Inphi Corp
Q4 2014 Earnings Call Transcript

Published: 10 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Inphi Corporation Q4 2014 Earnings Call. My name is Danielle, and I will 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, Danielle. Good afternoon, everyone. Thank you for joining us today for our quarterly earnings call to discuss the financial results for Q4 and the year-ended December 31, 2014, as well the business outlook for Q1 2015. 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, then Ford will give you an overview of our business. After that, I will provide a financial summary and the outlook for the first quarter of 2014, and 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 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 including revenue 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 Chief Executive Officer, Ford Tamer. Ford?

[Ford Tamer:]

Thank you, John. Good afternoon. Thank you for joining us for our Q4 and year-end 2014 earnings update. We appreciate your time as we recap the highlights of this successful quarter and year. To follow my commentary, please feel free to download our latest Inphi Corporate Update on the About Inphi tab on our website. Over the past two years we have transformed Inphi into a leader for data center interconnect. Over the next two years, we expect to transform ourselves again, as we deliver on the promise of the future data center for our Tier-1 customers, and for you, our shareholders. Q4 was a record quarter for Inphi from both revenue and margins perspectives. On a non-GAAP basis, we delivered Q4 revenue of $58.6 million which was on target. We also delivered solid Q4 gross margins of 67.6%, record operating margin at 19.6%, and higher than target Q4 earnings per share at $0.30. Our operating margin approaching 20% is the highest level we've achieved since I joined the company and a record operating profit for Inphi from both the percentage and dollar perspective. For the full-year 2014, again on a non-GAAP basis, our strong revenue and product performance enabled us to report yearly revenue of $160 million, operating profit of 15%, and earnings per share of $0.62. This was led by the 75% year-on-year organic growth from our communication product. Our strong performance especially noteworthy when compared with 2013 non-GAAP revenue of $103 million, operating profit of 5%, and earnings per share of $0.12. Inphi successfully closed the acquisition of Cortina Systems in early Q4. This strategic acquisition strengthened our communication business, which now accounts for approximately 75% of our total revenue. This quick move to scale puts us in even stronger position to capitalize on the rapid growth we anticipate in the years ahead, both in the data center, and service provider markets, for next-generation 10 gigabit, 40 gigabit, 100 gigabit, and 400 gigabit solutions. We expect our Cortina 10 gigabit and 40 gigabit physical layer product to ramp over the next few years with an excess of 200 design wins at different stages. Cortina product will benefit from reference design aligned with the ramp of Broadwell based server platform, and the continued deployment of 4G LTE cellular infrastructure. The Cortina integration has been even smoother and faster than we had initially anticipated. We are very fortunate to have the talented Cortina team on board, helping us to scale for the rapid growth opportunities ahead, and continue these impressive results for you, our shareholders. Looking at the overall combined company, let me draw the arc of where Inphi has been, where we are going, and why we are so excited about what lies ahead. The explosion of big data and the need for its rapid transmission has just begun. We expect continued rapid growth in big data, as operations in the cloud and the Internet of Things take hold. With each of these trends, the volume of data, and the speed with which the data must move, both within and between data centers are continuing to accelerate. Foreseeing these trends back in 2012, we increased our investment into several product areas to enable data transmission between and within next-generation data centers. First, between data centers in 2012, most networks operated at limited or binary 10 gigabit solutions. We invested in Linear or also called Coherent 100 gigabit amplifiers and drivers. And working closely with leading OEM customers, we helped them to start deploying 100 gigabit and 400 gigabit solution to create the vision of the cloud is the network. Next, within data centers, we invested in 100 gigabit CMOS-30, PAM or Pulse Amplitude Modulation, high speed analog to digital converters or ADC, and DSP. For the past two years our CMOS-30 supported the ramp of 100 gigabit CFP module in 2013 and 100 gigabit CFP2 modules in 2014. Our new PAM ADC DSP based solutions will enable the deployment of cost effective 100 gigabit QSFP modules in 2015 and 2016. These new solutions will align with the launch of 25 gigabit switches and 25gigabit mix. The low power QSFP modules enabled 3.2 terabit top-of-rack switches which will provide data center customers four times the port density at a quarter of the power and reduced cost. Faster interconnect within the data center will enable the vision of the data center is the computer. Our investments in optical and networking interconnect for data movement between and within data centers position us to generate multiple revenue streams in 2015 and beyond. Moving to our Memory Interconnect business, we are confident that these products offer equal promise as content per server continues to increase exponentially. We had a second memory module partner qualify our DDR4 offering which is positioned to translate into increased DDR4 revenue in the first half of this year. And we are gearing up to build DDR4 market share with the next generation memory in 2016. In the next few years the need for innovative memory solutions will continue as we move to an era of disaggregated data centers. Investments we're making today will help propel our growth as the cloud evolution continues. We are now more confident than even in our positioning and growth for the years ahead. We expect healthy financial performance in 2015 and anticipate 50% year-over-year growth from our core Inphi communication business. We foresee the balance of our business being stable with long-lived designs that we expect to extend for many years. As the core communication at Inphi continues to grow through 2016 and beyond, we expect its underlying core growth rate will become increasingly representative of our total company growth rate. Now let me turn over the call to John to discuss the numbers from the fourth quarter of 2014 and our outlook for Q1 of 2015. John?

