Inphi Corp
Q1 2018 Earnings Call Transcript

Published: 25 Apr 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to Inphi's First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Deborah Stapleton, Investor Relations. Ma'am, you may begin.

[Deborah A. Stapleton:]

Thank you, Scalar, and good afternoon, everyone. Thank you for joining today to discuss the financial results for the first quarter of 2018. I'm Deb Stapleton, handling Investor Relations for Inphi; and with me today is John Edmunds, our Chief Financial Officer; and Ford Tamer, our Chief Executive Officer. John will begin with the Safe Harbor then Ford will give you an overview of our business. After that, John will provide a financial summary of Q1 and then the outlook for the second quarter of 2018. After that we'll be happy to take your questions. John?

[John S. Edmunds:]

Thanks, Deb. For the Safe Harbor, please note that during the course of this conference call we may make projections or other forward-looking statements about Inphi, including references to our prospects and expectations for 2018 and beyond, the projected growth and size of our markets, our customers, market share, new products and design wins. 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 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 company Web site 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 CEO, Ford Tamer. Ford?

[Ford G. Tamer:]

Thank you for joining us for Inphi's first quarter 2018 earnings update. Let me start with an executive summary. As our guidance for Q2 shows, we believe Q1 represented the bottom of a down cycle driven by inventory buildups in China long-haul and Metro markets. We met our Q1 guidance with $60.1 million in revenue and a $0.05 EPS loss. We are guiding for revenue to grow 15% sequentially in Q2 to $69.3 million at the midpoint even after accounting for the impact of the ZTE export ban. We are guiding up for Q2 EPS of $0.13 at the midpoint showing the benefit of the restructuring we completed in Q1, that I will discuss in a moment. The challenges [ph] of Q1 notwithstanding. Our product innovation continues. We unveiled our newest 400-gig PAM DSP at the recent Optical Fiber Conference or OFC along with our 56 Gigabaud linear TIA and driver. Earlier we announced production shipments of our Polaris 200 and 400-gig PAM DSP platform with associated 28 Gigabaud TIA and driver as well as our M200 coherent DSP for long-haul and Metro markets. We look forward to our growing presence in the data center resulting in a continued diversification of our business, which we expect to head drive our growth in the second half of 2018 and beyond. To be specific, I will briefly discuss three important developments from Q1. First, some more details on the business highlights. As we discussed in our last earnings call, the China long-haul and Metro inventory overhang appears to be bottoming out. And we're seeing a modest level of revenue rebound from the region. To maintain Inphi position as the leader in data movement interconnect for long-haul and Metro between and inside data centers, we're committed to continuing investment in research and development and support. That said, we also understand the need to manage the business through the reality of revenue. With that strategy in mind, we completing in a restructured -- we completed a restructuring in Q1 that align our organization with a revenue reality, while maintaining our focus on product roadmaps and customer commitments. This restructuring affected just under 40 people in total, or about 6% of the workforce across all functions. This allows us to deliver significant operational efficiencies, while remaining firmly committed to our future growth. Second, on the ZTE ban. ZTE only represented approximately 1% of revenue in the second quarter of 2018, which we’ve taken out of the guidance. With some growth in Inphi revenue expected in the second half of 2018, ZTE was expected to represent about 5% of total sales by the first quarter of 2018. For the sake of being conservative, we’ve modeled it out of the annual 2018 revenue, but it was over 70% share of linear TIAs and over a 50% share of linear drivers. We suspect some of the share loss by ZTE is likely to be redirected to other Inphi customers. Third, I will report on the good news of our strong product introduction at OFC held in San Diego in the middle of March. This year at the show, Inphi demonstrated interconnects at speeds ranging from 100-gig to 600-gig for long-haul and Metro, a new Tunable COLORZ product between data centers and the best product portfolio in the industry for PAM4 interconnect for inside the data centers with speeds ranging from 50-gig to 400-gig. We are particularly pleased to demonstrate the newest member of our galaxy, this 400-gig Porrima DSP. Porrima was the only working DSP at OFC that meets the stringent IEEE specifications for 400-gig. We sampled Porrima to a dozen module partners, targeting hyper skilled talent and data center operators. As the industry's first sampling platform that also includes 56 Gigabaud linear TIAs and drivers for a variety of optical modules on a power efficient format. In the week leading to OFC, we also announced productization of our M200 coherent DSP for our long-haul and Metro customers supporting high-performance 100-gig and 200-gig data rates. Also in March, our Polaris PAM for 200-gig platform won the 2018 Lightwave Innovations Review award. I’m proud to tell you that the panel of third-party judges that bestowed this award is comprised of industry executives, service providers, technology developers, industry analysts and journalists. This industry-wide recognition speaks clearly to the efforts, talent, and dedication of the entire team. But speaking more clearly are the large volume of Polaris design wins we have with over 10 customers who will deploy Polaris for both short reach and the longer 2 to 10 kilometer solutions inside the data centers. Finally, we continue to make progress and win design with our 200 and 400-gig PAM Vega Retimer for line card applications. We announced our reference design with a partner switch for Vega gearbox, supporting the highest radix of 128 ports of a 100-gig to connect to existing NRZ-based based copper and optics. As you can see, we remain fully committed to develop industry innovative products, support our Tier 1 customers, and maintain our market-leading share. We believe this will result in continued progress on a revenue ramp and strong return for our shareholders. With that, let me turn the call over to John to walk through the financial details. John?

