Q4 2019 Earnings Call
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Conference call.
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I would now like to hand, the copper so to speak today burn assay senior director of Investor Relations and corporate development you may begin.
Good afternoon, everyone and thank you for joining us today discuss the financial results for the fourth quarter of 2019, a copy of today's press release can be found in the Investor Relations portion of in finds web site, and then find dot com slash investors.
With me today isn't vice President and CEO Ford Tamer antibodies, Chief Financial Officer, John Edmunds Honor coal I will first provide the safe Harbor Affordable give me an overview of our business. This will be followed by John with the financial results for the fourth quarter of 2019 and the outlook for the first quarter of 2020, John We'll then open up the call for question and answer.
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 2020 and beyond the projected growth size and strength of our markets.
Customers market share performance and success of new products design wins customer demand supply impact of worldwide issues and the success of related contingency plans and the integration to be silicon and acquisition. We closed on January 10th 2020.
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 todays call. We do not undertake any obligation to provide updates after this conference call.
For further information regarding risk factors for business. Please refer to our registration statements as well as her most recent annual and quarterly reports on forms 10-K in 10-Q, all file with the Securities 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 make reference to non-GAAP financial information a reconciliation of this information is included in the press release and honor company website at Www Dot Inphi Dot Com. This information is not a substitute for gap and should only be used to evaluate the company's results in conjunction with a corresponding GAAP measures.
Before I turn the call over to Ford I'd like to draw your attention to the media center in fights website, which can be accessed by clicking on the news tab on our about page, where it inphi Dot Com slashed Media Center. There you will find end up the press coverage of our recent product announcements and developments.
Not to begin our review of the quarter, Let me turn the call over to our CEO Ford Tamer Ford.
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[laughter] takes burn and thank you for joining us for enterprise fourth quarter and year end 2019 earnings update.
In fact closed 2019 was a strong Q4.
We finished the year was record quarterly revenue and operating and net income.
Revenue in non-GAAP, yes were above the consensus estimates.
Strikes in suburban market there isn't across several of our product lines contributed to a robust quarter.
We are confident this demand would continue in 2020.
Revenue for the fourth quarter of $102.9 million.
Exceeded last year's quarterly revenue of $86.5 million by 19%.
We booked 47 cents in fourth quarter non-GAAP earnings per share two cents better than consensus estimate and that's compared to 45 cents in the fourth quarter of 2018.
We generated $22 million in cash from operations in Q4.
Looking at 29 teams results revenue was $366 million it 24% improvement over 2018th $295 million.
We delivered 70% non-GAAP gross margin for 29 team, that's compared to 68.5% four to 40 or 2018.
On a non-GAAP basis fully diluted EPS were 2019 was a daughter 61 as compared to 86 cents in 2018.
This 87% increase in non-GAAP, yes.
Compared to the 24% increase in revenue.
Demonstrate the continued positive leverage in our operating model.
[laughter] through year end strikes came from several sources, which demonstrates the value of Inphi is continuing revenue diversification.
We saw robust demand for our cloud solutions, specifically, our pan platform with tier one customers.
In Q4, we also saw accelerated demand out of China in particular Warwick.
Before I discuss the strong results from a growing product portfolio, let me address China supply chain inventory and its recent corner virus outbreak.
As you may have read.
Somebody that some customers in China are building inventory ahead of a potential tightening of the export administration route.
Our seems to walk away in Q4 2019 have been ahead of plan.
Along with a strong Q1 2019. This resulted in while we accounting for approximately 11% of Inphi is revenue for 2019.
We expect the strengths to continue in Q1 2020.
However, taking a conservative approach, we assume a significant drop off in revenue from one way starting in Q2.
This would result in our forecast for what we for Q2 through Q4 2020 to be in the low single digit percentage of Inphi is still to revenue for that period.
We expect the strength of our continue its called engagement to more than offset those dynamics.
Our total forecasted revenue also contemplates while we know so far about the potential impact of the Corona virus.
First we don't have any indications from our customers in China. The demand requirements have shifted as a result of the virus.
On the supply side some of our partners have already resumed their manufacturing operations.
We are assuming an overall China return to work on February 10, after an extended lunar new year break.
So we currently expect that there would be minimal impact on the supply side if any.
However to be safe.
These assumptions change.
And final partners in China, I put contingency plans in place to maintain the supply side are critical components for our products and our customers.
Now, let me turn back to our product strength and diversification.
In Q4, and so far in Q1, we're seeing a continuous ramp up demand from top U.S. kannan vendors for a Pam product.
This includes our 50 gig Pam's U.S.P. Polaris, along with 28, Gigabaud T.I.E. cheese and drivers.
