Q3 2019 Earnings Call
Ladies and gentlemen, please stand by your insights third quarter 2019 conference call will begin momentarily again. Please standby conference will begin in a few minutes. Thank you.
I'd now like to introduce your host for today's conference Ms., Deborah Stapleton you may begin.
Good afternoon, everyone and thank you for joining us toward entice financial results for the third quarter 2019, I'm, Deborah Stapleton and with me today are in Vice President and Chief Executive Officer for Tamer.
Chief Financial Officer, John Edmunds, and burn assay, and finally senior director of Investor Relations.
Let's start off with Sterne, giving you the is safe Harbor and then Ford will give you an overview of our business after that John will provide a financial summary of Q3 2019 and the outlook for Q4 2019, then we'll be happy to take your questions burn.
Thank you Doug. Thank you for joining us today to discuss the financial results for the third quarter of 2019, a copy of today's press release can be found in the Investor relations portion of in fights web site at Inphi Dot Com slash investors.
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 2019 and beyond the projected growth and sides of our markets our customers marketshare, 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 take 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 Dot FCC Dot Gov.
Please refer in particular to the sections entitled Risk factors, we encourage you to read these documents.
Also during the course 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 <unk> Dot Com. This information is not a substitute for gap and should only be used to evaluate the company's results in conjunction with corresponding GAAP measures.
Now did begin to review the quarter, let me turn the call over to our CEO for Tamer Ford.
Thanks, Robin and good afternoon.
Thank you for joining us for third quarter earnings report.
Q3 was an excellent quarter.
It was both revenue and if yes exceeding the high end up our guidance range driven by strength in voice crowd and telecom customers.
This was despite continued headwinds I'd walk away.
In fact, our Q3 revenue set a record has the highest in our history.
And we're confident there would you continue to accelerate into your and and 2020.
In the third quarter of 19, we generated record revenue of $94.2 million.
9% sequentially increase over our second quarter 2019 revenue of $86.3 million.
And also this represents a 20.8 increase over to 78 million, we reported in Q3 off 2018.
On the non-GAAP basis, we earned 45 cents per diluted common share in the third quarter.
29% sequential increase over Q2, 29, Teeny P. S O F 35 cents.
This is it 50% increase over to 30 cents, we reported on a per share basis in the third quarter off 2080.
To illustrate the scale of the P.S. achievement, we guided for Q3, non-GAAP EPS midpoint of 37 cents on August 1st 29 team and we delivered an outstanding eight cents improvement.
Going to free up yes, it's 50% is about two and a half times, the 20.8% and your growth rate in our Q3 revenue.
This demonstrates the financial leverage in operating model as we continue to scale and execute for our customers.
This quarter's performance also demonstrates our continued diversification of revenue by geography.
Market segment and product type.
First as we know we continue to deal with a trade restrictions placed on why we.
In fact, all revenue from one way declined slightly in the third quarter.
Second we experienced slight push outs in Q3, and the ramp of Pam inside data centers.
Despite these situations or other customers grew at a healthy rate to more than compensated for the revenue headwinds.
The revenue increases in Q3 came from the following factors.
First.
Our lead customer for a pan for Silicon Photonics colors modular so significant upside in Q3.
This was highlighted on the earnings call around the move to a distributed computing fabric.
And driven by new data center beds across multiple geographies, including Europe and India.
Second our Mtwo hundred coherent DSP continue to ramp at multiple customers worldwide.
It is not clear there are customers consider inphi as the performance Peter immersion coherent DSP and are choosing goes over alternative solutions.
Third.
Our Vega Pam Retimer for line cards exhibited double digit sequential growth in Q3.
Finally, we continue to ramp our 64 Gigabaud T. I M driver, that's companion offerings to boast captive and merchant coherent DSP.
As we look forward to Q4, you could see that we have a very healthy guidance ahead of our expectations.
We expect the production ramp for Pam inside data centers to continue in Q4.
Our 50 gig Pam DSP platform for 200 gig optical modules is already shipping and high volumes.
The pilot drawn far 100 gig Pam DSP platform is proceeding what.
So we expect continued production ramp a 400 gig <unk> in Q4.
This would be in conjunction with a continued ramp of our Pam Retimer for line cards at networking system customers.
We also expect districts of hundred good color as modern and I'm 200, coherent DSP to continue.