[John S. Edmunds:]

Thanks, Ford. Now let me recap the key financial results. In the first quarter of 2018, Inphi reported revenues of $60.1 million. Revenues were down 30% sequentially and 36% year-over-year from a record quarter of $93.6 million in the first quarter of 2017. Long-haul and Metro products including the coherent DSP represented 29% of the business and declined sequentially by $15.9 million or 47%, which was a little weaker than expected as our customers in this market appeared to have completed their objective to absorb excess inventory over the last four quarters. At the same time, data center products including COLORZ and optical PHY business, represented 54% of revenues and was down $7.5 million or 19% sequentially. A little stronger in COLORZ than we had anticipated. Legacy transport business representing 16% was down sequentially $2.1 million or 18% as expected. Overall, the business came in at -- as expected at $60.1 million and we are guiding up 15% into Q2 primarily on the strength of long-haul and Metro business recovery. Gross margins on a non-GAAP basis in Q1 came in at 66.4%, which was about a 100 basis points below the low end of our guidance. This was based again on a somewhat weaker contribution from long-haul and Metro. The good news is that gross margins in Q2 are expected to be up 190 basis points. Based on stronger long-haul and Metro revenues and some additional NRE licensing revenue which is not been previously forecast. All in, we estimate non-GAAP gross margins for Q2 to be in the range of 67.8% to 68.8%. Again in the back half of 2018 we will be shipping the new coherent DSP product, the M200. And even with less business and we plan with ZTE, we continue to expect the M200 to buoy up overall gross margins based on an improved mix and back to the 71% to 72% range for the back half of 2018 leaving us to average roughly 70% for the year. In Q1 2018, the GAAP gross margin is for 54%. But this figure included purchase accounting adjustments and stock compensation expense. Please see the reconciliations in the press release for more detail. Q1 GAAP net loss was $22.99 million. We then add back standard adjustments of $30.69 million of certain standard GAAP expenditures as well as $1.48 million in accrued restructuring costs offset by removing $3.02 million in a favorable fair value adjustment of a private company investment. Then we just the associated tax benefit adjustment of $8.13 million to arrive at Q1 non-GAAP net loss of $1.97 million. The $30.69 million of standard adjustments compares to $28.8 million for the same adjustments in Q4. The difference is primarily driven by higher stock compensation expense in Q1. The standard adjustments are for stock compensation purchase accounting and convertible debt cost amortization. The related income tax effects of these adjustments of $8.1 million in Q1 compares to $12.7 million in Q4, primarily due to different valuation reserves been released for GAAP and non-GAAP. Please see the reconciliation in the press release for more detail. The non-GAAP net loss of $1.97 million for Q1 was down from $16.2 million in net income reported in Q4 of '17. Now let's look at the remaining components of non-GAAP reporting that led to this Q1 non-GAAP result. Non-GAAP operating expense for Q1 totaled $42 million, down $1 million from Q4. We have been reducing our gross operating spend over the last three quarters. We’ve also implemented a reduction in force in late March 2018, affecting just under 40 people aimed at reducing our spending in the remaining three quarters of 2018. Overall, non-GAAP operating margin swung from $17.2 million or 20.1% in Q4, to an operating loss of $2.1 million in Q1. More than 90% of this $19.3 million differential is explained by lower revenue and the balance is explained by lower gross margins offset by operating expense savings. Interest income totaled $1.5 million in the quarter which more than covered the cash cost of the convertible debt of $1.2 million. The convertible debt was a blended annual coupon rate of .972%. We also had other non-operating expense were approximately $200,000 for the quarter which is included in the slide as well. The GAAP income tax benefit was $8.26 million, which includes the release