Q2 2019 Earnings Call
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Thank you for calling my name is Justin Ma'am. Please have your conference I'd number.
Yeah.
Four five.
One night.
Yes.
I'm, sorry, one more time.
9745619.
Thank you ma'am please have your first name.
Evan K.E. the I am.
Last name.
Laflam L.A.S.L.A. and E.
So I will take time for me.
Last name.
Laflam L.A.S.L.A. and E.
Thank you your company name.
Era.
Our.
Company name.
I'm, sorry, not company name email address.
Evan at Aera Dotcom.
In Q, placing you now.
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This quarter the growth engines driving our success for Inphi is data movement interconnect within and between data centers.
Both of these market segments serve account customers was different technologies in a rapidly growing.
Specifically, the Pam cycle inside data center was strong in Q2.
For short to medium reach inside data centers, our customer continue to endorse our low power high performance 5100, 204 hundred gig Pam four platform interconnects, namely, our DSP CPI and driver platform solutions.
We also saw continued solid demand for our colors solutions that move that are rapidly between data centers.
Demand for these product lines was nearly strong enough to offset the trade generated setbacks and pause on our Chinese long haul and metro customers.
Which brings me to the subject away.
In compliance with us export regulation.
We've been able to ship only very limited products to walk away.
We've applied for export licenses to the bureau of industry and security and agency of the Department of Commerce.
Onton Inphi and others are granted licenses sales to walk away remained virtually on hold.
So why is the rhetoric has improved and trade discussions continue we're making no assumptions about meaningfully resuming our assays to walk away and the forecasts that John and I are providing today.
Nonetheless, we see this as encouraging for Inphi.
And the reason is that we've been able to continue to grow despite the revenue from one of our largest customers decreasing substantially.
In the first quarter of this year, while way was a very significant contributor to our revenue.
And actually our largest customer.
In the second quarter, even though Inphi is revenue from why wait was reduced by about two thirds relative to Q1, we still saw an increase in our overall topline.
For the current third quarter, we expect revenue from while weighing would be down even further.
This speaks volumes about our customer and revenue diversification and the strength of our product lines.
Of course would be pleased if the current trend situation worked to resolve itself and we could return to business as usual as Wally.
But even if that doesn't happen as you can see inphi is clearly a strong diversified company with technology that spans across markets and geographies.
Let me now turn to a discussion of even more current event the announce an intended acquisition of Acacia by Cisco.
We see nothing but good news for Inphi in this industry consolidation.
Both Cisco and Acacia inphi customers and we expect that to continue with the acquisition.
We expect that both companies will continue to require the components they purchase from Inphi and expect to maintain good working relationships with both companies.
Furthermore, Acacia as a significant player in the merchant coherent DSP market.
With acquisition by Cisco, We would expect that summer Acacia has system customers may seek alternative suppliers.
That said, we have not built any of that potential incremental demand in our forecast at this time.
In summary, the message that leave you as our number one.
Our core business is very healthy.
We continue to see robust demand for our telecom and cloud products, including colors.
Number two.
While we would be pleased and hope to see you always business come back.
Our other customers have almost completely offset the decline in business from one way.
And number three we expect to be beneficiaries of the recent Acacia Cisco announcement as Acacia has system customer may seek alternative suppliers.
With that I once again want to thank our employees for their effort through the quarter.
And our customers partners and shareholders for their confidence in us.
We strongly believe that our industry, leading product, we continue to attract new and repeat customers.
As we grow our revenue, we remain focused and diligent on expanding our operating margins, while investing for growth in the years to come.
With that let me turn over the call to John for the detailed financial discussion John .
Thanks Ford now, let me recap the key financial results in the second quarter of 2019, Inphi reported revenue of $86.3 million, which was up 24% year over year and up sequentially, 5% from Q1. This result was 2.8% better than the midpoint of our guidance at $84.3 million.
To address Q2 s performance in more detail, let me start by noting that a great deal of our datacenter business is being driven by cloud customers so to be more consistent with the way other companies refer to this part of the market.
We have renamed this stream of revenue as cloud.
Our cloud products include four inside datacenter Interconnects, we have the Pam DSP, Pam retimer or CDR as well as Pam T A's and drivers and and for between datacenter interconnect connects or DC I, we have the colorz product, which is a silicon photonics based platform solution.
Our cloud products were stronger in the quarter growing 35% sequentially and 72% year over year and comprising 59% of total revenues in Q2.
This growth was primarily led by our newer Pam DSP products, Polaris and prima, including their related chipsets comprised of specific linear amplifiers and drivers.
In addition, our growth included our Pan Retimer product Vega.
Colors was solid and relatively flat with Q1.
With it while way addition, I'm sorry, with the wall waste situation Telecom was off this quarter, representing about 36% of our business.
However, we do expect some recovery with stronger growth in Q3, especially driven by the coherent DSP.
