Q2 2020 Inphi Corp Earnings Call
After the speaker presentation, there will be a question and answer session.
Ask a question Dan the session you want me to press Star one on your telephone.
If you acquire any further instructions. Please press star Zero I would now like turn the conference your speaker today.
And actually please go ahead Sir.
I think you Joel.
Good morning, everyone and thank you for joining us today to discuss the financial results for the second quarter of 2020, a copy of today's press release can be found in the Investor relations portion of inflows web site.
It didn't buy dotcom slash investors.
With me today isn't vice President and CEO Ford Tamer nearby Chief Financial Officer, John Edmunds.
On our call I will first provide the safe Harbor, then Ford will give you an overview of our business. This will be followed by John with the financial results for the second quarter 2020 any outlook for the third quarter 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 forward looking financial information the projected growth size the strength of our markets our customers market share performance and success of new products does.
Sign wins customer demand supply impact of worldwide issues and the success of related contingency plans and the integration of arrive technologies.
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 or it was wells. Our most recent annual and quarterly reports on forms 10-K, and 10-Q, all filed with the Securities and Exchange Commission and accessible at Www Dot Si Si 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 reconciliation of this information is included in the press release in our company website at Www Dot Inphi Dot Com. This information is not a substitute for gap.
Should only be used to evaluate the company's results in conjunction with corresponding GAAP measures.
Not to begin a review of the quarter, Let me turn the call over to our CEO Ford Tamer Ford.
Thanks, Ryan and thank you for joining us for enterprise second quarter 2020 earnings update.
Today would be discussing our Q2 results Q3 outlook and acquisitions of assets from arrive technologies.
The second quarter of 2020 was a quarter unlike any other.
On the one hand, we've all been following the challenges of Corbett 19, as it continues to impact many regions.
On the other hand.
In fine has continued to experience strong demand across his product lines, leading to strong financial performance and projections.
Before we discuss the details of the quarter, let me reiterate there our thoughts are was all those who have suffered in any way during this pandemic.
We hope we've been a positive force for our communities through charitable donations.
We continue to salute and support humanitarian organizations and first responders, who are making huge difference.
During this time, we remain focused on serving our customers.
Growing our business.
And ensuring the why being all by employees and their families.
We continue to drive forward, our mission are being the global leader in high speed data movement interconnect and we continue to invest in product development and areas that expand our market opportunity.
And finally achieved record revenue of $175 million in Q2.
Hey, 103% increase over last years Q2 revenue of $86 million.
This revenue exceeded our expectations and guidance midpoint of $150 million.
Revenue grew 26% sequentially.
Up from $139 million in the first quarter.
This record results.
Significantly.
Outperformed our internal forecast.
Driven by positive momentum in both collagen telecom.
Oh cloud business.
Grew 92% year over year in Q2 due to two factors.
First we achieved better than expected sure enough Pam chipset for inside data center market segment.
And second we experienced better than expected demand for colors, one hundredg ZR solution for data center interconnect or D.C.I. between data centers.
Our telecom business grew 119% year over year, including the acquired he silicon and arrive revenue or 41% organically without the acquired revenue.
Our telecom organic growth was driven by both Pamfour fiveg and all coherent DSP offering for 200, Gi and long haul and metro segments.
On the east Silicon side, we're pleasantly surprised by the positive initial ramp of our middle and back haul Fiveg basics.
We also saw record non-GAAP earnings per share of 95 cents materially above the midpoint of our original guidance of 65 cents.
And a strong 169% increase over to 35 cents and non-GAAP earnings per share reported one year ago.
Our operating margin expanded from 24.5% into first quarter, 228.7% into second quarter underscoring the leverage in our operating model.
Due to favorable tax treatment, we achieved in that margin of 29.1%.
Both operating and net margins were record daughter contributions to the business.
As we look to Q3, the midpoint of our guidance chose a 3% sequential revenue growth from a very strong Q2, and also represents 92% year over year growth over Q3 2019.
We are pleased with our results and excited about a product development and market adoption, which we believe will further drive revenue growth.
We expect our Q3 P.S. two declined sequentially by approximately 10% due to a onetime tax benefit in Q2.
However, we expect our operating margin to remain relatively flat and our pre tax profit to grow.
We are proud to guide to an earnings 11, there would have been on realistically optimistic at the beginning of 2020, but acknowledging that at the moment uncertainty remains the key word.
Before we move to the quarterly details, let me discuss a recent acquisition.
Yes, it's off arrives technologies in human City Vietnam.
Just as we see silicon, we look to add to our resource footprint and strategic locations in Europe.
Asia and North America.
Was arrive we are expanding our engineering capabilities in human city.
Arrive brings to Inphi 100, and twice employees was a strong skill set in architecture front end design verification validation and framework.
This complements inphi is existing design centers in southeast Asia, along with our Bakken team in Washington City.
Our analog and optics team in Singapore, and Operation Center in Penang, Malaysia.
Arrives team has experienced designing products for many of our same system OEM customers for cloud and telecom markets, including Fiveg.
Now, let's look at the details for Q2.
First in our cloud inside data center market, we continue to benefit from the continued ramp of 200, Gi and 400, GE Pam solutions, but large cloud customers.
The robust ramp across multiple cloud customers plays to our thesis that the data center is the computer.
In this segment, we're pleased by better than expected market share in Q2.
As we look ahead, we expect competition to intensify as I'll turn it solutions got quantified.
We continue to invest in a roadmap and I'm confident about our market position.
In the cloud market. We also had positive news from the D.C.I. segment for data movement between data centers.