Our hundred gig Pam's U.S.P. parima.
Along with 56, Gigabaud T.I. isn't driver.
And I'll Pam Retimer Vega.
We again expect demand for each of these platform solutions to remain strong for duration off this year.
The operating characteristics and production maturity of these products.
Combined was our first mover advantage are the primary reasons for the high adoption rate of Inphi solution at our customers.
We also had important Q4 announcements.
First the newest star not growing private constellation is our new low power seven nanometer 400 gig coherent DSP chip kinda opus.
Its release generated the high amount of interest from a wide variety of industry observers.
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An office has now been sampling for over two months.
Two module partners and OEM customers.
It is a high throughput low power solution that can support traffic at 100 gig 200 gig and 400 gigabit per second.
The first mode of operation referred to as ZR.
Satisfies the need for faster lower power Interconnects between data centers for distance is up to 120 kilometers.
We expect broad adoption of the 400 gig ZR more by cloud customers.
Most of 2020, we'd be spending qualification and field testing with production ramp starting in Q4 2020 and into 2021.
[noise] cannot pushes also designed for long distance transmissions over fiber networks for Fiveg.
Access.
And metro long haul telecom customers.
The second more cooperation referred to as ZR plus.
Covers distances spanning hundreds to thousands of kilometre.
We expect strong adoption of 100 gig 200 gig and 400 gig Z, our plus mode by both cloud and telecom customers.
Second we also announced sampling of the colors to module, which uses in five can opus D.S.P. chipset.
This represents the industry's first 400 gig ZR pluggable coherent transceiver.
Two sampling to cloud and OEM customers.
Color as to where the neighbor cloud operators to connect Metro data center at a fraction of the cost of traditional coherent transport systems.
I could not be more proud of our engineers. Once again have helped us to be first to market with these industry, leading next generation interconnect solutions.
We expect a healthy demand for 100 gig color is one solutions to continue through 2020.
And we expect our customers were already purchased more than 100000 color is one units to date to transition to corners to in 2021, driving our business in the years ahead.
Last we're pleased to announce that our T.I.N. linear driver shipments have now exceeded 5 million units further underscoring our leadership position in the optoelectronics signal path.
We're pleased with our current market positioning most for the near term <unk> was an eye towards the future.
Much of this outlook is based on our organic growth from existing products.
We're also pleased to welcome that you said it can team and associated products and IP into the Inphi family.
We have pressure to close the silicon acquisition, just a few weeks ago and look forward to merging the team and company into our operations.
The second edition is expected to contribute in the mid teens percentage. So our Q1 2020 revenue.
What is even more significant is a very healthy demand for organic product portfolio and what's typically weak seasonal quarter.
The combination of in fine Silicon revenue.
Results and our outlook of a $132.4 million at the midpoint for Q1 2020.
This translates to a 29% sequentially increase from Q4 2019.
In summary, I leave it with these messages.
Our investments and leading edge R&D is paying off was a rich pipeline of excellent quality product.
We enter 2020 with a very strong adoption in production ramp of our products, but our tier one customer.
Our business is continuing to scale, both organically and with the addition of it you said it can tenant and resources to accelerate our strategic roadmap.
And what consistency demonstrating financial leverage in our model as a revenue continues to grow.
With that I guess, thank every member of the Inphi team for their efforts that led to the results. We just discussed.
I have every call furnace in the projections for what lies ahead for the company.
And with that over to John.
Thanks Ford now, let me recap the financial results.
In the fourth quarter of 2019, Inphi reported revenue of 102.9 million, which was up 9% sequentially and up 19% year over year.
This result was 3.1 million or 3% better than the midpoint of our guidance.
To address the growth in more detail, our cloud products, including PMT SP gearboxes, CD ours colors cloud <unk> and drivers grew 26% sequentially at 43% year over year.
Together they comprise 65% of total revenues in Q4 19.
Cloud growth was primarily led by 400 gig and 200 gig Pam business aided by some additional growth in colors.
For the year telco represented approximately 40% of revenues, which was remarkable given the trade war challenges we faced throughout the year.
For the fourth quarter, telco declined 8% sequentially and 2% year over year and represented 33% of revenues.
Telco declined sequentially in Q4, because Q3 2019 had been a particularly strong quarter.
In addition, if you look at the last three quarters of telco and 19 versus 2018, they were essentially flat.
This market is undergoing tremendous change by moving from 32, Gigabaud to 40 to 64, gigabaud speeds as well as changes occurring and component packaging.
We are pleased to continue to lead the market with these product changes and at the same time transforming our approach from selling just components to selling chipset and DSP platform solutions.
The legacy transport business represented 2% of revenue in Q4, 2019 down 2.1 million from Q3.