The legacy transport business represented 5% of revenue in Q2 and was down from Q1 by approximately $600000.
In Q2 2019, the GAAP gross margin was 56.9% down from Q1's, 57.9%, primarily due to a higher allocation of stock compensation to cost of revenue. This was associated with an increase in certain program revenue delivery expense.
The GAAP gross margins included $9.7 million in acquisition based adjustments and $1.7 million in stock compensation expense, whereas the non-GAAP numbers do not.
Please see the reconciliation in the press release for more detail.
Gross margins on a non-GAAP basis in Q2 came in at 70.1%.
Slightly lower than the midpoint of the guidance based on a heavier mix of cloud business in this quarter.
Q2, GAAP net loss was $20.6 million.
And then we add back certain standard noncash noncash GAAP expenditures of $37.3 million.
The standard adjustments are for stock compensation acquisition related accounting and convertible debt cost amortization, which compares to the 37.9 million reported in Q1.
The difference is coming from lower overall stock compensation expense in Q2.
Also to get to non-GAAP net income we add back approximately 8.4 million loss on noncash Remeasurement of one particular publicly traded equity investment.
In addition, we also add back 700000 in settlements of two different claims related to acquisition and divestiture related adjustments involving escrow accounts and delayed warranty claims. This concludes our exposure to known claims on previous M&A transactions.
Finally, we deduct the additional tax benefit associated with these non-GAAP adjustments of approximately $1.2 million.
To arrive at Q2, non-GAAP net income of $16.6 million.
This non-GAAP performance represents an increase of 8% sequentially and 153% year over year.
Now looking at the remaining components of non-GAAP reporting.
non-GAAP operating expense for Q2 totaled $44 million, which was up $1.5 million or 3.5% compared to the $42.5 million reported in Q1.
The increase was driven by $2.9 million in annual focal increases, which were effective April onest and higher payroll taxes from annual vesting of our us use.
All of which was offset by not having a 1.3 million test chip tape out expense reported in Q1.
Overall Q2, non-GAAP operating income and margin was has increased $5.9 million or 5.6% sequentially and 133% year over year.
Generally this is driven in both cases by a higher volume of business offset by a lower rate of non-GAAP operating expense growth of 3.5% sequentially and 8.1% year over year.
GAAP net interest expense for Q2, 2019, total a charge of $6.9 million expense.
We then add back $7 million and noncash accretion and amortization expense associated with the convertible debt.
As well as approximately point 3 million loss in noncash GAAP investment income and point $3 million in a gap claim settlement.
After which we arrive at point $7 million in non-GAAP other income net.
The GAAP income tax expense for Q2 was a benefit of point $6 million and the non-GAAP taxes was a charge of $2.6 million.
We are currently forecasting a GAAP effective tax rate for the year of a negative 1.2%.
This means we expect a tax charge in certain jurisdictions, even though one would expect to benefit with an expected GAAP net loss worldwide.
In general we find the ongoing overall GAAP tax rate with changes throughout the year based on a number of factors not always related to income to be difficult to forecast on both a quarterly and an annual basis.
The non-GAAP effective tax rate for Q2 was 3.7%.
And represented point $6 million.
We have updated our forecast for the 2019 non-GAAP effective tax for the year to be 3.7%.
Overall cash income taxes paid across a variety of jurisdictions for the first six months of the year was a total of $126000.
Now turning to the balance sheet.
Overall cash and short term investments was down $15.3 million from the 428.8 million at March 30, Onest to 413.5 million at June 30.
But still up $6.2 million year to date.
This decrease in Q2 was primarily due to a positive cash flow from operations of 23.5 million offset by $8.2 million in Capex, and 6.5 million and payments of software licenses and equipment financing obligations.
This gave us free cash flow of $8.8 million, and then we add and point $5 million for stock option exercise proceeds, which as then offset by.
18.6 million used to buy.
Back shares via stock with holding.
As advised in our earlier Q1 earnings call. We also had the timing and settlement of certain Q1 investment security purchases straddle the end of the quarter the end of the first quarter.
And end up being also reflected as a payable.
That payable then reversed in Q2, and thereby lower the cash balance for an additional $6.5 million.
We also had an increase of unrealized market value in short term investments in Q2 of approximately $8.5 million.
Cash flow from operations in Q2 was 23.5 million as compared to $25.9 million in Q1.
This represented a decline of $2.4 million, which was driven by an expansion of working capital of 3 million offset by an increase in EBITDA of point $6 million.
Cash capital expenditures was $8.2 million.
And.
Which was up from 4.4 million in Q1.
Free cash flow at $8.8 million in Q2 represented a decline from the $14.2 million reported in Q1.
This 5.4 million Delta was driven by $2.4 million and in that expansion in working capital for operations and $3.8 million increase in Capex.