of the federal tax valuation reserve of $6.7 million. In general, we find the ongoing overall GAAP tax rate which changes throughout the year to be difficult to forecast. We brought the non-GAAP effective tax rate for Q1, down to 3%. And we had a discrete ZEN48 reserve release that resulted in total in $131,000 tax benefit for non-GAAP. Going forward, we believe the 3% effective tax rate will be applicable for the remainder of 2018. It is lower this year because of the elimination of the corporate minimum tax and our lower income been offset by relatively higher R&D tax credit. We've also considered the new global intangible low taxed income or GILTI tax, in our rate forecast. Cash income taxes paid in Q1, 2018 was $1.6 million primarily in Singapore up from 21.2 million in 2017. Now turning to the balance sheet, overall cash was $394 million at March 31, down $11 million from the $405 million at December 31, primarily due to three private company investments we made in ecosystem partners in Q1, totaling $12.8 million. We had cash flow from operations of $19.6 million in Q1, as compared to $29.1 million in Q4 and compared to $18.5 million in Q1, one year-ago. The strong showing in cash flow from operations comes primarily from strong accounts receivable collection, resulting in a reduction of receivables in the quarter of $19.1 million which compares to a small expansion receivables in Q1 2017 of $2.7 million. Capital expenditures were $14.5 million in the quarter including mask sets of about $9 million and a $2 million software upgrade to a large piece of test equipment. We also had separate additional payments in the cash flow statement of $6.3 million for CAD tools software royalties and IP. DSO expanded from 71 days at the end of December to 73 days at the end of March, despite 30% less in revenue. However, we expect DSO to come down in the June quarter as revenue expanse again. Inventory increased by $3 million in the quarter due to changes of mix of inventory shipping during the quarter. This should even out in Q2. As a result, inventory days excluding the respective step up adjustments with 108 days or 3.3 turns at the end of December and expanded 249 days or 2.4 turns at the end of March. However, again we expect this trend also reverse in June as shipments increase. Now let me recap the business outlook for Q2 2018. I remind everyone again that the following statements are based on current expectations as of today and include forward-looking statements. Actual results may differ materially we do not plan to update nor do we take on any obligation to update this outlook in the future. Revenue at the midpoint is forecasted to be up approximately $9.2 million in Q2, primarily due to a strengthening in long-haul and Metro. This would bring revenue to $69.3 million at the midpoint plus or minus $2 million. This forecast is not included doing any business with ZTE in Q2. We anticipate this will result in total Q2 revenue to be in the range of $67.3 to $71.3. We expect non-GAAP gross margins to be in the range of 67.8% to 68.8%. We expect non-GAAP operating expense to be in the range of $40.2 to $42.8 million. We're currently estimating the non-GAAP effective tax rate to be 3% for Q2 2018. We're confident these components should then align resulting in the non-GAAP operating margin in the range of approximately 8.1% to 8.8%. This should also lead to non-GAAP net income of between approximately $5.3 million and $6.1 million. This will result in estimated non-GAAP income per share of between $0.12 and $0.14 based on approximately 45 million estimated diluted shares. For GAAP reporting for Q2, we expect a GAAP net loss in the range of $23.7 million to $24.3 million. GAAP earnings per share would then be in a loss in a range of $0.54 to $0.56 per basic share and $43.763 million forecasted basic shares. A more complete reconciliation of the forecasted Q2 net income compared to Q1 non-GAAP net income is included in the press release. We will not update this outlook during the quarter until the time of the next quarterly earnings release unless Inphi publishes a notice stating otherwise. So please ask any questions you may have today during the general Q&A period and I would be happy to take your questions.

