Inphi Corp
Q2 2014 Earnings Call Transcript

Published: 30 Jul 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Inphi Corporation Second Quarter 2014 Earnings Call. My name is Chantalay and I'll be your operator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will 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:]

Thank you, Chantalay. Good afternoon everyone. Thank you for joining us today for our quarterly earnings call to discuss our Q2 2014 financial results and business outlook for Q3. I'm John Edmunds, Chief Financial Officer and with me today is Ford Tamer, our Chief Executive Officer. I will begin with the Safe Harbor and then Ford will give you an overview of our business. After that I will provide a financial summary and the outlook for the third quarter of 2014. Then we'll be happy to take your questions. 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 and 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 our call over to our Chief Executive Officer, Ford Tamer, Ford?

[Ford Tamer:]

Thank you, John. Good afternoon, everyone. Thank you for joining us for our second quarter 2014 earnings call. We appreciate your time. Since the beginning of the year we've positioned our business as the FedEx of information. Speeding data along with planes our optical interconnect products, trains, our networking interconnect products and trucks, our memory interconnect product. Just like the transportation model, we are absolutely committed to moving customer data as quickly, reliably and efficiently as possible. To sum up the past quarter along that model, I am proud to say that our planes are right on schedule; our trains are squarely on the right track. And our trucks are riding well on the road. As John will soon tell you in detail, our revenue grew to more than $33.9 million during the second quarter of 2014, a 9% sequential increase and an almost 40% year-on-year increase. Our earnings per share held steady at $0.09 right on target. That revenue achievement marks the 5th consecutive quarter of consistent, sequential revenue growth and we expect the trend to continue in the third quarter of this year, reflecting continued strength in the business as John will detail later. We've accomplished this consistent, sequential growth while remaining focused on the very large, long-term opportunity in front of us. But it is not just about the top line. Concurrently, we've also driven increased operating margins from 1% five quarters ago to 11% in the quarter we are now reporting delivering a nine fold increase in earnings per share during that period. Even more importantly, we've achieved these results while continuing to invest in key resources and research and development to help us design, sell and support our solutions to a growing list of customers around the world. We are committed to growing our revenue and our operating margins. And to date we have delivered. Before I turn the call over to John, let me give you a brief update of Inphi business details for the quarter. One of our optical interconnect planes our 3214 quad linear driver has become a key enabling technology for 100 gigabit and 400 gigabit coherent systems and won the prestigious ECN IMPACT Award in May. This ECN IMPACT awards recognize the top products and services spanning the design engineering landscape. Also this quarter, customer using our 100 gigabit SerDes Gearbox trains are now ramping into volume production. In this past quarter alone, we tapped out seven new communication products and continued our strong design win momentum. This will fuel solid incremental revenue growth in the quarters ahead. Also in this past quarter, our focus on our memory interconnect trucks was on driving sales of our market leading DDR3 products while continuing to progress of our DDR4 generation. We are pleased with the qualification progress and the market traction of our DDR4 product. Our trucks are on the road and moving forward. As we move through the back half of 2014, we are very pleased with our progress and position. Across our products line and optical networking and memory, we are on target and where we expected to be. So the big message from this quarter is that for five quarters in a row with as expected delivered to you, our value shareholders, a consistent 8% sequential revenue growth and improving margins. And as we look to the third quarter we expect this momentum to continue. At this point, let me turn the call over to John from whom you will hear about our continuing commitment to deliver a steady growth, increasing top line performance and increasing operating margins. Once again I extend my gratitude to you, our shareholders and to our dedicated team responsible for our continued progress. John?

[John Edmunds:]