This was all offset by a decrease of 2.8 million payments for software and equipment financing arrangements.
Accounts receivable increased by $9 million.
Dsos at the end of June were up six days to 70 days from the March figure of 64 days.
We had a few large OEM customers, who also slip payments of approximately $6 million due at the end of June into early July .
All of these have been since collected in Q3.
Inventory increased by $12.4 million in the quarter as a result inventory days was 157 days at the end of June of 37 days from the 120 inventory days at the end of March.
Conversely inventory turns went down to 2.3 turns per year at the end of June versus the 3.0 turns at the end of March.
The larger inventory balance as a result of several factors one of which has to do with a delay in shipments of inventory from the foundry in Q1.
Due to foundry contamination issues, which were then backed up as they were received in Q2.
Another issue is the delay imposed on Inphi.
Not being able to ship product to walk away starting in the middle of Q2.
However, the third and largest factor and the buildup of inventory.
In our is a buildup of inventory in our newer products at the request of several customers for large forecasted rollouts in the cloud.
These rollouts through a few customers will extend over three to four quarters and over time should lead to better cash flow through a future contraction of inventory.
Now, let me recap the business outlook for Q3.
I remind everyone again that the following statements are based on current expectations as of today and include forward looking statements actual results may differ materially.
We do not plan to update nor do we take on any obligation to update this outlook in the future.
Revenue at the midpoint is forecasted to be up in Q3 by $3.7 million. This would represent 4.3% sequential growth compared to Q2 and 15% growth year over year.
This would bring revenue to $90 million at the midpoint, plus or minus 2 million, resulting in a range of expected revenue between 88 and $92 million.
For GAAP reporting in Q3, we are currently forecasting gross margins to be in the range of 56.6% to 58.2%.
Operating expense should be in the range of 64.8% to $67 million.
Absent non income related tax adjustments, we would expect the GAAP effective tax rate to be approximately negative 0.6 to negative 0.8%, which is a charge against the loss we are anticipating.
We have to pay tax in certain jurisdictions, primarily in Singapore and a net charge of the company is expected to be approximately <unk> point $2 million in Q3.
GAAP net loss would then be in a range of 17.6 million to $23.6 million GAAP earnings per share would be a loss in the range of 39 cents.
Per share to 52 cents per basic share on 45.6 million forecasted basic shares.
A more complete reconciliation of the forecast of Q3 GAAP net loss in gross margin compared the forecast of non-GAAP net income and gross margins is included in the press release.
non-GAAP .
Reporting in Q3, we are forecasting gross margins to be in the range of 69.6% to 70.6% or approximately 70.1%.
Based on mix of revenue in Q3, we expect gross margins to be approximately flat with Q2.
Operating expense should be in a range of $44.8 million to $46 million.
This represents a 3% sequential increase or about 1.4 million additional at the midpoint in Q2.
The increase is comprised of catching up with hiring plans, increasing consulting and project spend as we ramp toward tape outs on several projects.
We are currently estimating the non-GAAP effective tax rate to be 3.7% for 2019.
We're confident these components should then align resulting in a non-GAAP operating margin to be in the range of 17.3% to 21.9% approximately 19.7% at the midpoint.
This would also then lead to non-GAAP net income between approximately 15.3 and $20.1 million.
This would then result in estimated non-GAAP income per share of between 32 and 42 cents based on approximately 48 million estimated non-GAAP diluted shares.
We will not update this outlook during the quarter until the time of the next quarterly earnings release, unless invite publishes a notice stating otherwise. So please ask any questions. You may have today during the general Q and a period.
And now we'd be happy to take your questions.
Ladies and gentlemen, if you have questions at this time, please press the star and the number one key on your attached on top.
If your question has been answered or you wish to remove yourself from the King Please press to ASCII.
Your first question comes from Blayne Curtis from Barclays. Your line is open.
Hey, guys. This is Tom O'malley on for Blayne Curtis Congratulations on a really good results, particularly in this environment.
My first one is around the competitive environment.
In 400 G.
You guys have laid out a pretty consistent message on Tam I think 120 in 2019 and 320 in 2020 can you talk about where your competition is today and what you expect of those tams that for the next few years, if anything's changed there.
Thanks, Tom this is for the.
Pam is a very competitive market the.
Type of market sizing, we've been discussing for the past couple of years has proven to be accurate. So we have been discussing a 120 million.
Going to about 320, and we're still very much on track for that so the good news for US is next year that would be a significant market expansion, which should allow us to grow the revenue significantly.
It's a very competitive space on the DSP side.
We've got.
If you so if I look at the competition competition. It it's in four buckets.
We've got a DSP for 50, given time, we've got a DSP for 100 gig Pam we've got a retimer fourfifty Pam we have IP.
And so.
If I look at the various payers.