This pertains to 40, and 100 gig transport products, which have now been shipping for more than eight years and are declining overtime. We expect this revenue stream to increase in Q1, but the cline by approximately 15% overall in 2020.
In addition, we are estimating about 40% of art you Silicon overall revenues in 2020 will flow into the legacy revenue line.
These are mostly one per customer single sourced eightsix generally sold outside of the telco and cloud markets.
In Q4 2019 to GAAP gross margin was 59.9% up from Q3 is 57.8% due in part to lower technology amortization. The GAAP gross margins included 7.8 million and previously acquired technology amortization in Q4, as <unk> as compared to 9.7 million in Q3.
The non-GAAP numbers do not include these noncash it noncash adjustments so instead of a 2.1% improvement rather we see a 1% decline in non-GAAP gross margins in Q4, please see the reconciliations in a press release for more detail.
Gross margins on a non-GAAP basis in Q4 came in at 69.2%, which was down 80 basis points from the midpoint of our guidance of 70%.
This was primarily a function of the relative product.
Revenue mix.
Q4, GAAP net loss was 13.4 million.
We then add certain standard adjustments back of 38.1 million.
Noncash GAAP expense for stock compensation acquisition related accounting and convertible debt cost amortization.
This compares to the 39.5 million recorded in Q3, the difference of 1.4 million is due to lower amortization and acquired intangibles as the 2014 acquisition of Cortina is now beyond five years old.
To get to non-GAAP net income you need to add back the 38.1 million in standard adjustments.
You also need to deduct approximately 1 million in gains from the sale of standard Remeasurement of private and public investments and then add back approximately 1 million and acquisition related expenses due to the silicon acquisition.
And then add back point fourmillion from non cash rent expense.
Required for GAAP accounting purposes, which relates to a pre move and construction period to prepare a new office space in San Jose, California.
Finally, we add the tax benefit associated with these non-GAAP adjustments of approximately 2 million to arrive at Q4, non-GAAP net income of 23.1 million.
Q4, non-GAAP net income was up 7.4% sequentially and 12.4% year over year.
Non-GAAP net income for the year was 76.6 million, which essentially doubled from the 38.8 million reported in 2018.
Now looking at the remaining components of non-GAAP reporting non-GAAP operating expense for Q4 totaled 47.8 million, which was up 3.1 million or 7% compared to 44.7 million reported in Q3.
The Opex came in at the midpoint of our guidance. The growth is expected as expected was due to a full quarter of Q3, new hires plus Q4, new hires as well as higher consulting and higher project spend.
Overall Q4 in Q3, non-GAAP operating margin was up.
I'm, sorry was flat at 22.7% and down 1% from the 23.7% in the same quarter one year ago.
GAAP net interest expense and other income for Q4 2019 totaled 5.4 million of expense.
If you add back 7.3 million and convertible debt noncash accretion and amortization expense and then deduct a gain of approximately 1 million in GAAP equity investment income he will arrive at <unk> point 9 million non-GAAP other income.
This was due to a combination of net interest income of point Fourmillion as well as point 5 million of other gains on non operating activities related to masks masks Sherry.
The GAAP income tax expense benefit for Q4 was point 9 million. However, the GAAP tax expense for the year was a charge of point fourmillion.
The GAAP effective tax rate for the year.
As a negative 0.5%, which represents a small charge in some jurisdictions, primarily Singapore, even though we had a loss worldwide as we've said in the past we find the GAAP tax rate to be difficult to forecast. The non-GAAP effective tax rate for Q4 was 4.8% and represented a charge of 1.2 mill.
In our non-GAAP effective tax rate for 2019 was 3.6%.
This was up from 3% we projected in Q3 and reflects a catch up in Q4 of approximately point Fourmillion. This was primarily due to a more conservative estimate of the amount of U.S. federal R&D tax credit being available for 2019.
Worldwide cash income taxes paid across a variety of June jurisdictions for the year was $144000, which was then reduced by a 300000 dollar refund received in the U.S. for the M.T. tax as a result of the 2017 federal tax cuts and jobs Act.
Now turning to the balance sheet.
Overall cash and short term investments was 422.9 million at December 30, Onest 2019. This was down 1.9 million from the 424.8 million at September 30.
We were also up 15.5 million for the year.
From the 407.4 million at December 30, Onest 2018.
In Q4, the cash flow from operations was 21.8 million.
Offset by 12.2 million and Capex, and 4.4 million and financing payments for software license and.
It gave us free cash flow of 5.2 million.
The free cash flow, then combined with 3.4 million in investing income, which came from 2.5 million in revenues collected in common stock and then sold for a point 9 million gain.