This was driven by the continued moved to edge computing.
And the increase in demand for Metro access bandwidth.
The migration to edge computing is tangible evidence that our customer strategy or the cloud isn't network is enabling and tried to deliver a high bandwidth network fabric had great cost and power savings to our customers.
Okay.
Moving to a telecom market.
Coherent solutions experienced robust orders in Q2.
Revenue in this segment showed sequential growth in line with the overall company well our coherent DSP revenue grew over 50 per cent compared to Q2 over last year.
We also saw strong activity in our Fiveg PEM solutions in Q2 as telecom operators further investment in Fiveg infrastructure drove increased order activity.
Finally, we experienced very robust demand for he said it can 86 that also target this fiveg market.
Here to our revenue exceeded our forecasted expectations.
Now, let me spend a few minutes on the complex market situation in China or uncertainty remains the key word.
In Q2, we continue to serve all of our key OEM customers, including Fiberhome and why we although at the lower rate there would have been without export rules and regulations.
That said because of the political uncertainties, we have removed walk away from our guidance for the balance of Q3.
In summary, we clearly are delivering a meaningful upside with these results, reflecting strength across cloud and telecom markets.
Why not product lines continue to enjoy significant marketplace success, we anticipate normalization of sales due to increased competition in the future.
In addition to driving differentiation, we continue to drive our product strategy toward scale and diversification, while demonstrating continued operating leverage.
This shows that our business model is working we continued to deliver growth rates above the industry for both revenue and EPS.
All this is only possible because of the continued hard work by our employees around the word and every department.
And a quick adaptation to working mostly from huh.
With that I turned the corner over to John to discuss the financial results in greater detail John.
Thanks Ford.
First allow me to clarify that we've recently.
Reclass some smaller older portions of the cloud and telco business to legacy in Q2 and for the five.
Ceding quarters of history.
For instance, 11% and 2% of each areas respective Q1 revenues were reclassified.
We know this type of change can be inconvenient, but we believe it will provide more transparency and better reporting over the long run.
We have posted a spreadsheet in a PDF file on the web site with the trend restated for the last five quarters to help facilitate the transition.
The mix of business in Q2, 20 between cloud <unk> COO and legacy each had as a percentage of total revenue are now very similar to the mix in Q2 2019, albeit at roughly twice the total revenue level in 2020 versus 19.
Also at Q2 levels, the former east Silicon Hesik business in aggregate appears to be at a run rate threshold. So we plan to start breaking that piece out from organic revenues for Q3 and going forward.
Having made those provisos now let me recap the financial results.
Our cloud products, including Pam Dsps, and Retimers companion, T.I.E. A's and drivers colors and knew he silicon data Center 86 comprised 44% of total revenues in Q2 as opposed to 46% one year ago.
Q2, 20 cloud revenues represented growth of 10% sequentially and 92% year over year.
Our telco products, including Pam based Fiveg chipsets coherent T I used drivers and Dsps and he silicon Fiveg basics represented approximately 38% of revenues in Q2 20 as compared to 35% in Q2 19.
Telco in Q2 20 also represented 44% increased sequentially and 119% increase year over year organically. These amounts were approximately 3.1% sequentially and 41% year over year.
The legacy business as restated now represents 18% of revenue in Q2, 20, and 18% in Q2 19, Q2, 20 legacy revenues grew by 39% sequentially and 101% year over year of the sequential growth figure approximately 80% or about 7 million was driven by the surge in demand for older E.
Silicon 86.
We expect this overall higher level of revenue to be sustainable through the balance of 2020.
In Q2 20, the GAAP gross margin was 53% up from 52.9% in Q1. The GAAP gross margins in Q2 included 15.1 million and acquired technology amortization as compared to 11.4 million. In Q1. In addition, there was approximately 2 million of stock compensation included in both quarters. Please see the reconciliations in the press release.
In more detail.
As margins on a non-GAAP basis in Q2 came in at 64.1% as compared to 64.2% in Q1.
Gross margins for Inphi core products came in at approximately 71%, whereas the gross margins of the silicon business came in at approximately 42%. This blended then to an overall non-GAAP gross margin of 64.1% in Q2.
Q2, GAAP net loss was 24.1 million.
We then add back adjustments of 56.8 million of certain standard noncash GAAP expenses for stock compensation acquired related purchase accounting and.
Convertible debt cost amortization. This compares to the 48 million recorded in Q1. The difference of 8.8 million is due to three factors first 4.2 million and higher stock compensation, reflecting the annual refresh grant in April at a higher stock price second 3.45 million and higher purchase accounting.
Nation due to a full quarter in Q2 versus a personal Q1 based on the January 10.
Acquisition date.
Finally, 1.15 million higher in amortization on the new convertible debt issued in Q2.
To get to non-GAAP net income you need to consider certain add backs introductions to the GAAP net loss. In addition to the standard add back just might know 56.8 million as follows the first of three add backs our.
First an add back of 13.3 million, which was primarily a noncash onetime GAAP charge for the extinguishment of debt second add back approximately 5.7 million and acquisition related expenses due to the east Silicon and arrive and then third add back point 7 million from non cash rent expense required for gap that relates to a pre move.
In construction period to prepare a new office space in San Jose, California will be moving into that office. This month.
The two deductions are to deduct approximately 2.7 million in net gains from the sale and standard remeasurement of private and public equity investments and finally, we deduct the additional tax charge associated with these non-GAAP adjustments for approximately 1.25 million.
All to arrive at Q2, non-GAAP net income of 50.95 million.