[John Edmunds:]

Thanks, Ford. Now let me recap the financial results for Q4. As Ford told you, in the fourth quarter of 2014, Inphi reported record non-GAAP revenues of $58.6 million. Organically, this represented substantial year-over-year growth which was then combined with more than $20 million in revenues coming from the Cortina acquisition. The non-GAAP annual revenues of $160 million represented more than 30% year-over-year organic growth which then as of October 3, also included more than $20 million in Q4 revenues from the newly acquired Cortina Systems. The difference between GAAP and non-GAAP revenue is attributable to approximately $3.9 million of deferred revenue from Cortina Systems that was sold through the channel in Q4. Under GAAP purchase accounting rules this deferred revenue on the balance sheet as of October 3, was absorbed into the net assets acquired by Inphi. However, we believe reflecting the Q4 sell-through of this deferred revenue is more indicative of the underlying run rate of the business; hence it is included in our non-GAAP revenue of $59.6 million for Q4. Our communications business represented approximately 75% of the total revenues in Q4. Approximately 20% of the acquired Cortina revenue stream includes PHY-based products for 10 gig and 40 gig interfaces which complement similar Inphi developed 100 gig PHY technology. Together these product lines are in the middle of ramping more than 250 design wins into production and should grow at a pace of well more than 50% year-over-year. Approximately 80% of the acquired Cortina revenue stream is represented by transport and legacy products. Generally the legacy products having already enjoyed eight years of product life and there may be quarterly puts and takes as a result of end of life announcements for some of these through the course of time. However, the bulk of these revenues are revenues are for newer 40 gig and 100 gig framers that are used in carrier based systems and have substantial remaining product life. The majority of these products are sold into long sticky carrier based design wins at gross margins well above the corporate average. In fact, the high gain forward air correction technology on these products is often recognized as best of class by large carrier customers like Deutsche Telekom. These products are expected to make significant contribution to operating results and cash flow for at least the next four years. Q4 sales of product into high-speed memory applications were solid at approximately 25% of non-GAAP revenues. Our DDR4 products have begun to ship alongside our DDR3 products and both revenue stream are expected to grow sequentially into the first quarter. Though we are still in the process of ramping our DDR4 products, we currently expect Q1 to result in year-over-year growth of about 5%. On a GAAP basis we incurred a net loss in the fourth quarter of $17.7 million or $0.48 per share. As discussed previously, this excluded $3.9 million of revenue that had been deferred as of the acquisition date. In addition, the loss included stock compensation expense of $6.5 million, acquisition transition expenses, mostly legal and accounting cost of $1.1 million, a purchase accounting based step-up in inventory value of $12.3 million, amortization of acquisition related intangibles of $3.3 million, and a write-off of previously capitalized prototype masks of $2 million, as well as the collective related tax effects, and other tax adjustments, net into an income tax benefit differential of approximately $0.3 million. To give you more detail and comparing numbers between Q4 of 2014 and Q4 of 2013 let's now turn to some additional non-GAAP measures. On a non-GAAP basis then net income for the fourth quarter was approximately $11.7 million or approximately $0.30 per diluted share, which compares with non-GAAP net income of $2.4 million of $0.08 per diluted share for the same quarter one year ago. This Q4 2014 net income includes the full-year benefit of the restoration of the federal R&D tax with credit which was approximately $3.3 million or about $0.09 per share. This benefit led to a non-GAAP effective tax rate for the year of 13.2%. This also says that on an apple-to-apple comparison the results for Q4 without the R&D tax benefit were approximately $0.01 better than the $0.20 at the midpoint of guidance for Q4. Non-GAAP gross margin for the fourth quarter of 2014 was 67.6% which was up 260 basis points from the 65% reported in the third quarter of 2014. In Q4 gross margins came up primarily due to inclusion of higher than average gross margin products coming from Cortina. Based on a slight change of mix in Q1 2015, we currently expect Inphi's gross margins to align to approximately 66.3% which will generally be within the original range we expected from the combination of between 66% and 67%. Non-GAAP operating expenses for the quarter totaled $28.2 million. This was up $9.7 million from the previous quarter primarily from the acquisition of Cortina. For Q4 2014, non-GAAP