You have now some captive competitors like Lextar at Cisco and while we high silicon doing their own Pam DSP and you've got a number of merchant silicon vendor Broadcom mxnone or may calm semtech credo and marvell.
So it's a very crowded space.
I'll call it eight or so different competitors in the market and.
But we do expect this year, we've had we've been consistently saying, we've got 67% share and we are doing well above that.
And next year, we expect the chair to be 50% or higher so we still.
Feel like we've got the products and the positioning of the design win and the customer footprint to achieve this but it's obviously a very fierce competition and we've got to keep a running fast.
That's super helpful. And then my second one was really around Fiveg you guys brought it up for the first time in the last call and talked about.
Yes. Some drivers there can you talk about if you've seen that accelerate or if the hallway had headwinds are kind of dampening that.
And just what do you expect from products sold into that end market.
Yes, good question, Tom So on Fiveg.
You know we have discussed on the call that in Q2 and Q3 the revenue from one way was.
Becoming smaller than Q3, and Q2 and significant in Q3 and.
As a result to fiveg ramp for us has slowed down.
But we.
We expect this to.
Pick back up probably next year as some of these trade issue and while we headwinds subside.
Thanks, a lot guys.
Your next question comes from Queen of Bolton from Needham <unk> Company. Your line is open.
Hey, guys.
Echo my congratulations on the strong results again some forward. We're just wanted to follow up on your comment there Ah regarding the pant market here in 2019, Youd previously set an expectation to have about two thirds share and it sounds like you're running well above that can you can you give us some sense, what how much how much better than 67% you think you'll capture in 2019, and then I've got a couple of follow ups.
Yes, great and 29 fewer running well above that.
[laughter] I hope that answers the question [laughter] right right I figured I'd try.
Hey, moving onto the sort of coherent market Mtwo hundred can you tell us where you are in the ramp how many customers or are shipping today, because that seems like that's a pretty good growth driver into the second half of the year.
Yes. Thank you Quinn. So we are at the start of multiple rounds of multiple customer ramps and.
We.
Are doing quite well.
As I discussed in my prepared remark, we do expect increased business coming from Acacia customers coming to us, including the M 200.
That's probably will materialize next year because some of these transitions take some time.
But we're very well under way to grow the Mtwo hundred nicely.
In the second half.
And.
Right now we're seeing a significant increase from the first half to second half Chris.
Okay.
Great and then just a follow up on that occasion or the coherent DSP.
Market you guys said, yeah, when you acquired clarify they add up.
Development effort for sort of a high 64, Qualm 64, Gigabaud 600 gig per Lambda DSP that you guys sort of.
It took a write down about a year ago, given the scarcity value in the high end DSP market.
And indication.
Being acquired by Cisco do you have any thoughts around potentially restarting that high end DSP just to provide the market with another source of supply or do you think you will kind of stay in the lower end of the.
Speed range for that for the coherent DSP is going forward.
Good question Quinn so on the new.
400 gig.
Offering that is going to serve as both the ZR market for between data Center interconnect.
As well as the ZR plus that would give switch a rider inside the data center transport like capabilities as well as some of the long haul and Metro and we're very excited about the new emerging metro market for this new chip.
We've we've done a very nice job positioning ourselves with customers, where our customers are fielding to the market their own captive high end solution and where they're utilizing inphi for the midrange often its market.
And it's a very nice complimentary positioning of our in terms, if you want merchant DSP with their high end effort.
And we feel like that's that's been a very strong win win where they can deploy their internal captive if Jewish resources to the high end and we could compliment their efforts was this midrange products.
As we move forward, we've had some of these customers approach us and trying to understand better how we can collaborate better.
On potentially some of the higher end.
Products and we will only do so if we feel that that collaboration can actually expand the market.
A reticence to go into this high end market is really there wasn't much of.
The market available to merchant solution at the high end.
If.
This discussion there are currently underway proved to be different than we revisit the solution revisit the roadmap, but it's too early to say that a quick.
Okay. Thank you for.
Thanks, John .
Your next question comes from sorry, Svanberg from Stifel. Your line is open.
Yes, thank you and congratulations on the execution here.
And then if I could just take a step back for you obviously you talked about cloud.
Mean, almost offsetting the loss of law.
Could you elaborate a little bit on on where that came from a you know where they are with their pullins side did you get more share the way you expected or help us understand the dynamic that dynamic there. Please.
Yes, Thank you Tori.
So I'm sorry, it's the same dynamics there we have been discussing and just.
Multiple products like it was going to market. So I'll highlight all four.
We've seen continued ramp on the 200 gig Pam and does the 50 get spammed issues for 204 hundred gig type of modules and.
And that has been driven in large part so far by non switch application. So it's a major cloud application that consumes a lot of data.
And.
The switch application is coming to fruition now in the second half the year with a 12.8 t. switches that are going production. So thats a ramp number one.