Thanks Ford. Now let me recap the key financial results for our Q2. As Ford told you, in the second quarter of 2014, Inphi reported record revenues of $33.9 million, which represented 9% sequential growth and 33% year-over-year growth. Our communications business grew sequentially by approximately 18% which also represented roughly 80% year-over-year growth and now represents slightly more than half of the overall revenues of the company. Server revenues were essentially flat in the quarter as the market anticipates the second half introduction of the Grantley/ Haswell platform. After 50% sequential growth for LRDIMM revenues in Q1, Q2 seems to have cooled off somewhat due to the onset of the pending Haswell platform introduction as well as higher DRAM pricing brought on by an allocation of DRAM to other markets. We currently believe that strength will come back into this market in the second half of this year. At the same time LRDIMM market also grew share and we are able to grow revenues in that particular space. Again communications products grew 18% sequentially driven by growth from our new award winning 400 gig linear driver as well as growth in our 100 gig series product. Amplifier growth also looks to be strong for the second half of 2014. On a GAAP basis, net income in the second quarter was $2.7 million or $0.08 per diluted share. This includes stock compensation expense of $5.4 million and the associated offsetting tax benefit of approximately $1.3 million. Other GAAP income tax reporting expenses or differences resulted from benefits of approximately $3.8 million of tax that were included in those numbers. These were primarily driven by differences in inter-period tax allocation, coupled with forecast of mix for the year of taxable income and loss between the U.S. and international jurisdiction. Q2, 2014’s results compared to the net loss of $1.5 million or loss of $0.05 per share in Q2, 2013. To give you more detail in comparing numbers, let's now turn to some additional non-GAAP measures. On a non-GAAP basis, net income for the second quarter was approximately $2.9 million or approximately $0.09 per diluted share. This was in keeping with our Q2 earnings guidance of $0.08 to $0.10. This also compares with non-GAAP net income of $300,000 or $0.01 per diluted share for the same period one year ago. Non-GAAP gross margin for the second quarter of 2014 was 64.6%, which was down 70 basis points from the 65.3% reported in the first quarter of 2014. In Q2, gross margins came down slightly more than expected due to somewhat higher mix of new products with lower yields beginning to shift. We currently expect Inphi's gross margins to improve by approximately 40 basis points in Q3 and thereby revert back to the normal 65% all due to improving yield trends of our newer products. Non-GAAP operating expense for the quarter totaled $18.2 million. This was up about 100,000 more in the high end of what we expected due to timing of certain NRE payment coming in from customers. We also had merit increases in April and we added approximately 30 employees in the quarter, 26 of whom are working on R&D project. We will continue to bring on resources in the back half of the year as we have a total of six new chips taping up. We also added three additional people in sales and marketing, and given our performance for the company this year, we are beginning to recruit for a modest annual bonus. We continue to make investments to support strategic development for several different, large forward looking projects associated with a range of different OEM customers. The common theme is that all of these customers seemed to be interested in more bandwidth capacity for higher speed guaranteed with delivery from increasingly longer distances. Previous increases in R&D projects had led to the current 39% year-over-year growth achievement. As our revenue base expands, we continue to believe that investments will lead to a consistent record of sustained growth. Currently, we expect our Q2 operating expanding to raise approximately $700,000 plus or minus $200,000. With regard to the non-GAAP tax provision in the second quarter, the projected effective tax rate for the year is coming out at 26.5%, which is down from last quarter's estimate of 28.3%. This improvement is based on higher forecasted taxable income leveraged across our offshore tax structure. This also excludes the potential benefit from the eventual restoration the Federal R&D tax credit. The 2015 tax rate can be further reduced from the Federal R&D tax credit as reinstated. Other income Q2 is approximately $200,000 coming mainly from interest income consistent with Q1. Now turning to the balance sheet. Cash flow from operations is up approximately $10.4 million driven primarily by net income and the timing of payments coming in from a higher level of shipments in the third month of the first quarter. Which were then flowing into our Q2 collection? We used approximately -- we also use approximately $5 million in capital asset purchases primarily for mask sets, lab equipment and facilities expansion. On a net basis, cash and investments, and marketable securities increase by $5.3 million; from $117 million to $122 million. This represented a slight increase per share from $3.59 to $3.71 per diluted share at March 31st. Accounts receivable decreased $4 million from $18 million to $14 million due to collection for the prior quarter revenue. This also represented a decrease in days sales outstanding from 52 day in March to 39 days sales at the end of June. Inventory increased from $7.2 million in March to $7.4 million at the end of June. However, inventory days were actually down from 60 days to 56 days at the end of June. This implies an inventory turns measure improving from 6 to 6.5 times at the end of June. Payables decreased from $8.4 million to $7.5 million and day's payable outstanding went from 70 days at the end of March to 56 days at the end of June due to the timing of inventory received early in the quarter in June than in March. Now let me recap the business outlook for Q3. I 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. As a range of guidance for Q3, we forecast revenues to be up sequentially 5% to 9% or $36.3 million at the midpoint plus or minus $700,000. We expect non-GAAP gross margin to improve 40 basis points based mix of business which would put them in the range of 64.5% to 65.5% for Q3. We expect non-GAAP operating expenses to increase $700,000 in the third quarter plus or minus $200,000. We are currently estimating the non-GAAP effective tax rate to be 26.5% for the year. We are confident these components should then align resulting in non-GAAP net income of between $3.2 million and $3.9 million which on approximately 33.5 million estimated diluted shares would result in estimated non-GAAP earnings per diluted share of between $0.10 and $0.12. We also estimate non-cash stock compensation expense to be between $5.6 million and $5.8 million. This would imply a GAAP net loss in the range of $200,000 to $1 million. GAAP loss per share would be in the range of $0.01 to $0.03 per basic common share. We will not update this outlook during the quarter and up until the time of the next quarterly earnings release unless Inphi publishes a notice stating otherwise. So please ask any questions you may have today during the general Q&A period. And now we'd be happy to take your questions. Chantalay?