R&D was $19.6 million, non-GAAP sales and marketing was $5.5 million, and non-GAAP G&A was $3.1 million, all leading to non-GAAP operating income of $11.5 million or 19.6% on the non-GAAP revenue number of $58.6 million. In Q1, we planned to manage expense and R&D activities tightly and hope to reduce our operating expense to be in the range of flat to down $200,000. This lower expense along with the reversion to mean in the gross margin should allow us to maintain operating income in the range of 18% to 19.6%, but still improve so called earnings per share without the R&D tax credit. With regard to the non-GAAP tax provision in Q4, as we mentioned earlier, we got the full-year benefit of the restoration of the R&D tax credit, which added $3.3 million in benefit for 2014, and brought the non-GAAP effective tax rate in at 13.2%. This resulted in a slight credit or benefit of $0.35 million of 3%. Unfortunately Congress did not extend the R&D tax credit to 2015 as yet. So the 2015 effective tax rate will have to once again exclude the potential benefit. As such, we expect the non-GAAP effective tax rate to be 20% for 2015. Other income in Q4 was approximately $0.01 million, which came mainly from interest income on the remaining short-term investment portfolio. Now turning to the balance sheet. After spending $53 million in cash for the acquisition of Cortina, cash and investments and marketable securities came in at $69.3 million for the quarter. This was down from $119 million at the end of Q3. However, due to strong cash flow from operations this was well above the forecasted range of $60 million to $65 million. Cash flow from operations in the quarter was $16.6 million. The company also had capital expenditures of $8.2 million. CapEx was somewhat high in Q4 due to an expansion of the Santa Clara facility and updating computer equipment as a result of the merger. We expect roughly $4 million of CapEx in Q1 and averaging about $5 million per quarter through the balance of 2015. Accounts receivable came in at $37.3 million or 57 days sales outstanding as compared to 56 days sales at the end of September. Inventory on the balance sheet was $26.1 million. But this included a $7.5 million purchase accounting related step-up in inventory value as of the acquisition date. Excluding that step-up in inventory, that remaining step-up in inventory, the inventory days were 88 days outstanding or 4.1 inventory turns per year. To some degree, our mix of inventory has shifted to communications products that have longer lead times and require a greater investment in inventory. Nevertheless, we plan to improve on these inventory turns. Payables decreased from$10.8 million or 77 days in September to $7.9 million or 37 days outstanding at the end of December. Now let me recap the business outlook for Q1. I remind everyone again that the following statements are based on currents expectations as of today and include forward-looking statements. Actual results may differ materially. We do not plan to update nor do we take any obligation to update this outlook in the future. As a range of guidance for Q1, we forecast non-GAAP revenues to be in a range of approximately flat to up 2% or $58.6 million to $59.8 million. We expect non-GAAP gross margins to be in a range of 66% to 66.6%. We expect non-GAAP operating expense to be in a range of $28 million to $28.2 million. We are currently estimating the non-GAAP effective tax rate to be 20% for the year 2015. We are confident these components should align, resulting in a non-GAAP operating margin of 18% and 19.6%. This should then lead to non-GAAP net income of between $8.4 million and $9.4 million, which on approximately 40.4 million estimated fully diluted shares would result in estimated non-GAAP earnings of between $0.21 and $0.23 per diluted share, which excluding the impact of the federal R&D credit in Q4 would be $0.01 sequential improvement from Q4. We also estimate stock-based compensation expense to be between $6.5 million and $6.7 million. In addition, we expect about $400,000 in transition expenses primarily for the additional expense to close two general ledgers and combined tax structures for the fourth quarter. Going forward in 2015, we are already operating in one general ledger system and under one combined tax structure, which will result in savings as compared to the cost previously incurred. In Q1, we will also have one more quarter of an additional flow-through of the $7.5 million of stepped up inventory value as of December 31. And then except for technology and intangible amortization, acquisition related adjustments should largely go away. This would imply a GAAP net loss in the range of $4.8 million to $5.7 million for Q1. GAAP loss per share would then be in a loss in the range of $0.13 to $0.15 per share. A more complete reconciliation of the Q1 GAAP net income forecast is attached as the last page of the press release. 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'll be happy to take your questions.

