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Inphi Corporation (NYSE:IPHI)

Q1 2014 Results Earnings Conference Call

April 29, 2014, 05:00 PM ET

Executives

John Edmunds – Vice President and Chief Financial Officer

Ford Tamer – President and Chief Executive Officer

Analysts

Doug Freedman – RBC Capital Markets

Sundeep Bajikar – Jefferies

Frank Keller – Morgan Stanley

Richard Shannon – Craig-Hallum

Ruben Roy – Piper Jaffray

Tore Svanberg – Stifel Nicolaus

Operator

Good day ladies and gentlemen, and welcome to the Inphi Corporation First Quarter 2014 Earnings Conference Call. My name is Jason and I’ll be your operator for today. At this time, all participants will be in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. John Edmunds, Chief Financial Officer.

John Edmunds

Good afternoon everyone. Thank you for joining us today for our quarterly earnings call to discuss our Q1 2014 financial results and business outlook. I’m John Edmunds, Chief Financial Officer and with me today is Ford Tamer, our Chief Executive Officer.

I will begin today’s call with the Safe Harbor and then Ford will give you an overview of our business. After that I will provide a financial summary and the outlook for the second quarter of 2014. Then we’ll be happy to take your questions.

Please note that during the course of this conference call, we may make projections or other forward-looking statements. 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 and for our business, please refer to our registration statements on Form S(1) as well as our more recent annual and quarterly reports on forms 10-K and 10-Q, all filed with the Securities and Exchange Commission, accessible at www.sec.gov. Please refer in particular to the sections entitled Risk Factors. We encourage you to read these documents.

Also during the course of this conference call, we may make reference to non-GAAP financial information. A reconciliation of this information is included in the press release and on our website which is available at www.inphi.com. This information is not a substitute for GAAP and should only be used to evaluate the Company’s results in conjunction with corresponding GAAP measures.

Now, to begin our review of the quarter let me turn the call over to our Chief Executive Officer, Ford Tamer, Ford?

Ford Tamer

Thank you, John. Good afternoon everyone. And thank you for joining us for our Q1 2014 earnings call. I am pleased to report $31.2 million in revenue for Q1 2014, our third consecutive quarter of record revenue for Inphi. This represents a 7% quarter-on-quarter revenue increase and a 38% year-on-year revenue increase. Even on that record revenue, we are guiding to a further 8% quarter-on-quarter revenue increase over Q1, 2014 and a 39% year-on-year revenue increase over Q2 of 2013.

We are now operating at over $30 million per quarter on our way to our goal of $50 million per quarter by the end of 2015.

With respect to EPS we generated $0.09 per share in Q1 2014. This compares favorably with $0.08 per share last quarter and breakeven in Q1 of last year.

Both revenue and EPS have grown strongly, both quarter-on-quarter and year-on-year. We are committed to continue to grow our business and meet our EPS guidance going forward while we also continue to invest in engineering talent that would develop new product and fuel our future revenue growth.

Before John goes into detail on the P&L let me take this time to discuss the major trends impacting our business and our Q1 accomplishments. Just as FedEx provides reliable, high speed package delivery, we at Inphi provide reliable high speed data delivery. We provide semiconductor solutions to module and system OEM customers.

In turn, our customers deliver their systems to long haul and metro service providers and to cloud and enterprise data centers. To extend the package delivery analogy, shipping operators have airplanes, trains and trucks to deliver packages over various distances and time. We have our Inphi version of airplanes, trains and trucks to deliver data over various distances and time.

Our airplanes are optical interconnect product, amplifiers and drivers which deliver data upto 3000 kilometers for service providers. Our trains are networking interconnect products, SerDes and CDRs which deliver data over hundreds of meters in the data center. And our trucks are our memory interconnect products, registers and buffer which deliver data over centimeters between CPU and DRAM at fast speeds [and service] [ph].

All three types of Inphi interconnects are critical to support the needs of high speed data delivery of today and tomorrow. To meet those needs, we are continuing to invest in engineering to build faster, better, more cost effective products. So that’s the big picture. Now let me talk specifically about how this continued momentum played out in Q1.

As you recall, we discuss our business in two primary markets: servers and communications. First in servers, we are excited to see continued momentum for our DDR3 LRDIMM buffer products maintaining our leadership market share position. We recently announced shipment of 1 million LRDIMM memory buffer showing the value of increased memory performance and capacity for server virtualization, big data analytics, high performance computing and enterprise storage applications.

In Q1, our buffer revenue grew 48% quarter-on-quarter and 364% year-on-year. This rapid adoption of our buffers is being fuelled by the improved performance of LRDIMM with Intel Ivy Bridge processors and by the ability to increase workloads by about four times in virtualized environments.

Our buffer is being adopted for virtualization of web and data based servers, hosted virtual desktops and trial, print and security servers that would otherwise be deployed in standard physical servers. In the server segment, we are also excited to see continued progress in DDR4. Our DDR4 buffer is on the qualification at all major memory module makers.