And finally, adding point 7 million from option exercises brings us a total of 9.3 million in positive cash flows for the quarter, which was an offset by 7.9 million used to buy back shares via stock withholding and 4 million in private company equity investments.
At an adjustment for a change in market value and interest on investments of point 8 million brings us back to 1.8 million in net net use of cash in Q4 19.
Cash flow from operations in Q4 was 21.8 million compared to 25.6 million in Q3.
A decrease of 3.8 million was driven by an increase in EBITDA of 1.9 million offset by an expansion of working capital of 5.7 million.
Capital expenditures of 12.2 million in Q4 was up compared to the 4.6 million reported in Q3 due to a payment for our first because seven nanometer mask set.
Accounts receivable increased by 5.5 million Dsos at the end of December were up one day to 53 days from the September FICC figure of 52 days.
Inventory decreased by 1.7 million in the quarter.
As a result inventory days was down 24 days to 156 days at the end of December.
From the 180 days at the end of September.
Conversely inventory turns went up to 2.3 at the end of December from the 2.0 at the end of September.
I'm sorry, it went up to 2.3 at the end of December from the 2.0 turns at the end of September.
As previously forecasted the previous buildup of inventory is beginning to sell through and convert back to cash.
Now, let me recap the business outlook for Q1 2020.
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.
In Q1, we will be including the results of operations of East Silicon an acquisition, which closed on January 10th 2020.
We expect good organic growth in Q1, and it he silicon products as a percentage of total revenues to be in the mid teens.
As we stated when we announced the acquisition on November 11th 2019, we expect these silicon to add between 80 and 120 million in revenue in 2020 and to be accretive to earnings.
Revenue in Q1 is expected to be in the range 130.4 to 134.4 million or 132.4 million at the midpoint.
For GAAP reporting in Q4, excluding potential purchase accounting adjustments. We're currently forecasting GAAP gross margins to be in the range of 50.5% to 52.3% GAAP operating expense should be in the range of 85 to 87 million.
Absent non income related tax adjustments, we would expect the GAAP effective tax rate to be approximately <unk>, 0.3%.
GAAP net loss would then be in the range of negative 21.4 million to negative 27.3 million.
GAAP earnings per share would then be a loss in the range of 46 cents to 59 cents per basic share.
On 50.6 million forecasted basic shares.
A more complete reconciliation of the forecast of Q1, GAAP and net loss and gross margin compared to the forecast of non-GAAP are included in the last page of the press release.
Our non-GAAP reporting in Q1, we're currently forecasting organic gross margins to be approximately flat with Q4, which was 69.2% and then combined with ease silicon total gross margins are expected to be in the range of 64.2% to 65.2% were approximately 64.7.
<unk> percent at the midpoint.
Based on new E silicon products that will be ramping primarily in the second half of the year as well as other planned pricing and cost improvements, we expect the silicon contribution to gross margins to improve overall gross margins by approximately 50 basis points by the end of 2020 and buy something on the order of 100 basis.
Points by the end of 2021.
Operating expense should be in the range of 59.8 to 60.8 million. We're currently estimating the non-GAAP effective tax rate to be 5.5% for 2020.
We are confident these components to done a line, resulting in a non-GAAP operating margin to be in the range of 17.6% to 20.7% or approximately 18.2% at the midpoint.
This should also then lead to non-GAAP net income of between approximately 22.7 million and 27.6 million.
This would then result in an estimated non-GAAP income per share between 40 to 52 cents based on approximately 50.6 million estimated non-GAAP diluted shares.
We will not update this outlook during the quarter until the next time of the next quarterly earnings release, unless Inphi publishes a notice stating otherwise.
So please ask any questions you have today during the general acumen a period.
And now we'd be happy to take your questions.
Thank you.
As a reminder to ask the question you need to press Star then one on your telephone to withdraw your question. Please press the pound King please standby, while we compile the culinary roster.
Our first question comes on the line of Paul Silverstein with Cowen and company. Your line is now.
Thanks to upper single, taking the questions foreign so until some of the restarted equation in terms of China, both with respect to Corona bars, and with respect to any prospective buildup of inventory of a walk away.
You all been kind enough in the past to give the bids for conference I recognize that you're projecting much lower volumes for while we were second half the year. What can you all share with us. The insight you have you had some of your peers. This morning, and last night talked about expected demand impact.
On weather did well, whether due to employees not be able to work for their customers as central any insight you can share with us on those two issues.
The conference in the prepared remarks.
Yes, Paul and high this for.
So first on the walk away.
We've shipped a significant amount to all were in January so we feel the risk through Q1 is minimal.