[Operator:]

(Operator Instructions) Your first question comes from the line of Tore Svanberg of Stifel. Please proceed.

[Tore Svanberg:]

Yes, thank you and congratulation on the record revenue. A few questions maybe first of all, Ford, maybe you could explain to investors a little bit about what's going on in the sort of CapEx market. Because I think there is a lot concerns out there about some of the big service providers cutting CapEx for the second half of the year. So maybe you could talk a little bit about how that or how that does not impact your business at this time? Thank you.

[Ford Tamer:]

Yes, thank you, Tore. We are aware of other companies that have reported a slowdown in CapEx, We are benefiting from a transition from limiting amplifier and driver to coherent linear amplifier and driver. So fundamentally from a 01 type of modulation to a more different amplitude modulation and carriers are going to these coherent linear amplifier and drivers and as such we were seeing continued strength and forecast continued strengths in the second half and into 2015. So we believe what's going on is we believe we are taking share with our coherent linear amplifier and driver over the limiting type of generation. And as such are seeing continued growth and forecasting continued grow story.

[Tore Svanberg:]

Very good. Thank you for that. And a question also on the server side of your business. You said LRDIMM took a breather this quarter. But it looks like it's going to start growing again in the second half with Grantley. Maybe you could just elaborate a little bit on the dynamics there please.

[John Edmunds:]

Yes, Tore. This is John. I think primarily what you are looking at is a lot of sequential growth in Q1 that may or may not have been channel fill at the time and as we said it looks to us like the market is cool somewhat, whether that's in anticipation of Haswell, it’s difficult for us to say but we do think that there is good demand for LRDIMM, for DDR3 and in particular as DRAM seems to be coming back from allocations to believe it or not the PC market where there was currently an upgrade in the enterprise space away from XP. And so –believe it or not the DRAM makers could make more money on DRAM in the PC markets with those upgrades. So for the time being end of the first half year here there was a higher price and allocation of product over to the enterprise PC markets. We do think that's temporary in nature. We've seen that before particularly with allocations to mobile device market. And it generally leads to growth again in the back half and it will be part and parcel to see how Haswell takes route and how fast growth takes place on those particular platforms but we do think that there is a promise in both areas as we move forward.

[Tore Svanberg:]

Very good, last question then I will go back in queue. So you talked about being pleased with the qual process for DDR4. Could you elaborate on that? Does that mean you are currently qualified or are you working towards a qualification and if that's the case when should we expect that to be completed? Thank you.

[Ford Tamer:]

So we went from working with one major memory module to now having design wins at two and being qualified at the third one. And so we do expect to have revenue at the Haswell launch and increase our market share post Haswell launch. So we do believe that the significant factor would be the market share in the sort of mid next year is when the crossover in our mind will take over. And really the question would be the market share around that time and at this point we are very -- we feel positive about our market share at the time of the volume sort of taking off in DDR4.

[Operator:]

Your next question comes from the line of Sundeep Bajikar of Jefferies. Please proceed.

[Sundeep Bajikar:]

Hi, guys, thanks for taking the question. First of all, can you just give us some color related to progress with customers? Did Inphi add any new customers during the quarter? And were there any new customer platform that entered production during the quarter?

[Ford Tamer:]

Thanks, Sundeep. Yes on both. We have added new customers on all fronts. We've added new customers on our coherent linear amplifier and driver. We've added new customers on a new CDR that we have released; we call this the iKON product line. It's a new CDR product line have added quite a few customer for that product line. And as I discussed for DDR4, we've basically added a very major customer in the quarter. So we've added customers along all three of our planes, trains and trucks. In addition, we’ve had major customers, pretty large one go to production with our 100 gigabit SerDes Gearbox product on the line card which is really a major expansion for us of a 100 gigabit revenue that's now just starting and should benefit us in the second half of this year into 2015.