Due to non-GAAP net income was up 62% sequentially and more than three times plus year over year to year over year improvement in both is both a function of 103% increase in revenues with a with a nearly 50% improvement in operating leverage.
Now, let's look at the remaining components of non-GAAP reporting non-GAAP operating expense for Q2 totaled 61.9 million, which was about 3 million higher than our target of 58.9 million approximately 1 million from higher payroll tax on RSU vesting due to the higher stock price increased ITM CAD licensing of point 8 million due to changes.
Brought about from the shift toward work from home our program development spend began to rebound in Q2 based on certain projects being kept on track. Despite the challenges in working from home. This resulted in an additional $500000 above the forecast.
Finally, because the health crisis people have also been taking if they have not been taking vacations. As a result, we did not realize a forecasted expense relief of about 700000 vacation in Q2, as an offset to payroll expense.
Overall Q2, non-GAAP operating margin was up 4.2% to 28.7% compared to 24.5% in Q1 and up 9.6%, representing a 50% improvement from the 19.1%.
Reported in the second quarter, one year ago.
Before the operating income line below the operating income line. We also recorded a $13.3 million charge, mostly non cash for the early extinguishment of debt, which was part of the overall GAAP net loss.
This was the accounting result of one of a 403.5 million dollar debt extinguishment, which represented the fat face value principal or principal value. The convertible notes our primary objective for the exchange and repurchase was to slow down and put a cap on the ongoing share dilution associated with the older nodes in the face of a rising stock price.
In Q2.
Unfortunately, the rising stock price since Q3 of 2019 has brought on additional dilution from the conversion feature associated with the convertible debt.
As limited within a range by the capped calls.
In 2015 in 2016 as a smaller company, we were only effectively able to raise 500 million of cash either via equity.
Or convertible debt.
Equity would have required us to issue $14 million 40 million shares convertible debt had low interest rates and the same time.
The up conversion at 75% or $52 when the stock was at 29 or $73. When the stock was 41 seemed like a healthy bet.
Now the market realizes that a five year horizon on the notes is too long.
So our latest bond offering it has a more count now more common call feature for the company. After three years success with the stock price has brought on the recent dilution, but at this point.
Though 78 through 78% extinguishment, we expect that we have reasonably abated. These this issue.
Now as a bigger company, we can look at more forms of financing, including straight debt, which would be more cost efficient in the future. We have to remember that the convertible debt financings. We did do enabled us to acquire clarify which gave inphi a very strategic coherent DSP solution and then the same way enabled the recent cash acquisition of he silicon which is.
Also lining up to add scale and earnings leverage accretion to our earnings.
The 13 million dollar charge for your extinguishment of debt and included approximately 4 million of event driven cash charges for premiums and advisory fees otherwise the remainder isn't accounting driven calculation with a theoretical fair value, which all not try to take you through at this time.
In economic terms, we generally paid a fraction of 1% type of premium above the market value of the bonds to induce the bondholders to participate in the repurchase approximately 4 million in cash inducements, including advisory fees and other transaction costs, which were paid on the 403.5 million at face value.
And approximately 4.9 million shares were also issued at a weighted average price of $112 per share.
In addition, we have capped call hedge contracts in place that are expected to return approximately 1.5 million shares to the company at the mature original maturity dates. The result is a net 3.4 million shares of dilution of that amount approximately 2.2 million shares were already included in the March 2020 quarterly weighted average shares calculation.
Using an average stock price of approximately $78.
We were not able to engage in this exchange and repurchase project any earlier than March 20, Threerd due to an FCC requirement to file an 8-K with pro forma financials associated with the Silicon acquisition.
Descended a six month long acquisition process, we proceeded with an initial new $506 million convertible debt offering process and exchange about 30 days later.
GAAP net interest expense in other income for Q2, 20 totaled 6.2 million of expense.
If you add back 8.5 million convertible debt noncash amortization expense and then deduct a gain of approximately 2.7 million in GAAP equity investment income you will arrive at $400000 of other expense. This is expected expense, primarily due to imputed interest on CAD license agreements and other miscellaneous charges.
The GAAP income tax expense was a charge for Q2 of 249000. This includes the reversal of a finforty eight tax reserve for onetime booked benefit a 5.6 million.
This reversal is related to the resolution of a concerned that our transfer pricing policy going back to 2010 might be challenged by the U.S. internal revenue service.
The recent completion of an IRS audit laid those concerns and prompted the reversal of the reserve for gap. This reversal was offset by a change in valuation allowance for the same amount so no impact.
For non <unk> non-GAAP.
We accrued discharge over the last 10 years. So we were also taking the benefit of the reversal for the non-GAAP reporting.
The impact is a onetime benefit to Q2, which represents about 10 cents per share benefit.
As part of the 95 cents per share non-GAAP EPS.
The remainder of the 6.6 million in non-GAAP tax expenses represents the expense in various jurisdictions and U.S. and Singapore.
As we have noted in the past, we find the GAAP tax rate to be difficult to forecast.
Absent the onetime 5.6 million reversal of the tax reserve discussed above the non-GAAP effective tax rate for Q2 was 9.12% and represented a charge of 4.6 million.
By booking a small catch up in Q2, we brought the year to date non-GAAP effective tax rate up to 8%.
Non-GAAP effective tax rate for 2020 is expected to continue to be in the range of 8% up from the 6.3% in Q1, due primarily to higher projected offshore income and more theoretical U.S. guilty tax included as a result.
Worldwide cash income taxes actually paid in the first half of the year were 629000.
