Inphi Corp
Q1 2017 Earnings Call Transcript

Published: 3 May 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to Inphi's First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference, Ms. Deborah Stapleton, Investor Relations. Ma'am, please go ahead.

[Deborah A. Stapleton:]

Thank you and good afternoon, everyone. Thank you for joining us today to discuss Inphi's financial results for the first quarter of 2017. I'm Deborah Stapleton, and with me today are John Edmunds, CFO; 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 the outlook for the second quarter of 2017. Then, we'll be happy to take your questions. John?

[John S. Edmunds:]

Thank you, Deborah. 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 2017 and beyond, as well as projected growth and size of our markets and our customers, market share, new products and design wins and the integration of ClariPhy. 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 website 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. For this year, in particular, you will notice that we are reporting based on continuing operations and that historical numbers in the press release have been adjusted to reflect the Q3 2016 sale of our memory business to Rambus. This is being done in accordance with GAAP rules for reporting discontinued operations. However, for convenience, we have included a reconciliation to the historical reports on our website for the six quarters ended June 30, 2016. In general, the numbers we refer to in the conference call will be for continuing operations. When we refer to numbers that are not for continuing operations, we will so designate. Now, to begin our review of the quarter, let me turn over the call to our CEO, Ford Tamer. Ford?

[Ford G. Tamer:]

Thanks, John, and thank you for joining us for Inphi's first quarter 2017 earnings update. I'm pleased to report another strong quarter for Inphi with record non-GAAP revenue of $93.6 million, representing 16% sequential growth, and 73% year-on-year growth. This is the fourth consecutive quarter of double-digit sequential revenue growth. After taxes, we achieved $0.44 in first quarter earnings per share, which represents 69% growth over Q1 last year. We are ahead of plan on ColorZ, a 100 gigabit QSFP solution for connecting data centers up to 80 kilometers apart as one mega virtual cloud. With the solid product roadmap, supported by new customers and new applications, we are increasingly confident of the potential of ColorZ for the Data Center Interconnect edge, or DCI, 2 kilometer to 100 kilometer market. We also had many other exciting product and customer announcements in Q1, which we'd expect will continue to support Inphi rapid revenue growth in 2017 and for years to come. Before discussing the new announcements, let me update you on our guidance for Q2. We are guiding revenue to be down 10% sequentially at the midpoint, primarily to account for inventory accumulation in China at our OEM system customers. The China inventory situation developed for us in April, due to a pause in the build out of long haul and metro networks by the China telecom service providers. Based on our system OEM customer feedback, we currently expect the matter to bottom out in Q2 and recover sometime in the second half of the year, when spend for both national and provincial infrastructures resume. Going forward, we are confident that the explosive growth of data and bandwidth will continue to drive Inphi's evolution to a more secular data movement interconnect business. We are in the middle of this transformation from our focus on long haul and metro markets to a more diversified revenue base from the addition of inter and intra-data center markets. Let me be specific. First, we continued to take share in long haul and metro markets for TIA and driver products during Q1. This is evidenced by a record quarter revenue from that business, growing 15% sequentially and almost doubling year-over-year. The share gains were primarily driven by new DCO designs in China and by continued market transition to linear solutions where Inphi's TIAs and driver are well-positioned against our competitors. We strongly believe that our new products are leading the market in performance, new module form factors and quality. In terms of performance, we announced the world's first 64 gigabaud, 600 gigabit released production of our linear TIA and engineering sampling of our linear driver. With respect to new module form factor, we announced a new 32 gigabaud, 200 gigabit linear TIA and driver chipset for CFP2-DCO, or digital coherent optics, which have already achieved multiple design wins. Finally, we raised the bar in quality by surpassing 25 billion hours of incident-free field operation for our coherent TIAs. Inphi is well-positioned to regain momentum in our TIA and driver business as the inventory situation clears up. In those same long haul and metro market segments, we continued to make progress through our coherent DSP solutions from our ClariPhy acquisition. We taped out a new low-power product in Q1 and intend to sample it to customers in Q2. We expect this to be a driver of Inphi's revenue growth in the second half of 2018. Moving to our inter-data center market, our ColorZ solution was ahead of consensus in Q1, growing over 10-fold from a small base in Q4 2016. We expect to continue to outperform our projections in Q2. However, while deliveries are ahead of expectations, we're still short of our tremendous customer demand. We have achieved our target margin yields and are continuing to work on scaling the manufacturing capacity and supply chain for higher demand. I'm also pleased to report, we now have an additional large ColorZ customer that's currently in initial system validation. We expect this new customer to deploy in the second half of the year. The interest in Inphi's ColorZ solution continues to build. We had several very successful ColorZ demonstrations at the Optical Fiber Conference in late March in Los Angeles. The first demo was hosted in our booth with Arista and Adli (8