And as we discussed from Q2 Q4, the some of that revenue for us coming from always again very minimal compared to our total revenue. So we feel the impact of always has been mitigated and is not consequential for us for the remainder of the year.
Regarding the corner virus.
Our primary vendors that are in the manufacturing modules have already resumed work as of yesterday as of February threerd.
And so they're back to work Everything's Norman.
We have one component that.
As being manufactured at a place where there's but back to work on February 10.
There is a contingency plan to move the manufacturing to outside of China. So in case. There is an issue. So we feel that the impact at this point should be mitigated.
It is for if I could ask on the upside what are you. Most you've got obviously several a lot of when in your sales. What are you. Most excited about is impossible 400, ZR to be upside I assume it could be upsided in pull forward or are you pretty confident that that so we'll lead 2020 with the bulk of revenue coming in 2021 them. It.
What we're more excited about.
Paul would be upside on the Pam. So the 40 gig ZR is going to think about a year to go through qualification testing there isn't a way to shorten that period of time. So we expect it to go production on track and Q4.
Of this year as we've been saying now on month to put calls have been very consistent on the timing we're still.
Stick to the timing, we're very excited about the quality of the product that we have 7.2 customer superb no need for has been very high quality product came up out of the box and couple of weeks.
Just phenomenal execution by the team on the foreign gigs E R.
And we not only on the buy we separate modules have.
Our own partners, who sempra merger.
And we're actually very excited to already be in field testing.
Both cloud and major mobile operator.
Telecom type of.
Customer so.
We see a big upside and both Xian Xian plus for that and 2021.
As far as 2020, there could be significant upside on Pam.
As of right now, we do expect a higher.
Sure then what we had initially predicted.
Great appreciate that thanks, guys.
Thank you. Our next question comes on the line of Blayne Curtis with Barclays. Your line is now.
Thanks for taking my question in a graph on the results just a couple.
Just curious on while we can you just to remind us what it was in the beginning of the year I thought it was high single digit you did 11 for the year just trying to figure out when that started to pick up and you know for Q1 is it above that 11% I was just unclear.
Uh huh.
Blayne, we don't really a breakout or.
You know a major customers, a 10% or six up once a year.
I can't share with you I think for 2019, it was little more of a barbell. So we we had a big first quarter with why we I think before the ban came in and then one once the band came in the second and third quarters tend to be lower and then.
We did see more.
Shipments in the again in the fourth quarter, So that's kind of though.
And we just ended up for the year end total.
Then slightly above 11%.
That's helpful.
John on the Silicon I was curious I thought you said legacy would declined 15% I'm, assuming that's without the portion that youre going to allocate to it and I guess just curious how you plan on weaving. This revenue and as you report by segment. If you give us any color there as to when that 40% would it would end up in legacy.
Well, you'll see it you know beginning as we reported in Q1, Blaine and we'll just blend all of the numbers together.
That really to the existing legacy revenues only about 4 million a quarter. So it's it's not that significant and then we'll be.
Adding the silicon pay piece in the first quarter.
And we'll be taking the other portions of revenue that pertain do pertain to.
You know datacenter cloud based products on one hand in Fiveg on the other hand, those will be added into the cloud in Fiveg businesses that we report as well so we don't intend to break it out separately.
Thanks, and I, just maybe finally for forward on the Pam market looks like a very strong ended the year and continues into Q1, just any update on the size that market given the strength you're seeing early on.
Yeah. Thanks, Blayne, we expect at this point, we haven't changed our sizing for that market.
As we progressed through the year, we may very well do so.
We are a bit as I said more bullish about our share of those markets at this point.
Thanks.
Thank you.
Next question comes from the line of Harlan sur with JP Morgan. Your line is now open.
Good afternoon, guys and congratulations on the solid execution and strong start here to 2020.
Your comments on the press release forward suggest organic revenue core in find momentum in Q1 into the balance of plenty plenty.
That means that you expect to grow sequentially to 2020 based on your design win pipeline ramps and new customer programs, even with the step down slightly in Q2.
Yes, a hard and we do expect to grow sequentially every quarter this year.
Okay, Great and then on the strong much clearer guidance, if I back out east independence, the core inside growing 9% sequentially.
36% year can you just help us understand what's dragging the quarter on quarter growth is it both your cloud until core businesses I assume it's 10 full with the ramp up 100 gig remote for 400 gig.
Into your second cloud customer, but what are the other product categories that are driving the sequential growth.
Harlan it's a it's a combination of different things.
But obviously the cloud area is expected to grow through the course of the year.
We do expect.
Continued strong colors business.
In the year.
And.
Long haul and Metro I think we'll also.
You know.
Still be lumpy, but will have probably too good quarters into.