Right, but number two is 100, Pam DSP that is going to 400 gig module again in support of the 12.8 T. switches.
And that's a that's ramping nicely.
And actually you mentioned five ramps and ranked number three is the ramp of a switch from one of our partners. That's a that's a non immersion switch, but you know that's also.
Driving some of the 204 hundred gig margins in the market.
Ranked number four is our Pam retimer or CDR that goes on the line card next to the new generation of switches that support Pam and basically we extend the Sigma reach.
From that switch to the uptick in margin and ranked number five is our IP business that has picked up nicely and we expect to continue to pick up in the second half of the year. So if I put these five ramps together story, that's really what's driving our business and the strength of the business into account.
Very good and as my follow up you talked a little bit about the.
The hearing DSP dynamics for for long haul that Acacia.
What about the DIY market and specifically Xeon ZR plus.
How have some of the discussions been with customers.
Since that recent development.
Yes, Thank you Tory so.
On the XE or four between data center, we're very pleased with the results we've been able to deliver our main customer. There. We have been predicting is going to be stable and has been stable and actually we've had a bit of upside there compared to our initial forecast. So we're very pleased with the continued strength of our colorz product for 80 kilometer 100 gig between data center, we've picked up a variety of smaller customers that are giving us a little bit of growth there as well.
Moving forward to the new 400 gig ZR, we are extremely bullish about.
Our market position and we feel like we're going to be first to market. We feel we're going to have a fantastic solution. We're being told by customers that we're ahead and we feel that this is going to be a very significant growth of our business and our time starting in the mid next year.
Great just one last question for John John You mentioned the inventory.
It's going to remain elevated for the next few quarters.
Does that mean sort of by by days that the inventory days will stay kind of up here for the next three to five quarters or you know do you have sort of another comment on the actual dollar amount.
You know for the next three to four quarters I'm, just trying to understand sort of planning therefore for obviously what seems to be.
Some pretty big ramps.
Yeah, I think a tory they.
Both the days and the aggregate inventory levels should come down.
It all depends on.
Mix and demand from customers. So we we have a fairly broad product set now so we could have demand in other products from customers, where we might need to grow those a bit more while we're poised to supply the.
Hi speed data center products.
For this.
Growth and ramp in the cloud.
Large part of these are covered by Peos.
And it's just a question of timing.
And moving through a.
A deployment process with these larger customers. So we're not really worried about it and we think it will will come down and move through accordingly, but we're new to new as a company. We are new to the datacenter space and we took the advice of customers and follow their request to to be ready to to supply.
Sounds good congratulations again.
Thank you.
Your next question comes from Oregon Square from JP Morgan Your line is open.
Hi, good afternoon, and congratulations on the solid execution and strong results looking at the Tam for strength in Q2 and your guidance. In Q3 is it is it stronger 200 gig or stronger 400 gig that's driving the upside and.
Maybe for it if you could just update us on.
Given what you're seeing now what do you think the mix is going to be like 200 gig versus 400 gig pamfour this year.
Harlan. Thank you. This is for the I. Appreciate the question I was waiting for you to ask.
But as you can guess, it's a very competitive space right. Now we are in the middle of a very competitive bake offs.
Whereas a number of competitors that I've listed and giving you that breakdown, we'd give up competitive information that were not ready to share at this point. So it's I'm, sorry, but I'm not going to be able to answer.
Yes, not a problem maybe on the competitive front you know in terms of you guys.
Maintaining your kind of one two step lead over competitors.
And what we estimate is more like 80% market share have you guys started shipping your second Gen 200 gig and 400 gig pamfour products.
Thank you Harlan, yes, we have started shipping our second Gen and it's actually been received extremely well.
And we are going to be ready to ship to our third gen by end of the year. So we have a.
Rolling Thunder off my many releases planned and what we're going to be aggressively investing to open up a further gap between nothing other than the competition.
Yeah. Thanks for that and just one final question you know we're hearing.
From the Broadcom team that shipping outlook for Tomahawk three Jericho two looks very strong not just second half of this year, but into 2020.
You guys were looking for about two and a half ex growth in your Pam four market opportunity next year.
While the third party research guys are estimating more like four x. four and a half X increase in 204 hundred gig port shipments next year.
Given what you're hearing given that third party guys.
Are you are you changing your views on what do you expect your market opportunity to look like in 2020.
So Harlan I hope that these third party research guys are right we.
They may be I mean, we have taken a conservative view of.
Over the next year because number one we the cuts that type of increase will be will be phenomenal and.
Maybe a bit too early to call, but also we want to be.
Careful that as you mentioned, we have a very high market share today and.
Don't want to assumes that we keep that high market share into next year. So we're giving ourselves a few degrees of freedom here to.
Two.
So go a step at a time and a quarter at a time and hopefully be able to.
Give you better.