[Sundeep Bajikar:]

Great. That's really helpful. Just following up on the SerDes side, wanted to just ask for a quick update in terms of kind of the revenue trajectory on the SerDes side relative to what you had previously discussed. And also maybe as part of that touch on whether the growth so far that you have seen in 100 gig was predominately driven by module or had you already started to see a trickle from line cards assuming that the line cards portion would increase going from here.

[Ford Tamer:]

Yes. I know excellent question, Sundeep. So far most of the revenue on the networking interconnect or trains piece of our business is coming from one major customer on a CFP module. We have a second major one coming online in the second half of this year. That should see a nice increase on a CFP module. Then on a CFP2 we have a major customer that started shipping in the first half but we expect some very large new platform to come online on the Edge router side which should be significantly higher volume for that particular CFP2 type of customer. And that should really translate into increased revenue again in the second half this year into 2015. And the line card is just starting Sundeep. So we don't really have a lot of line card revenue at this point. And that's good news because you will see the line card ramping up into again the second half of this year and into 2015. So as you can see we are positive about a pretty nice increase in our communication revenue in the second half of this year into 2015.

[Sundeep Bajikar:]

Great, that's extremely helpful. Just a quick follow up on that. If you could just remind us of the different sub segments of the market within datacenter, is it primarily top of the rack switches? For example, if you could just update us on the status in server and what we should expect to see just going through the next year?

[Ford Tamer:]

So the deployment in the datacenter for our communication product I think as you are asking Sundeep has been primarily on the core side. As I mentioned now the edge is going to be coming online which would be a very nice increase in revenue? And then next we will see sort of top of rack which is even higher volume on some of the line card product coming online. So as you are suggesting we are going to see increasing volume. A very nice increase in volume for those products upon successive sort of transition from or introduction of from core -plus edge and core-plus-edge-plus top of rack.

[Operator:]

Your next question comes from the line of Quinn Bolton of Needham. Please proceed.

[Unidentified Analyst:]

Hi, this is Kristin Shoppa [ph] in for Quinn. Congrats on the quarter, guys. So just backtrack a little for the DDR4 certification. Just -- I would just like to try to clarify little bit; you believe you will see revenue with Haswell launch in the second half of 2014, correct?

[Ford Tamer:]

Yes. We are seeing revenue. So we already have revenue on DDR4. We have production orders for DDR4. And we will continue to see revenue at the Haswell launch; yes and maybe we can wait for your follow on question.

[Unidentified Analyst:]

Okay and then switching over to LRDIMM and DDR3. I know last quarter you said it was on track to grow 150% year-over-year, I know that you said there is probably you said there was a slight pause, do you still believe that's on track to grow 150% year-over-year or does that change to that?

[John Edmunds:]

No. Kristine, this is John. It's probably come down somewhat and I think the attach rate in our view it might have declined a little bit from the 4% that it was going to drive that 150% growth but it won't be quite as robust as what we were thinking due to this pause or hesitation before the Haswell launch and as I mentioned the allocation of memory it made denser higher speed memory that would be used in LRDIMM more expensive in the current more market.

[Operator:]

Your next question comes from the line of Jorge Rivas of Craig Hallum Capital Group. Please proceed.

[Jorge Rivas:]

Hey, guys this is Jorge on behalf of Richard. Congrats on the great results. One question regarding the association towards linear transceivers in the market. So it seems they have been fitting from the driver side. I am wondering if you can comment on the landscape, competitive landscape for TIAs, whether you expect to maintain your share, whether you are seeing new commerce into the market as we move to the second generation.

[Ford Tamer:]

Yes, thanks Jorge. As the market leader we always cognizant of the fact we have to move the roadmap forward. And as I said we -- and just this quarter alone, this past quarter alone in the second quarter, we've stepped out seven new products in the communication space. Targeted at leapfrogging any potential competitor they are coming from behind. So yes we have plenty of competitors trying to catch up. And specifically catch our past generation product. But we believe we are couple of generations ahead and already going through our new products. We set treadmill, we have got to stay on that treadmill and keep increasing performance, reducing power and increasing margins.

[Jorge Rivas:]

Okay. So one of your competitors reported yesterday and specifically on the driver side it seems that they saw slowdown in telecom. And would it be fair to say that you are probably benefiting from the transition due to you being first to market.