[Operator:]

[Operator Instructions]. And your first question comes from Quinn Bolton from Needham & Company. Your line is now open; please go ahead.

[Quinn Bolton:]

Hey guys, nice job on the results and closing the Cortina acquisition. Ford, I wanted to start with the comments you made about organic growth in the comm business specifically 50% organic growth in the optical side of the business. Can you just walk through for us where the growth is coming from? Is it sort of across the portfolio the TIA is the linear drivers as well as the SerDes, or is there one area that you are growing faster? And then I've got a follow-up question on the memory business?

[Ford Tamer:]

Thanks, Quinn. So the 50% refers to, if you like, three different businesses. First is our TIA and driver; the second is our organic 100 gigabit TI business; and third is our acquisition Cortina 10 gig, 40 gig PHY business. So let me start with the TIA and driver. And as you could see from the updated presentation we have on our website, we're now public about the fact that four out of four Tier-1 OEM use Inphi linear amplifier and three out of four Tier-1 OEMs use Inphi linear drivers to driver traffic between datacenters. We actually are the first company to come to market with 45 gigabaud linear driver and 45 gigabaud linear amplifier solution for 400 gigabit traffic. And Quinn, we believe these products will drive good growth for us in 2015. The second aspect and I'll talk first about the Cortina. Again, if you go to our presentation we now are talking about the PHY business as copper PHY versus fiber PHY. So we are now differentiating between what we call the traditional old copper PHY technology and the forward-looking fiber PHY technology that Inphi provides, both from the 10 gigabit and 40 gigabit Cortina and from the 100 gigabit organic Inphi. And as you could see from a chart in the presentation on our website, we forecast the fiber PHY to pass over the copper PHY in 2017 and become the dominant PHY technology in the data center. And we're talking about tens of millions of port in that timeframe. To break it up first on the 10 gigabit and 40 gigabit fiber PHY which is from our Cortina acquisition, we're going to benefit from a multi-year server I/O upgrade cycle from 1 gigabit to 10 gigabit, and we also benefit from a upgrade in the 4G LTE backhaul going from 10 gigabit to 40 gigabit. You could see a chart there from Crehan Research predicting that by the year 2017 there will be in excess of 70 million PHY's in that market. On the 100 gigabit business, over the past two years we've been getting gross from our CFP and CFP2 customers, fielding dissolution into both service provider and data center core. Moving forward in 2015 and 2016, we'll go into this new QSFP form factor that should drive additional gross going into our 100 gigabit PHY. Did I answer the question?