Now turning to the balance sheet overall cash and short term investments was 222 million at June 30, or 16 million lower as compared to the 238 million.
As of March 30 Onest.
The net change of 16.5 million was comprised of the following in Q2 cash flow from operations was 37.9 million.
This was offset by 14.5 million and Capex and repayment of lease obligations as well as 7.9 million in financing payments for software licenses combined this resulted in non-GAAP free cash flow of 15.5 million.
We also invested 71.1 million of cash on the acquisition of the assets have arrived technologies, adding more than 100 experienced engineers in Vietnam to combined with a small E. Silicon team, we already have there.
We continue to invest 1 million and follow on equity investment in a private company in which we had previously invested.
We invested 40 million repurchasing vested shares for employees in order to settle payroll tax withholding requirements upon vesting.
We added 29.2 million and net convertible debt activity.
And then we added point 9 million from financing cash flows, which came mainly from employee stock options and purchases.
Finally, we added finally, we deduct a 3.7 million balance sheet adjustment to cash reflecting timing differences in the settlement of an investment in marketable securities straddling between Q1 in Q2. This was offset by an approximate 1 million increase in unrealized gains.
All of which brings us back to use of cash of 16.5 million for Q2 20.
Cash flow from operations in Q2 was 37.9 million as compared to 35 million in Q1, and as compared to 23.5 million in Q2.
The sequential increase of 2.9 million was driven by a sequential increase in EBITDA of 16.5 million, which was 42% higher.
Offset by a relative expansion of working capital of 13.6 million.
This was brought on primarily by the 26% increase in sales in the quarter ramping more heavily in the second half.
Capital expenditures of 14.5 million Q2 was up slightly compared to the 13.4 million reported in Q1 to further bolster our liquidity on April 20, Swift, we closed a new five year convertible note offering for 506 million.
The rate on the new note is 0.75 per cent per annum.
Conversion premium was 32.5% up providing a based upon exercise price of approximately $125 per share.
The note is also callable at the company's option. After three years, if the price has been consistently 30% or more above the exercise price. We also enter into a cap cost structure to synthetically raise the economic exercise price threshold from $125 to approximately $189 per share.
Accounts receivable increased by 22.5 million in Q2 Dsos at the end of June were up four days to 44 days as compared to the March figure of 40 days.
Inventory at June 30 included 8.7 million step up in fair value without that step up inventory increased by 13.7 million in the quarter of this amount 12.4 million was for E. Silicon Eightsix, which were ramping so core inphi inventory was up only 1.3 million or 2.5% in the quarter.
As a result inventory days were down eight days to 128 days at the end of June as compared to 136 days at the end of March Conversely inventory turns were up to 2.8 at the end of June from the 2.6 reported at the end of March.
Now, let me recap the business outlook for Q3 20.
I remind everyone again that the following statements are based on current expectations as of today and include forward looking statements actual results may differ materially we do not plan to update nor do we take on any obligation to update this outlook in the future.
Revenue in Q3 is expected to be in the range of 179 to 182.5 million.
For GAAP reporting in Q3, excluding potential.
Purchase accounting adjustments, we are currently forecasting GAAP gross margins should be in the range of 55.1% to 56.2% GAAP operating expense should be in the range of 63.5 to 64.3 million absent nonincome related tax adjustments, we would expect the GAAP effective tax rate to be approximately.
Negative 185%.
GAAP net loss should then be in the range of negative 1.5 to negative 6.2 million GAAP earnings per share would then be in the range of loss of three to 12 cents per basic share on 52.1 million forecasted basic shares.
A more complete reconciliation to the forecast of Q2 GAAP net loss in gross margin compared to the forecasts of non-GAAP are included in the press release for non-GAAP reporting in Q3. We are currently forecasting as follows gross margins are expected to be in the range of 63.5% to 64.5%, which at the midpoint of 64% would be down approximately 10 bips.
In Q3 as compared to Q2.
Operating expense should be in the range of 63.5 to 64.3 million. We're currently estimating the non-GAAP effective tax rate to be 8% for 2020. We're also confident these components should then aligned resulting in a non-GAAP operating margin it to be in the range of 28% to 29.2%.
This should then.
Lead to non-GAAP net income of between approximately 45.4 million and 47.9 million, resulting an estimated non-GAAP income per share up between 83 cents and 87 cents based on an estimate of approximately 55 million non-GAAP diluted shares. Please note the added dilution from the higher stock price and the diluted shares in.
Q3 EPS calculation.
Might have been.
The Q3, EPS calculation might have been approximately two cents higher if it were not for the added dilution.
We will not update this outlook during the quarter or until the time of the next quarterly earnings release and less Inphi publishes a notice stating otherwise. So please ask any questions. You may have today during the general culinary period.
Let me add one additional comment Ford and I, both have Tenbfive one plans.
Which were filed six to nine months ago, it's likely that sales from these could be taking place in Q3 in Q4. This year as full disclosure our intention is to diversify our personal investment risk as individuals were trying to do this over time and in a manner that hopefully does not affect the market.
We both remain fully confident in the outlook for Inphi is business. We were also both maintaining substantial stakes in the future of the business and have every interest and seeing that interest continue to appreciate in value.
And now we'll be happy to take your questions Joel.
Thank you as a reminder to ask a question your need to press star one on a telephone so which I question on key please standby will be compared to Q1 day roster.
Our first question comes from hiring so with JP Morgan Your line is now open.