[Operator:]

[Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank. Your line is now open.

[Ross Seymore:]

Hi, guys. Thanks for allotting me ask a question and congrats on finding the bottom in china. So Ford, I really wanted to ask about that first. It sounds like you’re going to have the expected rebound sequentially albeit off of a slightly smaller base. Any more color about the sustainability of that as much as that possible in that sector?

[Ford G. Tamer:]

Yes. Thanks, Ross. I think the course for the rebound is that China Inventory off Coherent TIA and driver has returned to normal. In particular, our direct ICR customer as well as indirect OEM sharply cut the coherent TIA inventory by more than a factor of two, so it's not slightly below one quarter demand which is normal for industry considering the log manufacturing lead-time that we have. So with that, we feel more confident also on the driver inventory is even lower and matches up with demand in lead time, Ross.

[Ross Seymore:]

Great. And I guess as a follow-up, switching over to the data center side of things, you’ve a lot of new products that you rattled off earlier. Can you just give us a some rough chronology of how you think those will contribute to revenue through the end of this year and into next year, whether it's the DSP side of things, within the data center COLORZ customers, any sort of color on that would be great?

[Ford G. Tamer:]

Yes, thank you, Ross. So the first time will be our 200-gig and 400-gig Polaris PAM DSP. That’s a DSP that is based on a 50-gig PAM, 50 gigabit for a second PAM standard which is a 28 Gigabaud for the TIA and driver for the optical speed. So that start shipping this quarter, driven first by a non-switch application that are one of our major cloud customers. And then it continues to ramp and then we expected towards end of this year, early next year to ship along with the new 12 point ET or 12 point in terabit switches that we go in production. So that’s the first one, Ross. The second one is that same product, that same Polaris DSP. We expected to start shipping in Q3 of this year with an InfiBand customer and again to rent from there moving forward. Then the third vector is going to be our second product, which is the Vega 200 -- 400 gig retimer again based on a 50 gig Pam (50) gigabit for second Pam or 20 Gigabaud TIA driver or optical interfaces. And that start shipping along with switch customer. It was first switch -- first shipped on line cards in the second half of this year. And then we have a new application now of that retimer where it can be used reverse gearbox to drive along with 12 in Tb switches to drive 128 ports or 100-gig. Optical modules and that we have a lot of interest in that application. We expect that to again ship into this year early next year. So that’s the third vector. So, first, Polaris found. Second Polaris, InfiBand, third Vega retimer, fourth is Porrima, which is our new 400 gigabit, Polaris -- Porrima PAM DSP. This is based on a 100 gigabit per second PAM and then the equivalent 56 Gigabaud TIA and driver. And that we expect to ship along. Again, was 12.8 terabit switches early next year driven by cloud customers wanting to go to 400-gig modules to go on all the switches. So a longer answer, but hopefully that gives you the chronology almost.

[Ross Seymore:]

That’s perfect. Thank you.

[Operator:]

Our next question comes from Quinn Bolton with Needham & Company. Your line is now open.

[Quinn Bolton:]

Hey, guys. Let me eco my congratulations on the finding the bottom and the nice 15% recovery in Q2. Ford, I guess, I wanted to start. Obviously, that ZTE shipment ban has impacted the business I think specifically for you. On the M200 ramp, can you give us some sense how important that customer was for the M200 ramp and without that customer how do you now see the M200 ramping into the second half of the year?

[Ford G. Tamer:]

Thank you, Quinn. So the impact we discussed was including that new M200 win that we had one from our competitor. And we were expecting this to be about when we discussed a 5% impact to our Q4 revenue, you could think about it as about half of that -- 2.5% to 3% of that’s coming from DSP and the balance coming from the TIA and driver, okay. So the way we're thinking about it, it all depends how long it takes to resolve this ban at this point where assuming we took the revenue out of the year assuming the ban takes long to resolve. The DSP revenue is not one that we could get back if the ban takes too long to resolve, but the TIA and driver is potentially revenue. We could get back if the business gets driven to another Inphi customer. So that's how we’re looking at it at this point, Quinn. I’m not sure if I’m answering your question, but hopefully that gives you some color.