[John S. Edmunds:]

Thanks, Ford. Now, let me recap the financial results. In the first quarter of 2017, Inphi reported revenues of $93.6 million. Revenues were up sequentially 16%. Core communications revenue was up in Q1, with growth coming from our market-leading amplifiers, drivers, optical physical layer products, and DCI edge solution, ColorZ, now ramping ahead of plan. You'll recall last quarter, we defined our core communications products as the amplifiers, drivers, 10, 40 and 100 gig physical interface products and ColorZ, all of which sell into the service provider and data center interconnect markets. Last quarter, we described our potential to grow in core communications for the 2017 year in the range of 42% to 46%. Now with the inventory accumulation in China affecting our Q2 forecast, we expect that number to be somewhat smaller, in the range of 36% to 38% growth for the year in 2017. ClariPhy is still tracking to revenue in the range of $42 million to $45 million for 2017. When we add ClariPhy to other core business in Q1, the total makes up 88% of our revenue as compared to transport and legacy business, which was about 12% of our revenue in Q1. As expected, the transport and legacy business declined about 9% sequentially and about 14% year-over-year. This is due to mix changes as well as annual price renegotiations that typically take place in Q1. We would usually see transport and legacy remain relatively flat each quarter for the balance of the year. Gross margins on a non-GAAP basis in Q1 came in at 71.3%, which was down about 200 basis points from the 73.3% posted in Q4. This decline was a little stronger than the 30 basis points to 70 basis points decline we had forecasted. Generally, the decline was driven by the mix of product and reflects a relative surge in sales of packaged drivers in the quarter, which has good gross margins, but not quite as high as the higher gross margins associated with our die-based solutions. In Q2 2017, we expect the gross margins to be down approximately 80 basis points to 180 basis points. Again, this is a function of mix in the quarter and reflects a higher mix of ColorZ products. These currently ship with some additional components grab due to typical new product/component introduction challenges. All-in, we estimate non-GAAP gross margins for Q2 to be in the range of 69.5% to 70.5%. We expect gross margins to improve in the second half of the year, as the inventory accumulation in China is resolved, yields improve and we ship more high-margin Inphi and ClariPhy products as part of the mix. We're confident that gross margins can remain comfortably above 70% for the year 2017 as a whole. Q1 GAAP net loss from continuing operations was $11.3 million, which compares to non-GAAP net income for the first quarter of 2017 of $19.5 million. This $30.8 million improvement for non-GAAP reporting is derived by adding back the following recurring non-GAAP adjustments

[Operator:]

Thank you. And our first question comes from Tore Svanberg from Stifel. Your line is open.

[Tore Svanberg:]

Yeah. Thank you. Few questions. First of all, Ford, I realize visibility is probably not that great right now, but you did say you expect the recovery in China to happen in the second half. I was just wondering what gives you that confidence at this point.

[Ford G. Tamer:]

Thank you, Tore. So you're asking when the recovery will come back. We cannot, at this point, forecast the recovery timing because it's in the hands of our system OEM customers and their telecom service provider customers in China. What I could tell you is what our customers are telling us. Our system OEM customers are telling us that they didn't expect the long haul and metro port to grow from 2016 to 2017. Our system OEM customers are also telling us they expect a recovery to begin in the second half of 2017, however, visibility is limited, and we cannot at this point predict whether its Q3 or Q4. Our system OEM customers are also telling us they'll have more accurate forecast in the May to June timeframe. Once the recovery occurs, we're confident that Inphi will be well-positioned to benefit from that recovery due to our differentiator product and the leading market share in those markets, Tore.