Good morning, guys, and congratulations and solid execution, but the team in the strong results. So we just heard from most of your largest hauled in hyperscale customers. This earning season and by enlarge their strong data centers spending profile in the first half looks to be sustainable into the second half.
Given by the significant step up in data center traffic Fiveg in China as firing looks to be strong through the second half of the year. All of this is clearly helping to drive a strong but very diversified demand profile for the team for you guys had previously expected to grow sequentially every quarter.
This year, but also very strong Q2, and a very strong Q3, and you did talk about some normalization given competition.
Putting all of this together how do you see the revenue trajectory in Q4 and can you just talk about the breadth of new customer ramps in Q4 and into 2021.
Thank you Martin.
Thank you for your question the demand is very strong and as you heard and my remark is coming from all the different segments inside data center between data centers in our cloud segment for both to Pam DSP inside and clutter solution between.
As wettest telecom, including Pam four or five G.
The coherent DSP and accompanying Tia driver and finally, the new the acquired east Silicon a six week.
We expect that strength to continue across the board into Q4 2020 in into 21 at this point.
But as we as you heard me, we're not guiding for Q4, obviously.
Great, Okay, and good to see colors doing well you know your lead data center interconnect partner Microsoft continues its strong buildout of global data centers, India pull in Italy, New Zealand et cetera. These are all new build outs and then on top of that Microsoft also $1 billion to $10 billion U.S. Department of defense Jed I called come.
Cute initiative, which I assume there's going to drive more demand for your DC ice solutions at some point into future. If you could just help us understand all of this impacts the second half outlook for the colors business and how is potentially accelerating the move to your new 400 de our platform.
Next year, if you could just give us an update on the timing of your initial 400 knee.
Production deployments.
Yes. Thank you Harlan so two questions first the existing 100 Jeezy our solution is benefiting from an increased demand for edge computing and.
Metro access bandwidth that mushroom Inc. and we are.
Seeing that demand continue strongly throughout this year and into 2021 at that time, we expect a foreign exemplar to kick in.
In a sort of first half of 21.
As I discuss some of my prior.
Prior earning call we're still consistent the expecting.
Our ZR solution to go production into first half off 21 and ramp into volume's starting in the mid 21.
So we should expect the second half of 20 to 21 to be a significant.
Revenue driver coming from the 400 gigs you are a solution that month to put a cloud data center as well as telecom operators.
Great. Thank you good to see the diversification in the business. Thank you.
Thank you.
Our next question comes and Tom O'malley with Barclays. Your line is now open.
Good morning, guys and thanks for taking my question and congrats on the nice results, but my first ones on the Pam business. Obviously Ford you mentioned that you had some better expected share for data center. This quarter, but then mentioned some increasing competition later in the year can you update us on what the expected Tam for that business. As you previously had said about 300.
Yeah.
65% to share is that headed higher given where two thirds of the way through the year here.
No competition and can you just update us on what you expect that tend to look like in 2021.
Yes. Thank you Tom. So first question is the market for Pam and 2020 is still expected to be around the 300 Mark.
So that has not changed a number two question our share and offset market in 2020 is much higher than what we had initially discussed and that's coming from the competition being delayed and qualification.
We do expect <unk> the company competitors to be qualified and too.
At some point to take market share.
In a second half of 2020, but we're still very confident of our market position given the excellent road map.
And the.
Customer support and the firmware that we are working closely with customers on as we look into 2021, we expect that market to grow to about 500 million or so range.
And Tom that'd be geared to the numbers I'm quoting you hear our for depend market that includes fiveg. So as not just data center.
But that's both data center and Fiveg.
And that's both DSP as well as T I a driver in that market.
Okay. That's helpful. And then I just wanted to dive into the strength you guys saw the telecom business, obviously, some strength and 200 and.
Some early GR strength as well, but can you talk about the contribution from Silicon John you mentioned.
No.
Some real strength, there and the telecom market and and you said run rate you're you're at about.
The 25 million plus range for the year can you talk about where that is still a good number is headed you're not going to guide it in more of a where was it for the quarter.
Why was there such strong contribution.
So the primary growth driver in in Q2.
Was in the telco area as we pointed out in the Fiveg. He six and also in the.
The legacy area with the older.
A six from he silicon so.
All told a run rate.
Revenue thresholds running around 40 million or so per quarter for the business.
Great. Thanks, a lot guys.
Sure.
Thank you.
Our next question comes and did it Yeah with Bank of America Securities. Your line is open.
Hi, Thanks for taking my question then congratulations on on the strong growth.
The results. This year has been exceptionally strong I'm wondering how do you keep a track off.
The utilization of feel or products to make sure that there's no polenta, because I think earlier in the here.
There was some.
Talk off extended lead times until first I'm just curious how are you, making sure that that utilization up your products is staying on track and there are no extraordinary pull ins from China or otherwise.
Thank you for the question.
Yes, so in the data center, we have still short to just so we cannot make to parse fast enough. We've had tremendous support from our partners in the supply chain and very thankful to all our partners.
For supporting this incredible revenue ramp for us.
So we don't see any.
Inventory right now on a data center on the other hand, we have actually shortages and the data center and we're working hard to cut down the lead times in that market.
And the Fiveg is where we were worried at some point about having some inventory.
But again, we're seeing a the deployment of B, well ahead of expectation and our checks and the.
Supply chain have indicated that there was actually.
You know not that much inventory, we're talking about six months I've been three we think right now in Fiveg. So that's actually down from where we expected that inventory to be there last earnings call.
I see and as a follow up you know the reclassification your did put a lot more and legacy and I think you explain that.