You know flattish or slightly negative quarters in terms of sequential growth and just like it had been this past year, but overall, we'd expect growth in long haul and tech telco.
For the year as well as growth coming in the.
Cloud and data Center, and then obviously will there he silicon and on top of that.
Right and then my last question on the cloud and Hyperscale side. You know you had one large hyperscaler ramping your 50 gig Pam four last year that your 200 gig Polaris you had another large cloud customer ramping late last year early this year with your 100 gig Pam four per remote for 400 gig.
Other cloud and Hyperscalers do you see Larry non in terms of ramping with either <unk> karima or Polaris solution. This year.
So thanks Harlan this is Ford we expect to two more customers. This year, one into U.S. and one in China, and we expect all seven major accounts customers to go to PEM next year, including the remainder one into us into more in China, So overall and for U.S. and three big China cloud customer.
It is going to Pat.
Great. Thank you very much.
Thank you. Our next question comes from the line of clean.
Needham and company. Your line is now open.
Hey, guys congratulations on the nice results and outlook.
I wanted to follow up on Harlin's question. There, obviously, the Tam business seems like it could drive a lot of the growth an upside in 2020, you've talked about the 50 gig Polaris hundred gig Prima you've got Vega, you've got an IP licensing business is there any way you can give us some sense of how each of those contribute to your overall outlook are they.
All similar sized is that 200 gig Polaris the biggest piece of the bucket and then a follow up on the you watch cloud and the Chinese cloud customer ramping this year will that be 200 gig Tam or is that.
For the 400 gig Pam thank you.
Thanks.
For the breakout we don't we don't break it up but the way I'd characterize it as the two biggest contributors are the 50 gig Pam prolaris inside the module in the 100 gig pamper reminds had the module that they're both of them are.
Each quite.
Larger than the Retimer business between the two the 50 gig Pam is ahead. This year. So we will see the 50 Pam Polaris for 200 gig be ahead of the 100 gig.
Although the 100 gig is going to grow very nicely.
As far as a new customer as one of them we'd go towards Polaris. The second one is still undecided and could go either Polaris or prima TBD.
And then just final question just sort of mentioned wall way. It was an 11% customer in 2019 wondering if you had any other cloud are particularly module vendors that that broke above the 10% threshold in calendar 19. Thank you.
When the other one.
We'll be Microsoft this year and they were in.
The.
Mid to low.
Teens.
Range I don't remember the specific numbers, we sit here, but that they will also be reported as a more than 10% customer.
Thank you, obviously because of the colors business right.
Yes, yes, okay. Thank you.
Thank you as a reminder to ask the question you need to press Star then one on your telephone.
Our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Congrats on the strong ended the year in the beginning of this year I just had a question on your telecom portion your business I believe you talked about why we being strong in that barbell approach you said, John with the end of the year, finishing strong but that segment. Overall, you said went down 8% sequentially. So correct me if I'm wrong, but if wawa is a big portion to that and it was.
Strong I guess what was weaker in the quarter is it just lumpiness or was there anything going on in the fourth quarter there.
I don't know that I'd point to anything specific Ross.
I think.
For us it was just lumpiness in certain product areas that we think will return and show growth again in the first quarter. That's why I say that that business seems to see saw back and forth.
We will have a strong quarter, and then a little bit weaker quarter, and then and then come back within very strong quarter again so.
Overall, we would expect I think.
We've had growth of about.
18% for the year, and we'd expect something a little better than that for next year.
And you know, there's just a mix of things.
Moving back and forth, but our platform gross are going to continue to grow the coherent DSP.
In particular.
And some of the other components to Fiveg business.
You know also.
Grew nicely. This year is expected to grow again next year.
So there's there are several good growing pieces, there and then the more sort of Jermaine.
Components that we sold in the past that we've done well on.
You know we're looking to two.
Collect together on platforms and sell in chipsets and platforms more effectively just as we do on the datacenter and also in the coherent platforms.
Thanks for those details I guess my second question I don't know if this is for you or for forward, but as we think about he silicon you talked about 40% of that business at least initially being in your legacy segment. So I guess two parts to this one could you parse out even a little bit how the remaining.
60% of that business in the first quarter is going to parse between your two other segments and then a much more importantly, as we go throughout the year as we work from this roughly 20 million dollar number towards that a total year revenue level at about 100 can you just talk a little bit about the lumpiness of that and then kind of the linearity of it back half versus front half because.
I know that business has a bunch of company specific design wins that will kick in at different times, and probably doesn't look perfectly linear.
Yes. Thanks for the question, we do expect a east silicon to sequentially grow again every quarter or.
For the remainder of 2020 into step up really in the second half as the production.