[Quinn Bolton:]

Yes, that was very, very helpful, Ford, thank you. And then just on the memory business you talked about getting probably the second Tier-1 memory module vendor. Is that for the RDIMMs or for LRDIMMs and a clarification for John on the -- I think you said that the memory business would grow both in DDR3 and DDR4 in Q1. But I just wanted to clarify that you expect overall this memory interface grow sequentially March versus December. Thanks?

[Ford Tamer:]

So Quinn, on the first part of the question the second vendor is for the RDIMM register. John?

[John Edmunds:]

Yes, quite overall the business should grow sequentially. And overall, if you look at it, it should be up about 5% year-over-year for the first quarter.

[Operator:]

Thank you. And our next question comes from Tore Svanberg from Stifel. Your line is now open. Please go ahead.

[Tore Svanberg:]

Yes, thank you. And let me accolade you congratulations on the results and closing the deal. Could you talk a little bit first about your visibility? I mean how does you -- your entity -- how does that change your visibility; obviously I'm not looking for specific backlog or bookings number. But just sort of on a relative basis, are you seeing an improvement, is it about the same?

[Ford Tamer:]

Thanks, Tore. We had seen little bit of a pause in the Q4, but now the bookings have started the year quite strong. And so we're seeing a good visibility for the first half of 2015. The design wins for both Cortina and Inphi are very similar in the sense that they are multi-year designs over long periods of time. We are talking seven plus type of years on the communication side of the business story.

[Tore Svanberg:]

Okay, very good. And now that we're sort of looking at the business, Inphi communications business in three parts or three parts and then some segment after that. Just as referenced how big of the fiber PHY business is revenues there I mean what's the percentage today from Cortina?

[Ford Tamer:]

So John in his comment discussed the fiber PHY business as far Cortina being about 20% of that business, as compared to the transport and legacy business being 80% of that business. We did have high confidence that our communication business overall would grow 50% year-over-year from 2014 to 2015. Inside that segment the 10 gigabit and 40 gigabit PHY business from Cortina should faster than our organic 100 gigabit business because that's the current growth in 2015 and really it's going to be driven by Broadwell and by the 4G LTE which will favor the 10 gigabit and 40 gigabit over 100 gigabit.

[Tore Svanberg:]

Very good. And a question on the memory interface side. There's a lot of sort of chatter back and forth, DDR4 ramping about as expected, faster than expected, just from your assessment how would you classify the DDR3 to DD4 transition or even DDR4 ramp, if you will?

[Ford Tamer:]

From our assessment we look at Ivy Bridge being about two-third of the market versus Haswell being about one-third of the market so far. And in that Haswell business about 60% is going to DDR4 versus DDR3.

[Tore Svanberg:]

Great. Thank you again guys and congratulations on the results.

[Ford Tamer:]

Thank you.

[Operator:]

Thank you. And your next question comes from Doug Freedman from RBC. Your line is now open. Please go ahead.

[Doug Freedman:]

Hi guys thanks for taking my question. Can you may be give us a little sense of what you're seeing in the market in terms of the LRDIMM adoption. You talked last year or last quarter I should say about your memory business either holding share and being sort of flat year-on-year or having the potential risk of being down about $10 million. Where do you stand there now on you full-year outlook for the memory business?

[Ford Tamer:]

So first on the LRDIMM adoption we're still seeing LRDIMM adoption being strong in DDR3, Doug. On DDR4, we don't have enough market share to comment but our competitors have commented that the DDR4 LRDIMM adoption seems to be higher than in DDR3. As far as the revenue, for the year, we don't provide guidance on the yearly revenue and we're not trying to break-out the memory between DDR3 and DDR4. But our view for the year is still unchanged consistent with the comments we've made in the past, Doug.