As you can see insight continues to show resiliency to specific customer or sector news and to geopolitical issues.
Our diversification strategy across geographies.
Market segments and prototypes positions Inphi, that's a stable investment for future growth.
Our continued focus on innovative products for customer success was on display I do your European conference on optical communication or E. C O C in Dublin last month.
There we showcased.
First.
Oh sure our various PEM Dsps and Retimers was companion, Pam <unk> A's and driver.
For the victim.
The M N.
He and.
And silicon Photonics optics for inside data centers.
Second.
Our colors, Pam and Silicon Photonics based optical solution for 80 kilometers between data center interconnect.
And a multi vendor interoperability demo for its roadmap to our coherent 400 gig ZR solution 420 kilometers between data centers.
Third our coherent DSP was companion coherent <unk> driver for telecom applications.
This this pay demonstrated our leadership position for 5100 204 hundred gig applications inside data centers.
Well the data center is the computer.
As well as 100 204 hundred applications between data centers, where the cloud is the network.
I know like others.
In fives in production was hundreds of thousands of units.
In fact at E. C O C. We announced production of our next generation hundred gig Parima platform for 400, <unk> with several packaging options.
For an update on our markets products and customers. Please refer to the new presentation. We have just uploaded to our website on the boasts the about inphi and investor types.
In summary, I leave it was for messages.
One.
Core business is very healthy for both inside and between data centers.
Two.
Our team has consistently delivered market leading product.
Three.
Despite geopolitical and customer headwinds our revenue has exceeded our expectations.
For.
We're demonstrating leverage in our financial operating model was EPS growth outpacing revenue growth.
With that let me turn over to cold to John for a deeper discussion of our financials John .
Thanks for now let me recap the financial results.
In the third quarter of 2019, Inphi reported revenue of 94.2 million, which was up 9.2% sequentially from Q2 and up 20.8% year over year.
This result was 4.7% better than the midpoint of our guidance of 90 million.
Addressing this revenue growth in more detail, our cloud products, including the Pam DSP products gearboxes, CD ours colors and cloud T.I. isn't drivers grew 3.4% sequentially.
40.5% year over year in comprised of 56.2% of total revenues in Q3 19.
Our growth was primarily led by colors with Pam business being solid and poised to drive growth in Q4.
Telco grew 20.6% sequentially in the quarter and 7.3% year over year and represented 39.2% of revenues in Q3.
Telco grew primarily on the strength of our coherent DSP technology and amplifiers. This despite the ongoing walk away situation, where we experienced another small sequential quarterly decline indirect revenues.
The legacy transport business represented 4.6% of revenue in Q3, 2019, which was flat from Q2.
In Q3, 2019 to GAAP gross margin was 57.8% up from Q2 s, 56.9%.
The GAAP gross margins include 9.7% 9.7 million, an acquisition based adjustments and 1.9 million of stock compensation expense.
Whereas the GAAP non-GAAP numbers do not.
Please see the reconciliations in our press release for more detail.
Got it gross margins on a non-GAAP basis in Q3 came in at 70.2% slightly up from the midpoint of our guidance based on a balanced mix of cloud and telco business, including mid single digit millions of NRT and licensee on both sides of the business.
Q3, GAAP net loss was 16.2 million and then we then add back adjustments of 39.5 million of certain standard noncash cap expenditures for stock compensation acquisition related accounting and convertible debt cost Amber amortization. This compares to the 37.3 million report.
In Q2, the difference is higher overall stock compensation expense in Q3.
To get to non-GAAP net income you also need to deduct.
Definitely 2.1 million in noncash gains from a standard remeasurement of private and public equity investments. Finally, we had the tax benefit associated with these non-GAAP adjustments of approximately <unk> point Threemillion to arrive at Q3, non-GAAP net income of 21.5 million.
This was up 29.5% sequentially and 57% year over year.
Now looking at the remaining components of non-GAAP reporting non-GAAP operating expense for Q3 totaled 44.7 million, which was up point 7 million or 1.7 per cent compared to the 44 million reported in Q2.
The Opex came in at the lower end of our range due to the following factors lower than forecasted hiring and coming and the hiring coming later in the quarter.
Lower consulting and lower project expense overall, Q3, non-GAAP operating margin increased to 22.7%.
Compared to 19.1% in Q2 and 17.4% in the same quarter one year ago.