[Quinn Bolton:]

Maybe, Ford, just a clarification. I mean, I guess, was ZTE sort of will you clarify -- characterize them as perhaps the lead customer for M200. I mean, could they have been the biggest customer for that DSP or do you have a good set of M200 design wins that you still see a pretty good ramp of that product without ZTE?

[Ford G. Tamer:]

Thank you, Quinn. So we have about 10 M200 customers, ZTE would've been probably the third in line if you wish. There are two customers, one European and one Chinese that are ahead of them from a volume and revenue point of view. And then we've got other North America, European, and Chinese customer that make up the balance. So it's a diversified base, ZTE would've been probably the third in line from a revenue prioritization point of view.

[Quinn Bolton:]

Perfect. That’s what it is like a printing. Just a second question, as you look at what happened a couple of years ago, when ZTE first had their shipment ban, Huawei went into a fairly significant inventory accumulation phase for probably six to nine months after that have you seen any response from Huawei? I know it's only been -- probably a couple of weeks since this news hit, but have you seen any change in purchasing behavior from Huawei given the ZTE shipment ban.

[Ford G. Tamer:]

At this point we have not seen any change in Huawei behavior and we're being told that there will not be any change in Huawei behavior.

[Quinn Bolton:]

Great. Thank you all. I will turn it over to the next caller.

[Operator:]

Our next question comes from Joe Moore with Morgan Stanley. Your line is now open.

[Joe Moore:]

Great. Thank you. I know your guidance is sort of ¼ a time, but last quarter you had made some comments about the shape of the year and sort of getting back to Q4 '17 levels towards the end of the year. Is that still generally the way you’re feeling about things, and I’ve a follow-up.

[Ford G. Tamer:]

Yes, Joe, we still feel the same way about the year minus the impact of ZTV we just discussed.

[Joe Moore:]

Okay, great. And then I guess just the ZTE, just to make sure I understand, I mean, you talked about the exposure levels. Is that -- how solid is that number and I guess -- because I guess when we had the Huawei situation, I, at least had underestimated those exposures because it was not just what you’re selling to Huawei, but what you’re selling to people upstream from Huawei. That 1% to 5% is sort of comprehensive, that’s the total impact that you would expect from this, right?

[Ford G. Tamer:]

Thank you, Joe. Yes, so the 1% is a Q2 impact ramping up to 5% over Q4 impact and that's our best estimate of this point for both direct and indirect sales. So that would be directed to ZTE and directed to the ICR vendors that would use our TIAs and supply back to ZTE.

[Joe Moore:]

Great. That’s fair. Thank you very much.

[Operator:]

Our next question comes from Harlan Sur with JPMorgan. Your line is now open.

[Harlan Sur:]

Good afternoon. Thanks for taking my question and good to see the reacceleration in the business here. Good to see the -- you're PAM4 Polaris and Vega products still on track here Q2 and second half of this year. Are you guys still anticipating double-digit incremental revenue contribution this year from these products? And then if you look at your Polaris and Vega design win pipeline, roughly how many opportunities have you won so far with these products?

[Ford G. Tamer:]

Thank you, Harlan. So the first question, are we expecting double-digit revenue this year? Absolutely, we already have tens of thousands of units on order, firm orders for the year. Second question …

[Harlan Sur:]

How many opportunities have you won in this whole …

[Ford G. Tamer:]

Yes, sorry the second question -- yes, the second question on the number of opportunities as in tens of opportunities, Harlan, we win in excess of 50.

[Harlan Sur:]

Got it. Thank you. And then last call you guys mention the initial ramp of 400-gig long-haul Metro using a 45 and 64 Gigabaud coherent driver and TIAs solution in the second half. Is that still on track and roughly how many customers are you ramping these new solutions into?

[Ford G. Tamer:]

Thank you, Harlan. So, yes 345 Gigabaud and 64 Gigabaud products are on track. We're renting it to over 10 customers and or intends of different design wins at those customers. And we are still very positive on both the TIA and driver for the 45 and 64 Gigabaud generations.