[Tore Svanberg:]

Very good. And could you also update us on ColorZ, the capacity – the revenue capacity you have? I mean, it sounds like its ramping ahead of expectations, but you mentioned a second customer coming online in the second half. So, what types of revenue capacity do you have at this point for that product line?

[Ford G. Tamer:]

So we've increased the capacity significantly from Q1 to Q2 and planning to continue to increase it towards Q3. The yields of the margins are where we'd like them to be at this point, so we're satisfied and happy with the margin yields. We're still working with some supply chain component issues that could limit the upside growth. The demand is definitely here with the second customer now in system validation and many more customers interested in proceeding with deployment in the second half. So, we're still very positive on demand. We're working hard to increase capacity and that would be step at a time, quarter a time, Tore, we're working on increasing that.

[Tore Svanberg:]

Very good. Just one last question. Could you maybe update us a little bit on clarifying the competitive landscape there? I believe one system OEM at OFC talked about getting into the merchant DSP market. So, if you could just update us on the dynamics there and especially competitive landscape, that'd be great? Thank you.

[Ford G. Tamer:]

Yeah, we're getting ready to sample in Q2 a best-in-class power and highest integration, from a feature and function point of view, metro and long haul DSP in the market. We do believe that it should significantly increase the ClariPhy coherent DSP market share, just based on the design wins that we already have secured for those 16 nanometer products. So this new announcement at OFC does not impact the product we just sampled. We believe this new announcement at OFC will not have an impact until probably couple of years from now. In addition, we're very excited about what Inphi can impact – how Inphi can impact the ClariPhy product roadmap by taking it to 7 nanometer, helping with lower power design, integrating our world class SerDes IP into it and really getting synergies between the two teams. So still very positive on where this ClariPhy roadmap can take us and expecting a nice revenue increase in the second half of 2018, Tore.

[Tore Svanberg:]

Very good. Thank you very much.

[Operator:]

Thank you. Our next question comes from Quinn Bolton from Needham. Your line is open.

[Quinn Bolton:]

Hey, John, you went through the numbers pretty quickly, but if I heard you right, it sounds like your core communications business you said would grow 36% to 38% year-on-year, down from the prior year 42% to 46%. Is that the right number?

[John S. Edmunds:]

Yes, Quinn, that's correct, 36% to 38% for the core communications, including ColorZ, growing in 2017 versus the core in 2016.

[Quinn Bolton:]

Got it. And so, if I do my rough math, it sounds like 2017 revenue, given the range you expect for ClariPhy and the transport, probably comes out around $375 million, plus or minus, say, $5 million.

[John S. Edmunds:]

Yeah, we're not guiding to a specific number, but you could certainly pull the components together and come up with something in that range.

[Quinn Bolton:]

Great. And then it sounds like ColorZ is tracking nicely ahead of plan. I don't know (28

[John S. Edmunds:]

Yes. It exceeded that for the March quarter.

[Quinn Bolton:]

Okay. And will be double-digit then in June you said?

[John S. Edmunds:]

That's correct.

[Quinn Bolton:]

Great. So it sounds like you guys had previously talked about a sort of $30 million target, sounds like your – for 2017, it sounds like you're tracking nicely above that for ColorZ, given your first half numbers already put you probably more than half of that.

[John S. Edmunds:]

That's correct.

[Quinn Bolton:]

Got it, great. And then, just moving over to the gross margin, you guys have been tracking in sort of the 72% to 73% level prior to the ramp of ColorZ. Do you think you can get back to that level once we get through this inventory correction or will ColorZ sort of bring that level down a touch?