GAAP net interest expense net of other income for Q3 totaled 4.7 million of expense. If you add back 7.2 million in noncash accretion and amortization expense associated with the convertible debt and then deduct approximately 2.1 million gain in noncash GAAP equity investment income you will arrive at point.
Fourmillion non-GAAP other income.
The gap.
Income tax expense for Q3 was point sixmillion into non-GAAP tax was a charge of point threemillion.
We are currently forecasting a GAAP effective tax rate for the year of negative 1.3%. This means we expect the tax charge in some jurisdictions, even though we should have a loss a GAAP loss worldwide.
As we have set in the past, we find the GAAP tax rate to be difficult to forecast. The non-GAAP effective tax rate for Q3 was 1.5% and represented point threemillion.
We have updated or forecast for the 2019 non-GAAP effective tax rate for the year to be 3%.
Worldwide cash income taxes paid across a variety of jurisdictions for the first nine months of the year was $177000.
Now turning to the balance sheet overall cash and short term investments was up 11 point Threemillion from 413.5 million at June 32, 424.8 million at September 30.
Were also up 17.4 million year to date.
This increase in Q3 was primarily due to a positive cash flow from operations of 25.7 million offset by 4.6 million in Capex and 7.5 million in payments of software license and licenses and equipment financing obligations, which gave us free cash flow of 13.6 million <unk>.
Free cash flow, then combined with EUR 3.8 million for stock proceeds and other which was then offset by 3.1 million used to buy back shares via stock withholding and 3 million in private company equity investments, bringing us back to the three two of the 11.3 million increase in cash on the balance sheet.
Cash flow from operations in Q3 was 25.7 million compared to 23.5 million in Q2.
This represented an increase of 2.2 million, which was driven by an increase in EBITDA of 5.3 million offset by an expansion of working capital by 3.2 million.
Capital expenditures of 4.6 million in Q3 were down compared to the 8.2 million reported in Q2.
Accounts receivable decreased by 10.7 million Dsos at the end of September were down 18 days to 52 days from the June figure of 70 days.
Inventory increased by 12.6 million in the quarter as a result inventory days was 180 days at the end of September of 23 days from the 157 days at the end of June .
Conversely inventory turns went down to 2.0 at the end of September from the 2.3 turns at the end of June .
The buildup of inventory is primarily comprised of our newer datacenter products at the request of several customers for large forecasted rollouts in the cloud.
These rollouts through a few customers will extend over three to four quarters, which should lead to better cash flow in later quarters through a contraction of inventory.
Now, let me recap the business outlook for Q4 2019.
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 in Q4 by 5.6 million. This would represent 5.9% sequential growth compared to Q3, and 15.3% year over year growth compared to Q4 of 2018.
This would bring revenue to 99.8 million at the midpoint, plus or minus 2 million, resulting in a range of revenue between 97.8 and 101.8 million.
For GAAP reporting in Q4, we're currently forecasting gross margins should be in the range of 57.5% to 59%.
Operating expense should be in the range of 68 to 70 million.
Absent nonincome related tax adjustments, we would expect the GAAP effective tax rate to be approximately negative 1.3% to negative 1.4%.
That has a charge against the worldwide GAAP loss, we are anticipating.
We have to pay tax answers jurisdictions, primarily in Singapore, and the net charge to the company in total for the year is expected to be around $200000.
GAAP net loss would then be or in the range of 15.6 million to 21.5 million.
GAAP earnings per share.
And would be a loss in the range of 34 cents to 47 cents per basic share on 45.8 million forecasted basic shares.
More complete reconciliation of the forecast of Q3 GAAP net loss in gross margin compared to the forecast of non-GAAP net income and gross margins is included in the press release for non-GAAP reporting in Q3. We are currently forecasting gross margins to be in the range of 69.5% to 70.5% were approximately 70%.
At the midpoint.
Based on mix of revenue in Q4, we expect gross margins will be approximately flat with Q3.
Operating expense should be in the range of 47.2 to 48.4 million. This represents a 3% sequential increase or about $3 million additional expense at the midpoint in Q4.
The increase is comprised of a full quarter of Q3, new hires plus Q4, new hires as well as increased consulting and project spend.
As we continue to invest in ramp toward important tape outs in validation work on several projects in Q4.
We're currently estimating the non-GAAP effective tax rate to be 3% for 2019.