[Harlan Sur:]

Great. And then just one housekeeping question, I just want to make sure I heard this correctly. So the team is anticipating given the mix of business and growth in the second half to get gross margins into that kind of 71%, 72% range in the second half of the year. Is that what I heard

[Ford G. Tamer:]

Yes, that's correct. Based on the M200 shipping and production, and the higher gross margins with the coherent DSPs buoying up the gross margin, so that’s 71% to 72% range, yes.

[Harlan Sur:]

Great. Thank you.

[Operator:]

Our next question comes from Paul Silverstein with Cowen and Co. Your line is now open.

[Paul Silverstein:]

Thanks. Ford and John, can you give us any update on -- I recognize there's sensitivity, but given how big Microsoft has been with -- for you historically with COLORZ, what is the outlook there? Is there any chance of a meaningful softening at the particular customer. I was hoping you could also tell us what the ClariPhy revenue was for the quarter?

[Ford G. Tamer:]

Thanks, Paul. We are on track with Microsoft and let John take the question on DSP.

[John S. Edmunds:]

Yes, Paul, we’re not breaking the elements out, but the coherent DSP was in the mid-single digits range that was expected to be in.

[Paul Silverstein:]

I appreciate that. Thank you.

[Operator:]

The next question comes from Mark Kelleher with D.A. Davidson. Your line is now open.

[Mark Kelleher:]

Great. Thanks for taking the questions. Let me just follow-up that last question, maybe ask in a different way. I think you indicated that COLORZ came in a little stronger in the quarter than you had anticipated. Is that just fluctuation or is that sustainable?

[Ford G. Tamer:]

The business with COLORZ tends to be a little lumpy based on a construction schedule. So it may have been slow depending on the timing of the project and so forth. So in general the business there is solid and sustainable over the next couple of years, which is what we’ve conveyed to investors.

[Mark Kelleher:]

Okay. And just to kind of step back, if I look at all the new product introductions that are coming out this year, and I look at the two key markets, the long-haul Metro market and the data center market, which one do you think with all these introductions, which one do you think is going to be stronger this year?

[John S. Edmunds:]

Well, I think you have a couple of things going on there more so. One is the long-haul and Metro business is going to recover in China, and then we'll see the M200 and the coherent DSP launch in there as well as a 45 and 64 Gigabaud technology. So I think they all do nicely this year, and then on the data center side we have the PAM businesses that’s driving forward, elucidated earlier with several different products launching and driving growth in that area. And that's really just the beginning of that particular cycle, so we'll see more PAM growth in the next several years.

[Mark Kelleher:]

Would you say more visibility on the data center side?

[John S. Edmunds:]

Not necessarily. I think we have good visibility on both sides. But we have obviously data center has a lot more volume and sort of interested parties and so it tends to have a greater allure that way, but the long-haul metro size is very solid and very profitable.

[Mark Kelleher:]

Okay. Thanks.

[Ford G. Tamer:]

Mark, if I may. This is Ford. I did go through a enumeration of the different growth vector on the PAM side. So if you don’t let me -- allow me to do the same for the Metro long-haul to give you a bit of a feel for what's going on there. So currently we're -- our bread-and-butter is really the 32 Gigabaud coherent TIA and driver. They continue to be number one. 400-gig and both MSA and CFP modules. So that's really the major volume shipment today. The second wave after this is our 45 Gigabaud product, our non-mass production and those are going to allow us to build the 200 gig module for MSA and CFP2 module and that will continue to ramp in the next several years. The third leg then is our 64 Gigabaud product. And again, these are doing extremely well, 10s of customers in terms of design wins and those are being designed for 400-gig and 600-gig platform and line card, daughter card, CFP2, OFFP, QSFP-DD modules. And so that again we will start renting in the second half of this year and going to be a workhorse for many years to come. So you could see even in the Metro long-haul we’ve got now three legs of growth if you wish. Our current 32 Gigabaud business followed by the 45 Gigabaud and then the 64 Gigabaud just getting started. So we're as bullish as on the Metro long-haul as we are in the inside data center having multiple legs on both side.

[Mark Kelleher:]

Okay. Thank you.

[Operator:]

The next question comes from Richard Shannon with Craig-Hallum. Your line is now open.