[John S. Edmunds:]

I think not necessarily ColorZ, but just the mix of products. ColorZ is certainly a part of the mix, but just in this particular quarter, we had very good driver growth and gained share in the driver market. But we were shipping more packaged drivers than we had in the past. And relative to the amount of die-based solutions that made up our mix prior to this quarter, it brought down the gross margin a little bit. So we do expect gross margin to improve in the second half just based on both mix of product and being able to sell more ClariPhy product and some of the higher margin Inphi product as well. So there's a number of factors that should keep the margin moving back up in the back half of the year, probably more on the 71%, 72% range, though.

[Quinn Bolton:]

Okay, great. Thanks, John. Thanks, Ford.

[Operator:]

Thank you. Our next question comes from Harlan Sur from JPMorgan. Your line is open.

[Harlan Sur:]

Hi. Good afternoon, guys. Thanks for taking my question. On the inventory overhang here kind of near-term, I want to try to understand where the inventory pockets are? Are they mostly with your module partners or with your OEM customers? And I'm just wondering if the team has assessed module inventories with your systems OEM partners? I'm just trying to get a feel for if you guys have a good understanding of where total inventories are across the entire value chain such that when demand does pick-up, you anticipate a smooth transition.

[Ford G. Tamer:]

Thanks, Harlan, on the inventory depreciation you're asking about, we were informed in April by certain OEM customer of their intention to reduce inventory. And this decision, as you allude to, affected us both directly and indirectly at both the system OEM as well as through the module maker customers that we also service. So on the system – we sell directly to both system OEM as well as the module maker. And at this point believe we have taken a good reduction in both the forecast of both the system OEM as well as the module makers. And we can walk you through the different details maybe at a follow-on call, if needed.

[Harlan Sur:]

Okay, great. Thanks for the insights there. And on ColorZ, sounds like you guys have done a good job of ramping that program ahead of plan relative to I think our expectations for roughly about $30 million in revenue this year. And if we take into account the potential ramp of a second major customer, and let's assume that your ColorZ program in general does exceed $30 million in revenues this year, I'm wondering, thinking about your capacity plans, could you support a revenue number, a program number that supports greater than $30 million kind of manufacturing wise exiting this year?

[Ford G. Tamer:]

Harlan, yes, we are working towards a manufacturing capacity plan that would support above that $30 million for the year.

[Harlan Sur:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question comes from Ross Seymore from Deutsche Bank. Your line is open.

[Ross C. Seymore:]

Hey, guys. I wanted to get back to the inventory side of the equation. I know you have limited visibility, but the guidance range you gave is much wider reflecting that lack of visibility, I'm sure. But can you just talk a little bit about what goes into the equation at the higher or lower end of the revenue guidance that you're giving?

[John S. Edmunds:]

Ross, I think it's really a function of the forecast that we have from our customers. So I think we feel comfortable at the midpoint, but as this quarter has shown that, forecast is just that it's a forecast, so we could have some business continue to get soft. We don't anticipate that. So we have a lower end of the range. And then, we do expect that business can improve at some stage, but it's never just one quarter. So it'll probably take couple of quarter before we're back to full steam again.

[Ross C. Seymore:]

And as we go through this correction, is pricing part of the equation to clear out the inventory and does that have any implications for your gross margin?

[John S. Edmunds:]

No. Pricing really isn't a factor at all. We've gone through and looked carefully at what's going on with pricing through the first quarter and into the forecast for the rest of the year. That's not an issue in terms of what we're looking at, strictly unit consumption as far as we can see.

[Ross C. Seymore:]

And I guess my last question will be on the OpEx side of things. You guys have had great growth longer term, and you always want to invest for the future and not overreact to any of these cyclical corrections. But what sort of levers can you pull on the OpEx side of things during tight revenue times like this to mitigate the impacts to the bottom line?

[John S. Edmunds:]

Yeah. We're certainly taking actions and we're only hiring critical employees at this stage for the balance of the year and we're tightening our belt. So we do think we can save probably something on the order of about $5 million to $10 million in our operating expense this year, maybe more than that if we need to, but we're looking at trying to continue to prosecute our development plans, as well as keep an eye on the bottom line as we move through the year.