Two I believe some order a ski silicon Essex and you expect that to sustain for for the rest of the here what is the right way to think about that segment.
Over the next.
The undersea is this revenue that stays is there an air pocket when it.
Goes away, obviously, that's not the focus business for you, but at this did a meaningful part.
So what does it right away.
Think about this for the next amphitheaters.
Yes, So Vic this is John.
What you're seeing right now is the the newer fiveg basic shipping into the telco space.
Later this year and into next year, we'll also see a new fiveg I'm, sorry, new ASIC thats going to be shipping into the data center space with a large customer. So we'll have those two new product ramps.
We are seeing a surge in the older age basic business, which we think will sustain through the end of the year at some stage over several years that'll probably Peter out, but you have to remember these are all custom one off basics that people designer systems around and so they're they're only unlikely to fall out of the mix windows systems actually come out of service.
Or unless the customer wants to too.
By out the the basic production from us, which in some cases, we've been opened two.
So you know those that's kind of what we're working with so right now we see the older Essex sustaining through the end of the year and we have a early surge in the.
The telco Fiveg is there's probably some channel fill in factory fill in there.
And that'll be.
Sort of.
Compensated for by the data center, a sick ramping later this year and then into next year. So we do see some growth into next year.
But it's it's ramped faster than we thought it might in a in Q1 I'm sorry in Q2 here and into 2020.
Which is good for US and then you will see some some growth into next year.
Thank you.
Sure.
Thank you. Our next question comes Quinn Bolton with Needham Your line is now open.
Hey, guys and congratulations nice results and outlook.
Just wanted to come back to the Pam four in the data center business.
Wondering if you saw strength across the board across both 204 hundred gig or whether the strength was driven by one or the other those states.
Thank you Quinn so yes, we saw strength across the board the foreign to GE was.
A stronger in Q2 because of the ramp of a new customer. We expect this tracks to continue in Q3.
And then we expect some new customers to come and into Q4 timeframe and half the 50 GE Pam for 200 gig modular tick over again, so but for the year, we seeing strengths across both segments. So quickly.
Great and then sort of a follow on that forward you guys I think its a.
Well, let's see announced you're speaking to 800 gig DSP can you give us a sense one that may enter volume production.
Yes, when we take about a year from the time, we sampled to a time, we go to full volume ramp up customers, we announced a product in March of last year off this year.
So you should expect that revenue to kick in and more significant type of revenue in Q2 timeframe off next year.
Great and then just.
Over to the CR market I think in finding new photonics and an ounce interoperability.
What what both modules based on the Inphi DSP have you guys conducted interoperability testing, yet with indication or any I'll DSP and can you give us any update if you have.
Yes going first the the Interop. We have conducted was neophotonics is very exciting because it shows our vision of having a multi source ecosystem afforded ZR is here.
And by the way the Neophotonics solution is not only for data centers also for telecom, operator, and there are being successful and feeling it there.
We also are conducting and continue to conduct interrupt testing with other DSP solutions and we will announce that soon but at this point. It is looking very good.
And so we're very excited about having a multi source ecosystem for ZR with three different DSP solution, Inphi Acacia and yen.
Yeah, we are the three of us our exchanging.
Interruptus vectors are working closely on Interop in a very committed to throw up between the three DSP solutions at the same time, we're probably seeing.
And full of module customers, including ourselves Acacia and any it'd be solutions that are coming to market. So we've been committed to an open ecosystem all along and were very positive that this is going to help.
ZR business grow compared to captive solutions that are very proprietary and not open.
Great. Thank you.
Thank you Sir our next question comes an oxymoron with Deutsche Bank. Your line is now open.
Hi, guys. Thanks for mass question and congrats on the strong results sort I wanted to go back to that China dynamic you talked about I know, there's a ton of uncertainty and things that are out of your control and and it's prudent to take that walk away business down to zero in the back half of the year, but I wanted to see dynamics in a couple of different ways. One in greater China are you seeing other people picking up demand from the.
Hi, wayside.
And then to are you able to apply for a license to be able to ship to need to walk away side. So is the optionality still to the upside or is that in your opinion or relatively permanent.
Impairment of that customer and your ability to ship to it.
Thank you Ross so in my prepared comments I did not say, we took a while we out for the back end of the or I said, we took it out for the balance of Q3. So that's the only stay thing we've made regarding one way.
We you know at this point continuing to ship compliant who is the U.S. E. R. So that's a at a reduced rate to what we could ship otherwise.
And I think time will tell a word. This goes we are hopeful that we'd get to a win win solution down the road at this point.
We're going to continue to stay cautious regarding that relationship.
And then one for John on the topic side of things you explained in detail why it was a little higher in the June quarter can you just talk about the philosophy on that and the arrive side of things that acquisition I assume it sounds like it adds a lot more on the opex side of things than it does on the revenue side, but can you just talk about kind of what that the normalized growth rate going.
Forward, how much the arrive comp acquisition contributes to that and then generally how you should think about opex relative to revenue growth as the revenue side is growing so aggressively.
Yeah Ross Thanks for the question.
Arrive, we closed in the middle of the second quarter.
As a small transaction and we just went hadn't close it in and we're talking about here on the earnings call.
Although we picked up a little over 100 engineers in in Vietnam. The monthly operating cost for that is relatively low and.
So you're what you're looking at is probably a.
Something on the order of.
Half a million to a million dollars a quarter in spending that that might come in.
And they have.
Some revenue and customer engagements that actually cover most of that cost.
So on the whole, we're we're picking it up with not much impact to the piano.