[Richard Shannon:]

Hi, Ford and John, thanks for taking my questions as well. And also a question on 400-gig data center. You talked about a ramp or at least multiple ramps happenings with the 400-gig PAM4 related products latest early next year. Ford, do you think that is derisked in terms of other ecosystem constraint switch chipsets etcetera or do you still see some risk there?

[Ford G. Tamer:]

Thank you, Richard. Good question. So really what Inphi is about is at this point providing solutions for the whole range of customers. And as I said we're seeing the market divide up if you wish into three different buckets. The first bucket is going to be the early -- earliest customer to go to production on PAM. It's going to be 200-gig and 400-gig along was Polaris and a 50-gig PAM and that will start in Q2. Then the second and third leg are going to be the 100-gig and 400-gig. So we’re seeing actually some customers decide that the 100-gig modules are cost effective and deciding to stick with CWDM4 module is 100-gig so they take these 12.8 terabit switches and 428 ports of 100-gig and there we sell our Vega retimer. While other customers are deciding to put 400-gig modules and there we settle our Porrima chip that goes into 400-gig modules. So you could see customers supporting 100, 200 and 400, and we support all three. The other interesting thing for us is we're discovering -- there is probably even a bigger market for short reach application than for long reach and we're supporting that as well. And we finally have some customers that are interested even in 50-gig type of SFP type of modules and we support that was Polaris, and that's a pretty nice application. So you could see we are multifaceted and have solutions that fit all the customers as platform solution, not justly dependent the DSP or retimer, but it also goes with TIA and driver to complete the platform.

[Richard Shannon:]

Okay. Thanks for that detail [indiscernible] other questions I might have asked otherwise. Maybe my follow-up question, Ford, will on COLORZ. You’ve talked about some development, say, outside the United States, I think in China. Any updates you can give us in terms of business development there?

[Ford G. Tamer:]

Yes. Thank you, Richard. So as far as the next business development for COLORZ, we’re still working in all geographies. We have actually interest from China, from North America, and from European customers. As you mentioned, the lead cloud customer right now as the second potential customer, it's a China one, but we actually have another one that’s a potential U.S cloud customer, still working on it. Then we’re working with networking OEMs that are serving both the enterprise market and the service provider market and those are in all geographies, in China, in North America and in Europe. So this is where the next business development will come from.

[Richard Shannon:]

Okay. That’s helpful. I think that’s all the questions for me guys. Thank you very much.

[Operator:]

The next question comes from Jeremy Kwan with Stifel. Your line is now open.

[Jeremy Kwan:]

Yes, thank you guys for taking my call. Just wanted to follow-up briefly on ZTE and expectations there. You mentioned that there is potential for some market share shifts to go there. Can you give us a sense of maybe potential timing for that?

[Ford G. Tamer:]

Jeremy, if we could answer this question, I wouldn’t be working. So I would say that’s a very difficult question to answer. I’m not sure we know the answer. It's a geopolitical question and that’s beyond my pay grade, I think.

[Jeremy Kwan:]

Okay. And maybe just to follow-up …

[Ford G. Tamer:]

Maybe you can ask the question differently. As far as trying to determine whether this is going to be resolved or not, it's a very difficult question. I think what we’re doing is, we’ve been conservative. We’ve taken the ZTE out of our 2018 forecast and we’ve different model scenarios for 2019, where we assume that if this doesn’t get resolved, this could go to customers that either have the DSP, the TIA and the driver, all coming from Inphi or it could go to customer that have the DSP coming from either their internal effort or a competitor effort. So we’ve got a whole range of different models for 2019 that we will be happy to discuss on a one-on-one, but 2018 to be conservative we’ve taken it out of the revenue.

[Jeremy Kwan:]

Understood. That’s very helpful. Thank you. And maybe just switching gears, I guess, then to the balance sheet. Just that uptick in the CapEx, is this -- do you see this as a kind of a one-time thing or is it kind of an indication of more sustained capital investment ahead from your product launches?

[John S. Edmunds:]

Yes, thanks for the question, Jeremy. Basically we do see CapEx in particularly investing in mask sets as kind of an ongoing part of our spending. And as we -- today we’re shipping and taking out things primarily in CMOS, in 60 nanometer. So I think for this year, we'll see some additional tape out expenditure in 60 nanometer and then maybe late next year we will see or probably in the first half of next year we will see a 7 nanometer tape out at some stage. So obviously gets more expensive as you go down geometry and you have to factor that into your capital spending plan.