[Doug Freedman:]

Okay. And on the LRDIMM front for DDR4 when do you think you might be able to impact the market share there, I know you have efforts underway to try to get that qualified?

[Ford Tamer:]

We are, our buffer solution is currently being evaluated by all memory vendor and is difficult to predict the timing of that revenue ramp as it's going to be tied to memory process transition and platform transition.

[Doug Freedman:]

Okay. And then, John, I guess, if I could, just one for you on the revenue. I just want to make sure I'm comparing apples-to-apples here. There is no expected non-GAAP revenue in the March quarter is that correct?

[John Edmunds:]

That's right. It's a just a artifact of purchase accounting that any company who buys a target company that has deferred revenue, that deferred revenue as of the execution day falls through the cracks and then you, you go back to generating deferred revenue again at the end of the next quarter.

[Doug Freedman:]

Okay. Terrific. Thanks and congratulations on the strong results guys. Nice job.

[Ford Tamer:]

Thanks, Doug.

[Operator:]

Thank you. And your next question comes from Sundeep Bajikar from Jefferies. Your line is now open. Please go ahead.

[Sundeep Bajikar:]

Hi guys thanks for taking the question. First one, can you just give us an update on timing of new products in 100 gig such as QSFP and also the competitive landscape for those products. How much of the growth this year that you're guiding to would be driven by these new products in 2015?

[Ford Tamer:]

Sundeep, thanks for the question. Good question. Almost none. So basically, in these new products that we're talking about we'll start fielding them this year as PAM based solution, and most of the gross for us would be coming in 2016 and beyond. And we expect a multi-year upgrade cycle with these products. Competitive landscape, you will see non-PAM based solution come to market mid this year and really dominate for the second half of this year. While our PAM based solution will really come to market mid this year to and really be tested in the second half to go to production and ramp in high volume in 2016. So we look at these new QSFP modules as really 2016 ramp in revenue.

[Sundeep Bajikar:]

Great. That's very helpful. And then just a follow-up on the competitive front. So how should we think about like a Broadcom integrating some components like the SerDes for example within their switch products? Are you -- do you anticipate an impact? Is there a timing of the impact? How should we think about this dynamic?

[Ford Tamer:]

No impact. We had a product on their development. There was basically a KR retimer which is a long retry/retimer which we have cancelled as a result of that KR being integrated into switch. So the integration does not have any impact on our forecast or guidance. What is going to have an impact is the rollout of 25 gigabit switches to production by Broadcom, Cavium, Intel Mellanox, Barefoot Network, and a bunch of others as well as 25 gig mix from the same players plus QLogic and Emulex. So we have a number of players coming to market with 25 gigabit switches and 25 gigabit mix, which will drive 100 gigabit out of the top-of-the-rack on the uplink. And you're going to need 100 gigabit modules to plug into these switches if not you're going to have a 25 gig link plug into a 10 gig switch which doesn't work. So the good news is we believe that the new switches that are being rolled into market are going to be a big gross factor for us moving forward, Sundeep.

[Sundeep Bajikar:]

Thanks great to here, and nice job on the quarter.

[Operator:]

Thank you. And our next question comes from Richard Shannon from Craig-Hallum. Your line is now open. Please go ahead.

[Richard Shannon:]

Hi guys may be just a couple of quick question for me, may be delve in kind of one of your response to earlier regarding your TIAs and drivers, you obviously done very well in TIA business and it sounds like you are expecting keep your share there, Ford, if you can just confirm that and also what is your forecast for this year assumed for share and the driver side as well?