[Ross C. Seymore:]

Great. Thank you.

[John S. Edmunds:]

Thanks, Ross.

[Operator:]

Thank you. Our next question comes from Timothy Arcuri from Cowen & Company. Your line is open.

[Karl Ackerman:]

Hi. This is Karl Ackerman for Timothy. I just wanted to follow-up on that last question regarding OpEx. So, if I look at your second quarter guide, it does imply OpEx declining, I think, low single-digits sequentially. You touched on some of the actions that you could do to save on the OpEx in the second half of the year. But how do we also think about your ability to reduce OpEx? As you balance increasing capacity, you'd also look to gain synergies on the R&D side from your recent acquisition of ClariPhy.

[John S. Edmunds:]

Yes. We certainly are gaining synergies from that perspective as we integrate the company and we will continue to look for those. In particular, in the second quarter, we have some co-development funding coming in that's offsetting some of the R&D expense, so that's a part of the plan for the second quarter. And so that's what's influencing that differential.

[Karl Ackerman:]

Got it. So I guess, from a follow-up perspective, so as we think about the second half of the year from an OpEx perspective, should we think about kind of a mid-40s level from here? Or is it a function of your opportunity to expand, increased your capacity in the second half of the year? If you just help us out on OpEx that would be helpful. Thanks.

[John S. Edmunds:]

We'll have some increases, Karl, from the second quarter, but we will stay in the mid-40s kind of range. And would be happy to help you after the call understand the comment I made previously about savings potential for the year. Next question?

[Operator:]

Thank you. Our next question comes from Vivek Arya from Bank of America Merrill Lynch. Your line is open.

[Vivek Arya:]

Thanks for taking my question. Ford, on the inventory accumulation in China, is there a way to quantify that? And I think sort of along those lines, you mentioned this 36% to 38% core communications growth for 2017. Are you assuming a snap back in Q3 or do you think it is prudent to sort of assume sort of flattish trend in Q3, but with more of the recovery in Q4? What I'm really trying to get at is, this is not the first time your industry has gone through this kind of excess inventory issue. From your prior knowledge, how long do these things last? And is it better to be a little more prudent and assume that the recovery could be maybe two quarters out rather than one quarter out?

[John S. Edmunds:]

Yeah. So, Vivek, this is John. Thanks for the question. Generally speaking, we don't expect a full recovery in the third quarter or a complete snap back, but we would expect some level of recovery starting in the third quarter and then getting back to something closer to what we had originally forecast or the Street had forecast in the fourth quarter. So I think getting back to something along the lines in the first quarter, in the third quarter as an example would be a relatively good goal and kind of a midpoint rather than thinking we can fully recover.

[Vivek Arya:]

Got it. And on ColorZ, good to see the strong ramp there and the second customer. The $30 million target you had before, was that inclusive or exclusive of this second customer, because if I think – if you were to just maintain the low double-digit ColorZ number you had in Q2, and if we assume that it sort of stays at least at that number in Q3 and Q4, you would certainly be above the target you had. But I just want to make sure, was that already inclusive of a second customer or can that second customer present some kind of upside?

[John S. Edmunds:]

The $30 million consensus number that we have discussed in the past really just represented one customer – our lead customer, Vivek. So the second customer would add to this. We also have interest from many other, both cloud and OEM customers, for various applications for ColorZ. So the demand for ColorZ is significantly higher than the capacity and right now, our focus is how to increase capacity to be able to meet that demand. So the upsides for ColorZ is definitely here, demand is here. We're working hard to increase capacity to be able to meet that demand. And as we do, we'll be more diversified inside the inter data center type of market to potentially help mitigate any service provider longer inventory issues.

[Vivek Arya:]

Got it. And just one last one, Ford, you mentioned China is about 40% of the optical market. So one part of the question is how is the demand outside of China and then sort of Part B of that is, and my understanding has been that sometimes what you ship to China also goes outside of the China and their export markets, so the domestic consumption is perhaps smaller than 40%. So if you could just give us some color around the demand trends that you're seeing outside of domestic China? Thank you.

