. If I could before we leave the networking business, can you offer -- what are you seeing in terms of content or ASPs from one generation to the next? Is this a market that you're seeing heavy price pressure in or are you able to get higher dollar content in every successive generation? Hello? Did I lose you?

[Ford Tamer:]

Hey Doug?

[Doug Freedman:]

Yes.

[Ford Tamer:]

Oh, okay. So it's really a function of the age of the technology. We do see some price pressure on some of the older technologies. So for instance, the 2850 TIA has been out for a while, but we've now started to introduce the 3250 so that allows us to bring newer technology to market and kind of reset some of the price points again. So it's really just a function of, I think, age of technology than necessarily price point per se. Different markets do offer and have different pricing associated with them. So I think once we get the data center, it will be a different pricing dynamic than what we see early on in the carriers, but everybody's ready for that in the grand scheme of things.

[Doug Freedman:]

Great. Thanks so much. And I'll jump back in the queue with further questions, but congratulations on the revenue progress.

[Operator:]

Your next question is from the line of Tore Svanberg with Stifel Nicolaus.

[Unidentified Analyst:]

Eric [ph] calling in for Tore. I’ll also voice my congrats on the revenue number look very good. Maybe if you could just comment on your backlog and your bookings through the first four weeks of the quarter and maybe you can address what customers are saying at this point. It seems like things look pretty healthy so far?

[John Edmunds:]

Hi, Eric. It's John again. The backlog looks reasonably good from our perspective. We don’t really quote backlog per se but it's at what we would say a healthy normal level for this time of the quarter. So we feel good about Q2 revenues. Generally we’re running in any given quarter probably at around 60% at this point in terms of backlog and billings. So we are in good shape from that point of view.

[Unidentified Analyst:]

Okay. Thanks. And maybe on the server memory side, can you give us an update on DDR4, specifically, maybe, what are the next milestones that we should be looking out for?

[Ford Tamer:]

We’re just at the beginning of that qualification cycle. It’s a cycle that will last through probably mid next year. So the final Jed spec is not yet finalized. So the one milestone at some point would be for a final spec, which will drive the final revision from all the different silicon vendors. And after that, it would be probably the early sampling from the processor vendor of server-based system using that new generation of processor. So, probably, those are the probably the next two milestones and then eventually the launch of the DDR4.

[Unidentified Analyst:]

Great. That’s helpful. Maybe, just switching gears here, the gross margin seemed to be a little bit below the range. Can you just talk about what drove that?

[John Edmunds:]

Yeah. Eric, thanks for the question. The gross margins in the quarter are down primarily due to the absence of about 600,000 of NRE. So they’re down 110 basis points sequentially, but 90 of that is just not having about 600,000 of NRE in the mix. So, really, when you look at the product gross margins, they’re only down about 20 basis points. And on average over the last year, that’s about what you’d expect. We do expect gross margins to expand, again, in the second half of the year, as we have a higher mix of newer technology shipping going into the second half. So it's really all about a function of that mix of introducing and shipping more of the newer technology and higher volumes.

[Unidentified Analyst:]

Great. Thanks.

[Operator:]

Ladies and gentlemen, this concludes the question-and-answer portion of today’s event. I will now turn the call back over to John Edmunds for any closing remarks you’d like to make.

[John Edmunds:]

Thank you, operator. Ford and I would like to thank everyone for joining us today. We do plan on attending the Jefferies Conference on Tuesday, May 7th, in New York and we’ll be at the Deutsche Bank one-on-one conference in San Francisco on May 9th. Ford and I would like to thank everyone for joining us and we look forward to speaking again with you in the future.

[Operator:]

Ladies and gentlemen, we’d like to thank you for participating in today’s teleconference. This does conclude the presentation and you may now disconnect. Have a good day.