In in other in another sense, I think you're going to see operating expense.
Expand to some degree you know we're experiencing a lot of.
Good growth right now, but we're also wanting to invest back in the business for the next.
You know generation of growth moving forward and so you will see us.
Investing as we move forward.
To some degree here in Q3, but also in Q4 and into next year or so.
[music].
From our point of view, we've had good growth, but we're just we feel like we're just getting started and we want to move on and.
Invest to propel that growth on into the future.
Great. Thank you.
Thank you.
A question comes down Moreover, Stanley DRAM is now.
Great. Thank you in terms of Q2 can you help us size the walk away and Fiberhome exposure, if they kinda worried immaterial level and you know I guess with while way you keep kind of taking it out of the forecast and then they keep coming in with the reasonable revenue. You know do you think that will continue to.
I mean, it seems conservative to take them out, but you think that'll continue to be the dynamic or just what's going to happen there.
Joe This is John.
Good question we.
We have booked some revenue already in in Q3.
And we don't want to imply that we were at risk for hitting the revenue target in Q3 with respect to always I think you understand that.
Right now, we're still able to ship.
You know products that are made outside of the U.S. are substantially outside of the U.S. under the current rules as they exist.
We don't know that that will change moving forward. We also don't know what will happen with.
The federal.
Leadership pass the fall season here so.
If things change.
The hopefully will change the better and we'll have more freedom degrees of freedom to too.
Provide service, while we this year will be less than a 10% customers. So I think overall, it's this whole situations hurt the market in her business, but.
There are good customer they do devote good technology and we'd like to continue to do business with them. So you will see us trying to support them.
At some level as we move forward here.
To the certainly to the Korea, we're able to.
Okay. Thank you and then going back to the next question I mean like three months ago.
There was a little bit more of a sense. If you know we need to make sure we're shipping to end demand and things like that.
Now three months later, it sounds like you're still pretty tight on supply for data center, but it doesn't seem like you have the same kind of question. It seems like it you're pretty confident you're shipping directly to end demand is that a fair read and you know where would that inc. I mean, obviously other revenues have been great, but like it seems like the better the revenues are them, sometimes the more those anxieties persist.
Like but what gives you the confidence that you're shipping to end demand rather than inventory accumulation.
Well for particularly for the datacenter.
You know they tend to move quickly in small windows and so.
We're pretty confident that that's that's all going in and being used we don't see that is stockpiling up for particularly for the U.S. data centers.
And they do need more capacity more bandwidth so all of that makes sense to us.
We are however, cautious as we move forward here.
And we try to be conservative.
As you know with our forecasting just to make sure that.
We can continue to to deliver good results.
Even if the macro around us is deteriorating to some degree at some level, we're not immune right, we will so calm as well but.
So far so good and we just keep looking forward to continuing to try to grow the company keeper heads down and and grow the company's business.
Great. Thank you very much.
Thank you Sir our next question comes on time spent with Stifel. Your line is now open.
Yes, Thank you congratulations and and thank you for the disclosures.
My first question is on the mix between panic coherent as I was 400 ZR.
Starts ramping because you talk about.
And perhaps going after 400, the our main stream.
So I'm just trying to understand where do you draw the line between Hammond coherent.
And.
Maybe you could talk about it in terms of distances against.
Yes, Thanks story so.
I think we think about it in two separate segment.
The cloud and Fiveg. So first in the cloud, we really have one large customers driving a demand for one hundredg ZR between data center for cloud.
And that customer's going to remains very solid throughout the 2020 into mid 2021.
All the new installation and cloud would be 400 gig ZR. So as we move forward beyond mid 21, most of the revenue in a second half 21 and going forward for next few years are gonna be foreign gives you are and the cloud data segment.
As we go into five G did limiting factor there is 40 kilometers. So under 40 kilometer Pam is winning and we've had some very significant shipment of Pam for Fiveg.
And as we go above 40 kilometer is where coherent is winning and this is where we've seen the growth of both our own internal DSP as well as these fiveg basics that we've been discussing on the call. So the good news I think for US is that we are supporting.
Boasts Pam and coherent for both cloud and Fiveg and that gives us the diversification as strength. Thank you.
Thank you Dennis as my follow up I'm, just looking at callers and I do all these understand that up until now it's been one large customer as as we see acceleration then gets edge computing or distributed server architecture, Oh, you're starting to see more demand for even called there's one.
Outside of your large custom.
Yes, sorry, we are seeing demand outside of a one large customer by a small number is less than 10%. So we don't.
Speak about as much but what's relevant about it is that is being adopted actually by you know internet service provider as well as telecom operators.
Obviously, the numbers are small, but it bodes very well for the demands foreign exists or as we go to foreign. It gives you are so all of these smaller accounts are actually a teaching us and getting the customer base to learn.
And as we migrate to foreigner gigs yard those would be great opportunities for us to expand the market beyond just the major cloud providers.
Great Congratulations again.
Thank you Sir our next question comes on Paulson Senior Cowen. Your line is now open.
So good question guys Im a little bit confused.
Oh.
I was based on where products are soon to was 50% of your once you revenue.
It was 67 million 68 million 139, how large was trying to suit to walk away with less than 10%.
Where's your China revenue coming from.
Fall and let John give you some of the details but at the high level you should think of the China revenue a large part of the China revenue comes from cloud data center in the U.S. So.
We have some very significant shipment to our module partners in China, who are doing quite well and that represents a pretty large percentage of the revenue. What you're also should think about is this fiveg basic and that has now started to ramp.