[Ford G. Tamer:]

Yes.

[Jeremy Kwan:]

Great. Thank you very much, guys.

[Operator:]

Our next question comes from Tore Svanberg with Stifel. Your line is now open.

[Tore Svanberg:]

Yes. Thank you. So I was stuck there for a bit, but I'm back on. So I may have missed some of this, but, Ford, could you just talk a little bit more about some of the Porrima time lines and perhaps even inflection points that we should be looking for? So, I think the current consensus is that maybe you start to see some revenues from Porrima first half of next year, but if you could go through some of the timeline and some of the milestones for us to look after, that will be great.

[Ford G. Tamer:]

Yes. So, Tore, just to clarify, we had a detailed question where we went through Polaris and Vega will ramp this year and then Porrima next year. Do you want me to go through Polaris and Vega, or your question just is focused on Porrima?

[Tore Svanberg:]

You know, I already heard the answer to that question, so this is exclusively about Porrima.

[Ford G. Tamer:]

Okay. So Porrima exclusively really is starting first quarter next year. There'll be some samples revenue this year that will not be insignificant, so we will be shipping samples quantity this year, but you could take off Porrima production in Q1 '19.

[Tore Svanberg:]

Okay.

[Ford G. Tamer:]

And ramping [multiple speakers].

[Tore Svanberg:]

Okay. And can you put some framework around that in relation to the Tomahawk III. I mean there's lot of speculation back and forth, but based on what you can tell is that product is now sampling too and on schedule?

[Ford G. Tamer:]

As far as we know, the switches are sampling on schedule. There are switch silicon sampling from Broadcom plus another vendor that is also sampling and I think people now with Innovium. So we’ve got at least with this point there are two switch silicon sampling. Broadcom and Innovium are both sampling 12.8 terabit switches. And the market today, both on track. As far as the customers, so far as I said, one major cloud vendor has publicly discussed they’re going to go to 200-gig module and then the 400-gig with 2x 200. Another cloud customer has publicly discussed the fact they’re going to go with 100-gig modules, and the third cloud customer has discussed the fact they’re going to go with 400-gig module, and the rest is still deciding. So I think you could see a split in the market as far as who is going to do what, which plays to Inphi's strengths, because in order to service those three cloud customers, you need a Polaris, you need a Vega and you need the Porrima. So each one of those three configuration I just discussed is going to require a different DSP or retimer, and at this point as far as I know we’re the only one sampling all three flavors to customers today.

[Tore Svanberg:]

Okay. That’s very helpful. And then just last question back to China long-haul Metro, so I understand Q2 is obviously sort of getting back to true consumption. But do you have any data points or anything to share with us on consumption scheduled for the second half of the year?

[Ford G. Tamer:]

What we can share, Tore, is we expect the port count growth in China to be approximately 20% or so this year and consistent with other third-party forecast. So as an example, Cignal AI is forecasting the worldwide coherent port growth to be about 27% from 388,000 ports to 494,000 ports. So it shows the growth is resuming in China in 2018 and this is a worldwide forecast, China is about half of those ports. So our current forecast is actually less aggressive than Cignal AI. We're currently forecasting 20% versus Cignal AI of 27% and that would drive growth in the second half.

[Tore Svanberg:]

That's very helpful. Thank you so much.

[Operator:]

At this time, I’m showing no further questions. I’d like to turn the call back over to Mr. John Edmunds for closing remarks.

[John S. Edmunds:]

Thank you. Inphi plans on attending the Jeffries Conference in Los Angeles on May 10, to sit in with investors in Needham in New York on May 15. Attending the J.P. Morgan Conference in Boston on May 16. The B Riley Conference in Los Angeles on May 23. The Craig-Hallum Conference in Minneapolis on May 29 and 30th. The Bank of America Conference in San Francisco on June 5 and the Stifel Conference in Boston on June 12. Ford and Deborah and I would like to thank you for joining us today and we look forward to speaking with you again in the future.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. That does conclude the program. You may now disconnect. Everyone have a great day.