We are confident these components has done a line, resulting in non-GAAP operating margin to be in the range of 20.1% to 24% were approximately 22.1% at the midpoint.
You should also then lead to non-GAAP net income of between approximately 19.3 and 24.2 million.
This would then result in estimated non-GAAP income per share of between 40 and 50 cents based on approximately 40.8 million estimated non-GAAP diluted shares.
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 on a period and now we'll be happy to take your questions.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one on your Touchtone telephone. If your question has been answered or you wish to remove your thoughts on the Q. Please press the pound key.
[noise].
First question comes from the line of the back are you from Bank of America. Your line is open.
Hi, Thanks for taking my question on that congratulations on the really good growth then execution.
Hi, My first question for how do you see the mix of data center and telco playing out into Q4 and in general how is the visibility because you have a you have had no such a couple of strong.
Quarters on the macro environment does not that great, but I know you have a number if a company specific product cycles. So I'm just curious how is your Q4 visibility what tends to be yet at this point of the here.
I'll go back this is John and I'll, let forward respond as well we do have good visibility into Q4 right now in general we don't quote backlog numbers. So I won't do that here on the call but.
We do expect growth into data center in Q4, and we expect that to drive growth that we're expecting.
So that that will give you a rough feel of I think where we're going to come out and I look forward respond as well.
Thanks, Sean you if you back we've got a.
To put product cycles, and new product ramp as you mentioned and we were very positive on what this means to us for Q4 and 23.
Got it and so my follow up I know, you're not and its electric already to guide for 2020, but expectations are for this kind of strong 20% or so growth to stay there.
But I'm just looking at what would be the puts and takes does achieving this kind of growth.
Pretty quiet any specific capex to come through any specific project to come through any product to come out on time I'm, just trying to get a sense for hows the confidence heading into next year.
Vic This is John again, a again I'll, let for comment as well, but we actually have a very balanced business right now and we are.
Poised for additional growth in the data center, which we think will take place, but we also have very good positioning Nicole coherent DSP markets. So.
There are some newer products. It will continue to ramp for instance, the a foreigner gig perimeter chip will continue to ramp in higher volumes.
And there are.
Other products in the in the wings, such as the 400 gig ZR, which might drive a little bit of revenue in the back half of next year, but.
That will then drive more revenue growth, we think in 21.
And other than that yeah, we have.
Very good progress anticipated across the board. So there's nothing per se I think that we're dependent on these are just natural outcomes of the existing design wins that we've already achieved.
Exactly this is Florida on or are they all of the all of the revenue in 2020. The products. We have already done so and we're working right now on 2021 and 2022 revenue.
Excellent. Thank you so much.
Your next question comes relied Harlan <unk> from JP Morgan Your line is open.
Good afternoon, guys. Congratulations on a solid execution and strong results and it's actually good to see the diversification of the drivers in the business.
On that front.
You know this like more of the incremental revenue growth came from the telecom business on the coherent DSP ramp in particularly went down 200, you've got a combination of tier one in tier two customers, but for somebody tier one customers I mean, it never use merchant solution before so what is the big difference.
Operator that is motivating these tier one to move to your off the shelf and 200 solution.
Thank you Harlan so.
We mentioned a few growth vectors.
One as you mentioned as the coherent DSP. The second one as you know is our colors.
Between data center 80 kilometer solution right.
Coherent DSP is being driven mostly by the fact that we've got a better performance than alternative solution and that's driving customers to adopt us.
Great and then you know there's been a lot of new architecture activity within your customer base. Microsoft for example, you know looks like they were an upside driver in Q3, they announce a data center partnership with reliance steel in August and then just its we are they got awarded digit ideal decline shock I think thats 10.
Billion spend over 10 years I know, it's early days on both these programs, but how does this impact your view for 2020, both for colors and as well as for 400 gig and for transition with this particular customer.
Thank you Harlan so obviously both of these trends that you mention may cause more confident in our colors. So.
Staying strong and revenue for a longer period of time.
At least a you know through 2020.
That time, we'd expect to transition to go to foreign to give Pam inside data center on the foreign exists between data centers. So we're very well poised to benefit from both the a continued strength in 100 gig Congress and the transition to 400 gig kind of future.