[John S. Edmunds:]

Vivek, this is John again. So I think if you look at Huawei, in their financial results, I'll say that about 40% – I guess 41% is for domestic consumption. So Huawei does ship around the world and so do other people that we ship into in China. So there's a fair amount of business that where people manufacture in China and then it gets exported to other markets. So it truly is a global market that we're looking at here, and this is primarily focused on Chinese manufacturers, but it is a function of their demand. And so I think to answer your question, we have had some other markets also have issues that have contributed toward the overall problem, but in general, the major issue has been the inventory accumulation in these Chinese manufacturing sites.

[Vivek Arya:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Hans Mosesmann from Rosenblatt Securities. Your line is open.

[Hans Mosesmann:]

Hey guys. Question on the capacitors that you are buying. Is that for ColorZ?

[Ford G. Tamer:]

Hans, we did not mention capacitors. We mentioned we're increasing capacity for ColorZ.

[Hans Mosesmann:]

Okay. My bad. So, I thought you were purchasing some products that were going to be constrained as part of the supply chain.

[Ford G. Tamer:]

Yeah. These are not capacitors. There may be some components we'd buy in the supply chains that are creating some capacity issues, but these aren't capacitors.

[Hans Mosesmann:]

Okay. So what are these components and just to kind of frame what types of products are involved here? My bad in assuming it was a capacitor. But if you can give us more granularity that'd be great.

[John S. Edmunds:]

Yeah. Hans, this is John. We're mixing up two words here, I think. There's no issue – these capacitors aren't related to the ColorZ product, first of all, to clarify your original question. And the buildup in inventory that we've had is a function of making a long-term investment in capacitors related to another product that we sell and it's a product that we'll sell well and continuing to sell well for quite some time. So, we want to make sure we didn't have a supply issue on that particular component.

[Hans Mosesmann:]

Okay. And then one last one and just related. Are there any other components that you would need to perhaps buy in anticipation should there be more supply constraints or more severe constraints?

[John S. Edmunds:]

Not that we anticipate a problem was right now. We are not over investing. We are trying to improve the supply chain in various areas, but nothing specific like this particular investment that we made.

[Hans Mosesmann:]

Okay, great. Thanks a lot.

[Operator:]

Thank you. Our next question comes from Richard Shannon from Craig-Hallum. Your line is open.

[Jorge Rivas:]

Good evening, guys. This is actually Jorge on behalf for Richard today. So I was wondering if you can provide some more granularity on the issues in China. I mean, I understand that there is a build up at your OEMs that impacts the components and modules. But if you can just, given the share reaction, aftermarket of your shares would imply that the cycle is over and we certainly don't believe that. Can you just give us a little bit more detail? I understand that this is related to the delays of the next phase of 100 gig deployments. What is exactly causing the delay? Is this red tape from the Chinese Government or are there other elements involved in this?

[Ford G. Tamer:]

Yeah, Jorge. This is Ford. Let me clarify this a little more on this inventory depletion issue that you're asking about. We learned in April of our customer decision to reduce inventory. We did not know earlier on of their decision to consume inventory for a period of time rather than continue to carry that inventory. So it was only in April that we were made aware of their decision to reduce inventory. And we do believe that the burn off should happen in a quarter. However, given the lack of visibility, we're being cautious and not calling it Q3 or – and being careful on saying could be Q3 or Q4 recovery. We've had other vendors, like there was a vendor yesterday who discussed a very similar issue on the RF side of the world, so not on the communication or optical, but this was RF specific, where they also discussed the same inventory buildup at that same major Chinese customer. And their view was that this was going be a one quarter type of issue that should be completed in the June quarter. Our markets are really long haul and metro networks, and yes, there has been a pause in the build-out of the backbone, both national and provincial backbones in China. And it's hard for us to tell you the exact timing just because that decision is in the hands of our system OEM customers. But again, I'd go back to our Q1 results, demonstrate that we are taking share in TIA and driver. Our Q1 results demonstrate that we have some very differentiated product, that we're working very closely with those Chinese OEM, as well as their customers on the telecom service providers, and again, demonstrate that we're well-positioned to benefit from the recovery when it comes back. So we do believe that as soon as we hear good news on that pause getting released, we should see a pretty nice recovery for Inphi.