For middle and back haul there, we're doing with another telecom OEM operator.
And that that is also growing so.
Just don't think of China, as one way or there is multiple customers outside away and the telecom space there are some.
You know a strong fiveg on both Pam and coherent.
There is some cloud modular U.S. cloud module makers that are.
The man modular being made for U.S. cloud.
And you know all this is coming from China.
All right Paul is my fault.
Good Paul This is John when you when you see the 10-Q filed I think we're going to be finally, either late this week or early next.
The number for China, and Hong Kong.
We will be up.
Between 50 and 60%.
In the.
And because of the overall revenue so it is up as a percentage revenue.
As for pointed out it's not based on walk away per se.
I appreciate that information and then John It bigger would you say the so-called.
Sequentially was around six months.
The question is what is normal what do you feel comfortable with.
Oh, if you asked me I don't get my way around here very often but it's.
I'd like to have you know it's somewhere in the range of 60 to 80 days. So were up at around 128 days I think if I remember correctly.
And we include that partly to have flexibility.
And be able to shift if customers demands are shifting or the timing of the demand is shifting.
But we have a pretty broad.
Customer base at this stage both in products and customers so that that flexibility gives us the ability to react and keep them happy. So that's really why we carry more inventory at this stage, especially when we're ramping with a new product. We're trying to support people as they are coming into production. They like to know that were good business partner in that.
Are there for them.
I would just to be clear that's a choice you all had made as opposed to you know this was launched during a concern about.
Over ordering all going throughout the industry. That's a choice you've made as opposed to forced upon.
Yes, absolutely Paul I mean, this is part of having to ramp with these large mega cloud data center is an expectation to be able to deliver within a relatively short lead times.
And same actually on a some of the other a large customers we have on boast a sick front end to telecom front. So we see this the strengths as an a choice to we've made a two to be able to be a strong partner in a world where supply chain is not always.
Oh sought it so we've actually.
Made an investment to be a very strong partner for our customers.
I appreciate the automobile tells me with one other quick question I Trust from the magnitude of the strength in your comments about the breath that your non showing a telco business Fiveg and beyond was written was strong from a from a breath perspective, not just from a magnitude.
Our technical business is strong across across towards yes. Thank you Paul.
Hi, Thanks, guys.
Thank you.
Final question comes on stream you put your favorite SMB see Nikko Securities. Your line is now open.
Thank you and good morning, guys first step forward in terms of the visibility into second half.
Can you compare and contrast with last quarter has has the visibility improved.
Relatively been stable or is it because some of your larger peers have talked about it digestion period and within the cloud datacenter. So I'm just curious as to what you're seeing out there or maybe you know you were 200 400 gig ramp is offsetting that just just want to hear your thoughts on that.
Good morning training. Thank you for the question, yes. The visibility is still the same quite strong driven by.
New customers.
Coming onboard and starting to ramp in the second half. So what you haven't seen in numbers yet is really the number so far and their cloud have been driven by two large mega cloud U.S. base as we get into second after a year, we expect other U.S. and worldwide Todd to jump on the Pam Bandwagon.
We also expect as John discussed, having an a sick that isn't accounts customer to ramp in the second half the year does not and numbers yet.
And as we go into 2021, we do expect yard to be a significant and meaningful.
New ramp again, we expect continued adoption of Pam.
Inside the data center as what a significant new adoption of Pam and Fiveg operators around the world. So we've got quite a few different growth vectors that were very positive I going to allow us to.
Inflect in a in a very good way in a second half of this year in 2000 2021.
That's great and then.
Just a follow up on that the 200 400 gig transition you're talking about you know to customers and maybe more coming I'm just curious what sort of I guess you know you get some ASP you benefit from that you know how should we think about the overall opportunity to isbee improvement and as you ramp through the next few quarters just trying to understand.
You know in terms of enough growth denies it going to be similar to what you saw within.
The 100 gig or is gonna be difference and any color you could provide I think will be helpful. Thank you.
Yes. Thank you so on a espeed, we try not to take sides here. So we try not to have a difference we have customers building 400 gig module who's our primo.
Chip.
As well as customers billing 400 gig as two times 200 gig was up Polaris chip so.
The expectation from these large customers is that they shouldn't be a disadvantage and so.
That sort of a solution price if you wish is kind of equivalent between the two segments.
And you had a second question.
The screening can you I'm sorry, I was just I was just trying to compare the ASP would the 100 gig Pam I mean, Pam four that you know you historically side, just what sort of because when you said 200 400 is beneficial to you.
Trying to kind of put that into some numbers just didn't know units right right. So we really have a 50 gig Pam solution that allows our customers, but 200 module and what they're doing actually their billing to by 200 gig module to go to 400.
Well go to 100 gig Pam solution, where they build a 400 gig chipset solutions. So what I'm, saying is we are do not we try to have to customer get to price parity, whether it's two by 200 or one by 400.
Was either one of our chipsets hopefully that answers the question.
Yes. Thank you. Thank you.
Thank you.
This could.
And then answer session I would now to turn the call back over to John Edmunds for closing remarks.
Thank you. Thank you do well.
Forward and Vernon I would like to thank everybody for joining us today.
We plan to appear at the following virtual conferences in Q3, we plan to appear at Oppenheimer on August 11th Bank of America. The best ideas on August 12, JP Morgan Virtual bus tour on August 26.
Jefferies Midwest Conference on September 1st and Deutsche Bank Annual Conference on September 14th again, we'd like to thank you for join US today, and 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.
[music].