Yes, just last question you know what does your other customers on the Pamfour side, just last night talked about stepping up their data center spending here in the second half of this year and it was interesting way because they're putting a lot more emphasis on putting more AI machine learning compute capability into their new data centers I would assume using their anything.
Process are you guys have a strong partnership with them on the 200 getting 10 for side and the high end deep learning pushed driving a lot of the pen for the man here in the second half of the here.
Great question, Hernan, So AI and machine learning have been a big driver off the bandwidth inside data center and in turn a big driver off the need for Pam four.
And we do expect a strong Q4.
Data center, driven by a 200 400 as well as.
Retimer applications.
Yeah, great execution. Thank you.
Your next question comes from the line of Blayne Curtis from Barclays. Your line is open.
Hey, guys. This is Tom O'malley on for Blayne Curtis Congrats on the really nice results.
My first one here is a again touching on the Colorz product you guys mentioned it a couple times in the prepared remarks. It seemed like you had some significant upside in the quarter I think originally heading into the year you thought it'd be more of a flattish business for US last year can you talk about what happened in what incrementally is going on there to make it better and do you think that that trend kind of continues into 2020 as a major driver as well.
Yes, so as.
You mentioned I prepared remark, we believe this benefits off this between data center.
Modular solution plug into irregular switch a route or are becoming very tier and the good news for US is today. This is giving us tracks and 100 gig solution that is manifesting itself into Q3, we expected to continue into Q4 ends of 2020.
And Furthermore, we expect those benefits off space density cost power advantages to propel the need for 400 ZR as to follow on product and its roadmap.
And I think we're becoming very clear that not only do these pluggable solution in a regular switching route or provide tremendous opex advantages latency advantages power advantages, but they also provide tremendous revenue upside because of the density you and you end up freeing up server space in a day.
Data center, that's could be used for extra servers that are gonna be dedicated to revenue generation as opposed to putting in a bunch of bulky and big transport boxes that are not needed anymore.
Great and then I just have one follow up you guys. Also mentioned you saw some t. a driver of growth for both the captive in merchant DSP do you think you're starting to see some signs of share shift in that market or do you think thats just natural demand picking back up.
The your share shifting that market has been very stable word the market Peter was a strong leading market share in hasn't change actually.
So that's the good news I think where you're seeing.
We are you seeing no the 64, gigabaud merchant and captive solution starting to grow and so these offerings are growing alongside with us.
Great. Thanks, a lot and congrats again guys.
Your next question comes from the line of Ross Seymore from Deutsche Bank. Your line is open.
Hi, guys. Thanks for let me ask a question and congrats on the strong execution.
So for do you mentioned about the Pam four adoption being pushed out a little bit from the third quarter. It sounds like it's ramping in the fourth quarter can you just talk about your expectations for that market I know, it's largely single customer driven in the fourth quarter of this year, but it seems like it should broaden going forward does does this push out change the slope in any meaningful way or the adoption from those new customers are.
You view it is just kind of a temporary pause and everything will be back on the normal slope bus soon enough.
Thanks, Ross so no great questions.
So look I mean, we have a property over 10 customer going through market was time I mean, that's to people keep forgetting that on 200, a good time, which is driven by 50 gig time DSP, we've got multiple customers are ready ramp.
Last year end this year strongly in Pam and that continues okay.
As you mentioned, there's a new customer coming in was 100, Pam DSP for foreign to get module and that that is.
It is on track. So there was a lot of noise must be generated by competitors about.
All kind of FID as being created in that market right now we're on track the pilots on which were the only wants to be in positron you know are on track and looking fantastic.
And we're gonna be ramping to very significant significant volume for death customer and then you add on to multiple system customer the feeding our Pam DSP Retimer solutions for line cards.
And you end up was a number of customer there are going to generate this PEM revenue.
And this prime revenue is going to grow very in a very healthy way not only from Q3, two Q4, but also from 2019 to 2020. So does this and it doesn't end up being a very high.
Growth vector for us not just a DSP and the Retimer, but wonder companion Tia and driver from month to put optics platform Vixel DM and Yeah man Silicon Photonics are we being adopted across the board. So we were very excited about this were very strong growing up to seven nanometer moving to five.
You were opening up a gap and we're in a great shape.
Great. Thank you for all those details.
Two quick ones that I'll I'll ask at the same time and then you guys can can answer. It. However, you see fit on the telecom side of things that was superstar sequentially. It up 21%, there's a lot of pull in versus push out that's affecting different markets with the trade war going on and bands to different customers et cetera, do you believe any of your business.