Outlook later in the year or early next year.
Yep, great job on the results. Thank you.
Your next question comes from Ross Seymore.
From Deutsche Bank. Your line is open.
Hi, guys I'll also add my congrats if I want to follow up to what the Tories questions before I. If I remember correctly you guys had guided to I think the cloud is now named cloud business to to rise low to mid teens, I think you said sequentially and it did significantly better than that so.
I know you said you had those five drivers Ford, but what really was the upside relative to your act original expectations in the quarter and then somewhat also segment wise. John You mentioned, you expect a little bit of a rebound in your telecom business in the third quarter, but we go through the <unk> the pluses and minuses by your three main segments. What do you think is going to be driving the roughly 5% sequential growth.
Thanks, Ross. So if you look at the first quarter of the year Ross the only contributor to revenue in the first quarter really was the.
50 gig Pam four DSP for 200 gig modules. So we really had one out of five cylinders firing in the first quarter.
As we go into the second quarter.
The.
Call. It three out of four new assuming there is starting to fire and by the time, we get into the second half of the year, we'll have all five students are aspiring so.
We incrementally add products with corresponding ramps and corresponding customers and we expect that to get even better next year.
This year, we expect read the revenue.
To come in from two large.
Cloud customer as well as a.
Captive us if you want to switch system customer that's more in the HPC Infiniband market and then.
A number of system Oems.
That are shipping switches.
With the Retimers as we go into next year, we expect at least one more major U.S. cloud and possibly another China based cloud to add themselves to this and we expect a number of system OEM that we'd be taking on retimer solution to market to increase significantly plus the number of.
Design wins.
At the system Oems to to go.
Significantly higher next year as far as production ramps.
So that gives you a feel for the Pam could be rolling Thunder, where we add new products and new customer and new design wins.
Every quarter for the next six seven quarters.
So Ross.
Also try to.
Answer your second question.
Without getting into detail I think one of the.
Good parts in our businesses forward as already mentioned the amount of product diversity and that amount of customer diversity even.
We also have the M 200, and nickel here at DSP side of the business.
Providing for growth and market share gains.
So even as that side of the business is suffering a bit from not being able to ship into.
In one of our largest customers.
The diversity of the business continues to provide growth opportunities at the same time.
Like any company with large customers or may be lumpiness from one customer to another or one product to another in any given quarter.
So again I think you'll see.
A multitude of different things driving the growth into Q3.
We just happened dimension.
The coherent DSP and the telco business because it.
Did hit what we think will be a low ebb in the in the second quarter and we hope to see that.
Growing to some degree in the third quarter.
That's helpful. Thank you guys for the color one follow up I had after that last quarter, you talked a bit about the inventory I think you said high single digit millions and your plan to digest that in the back half of the year.
I know that whole process gets a lot less predictable given what happened with wawa.
But in general can you just talk about the inventory situation in the channel specific to that that high single digit level or if theres any other pockets of inventory that.
You are kind of forecasting to have to deal with in the back half of the year.
So Ross this is forward I'll just give you one quick comment and then turn to John to give you more details.
Part of that inventory growth is.
You know sort of.
Agreements that we've signed with some of the cloud customers as far as keeping a minimum inventory available on hand for if you wish square function increases and their demand.
So we started building this and this is this is part of what's going on from an inventory point of view and I'll turn to John .
Yeah, I think Ford.
Ross So a lot of these.
Product launches and deployments are in the early stages. So.
I think as a result.
Because we're a long lead time kind of item.
We've built up inventory and we haven't seen as much build into the channel yet there are some.
And we have very good partner relationships.
With the module makers in.
In the cloud here so.
For them this is.
This.
Kind of.
Scheduling is par for the course and they both carry upside and they're ready to react to and they themselves are looking at diversification possibilities. So I think we're very happy with the relationships, we have there and we're confident that.
The inventory can move through and in various ways that they're not just dependent on a particular deployment there's several.
Different channels for that inventory moves so.
And again, we wanted to show our level of investment and commitment to these guys and be ready.
As these deployments began and ramp over the next several quarters.
Great. Thanks for all the detail congrats again.
Your next question comes from Fahad Najam from Cowen and company. Your line is open.
Thank you for taking my question.
John and Ford.
And then at the Port transparency do you mind, telling us what your revenue from cloud was I know you mentioned you had to cloud customers, but I'm trying to put the picture together what cloud really represents for you or that portion of your revenue you mentioned that youre diversifying your customer base will help us to go to show how much that maybe today you are getting from cloud customers.
Yeah for hard good to hear from you again by the way so.
In total the cloud business comprised 59% of our revenues in Q2.
And the vast majority of that is from actually from cloud customers, who there are other smaller players and different niches that are.
You know developing but.
Again, because the vast majority of this is cloud base, we thought we'd align and associate with other people in the market who are talking about cloud business.