Basic.
Both the data center into Fiveg go to production up on midyear. So.
And then Furthermore, we expect this to step up another step up into 2021, if we would have a full year of production for those 86.
As we when we closed the acquisition, but you silicon we did say that the revenue growth be accretive.
Our gross so the from 2020 to 2021.
The time, we said we'd expected the revenue from me silicon to grow by 50% from turning 20 to 2021. So as you can see we we see sequential growth this year and we see sequential growth year over year.
Perfect. Thanks, Ross just just to try to answer your question. The initially I think we'll see more fiveg business come on and then.
Back half a year it'll be.
Split relatively evenly between datacenter in Fiveg.
Perfect. Thanks.
Yes.
Thank you. Our next question comes from the line of toys vendor Stifel.
Your line is now.
Yes. Thank you again, congratulations on the record results.
You talked a little bit about colors to versus 400, ZR just like I understand that's great color colors to will still be only for your largest customer right well formed is yards basically sampling to everybody.
Yeah. Thanks, sorry.
Colors, one is really the name we gave our 100 gig.
Product and we're calling this color through to.
To stress the fact that you know there's a.
Good I'm on our leverage that we can have on the firmware and some of the labs and into up this thing that as we move forward to 100 gig.
ZR to the torrent of gigs youre.
Colors to isn't in front of margin can help us really is a name for the DSP.
That's what you're saying is you don't win.
Can opus.
You are suggesting can help us is having a larger adoption just because they're going to go to.
More customers their go to more module customers outside of any kind of go to more OEM customers as well.
So from that point of view, yes. It can opus may have a larger adoption compared to countersue.
Colors to though it is going to have a higher S.P. So.
Did I answer your question.
Yes, again thats very helpful.
Second question is I know you're sampling youre, a seven nanometer clariant. This deal right now any any further thoughts on that.
Sure.
Seven nanometer product.
[noise] Oh, we have plenty of thoughts on that but we haven't how some yet Tory so stay tuned I think we have some news a very soon.
Okay I'll try another one and then so obviously the silicon acquisition is not just for revenue but.
I didn't custom silicon and to not people inside the packaging technology is important as well can you just talk a little bit more about how that positions in five not just here for 2020 and 2021 to perhaps.
From a from a more scalable offering and whether landscape. These today you know when all that different acquisitions going on.
That's really helpful. Thank you.
Yes. Thanks story, so the silicon acquisition gives us a tremendous amount of flexibility because it brings a lot of resources.
Two projects, where the customers are requesting for us to customize and we didn't have.
In the past all the resources required. So so right now it gives a lot of flexibility and potentially taking on incremental projects, where discount vendors or telecom vendors.
There are very strategic in nature.
Great. Thank you.
Thank you. Our next question comes from the line of Richard Shannon with Craig Hallum. Your line is now open.
Well I for John Thanks for taking my questions as well for you mentioned are you expecting better share and Pam four I'm not sure. If that was related the entire you were just starting to hear but maybe you can give us a sense of of why that is I know your first to market. Other reasons have been drop ability or competitors not to executing.
Or give us understanding what's going on there.
Yeah, Thanks, Richard so.
The first reason as you heard about the different variance off Pam. So obviously there is.
50 gig PEM DSP hundred PEM DSP, you got a 50 gig Pembrey time are good IP and we've got a portfolio of 28 gigabytes a driver in the portfolio Fiftys Gigabaud Tia driver.
For quite a few different optics form factor. So some customers that they can you vixel to market. Some other are ticking directly motivated and these are determined to market.
Others are using certainly mounted in laser or yeah man and funny Silicon Photonics. So that gives you quite a few variance of T. I M drivers for these four different optics variance.
We are the broadest portfolio of anyone in the markets. So in some markets. We've got competition Submarkets good no competition. So.
We enjoy some market <unk> higher shared that that so far has not been matched by competitor.
And the markets, where we are matched by competitors. We have enjoyed as you suggested they and we suggested the first mover advantage, which has allowed us to capture this higher share. So I think it's a combination.
Off a broader portfolio on a high quality product phenomenal performance in power and then first mover advantage.
Okay fair enough. Thank you for that.
Second question for John I'm trying to mitigate in your prepared remarks, you talked about something related to gross margins. It frankly, when fibrek quickly something about 50, and 100 basis points of help I think throughout 2020 can you repeat that and then I'll probably a follow up based on what I heard there, but I completely missed that.
Oh, yes Richard.
Basically you know what I suggested is that.
Our gross margins as we integrate the silicon are going to step down.
In the near term, but that they will improve the total gross margins would improve.
50 basis points by the end of 2020 and buy something in the neighborhood of 100 basis points in 2021.