[Ford Tamer:]

Yes, Jorge. We absolutely believe we are benefiting from this transition. I think there is a transition going from the generation to the next and that we are benefiting from this transition. We are not seeing any slowdown.

[Jorge Rivas:]

Okay. And last question. Wondering if you can breakout the performance within your communication segment between telecom and datacom? Which one was a largely contributor in the quarter?

[John Edmunds:]

Generally speaking telecom and carrier is driving more of our business and more of business from 100 gig in the markets today. Datacenter still primarily a 10 gig centric or multiple 10 gig like 4 by 10 to be 40 gig type of hub. So we believe that's beginning to change with the introduction of CFP2 and you will see line cards with 100 gig SerDes, smaller modules more cost effective optical networking being starting to be used in top of rack switch or other parts of the datacenter architecture, so there is a lot of good growth to come into datacenter and we are excited and looking forward to exploiting in a number of different ways.

[Operator:]

(Operator Instructions) Your next question comes from the line of Tore Svanberg with Stifel. Please proceed.

[Tore Svanberg:]

Yes, just a follow up. First of all, could you talk a little bit about relative visibility? I mean you know probably don't want to comment on your backlog but just your relative visibility entering this quarter versus where you were 90 days ago?

[John Edmunds:]

Well, Tore, we typically don't -- yes, you are correct, we typically don't correlate particularly backlog number but in general I would say that the division of the order that we have booked for the quarter at this point in a quarter relative to last quarter is slightly stronger right now.

[Tore Svanberg:]

Very good. And the last question on 52. Just to clarify, did you say you expect already some revenue in the second half of the year or is this still scheduled primarily for 2015?

[Ford Tamer:]

No. We already have revenue from CFP2. Really coming mostly from core transfer modules but we do expect second half of this year introduction of edge router platforms which would significantly increase that revenue.

[Operator:]

Your next question comes from the line of Doug Freedman of RBC. Please proceed.

[Doug Freedman:]

Yes, thanks for taking my question. Congratulation on the result. If you could comment about the transition that we are looking at especially in your memory market, if you are seeing or achieving the ASP bump that you were hoping for moving from DDR3 to DDR4? And also if you can bring us up to speed sort of the ASP different that you see between LR and regular DIMM, regular RDIMM?

[Ford Tamer:]

So yes we are seeing a nice ASP bump from DDR3 to DDR4 for the registered that go along with the registered DIMM or RDIMM. If you look at the difference in price between LRDIMM or DDR3 and DDR4, it is almost equivalent -- the ASP for one LRDIMM and the DDR3 generation is about equivalent to nine of the new buffers for the DDR4 LRDIMM generation. So I think the ASP bump is mostly going to come from the registered and it is significant ASP bump. In addition, I think we do believe that DDR4 may have a higher attach rate for the buffer. Obviously, it will depend on an introduction of the new 8 gigabit component. And so along with the 4 gigabit component generation, Doug, you should see a higher attach rate for LRDIMM or the buffer. The question is going to become as the 8 gigabit component generation gets all rolled out which is really what would drive DDR4 into high volume. Would the LRDIMM attach rate -- it really come down and so that's third sort of a factor to keep in mind. Did I answer the question?

[Doug Freedman:]

Yes. You did. What do you think the present attach rate LRDIMM on the DDR3 platforms?

[Ford Tamer:]

Our view is running about the around the current 3% mark, Doug.

[Doug Freedman:]

Okay. And could you comment maybe a little bit on the competitive landscape? It would seem that there is few competitors that seemed to be more comfortable with their position in the market and one of your competitors recently privatize, I was wondering if there is any change in that dynamic that you presently see or might expect to see as a result of landscape.

[Ford Tamer:]

Sure. A great question. So I am a student of history and I believe to predict the future. You got to understand history and one of our competitor announced couple of days ago and it made a big point about the fact that this components are extremely complicated and not that easy to qualify and put into production. While if you look at the DDR3 generation, we split the market call it 50

[Operator:]

At this time, there are no additional questions in the queue. And I would like to turn the call back over to Mr. John Edmunds for closing remarks. Please proceed, sir.

[John Edmunds:]

Thank you, Chantalay. Inphi plans on attending the Oppenheimer Conference in Boston on August 13. The Jefferies Conference in Chicago on August 27. And the Deutsche Bank Conference in Las Vegas on September 9 through 11. Ford and I would like to thank you for joining us today. And we look forward to speaking with you again in the future.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.