[Jorge Rivas:]

Okay. Thank you, Ford. And then one last one on the computer market. With the announcement of Ciena, willing to license its own DSP to other module providers and with Acacia and you guys, I'm wondering, if you are seeing any other entrants in the market as the market evolves.

[Ford G. Tamer:]

So, again, we do not believe the Ciena decision to license their DSP is going to impact any of the pre-established vendors, ourselves, Acacia, NEL in the short-term. I mean in the short-term, the design wins are already won, the software is already being developed, the boards are being developed. We do not believe that Ciena's decision will impact any of the three of us in the short-term. Longer term, time will tell. We do believe that there's a huge advantage to purchase DSP from commercial DSP vendor like ourselves, Acacia, NEL as opposed to go through a captive OEM system. You're going to need to debug software on your system. You're going to need to have application engineers go work at the customer, customers. I'm not sure you want a competitor's application engineers debugging your system. So we do believe, it'd be a lot easier for our system OEM customers to work with the commercial DSP vendor, like one of the three established vendor as opposed to a Ciena type competitor.

[Jorge Rivas:]

That was great color, Ford. Thank you very much. That's all from me.

[Operator:]

Thank you. Our next question comes from Joe Moore from Morgan Stanley. Your line is open.

[Joseph L. Moore:]

Great. Thank you. Yeah, following-up on the last question, I guess that inventory situation that you discovered in April, was there anything that caused it other than just maybe demand not being as robust as people had thought? Was there any kind of a shortage situation where the customer had overstocked, or just any color that you can give us on where this extra inventory came from, if it wasn't a demand shortfall in Q1?

[Ford G. Tamer:]

Yeah. Joe, so if you look at the inventory build up, it started occurring probably in the December and some in the Q1 timeframe, but it was a strategic inventory that was supposed to be kept. And what seemed to have happened in April is that there was a decision that they did not need to keep that inventory anymore for a variety of reasons, some could be geopolitical. This happened starting in late – sort of mid to late April, we started seeing early signs in early April and it got increasingly clear through the next couple of weeks of April. So anywhere from April 10 to April 24 forecast, those couple of weeks, we saw some forecast being canceled based on the decision from the Chinese OEM vendor that they did not need to keep that strategic inventory. So I mean, there are potentially multiple reasons that we can surmise as to the cause of it, but you probably can come up with the same reasons. I mean – multiple reasons why they may not want to keep it, but it's basically their decision to consume inventory as opposed to keep it for strategic reasons.

[Joseph L. Moore:]

Okay. That makes sense. And then, I guess, the situation has evolved relatively quickly. You gave a wide range for Q2 and yet your range for core comps for the year is pretty tight and does imply a good sequential recovery in the back half. What gives you that degree of sort of precision on the full year? And is that because of the ColorZ ramp or is there some other element that we should take into account, because it seems like you're not exactly clear on when the long haul metro businesses get better, but you're still forecasting to a pretty narrow range overall?

[John S. Edmunds:]

Well, I think our confidence in the demand for ColorZ product and our ability to ramp the capacity through the course of the year is the big part of that, Joe. And other than that, I think we feel like we're being relatively conservative, but trying to be realistic about what we can do in the back half of the year with growth in the product set. So there's combination of factors, but it's a well studied, analyzed number. It wasn't put together lightly.

[Joseph L. Moore:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question will come from Brian Alger from ROTH Capital Partners. Your line is open.

[Brian Alger:]

Hi, guys. Good afternoon. A lot of question has been asked. I appreciate you guys are going through at all. You made a comment earlier that you didn't see an effect of pricing as a result of the inventory buildup. That seems a peculiar to me; that tends to be the next shoe to drop whenever we've had these in the past for the industry when there's been a prolonged delay, I guess, in spending. Why is it that you don't believe pricing won't be affected?