Based on a combination of new products shipping coming out to be silicon that have higher gross margins and it's also based on some cost in price improvements that we expect to achieve through the course of the year.
On their existing base business.
And to be clear on that John is this a measuring pointed the 5800 basis points [laughter] excuse me is that based on your first quarter guidance or some other measures.
It's based on the.
The improvement will be based on total.
Gross margin improvement so in other words, just those improvements should drive a total gross margin improvement at that level.
Obviously, there they're only going to be.
Mid teens kind of percentage of the overall business. So they would have to have much greater improvement in order to drive the total gross margin improvement.
Through the course of the year not just the first quarter.
Got it okay and that has all the questions for me. Thank you.
Thanks Richard.
Thank you, ladies and gentlemen, as a reminder, if he would like to ask your question. Please press Star then one on your telephone [laughter].
Our next question comes from the line of a hot Joseph with Cowen and company. Your line is now open.
Thank you for taking my question, if I can start with a quick.
Of course.
Question on what was the revenue in the year from your Metro DSP business.
The 200, and how should we be thinking about that business in calendar 2000.
So I'll, let John give you the number if she wants to but I think we increased the business is very significantly from.
18 to 19, and then we see some very significant improvement from 19 to 20, John do you want to give more specifics.
Yeah, the business overall for hot I believe increased by.
Around 84%, but we don't break it out separately. So we're not going to give you the details.
Got it and you see the same traction going forward in calendar 2000, and he saw no 19 Directionally speaking.
Yes, we can we continue to see a strong business.
And you know what it would be again, you know something probably on the order of 50% improvement.
Got it a 45 me ask you a big picture question.
Specifically regarding.
Pamfour on one end and also on the CR side, we see a divergence in.
Both the end markets, but they are.
Acacia and that group of pushing.
Opens yard and down the path for side, we have.
The opened I.
Spec being placed by your competitors to what extent do you think that the.
This impact at all or Tam opportunity for you guys and if you could comment on both the dynamics, if you're seeing from from here, especially the pen foresight first and then on the ZR, how do you see that play out.
Yeah I think these are thank you very good question fraud. These are in our mind two very different trend right.
On the coherent side of the word we're absolutely committed to interrupt and come to a joint.
Forward error correction, there with standardized across the industries were working frankly very close he was boasts acacia and any and too.
Come to a joint proposal and the short term our see frac.
Has been adopted in quite a few standards and I believe occasion, and yet it will be putting them in their products.
There are OPEC has been adopted as well and we committed to put in our products. So in the short term, we're going to be cross licensing each other and were both put the effect into products.
However longer term, we do believe that it's in the industry interest to standardize on one fixed so we don't end up having.
To do twice to work and and the customers enough having to do twice to firmware and so.
Longer term, we're committed to an interim and getting through hopefully one standard and we.
We've got a very good relationship was all the different payers, an ecosystem, including Shannon and others and Nokia and others, while way the do these facts so.
I think we're seeing eye to eye was many of the industry players toward standardizing and.
The cost of these DSP right now can opposite seven nanometer. The next one is gonna be five nanometer because we're doing a DSP is going to is going to start approaching 80 plus million donors.
And is not sustainable to have all these different standards compete and an increase the costs for every one right. So I think you're seeing a very good convergence there I think there's a very good.
Working relationship and a commitment to get to interrupt longer term and that's good for everybody in the market.
On the PEM side of the equation.
You know you see companies like you know in fine broke on my senior and others. All funneling I've tried police tendered, which is what Pam is four and.
We're all collaborating.
Competing if you wish in different places, but but that's fine again I mean, a standard is good for the customers that open I is a corner case, where you know you've got some vendors that don't have enough strengthen their solution to close the link and they define.
Some kind of weird non standard you know book ended solution that you'd have to cover the products on boss and if you put somebody else the product on deal there is nothing work.
And this really just a artifact of the fact that their solution is not strong enough to be able to be a standard solution. So.
There again, we believe that this opened <unk>, it's just a nonstarter.
And in doing to fail. We don't believe this is going to go anywhere.
You are very much on that's all for me.
Thank you.
This concludes today's question and answer session I would now like to turn the call back to John Edmunds for closing remarks.
Thank you Sarah.
Forward and Vernon I would like to thank you for joining us today and let you know that we plan on attending the Morgan Stanley Conference in San Francisco on March 2nd and we'll be at OWS or see in San Diego on March 10th and 11th although we caution you that OFC is primarily in industry and trade conference not an investor car.
Once per se.
But we were happy to talk with investors what were there.
And again forward and Vernon I would like to thank you for joining US today, we look forward to speaking with you again in the future.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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