[Ford Tamer:]

Richard, as you know, these are competitive markets, so I keep telling our team and they keep -- we keep remaining each other that it doesn't matter you've shared a lion or gazelle in Africa you've got to wake up in the morning as to running. So if there's a treadmill and we keep running, we have sampled our 45 gigabaud amplifier and driver and working hard on the next-generation and beyond that and investing heavily in the TIA and driver for both the coherent solution between data center, as well as solution for within the data center that we haven't yet announced. So it's going to be a very competitive dynamic. There are multiple people coming as for us and we do believe today that we've got some excellent product and working closely with Tier-1 customers, as a result we'll keep our market share, but obviously we'll have to keep running.

[Richard Shannon:]

Okay. Fair enough. I have no doubt you guys will continue to run. Just here a follow-up, a kind of big picture within your comms business. As you exit this year, Ford, any characterization you can give us as far as your business between more data center oriented product versus long haul?

[Ford Tamer:]

So we have given a forecast in a prior call that we hinted back today of 80% comms 20% memory exiting 2015. As the prior question about QSFP module indicated, we do expect a big ramp in 2016 for our data center solution. So we do expect 2015 to still be dominated by our coherent and between data center type of business, while 2016 would be the ramp of both enterprise and cloud data center of Inphi.

[Richard Shannon:]

Okay. That's fair enough. Last one question may be for John. John, you talked a little bit of a movement downwards in OpEx for the first quarter. How should we expect the shape of that throughout the rest of the year?

[John Edmunds:]

Thanks for the question, Richard. We're actually because of the acquisition we're fairly -- in fairly good shape in terms of resources at the moment. And we do, as you guys know, we do invite customers to help co-fund some R&D developments. And as a result of those two conditions we actually believe that we can have operating expense remain fairly flat through the course of the year one quarter to the next, so at least that's the outlook so for.

[Richard Shannon:]

Perfect. I appreciate that. Thank you guys and congratulations from me as well.

[Ford Tamer:]

Thank you.

[Operator:]

Thank you. And your next question comes from Ruben Roy from Piper Jaffray. Your line is now open. Please go ahead.

[Ruben Roy:]

Thank you. I just had a clarification, John, you had mentioned about the Cortina the 80% or so of Cortina revenues that you consider some of legacy, some quarterly puts and takes, and Ford also talked a little bit about a slowdown in December that seems to worked itself out. Just wondering if your expectations for that part of the Cortina business have changed at all for the -- for 2015?

[John Edmunds:]

No generally those revenues have come in about the way we expected them to and so far they are behaving about the way we expected they would. We are pleased with the depth of the technology and the customer response for their interest in particularly this high gain FEC capability that sort of unique to Cortina products. And so we are looking forward to trying to exploit those advantages and continuing to try to work in those market to a limited degree.

[Ruben Roy:]

All right. Thanks for that. And just a quick follow-up for, Ford. Sort of another bigger picture question, Ford, it's nice to hear about your growth expectations and perspective on the market. In terms of service provider what's your feeling in North America, I guess China being the big areas for potential upgrades of the backhaul and wireless for instances. I'm just wondering if you can give us a little perspective on your -- how you're feeling about the spending environment specific to the wireless carriers in those two geographies. Thank you?

[Ford Tamer:]

Thanks, Ruben. As I indicated we had a seen a bit of pause and confusion towards end of the Q4 -- end of 2014 but we're seeing the beginning of this year being extremely strong and good visibility again for the next few months. Actually we're on location for some product. So we're feeling good about it.

[Ruben Roy:]

Great. Thank you.

[Operator:]

Thank you. [Operator Instructions]. And you next question comes from Scott [indiscernible]. Your line is now open. Please go ahead.

[Unidentified Analyst:]

Yes thanks for taking my question. Just point of clarification, when you talk about 2% growth on your core optical business, are you talking about just the in PHY portion or in PHY plus Cortina?

[John Edmunds:]

Yes, I guess that's Inphi plus Cortina should be little better than 50% growth actually.

[Unidentified Analyst:]

Okay. All right. So I'm a little confused. So you said the run rate of the fourth quarter or the sum of the part?

[John Edmunds:]

That's really the year-over-year it's looking at annual rates of the business.