Appreciate that thank you. So much now I have two question kind of related.
Regarding the Tam or market outlook, especially from a competitive perspective.
We often hear from the large cloud customers, Microsoft and Amazon decision or the 400 gig optics prices come down meaning that likely to take 100 gig.
Optics in the second half of 2020.
What does that mean for your business does that mean incremental revenue for you for the Retimer business.
And if that's the case.
I'm, assuming they're still going to like do the bulk terabit switching.
In the meantime, and does that mean that the artificial bump and you'll be timer business and hope once those 400, Gigoptix I mean, the market that retirement business thanks to build in it.
No you don't want to understand how that dynamic plays out and then another related topic as you've heard often from your competitors that come together.
Put together this open I must say I wanted to get your thoughts on from a competitive perspective, how youre solution stacks up if you can address that as well.
Sure. Thank you so.
On the first question right.
You know John gave you the breakdown of 59% of our $86.3 million in Q2 coming from cloud.
And that's actually all time based right. So we have broken up in the past colors as.
What dollar figure that represent that we've been saying is flat. So you could you could take colors out of that number and you can see colors is not is a is a smaller percent of that's number. So you can see that in Q2, we had a very significant Pam.
Number.
And that's not only come from 200 gig is also coming from 400 gig and while we're not at Liberty to.
Break down for you to 200 versus 400 400 would be a significant piece of our revenue in 2019.
And yes, it will increase further and 2020 as other towns customers join the first two.
But you know again to first to ours is going to be significant and 2019.
Regarding the open I must say open I must say.
We don't believe that having proprietary solution is very useful I mean, we our emotions solution that supply into immersion market, where our customers should be able to mix and match different solutions from different vendors was up.
Fear off you know not having into our probability so.
Right now we feel that the solutions that are provided by companies like Broadcom and Mexican air.
Marvell Credo ourselves are.
More.
You know open to interoperability and we do expect the Lextar assist going away Pam DSP to also be into our problem. So you'd end up with into our preferred solution that can be easily mixed and matched.
By customers as opposed to these proprietary short reach on the.
You know very finicky solution that you got to keep tweaking. So the sink works I mean, you know we provide very robust very high performance very high reach very reliable solutions are going to give you quality again gives you yield you don't have to worry about tweaking of fiber and the stuff the stuff stuff working so I mean, that's what we provide and so we're going to win I mean that there is no question that.
A robust highly yield above solution moving over a proprietary low reach.
Custom solution.
Appreciate it if I Miss we then one last question.
And just.
Released the linearity in the quarter of post Acacia.
Cisco announcement was that an uptake in your conversations with customers. That's fueling your outlook about winning share on what Acacia was looking to.
Look for alternative solution interactions increase since that announcement I, so I assume it does.
We've heard that has been doing some special works with you can you comment on any of those.
Then you already seen since that announcement.
So part of why we have been doing pre.
Acquisition, regardless was already taking share from Acacia. So you know we're ready we're into.
The major Acacia customer taking share so I mean that is going to only increase.
You know there was a very significant uptick in conversation with them you know 24 hours after news being announced and you know the discussions.
Being kicked up a couple of level above where we used to have them to the CEO of all of these companies. So we've had some very significant very serious discussion at a different level across the board on older system companies and we're very pleased about that.
But as I said in my prepared remark, we don't expect this to.
Translate into.
Much increased revenue Onton sort of 2020. It takes time for some of these people to design new systems and so.
We don't expect that share change to manifest itself until probably mid next year.
Appreciate the answers thank you very much and congratulation on the quarter.
Your next question comes from Hans Mosesmann from Rosenblatt Securities. Your line is open.
Thank you most of my questions have been answered, but that's 40 can you.
Give us a sense of what's happening in China outside of Wal way and as a follow on can local Chinese players do reliably linear a t. agent and drivers at this point. Thanks.
Han's two very good question.
So here is another piece of good news is we got to the forecast we got even though there is sluggishness in the China market beyond the wawa situation. So.
We're seeing in the China market right now is the same thing that happened on Wednesday de was banned last time.
The Chinese carriers are pushing out the tenders to wait for the ban to be lifted you know so.
We're seeing an overall slowdown after deployment of the 200 gig backbone.
And that's slowing down our demand for our 64, Gigabaud optics like T. I am driver and even DSP in some cases.
And so I think thats good news, because we got into the Mark to the numbers, we're getting despite this weakness.
Beyond what we said there is weakness in the China market well beyond walk away.
And pushing on the deployment of the phase 13, the backbone deployment.
You know.
Outside of the China market were seeing strength driven by the upgrade to 400 gig. So in the foreign get coherent is doing well outside of China and Thats, helping.
But in China itself to your question and the first question Hans we're seeing slowness there.
So on the second question the capability off new indigenous.