Maybe specifically within the telecom side had any of Poland's a that benefited it and then the second question is separately for John in the leverage side of things you guys have done a great job on giving operating leverage earlier. This year, you promised where you'd be exiting this year and you're hitting that beautifully how do you guys think about leverage of revenue growth.
Falling down to earnings growth as we look forward to just some sort of framework would be helpful. Thank you.
Yes. Thank you. So if you worried about put ends you've got to look at the wall weighing on burn as we mentioned in our prepared remarks, well wait revenue actually declined from Q2 Q3. So there was no such thing now going onto John .
I think from a leverage point of view, we typically are looking to.
Gross the revenue side of the business said.
20% a year or better.
And then we're looking for leverage on top of that so if we could double that number that would be ideal, although we don't always get there but.
It's combination for us both investing in the business and providing a good return to the shareholders and that's what we try to keep balance as we move forward.
Great. Congrats again guys. Thanks.
Your next question comes from your line of policies theme from calling your line is open.
Thanks, I appreciate all taking the questions of foreign John If I get asked her to go back to them 200 coherent disputes and provide some additional color on with respect to customer count the revenue growth opportunity. The accuses Cisco impact I think in previous question indicated that you all we're gaining traction with tier ones. My question you there would be.
We all know that Nokia as you know and while we've got their own coherent DSP as our trust the traction you're getting is either with the switch unique items like Arista, Cisco Juniper and or would you are to transport bog group.
Just incremental insight on that if you could do that that'd be great.
Thank you Paul Great question. So number one this increase is pre Acacia Cisco impact. So there's no impact so far off the Cisco occasion, I mean, there's discussion we're having.
With those customers are type of future type of growth.
So more more more positive news to come.
But in a into Q3 timeframe, what really has helped us grow is to ramp of the mtwo hundred customers. We've been very public an open abad from multiple quarters you know so we're finally getting the numbers.
That are now proving that we're taking share and there were growing along.
Boast captive customers and merchant customers into and meaning number one is for some of their customers. You mentioned, it's not always there on DSP and so for some of these customers sometime they use their sometime news ours and we're not at Liberty of mentioning who's doing what.
But you can imagine that we've got some of these customer using us.
And then we've got a number of the other customers and.
Or geography is actually mostly China, and Europe , but all geography, or moving to us and and helping us grow so weve in the past talked about 10, or so customer around 25, or so different platforms and that's what's ramping right now so it's not just one this month to put a variety of customer and.
And stay tuned for more positive news.
Into 2020.
Guys can I push you on where that revenue stream is today and what the opportunity is over the next year in terms of growth.
We don't break it up on as you know, but over time I know you've got side over your wood.
Okay. Good try.
One other question if I may Oh, we added second indicated that you had successful tape out on the 400 gives you are platform I think I heard you make some log cursory remarks on that I was hoping you could provide some agreements that are revisit those remarks.
Good question, Paul tape out is very old news right. We've picked on a long time ago I can't even remember when.
So you can imagine we've got other news right now that we haven't yet publicly disclosed but if we wanted to we could this close so you make your own judgment of would that news as you probably can guess, but we're extremely excited there but the what.
You know the robustness and quality of that product and absolutely expect a to be first and the market for what could be a very promising 400, ZR NCR plus.
Increasing market opportunity.
With meaningful revenue what timeframe.
No meaningful revenue is going be 21, right there'd be some revenue in 2020, but 2020 is gonna be on pilot drawn and qualification so really 2021.
I appreciate it thank you.
Your next question comes from the line of clean Bolton from Needham Your line is open.
Hey, guys. Congratulations on the a strong results and outlook just wanted to come back to the Pam market, a few quarters ago, you'd sort of so Tim expectations of about 120 million. This year 320 million in calendar 20 wondering if if you still think those are good estimates and then given some of the concern.
It's about the 400 gig timing potentially slipping out at one of your customers can you give us some sense of how you think the business splits between 50 gig Pam and hundred gig and both this year and next and then I've got a follow up thanks.
Yeah, Thanks, Grant and I've got the benefit of having listen to your question and their answer I Wonder what competitors earnings call. So I listen to that and we respectfully disagree. So I think the 120 million dollar.