[John S. Edmunds:]

Yeah. Brian, I think we keep a fairly close watch on pricing in our forecast and I look to see whether pricing was a factor in our Q1 results or if it was a factor in the forecast that we have. So, right now, as we sit here, we don't see pricing becoming a particular issue. In a lot of cases, we're sole-sourced in the particular design. So it's a function of those end customers deciding to go ahead and ship those particular modules. And if they do, they're going to be using our components to sell them. So we shouldn't see a lot of variability. There isn't a lot of hand-to-hand combat over a particular component pricing. Even our analog components, if someone were to choose this, a different one that has different performance characteristics, and it has to be qualified in its own modules. So, it's not so simple to have two different components as far as for the same socket. So, that's why we don't this as much as you might in other markets where it's really a commodity that could be replaced.

[Brian Alger:]

Got it. And that's helpful. Thanks, John. And maybe a bigger picture question on this, with the delay or decision to work down the inventory. From an aggregate demand standpoint for the amount of fiber that needs to be deployed or the amount of gigabits of traffic that needs to be supported or the overall plan to support data growth within China, has anything changed from a fundamental long-term perspective?

[Ford G. Tamer:]

Brian, thanks for the question. We have not seen a change and the need for data or bandwidths. We have not seen a change in the need to continue to build long haul and metro networks to support that continued growth of data and bandwidth. So we're still confident that this will resume. We are also being told by our system OEM customers that they are still planning to grow the ports from 2016 to 2017. And if their support growth comes back as they are predicting, then we should be able to at least to the numbers John is discussing or better. The problem right now is we obviously have taken a sharp correction and we're being gun shy about predicting this. So I think what you may be seeing here is a bit of conservatism on our part because we don't have visibility. So if the port grows – from 2016 to 2017 grows, I think we should be in pretty good shape. And our system OEM customers are telling us this is what's going to happen. We just are a bit worried about being too aggressive on predicting this ourselves. So, we're saying, look, May, June is what they're telling us – they're going to tell us more about it. I'd be in Asia twice at least in the May and June timeframe. Our VP sale would be there two, three times. Our staff is going to be spending a lot of time. As you can imagine, we've spent a lot of time in the region and we're going to spend even more time in the region trying to understand and stay close to the customer situation. But we'll get more data in the May, June timeframe.

[Brian Alger:]

Great. Well, I appreciate that, Ford, and I applaud the conservatism. I think it only makes sense to be cautious when you don't really know what the game plan is. Just one quick follow-up with regards to the growth here. There been a lot of talk about tenders or release of government projects here. With this OEM in particular, is their growth dependent upon the government subsidizing or the government paying for the deployment?

[Ford G. Tamer:]

Yeah, the question I think you're asking is, what is the timing of these tenders and whether the recovery at this particular OEM is tied to these tenders, right. As John mentioned earlier, that those Chinese OEM sell in China and as well as outside of China. So for the China growth, yes, they are depending on those tenders coming back. The picture that seems to be emerging right now is what's being called the Phase 12 that is a tweener that seems to be a presumption and the national backbone build out and that seems to be a small incremental spend on the national backbone. And this new tender, the China mobile terminology is Phase 13 for those provincial backbone is the one that has – that seem to have been pushed through the second half of the year. And again, we are hearing that we should get more specificity on the exact timing in the month or two timeframe. So we don't have that visibility today, Brian. We should have it in a couple of months.

[Brian Alger:]

Got it. Thanks, Ford and John. Appreciate it.

[Operator:]

Thank you. And that does conclude our question-and-answer session for today's conference. I would now like to turn the conference over to John Edmunds for any closing remarks.

[John S. Edmunds:]

Thank you for attending the call today. Inphi plans on attending the Jeffries Conference in Miami on May 9; the JPMorgan Conference in Boston on May 23; the Craig-Hallum Conference in Minneapolis on May 31; as well as the Stifel and Bank of America Conferences in San Francisco on the first week of June. 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:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.