Local Chinese companies to compete with us on Tia and driver. We've had many you asked based company and many China based companies trying to compete with US and then European companies for that matter trying to compete with us on Tia and driver for seven years I've been in Inphi.
And so far the amount of market share and have taken from US is insignificant actually we have actually taking market share from them.
So I mean, yes, there will be incremental funding there be incrementing figured that would be a lot more people in China itself.
Are being funded to go compete with us.
But it doesn't change the game at all we're going to have to do is to keep running and running even faster. So.
That'd be more competitors and we the last time I counted han's theres, probably six new companies in China.
There are now being funded to go compete was on T.I. Im driver and Thats, probably another two or three we don't even know about so.
The list of nine competitors, maybe as eighteens, but you know it hasn't stopped us in the past from keeping our market share and expanding our market share. So.
We'll have to keep running.
Great Congratulations again thanks.
Your next question comes from Richard Shannon from Craig Hallum Your line.
Hi, guys. This is Joe fine on for Richard.
Just to expand on the interim.
Inter operability point.
I just made.
Are we seeing some commentary just around how cool.
And possible some delays from competitors.
In regard to test.
So.
If you could add any color on that.
Talk about any maybe early benefit you're seeing because of the interoperability.
Yes. Thank you Joe So we've been working on my Pam solution to enter off and and take care of things like you know link training between us and other solutions also negotiation with another other solutions, there's all kind of corner cases on interoperability that we're actually working on with companies such as Broadcom Marvell.
You know.
Credo just to mention a few and so when you look at it may come Semtech trying to come in was this proprietary solution a short reach only.
We don't see any big advantage I mean, there are advantages are going to have as price. So.
Would they be able to take a small percent of the small market niche market that could potentially work into four customers only solution, maybe but we don't really see it as a big threat.
Okay, great. Thanks, and just one more when you guys talk about the.
Our 20 million to 320 million next year and.
Is that you're just referring to the prima and Polaris chipsets or.
It does include like all five of the kind of buckets you guys have talked about.
We we.
You could see from when Harlan asked a question on site at some of these third party analysts to the numbers from a third party analysts probably have that those five vectors to be a bigger number than our 320.
We have been referring to the 120 going to 320 as all five of those vectors together and we have been referring to as DSP and Retimer anti and driver so all of the.
Different piece of the solution that we have but Joe we may be too conservative here. It was but we'll have to see a step at a time.
Okay, great. Thanks.
Your next question comes from Joe Moore from Morgan Stanley . Your line is open.
Great. Thank you I Wonder if you could talk about just the process went away.
You said you've submitted licensees there I guess some companies are kind of hoping to hear back within a quarterly timeframe. I mean is there any way of kind of assessing that and is it is it monolithic where there's sort of one license that means a whole lot are there are a whole bunch of licenses that are that are spread out over a bunch of time.
Thanks, Joe two very good questions on the first one if I could predict how long. These export licenses would be I mean, you know be a different business right.
On the second part of the questions. Yes, we do need everybody to get a license I mean part of the issue. We have today is weak there there are certain components that we can ship to walk away.
That that are okay to ship under the U.S.E.R.
Unfortunately, if they cannot get another piece of the component that's needed for line cards, then we cannot ship I mean, they need all the different pieces to be shipped in order for a solution to be ordered.
And so yes, eventually we would need all the pieces to be shipped so not only us, but others now to our understanding and our knowledge everybody's applying for licenses. So we don't see why somebody would be granted and somebody else would not be so we expect everybody to be granted together.
Okay, and then on the Fiveg.
Side of it would you make the scene.
Okay stepped the deployment at the tenders and deployments could get just deferred if this situation persists or.
Okay. The carriers use other base station vendors and then what I mean, I would assume there still a fiveg backhaul opportunity.
Regardless of Who's base station.
Yeah, it's going and just what are the gating factors for timing around five key field.
I mean, if we just learned from the last time around Joel China has been very good at delaying the deployment and just ordering everybody's delay until the ban was lifted so we don't see and this was for city.
Wow is significantly bigger players. So we don't see why did behave any differently. This time around.
Okay, great. Thank you.
I'm showing no further questions at this time I would now like to turn the conference back sorry, Speaker Mr. John Edmunds.
Thank you.
One final note for today, if a fortnight as we've mentioned in the past have both had tenbfive one plans and.
There had been pending and they May result in.
Sales of shares some shares through the balance of this year.
These sales are for diversification purposes, and will generally be less than approximately 5% of our holdings, if and when they happen.
[noise] Inphi plans on attending the Oppenheimer Conference in Boston on Tuesday August six the Jefferies Conference in Chicago on August 27th the Deutsche Bank Conference in Las Vegas on September 10th.
Ford and Deborah and I would like to thank you for joining us today, and we look forward to speaking with you again in the future.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may now all disconnect.