Market size for this year has been a bit going under conservative side and and.
Well above that a or b or you know so you know we think we've got a very high market share into 2019.
Our estimate for 2020 is still around the 300 million. So even that's life push out on that competitor earnings call. It. When you asked the question. They said, there's a six months push out well I'm glad the people that don't know what they're doing our ask answering that question. We don't we don't see it.
You remembered the market is broken up between all of these different pieces. So we got to 200 Pam DSP.
Thats, a 50 gig Pam for two and a good margin. We've got a 100 pound DSP for 400 gig module, we've got Retimer as we got IP. So between those four pieces, we're still very positive on the market being around the 300 million dollar market for next year.
Great then there's just a follow up question you know when when the wall way Dan first went into place back in May I think you would encourage folks to take one way largely out of the numbers it sounds like it was.
You had revenue in the June quarter, It was down a little bit in Q3 can you give us any sense.
We are walk away is running just just so we can kind of level set how important of a customer that is or potentially the extent the ban gets repealed or how much revenue may still come back into the model.
Yeah, they're running well below Q1, so Q1 was sort of the on restricted view.
Quinn and our Q2 and Q3 have run well below Q1.
We see a bit of an uptick in Q4 and for sort of planning purposes, we're probably planning to be at about 50% of what the natural run rate would be in 2020.
Great. Thanks.
Your next question comes from the line of Toys Van Berg from Stifel. Your line is open.
Yes, Thank you and congratulations on the record results when I look at your new presentation that see definitely lot a reference to seven nanometer.
I'm wondering if the former ZR I assume is something already at seven and at what point would you be a at seven nanometer what would you PEM product.
So we have not confirmed that a foreign dixie or a sampling a story. So so you know good.
Good good try again.
We will announce when we're ready to announce.
Just a coherent.
We are isn't seven nanometer the Pam DSP they'd be sampling tours and this year on seven nanometer.
Very good and could you talk a little bit about the dynamics that really changed Oh things for colors. I mean is just just regional expansion from from your customer there or you know did they find anything about it was about the technology that they would like to leverage.
In order to obviously make this a bigger business before you transition to funded.
I think the benefits are becoming clear I think they're winning a new data center business in new geographies. This would they mentioned on on their call. So that that's where we know.
They did just one last question.
Again going back to your presentation, you talk about the idling highway between the just the digital islands and.
Clearly you guys dominate the physical layer and I would say probably no more so now than ever before what's going on with the competitive landscape and you know how how come how come nobody else is getting close to your discipline is it just simply because it's it's just difficult or you know do you have any other thoughts on that subject.
As we Ah. Thank you sorry for mentioning on your presentation as we show on slide number 12, we R&D analog DSP optics physical layer partner for all of these different partner on the processing networking and storage side of the word and we intend to stay that way. So we intend to remain extremely focus.
Yes on just doing what we do a which is this analog DSP optics, we're not we have no intention to get into any of these they did it tonight and [noise].
No interesting getting CPQ Gpus switching routing AI, Nick any none of this.
So our view is there's a huge market multibillion dollar market to be had and just being very good at what we do.
Our secret has been to just say extremely extremely focused so we don't we don't go invest and other stuff, we only invest and stuff we're good at.
We should this stuff in the middle analog DSP optics and.
It's a very competitive market and we've got some very good because it's very good competitors, both large and small companies.
So lets stuff more now doesn't competitors in the market today, so extremely competitive market.
And we we expect many of those customers many of those competitors to to grow next year. So I think a rising tide wouldn't would help or boats. We do expect this to be a big market and we expect many competitors to to grow next year and win or grow together.
Great and congratulations again.
Your next question comes with a line of Tom Diffely from D.A. Davidson. Your line is open.
Yes, good afternoon, I guess, a similar question to the last when you look at your Lee right now on the Pam four side I think you mentioned to you the only wins with the pipeline out there I do think your competitors are going to be ready for a ramp next you are they more of a 2021 competitive story against you.
No we do expect a competitor's and to be ready for ramp next year, and we expect them to come from different places. So we have.
Strong competitors on digital side of the world with people like Bronco next near and we've got strong competitor on the alongside the word must be produqumica synthetic and.
You've got multiple people are ramping to own solution like you know the lextar at Cisco the high Silicon as one way and [noise].