[Unidentified Analyst:]

Looking at the annual run rates coming off to Q4 you should be up 50% and a run rate exiting the year is that a good way of thinking about it?

[John Edmunds:]

Yes, that's a reasonable way to think about it.

[Unidentified Analyst:]

Perfect. I appreciate it. Thanks nice quarter and good outlook.

[John Edmunds:]

Thanks, Scott.

[Operator:]

Thank you. And your next question comes from Ross Seymore from Deutsche Bank. Your line is now open. Please go ahead.

[Ross Seymore:]

Hi guys congrats on the solid quarter and guide us well. Just to make sure I understand the answer to the prior question because that's one that I was going to ask as well John is it 4Q 2015 over 4Q 2014 that would be the 50% you're looking for in the comms business?

[John Edmunds:]

Actually the way we generated the number was to look at the -- what these business did in all of calendar 2013 versus what we think are going to do in all of 2014.

[Ross Seymore:]

I assume you mean 2014 and 2015

[John Edmunds:]

Sorry 2014 and 2015. That's right. Full year of 2015 over full year of 2014.

[Ross Seymore:]

Got you. Okay. Then a couple other hopefully a little more smarter questions on my side of things. It sounds like the memory side is going to bounce back and isolate to get that 5% year-over-year growth in the March quarter. By definition there's a little bit of a drop-off in the communication side, it doesn't sound like you are at all worried about that slowing, what so over but can you give us a little color on what is a little bit slower in the first quarter versus the fourth?

[John Edmunds:]

Actually when you look at the year-over-year the communications business will also grow year-over-year significantly and that's why that year-over-year number is -- doesn't necessarily indicate a slowdown in the communications business in Q1. We do expect some marginal sequential growth in memory in Q1 and I guess you can argue that implies a slight marginal downtick in communications but it's fairly close to flat on both sides of business sequentially.

[Ross Seymore:]

And then I guess my last question, when you think about the puts and takes on that roughly $20 million of the Cortina business, I know you have the 20% that's growing and the 80% that's going to be lumpy, how do you think about how that all plays out over the course of the year? What's the puts and takes to the aggregate $20 million number? Does that number go up on a quarterly basis or go down and how should we think of the trajectory? Thank you.

[John Edmunds:]

Well for the Cortina business itself we've said that the PHY business would grow and offset any decline that we might experience in the transport business. So you might have marginal growth through the course of the year. Also we're not going to break out Cortina business moving forward. And so I think in general you can look at the legacy and transport business as coming down may be at the rate of about 3% to 4% a quarter on average, some quarters may be better than others, they may be a function of these end of life announcements and sometimes that accelerates revenue in a given period, and we do have ongoing design wins. As we mentioned, it is world class high gain FEC technology and is important in some deployments. So from our point of view, it's very high gross margin revenue and it's going to generate cash flow and we expect that to be a substantial contribution over the next four years and each of those years even through the decline of the revenue stream.

[Ross Seymore:]

Okay. Thank you for all the clarification.

[John Edmunds:]

Thanks, Ross.

[Operator:]

Thank you. And we do have a follow-up from Quinn Bolton from Needham & Company. Your line is now open. Please go ahead.

[Quinn Bolton:]

Hi guys, Ross just asked my follow-up question, thanks.

[John Edmunds:]

Thanks, Quinn.

[Operator:]

Thank you. I'm not showing any further questions in queue. I will turn the call over back to John Edmunds for closing remarks.

[John Edmunds:]

Thank you, Danielle. Inphi plans on attending the Stifel Conference in San Francisco tomorrow on February 10. We'll be marketing in Boston on Tuesday, February 17; we'll also attend the Morgan Stanley Conference in San Francisco on March 3; the ROTH Conference in Los Angeles on Monday, March 10; the Piper Jaffray Conference in New York on Wednesday, March 12; and finally, the Northland Conference in New York on Wednesday, March 18. 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 does conclude today's presentation. You may now disconnect. Good day.