Other captive solution. So I think we do expect this market next year to be extremely competitive and but we will or will have to hold their own we have to keep running and stay ahead.
Okay. Let me just a quick model question. When you look at the stock comp is that tied to anything to hear like revenue growth or earnings growth or is it a set number each year.
No, it's really a function of the.
The timing of stock grants and then they amortize over the vesting period, which is usually for years in our case so.
Every year, we have refresh grants that typically take place in April timeframe, and then you can see new hire grants take place through the course of the year. So as we bring new hires in that sometimes.
Increases the stock compensation expense, because we make a measurement at the at the higher data at the grant date at a certain value and then in effect, we amortize that into the expense over the four years that the person vest. So that's that's how the expense curves.
Great. Thank you.
Your next question comes from in light of Joe Moore from Morgan Stanley . Your line is open.
Great. Thank you so if I Miss I have more than one call going on but in terms of the fiveg opportunity for you guys to have Pam in that in Fiveg ecosystem I know that your lead customer there's kind of compromise, but some of the trade tensions can you just talk about generally what what you're seeing there and.
Do you see is that opportunity just going to happen more slowly because while we can't deploy and do you see other customers using can't type technologies and backhaul.
Yes, Thank you Joe so.
On the.
Fiveg in one way, we understand what we continues to win on Fiveg deployment, and thus driving to back on demand.
Right now as you mentioned this doesn't seem to be any significant share shift between why we and others.
So.
Five G.
Opportunity is.
It could be a bit slower then.
Initially anticipated because of this dynamic however, the strength of time and or the other markets far outweighs that's negative.
Great. Thank you.
Your next question comes from the line of Joe Flynn from Craig Hallum. Your line is open.
Hi, guys. The quick question on the.
Inventory build which has been significant over the past couple of quarters.
I'll just working for you at a reasonable timeframe or expectations for that balance to wind down in the future as the products start to ramp.
And the new cycles.
Yeah. Thanks for the question the it's really a function of the ongoing demand, but with what we have on the balance sheet today.
Yeah, we'd expect that to dissipate to some degree over the next three to four quarters.
As the Rollouts in particular that their lined up for.
Now demand continues Roland and you know people want to have inventory available then we'll have to make those decisions as we move forward, but in general we're looking to bring the inventory back in line within the next three to four quarters.
Okay. Thanks, that's helpful and just eight.
Question about walk away.
We were wondering throws any update or.
Insight into the.
Do you like the license <unk> granting.
Or just anything you can comment there.
Yes. Thank you Joe a weve doubled checked and stripping checks we applied for licenses. We haven't received a license we double checking triple check across the industry. We haven't heard of anyone having received a license.
We know about a one of a competitor on on the earnings calls had mentioned that got a license, but when we when we do our own checks in industry.
We haven't heard off anyone at least in our markets getting a license so its.
We're still hoping for some positive.
The news there we keep working.
Well it whatever it is to get the license and.
I think we'll.
Stay tuned for hopefully a fruit future progress and the talks.
Okay, great. Thanks, all for me.
We have follow up question from toys Vanguard from Stifel. Your line is.
Yes. Thank you just a quick one for John John I noticed a the right of use asset, but $11 million. This quarter I think that the new item was just wondering you could clarify what that whats.
Are you talking about a licensing in the cash flow statement I'm not quite sure what you're referring to.
On the balance sheet gather a REIT abuse asset the net there's about 10.8 million.
Yeah those are generally capitalized.
Licenses.
So you could see CAD licenses in particular that might be.
Have a three year life, we capitalize the the license payments and put them up on the balance sheet now so that's what that is.
Got it thanks for clarifying sure.
I'm showing no further questions at this time I would like to turn the conference back to use Mr. John .
Thank you operator as a special no today, we'd like to thank Deborah Stapleton and Elecsys for helping us with Investor relations for the past five years, we've grown in revenue two and a half times in our earnings is almost quadrupled in that timeframe. So we're bringing to function in house now, but we certainly will Miss Devon, Elecsys and we wish them well.
In terms of our plans for we attend we planned on attending the Stifel Conference in Chicago on Thursday November 7th the Needham Conference in New York on November 12, the Cowen Conference in New York on December 10th the Barclays Conference in San Francisco on December 11th.
Forward endeavor and Vernon I would like to thank you for joining us today, and we'll look forward to speaking with you again in the future.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.