Furthermore, in Q1 we announced our support of non volatile DIMM or NVDIMM to further increase the adoption of memory in DIMM slots. We became founding members of the storage networking industry association special interest group on NVDIMM. We support industry standard bodies as opposed to proprietary solutions. That’s because NVDIMM provide server customers with the benefit of rapid performance and endurance of DRAM with the persistence of NAND FLASH into standard DIMM form factors.

We are excited about what persistent memory application could mean for increasing Inphi’s total available market.

Second, in the communications segment the OFC show in March in San Francisco was a big success for Inphi. There, we displayed several of our 100 gigabit and 400 gigabit communication solutions.

This included, first, our second generation SerDes and CDR offerings. Second, our 100 gigabit pulse amplitude modulation or PAM technology, transmitting over 10 kilometer single mode fiber. Third, the industry’s first 32 gigabit dual, high gain amplifier critical for the deployment of 100 gigabit link and the metro network. And fourth, world leading 100 gigabit, 400 gigabit linear drivers.

In Q1, we recognized 48% quarter-on-quarter revenue growth in our 100 gigabit amplifier and driver business proving the continued momentum in 100 gigabit roll out. We also had 180% quarter-on-quarter growth in our second generation SerDes gearbox beginning the ramp of 100 gigabit for datacenter line cards. We expect the 100 gigabit product momentum to continue in Q2.

As you can see, we are off to a very solid start in 2014. I don’t want to underestimate the challenges of these always competitive markets, but we believe our product line matches well with the industry trend and currently emerging product cycles. In that sense, the market is presenting us with a unique window of opportunity for future growth.

Continued demand for our products from Tier 1 customers is driving us to increase our engineering investments to accelerate building the next generation service provider and datacenter interconnect. As we look ahead and as you’ll hear from John, we strive to deliver further steadily increasing topline growth while also maintaining gross margins and operating margins. Once again, I thank you, our shareholders and the dedicated team responsible for our solid results and optimistic outlook. John?

John Edmunds

Thanks Ford. Now let me recap the financial results for Q1. As Ford told you, in the first quarter of 2014, Inphi reported record revenues of $31.2 million, which represented 38% year-over-year growth and 7% sequential growth. Overall, both our communications and server revenues grew sequentially. As we expected, we experienced stronger growth in communications products in Q1 in particular due to a product cycle driven growth from our new products being our 100 gig linear amplifiers and our 100 and 400 gig linear drivers.

Overall, as we predicted in the Q4 earnings call, the mix of product sales in the first half of 2014 is getting closer to a 50-50 mix with server sales slightly highly through Q1. In the server area, LRDIMM sales continued to grow approximately 50% sequentially. The attach rate for LRDIMM for the market appears to be nearing 4% in Q1, and if it holds for the year we now expect roughly 150% year-over-year growth in LRDIMM for 2014.

On a GAAP basis, net income in the first quarter was a loss of $1 million or a loss of $0.03 per diluted share. This included stock compensation expense of $4.5 million and the associated offsetting tax benefit of approximately $1.3 million. Other GAAP income tax reporting expenses and differences resulted in additional add-backs of approximately $700,000. This compares to a net loss of $7.7 million or $0.27 per diluted share in Q1 2013.

To give you more detail and comparing numbers, let’s now look at some additional non-GAAP measures. On a non-GAAP basis, net income for the first quarter was approximately $2.9 million or approximately $0.09 per diluted share. This was in keeping with our Q1 earnings guidance of $0.08 to $0.10. This also compares with non-GAAP net income of $31,000 or $0.00 per diluted share for the same quarter one year ago.

Non-GAAP gross margin for the first quarter of 2014 was 65.3%, which was down 100 basis points from the 66.3% reported in the fourth quarter of 2013. In Q1, gross margins came down slightly more than expected. We had scrap charges and inventory reserves of approximately $200,000 based on older revisions of certain products becoming obsolete, which is why the gross margin was down about 50 basis points more than the low end of our guidance range.

We currently expect Inphi’s gross margins to come down further by approximately 30 basis points in Q1 due to a relative increase in volume of newer products with less mature manufacturing yields.

Non-GAAP operating expense for the quarter totaled $16.5 million. This was up as expected approximately 200,000. However the underlying detail anticipates increases in particular line items forecast going forward. For instance, salary and benefits increased approximately $1.2 million due to additional payroll tax and increases in hiring. This was offset by approximately $1 million less in foundry, package and test development cost. There were also about 600,000 in increases in other cost such as legal expense for patent portfolio development, travel and consultants, which were all offset by about 600,000 less in bonus accrual.

During the balance of 2014, we plan to continue to hire engineering resources. As we continue to make investments to support strategic development of forward looking products for large OEM customers. Previous incremental investments in product development have led to the current 38% year-over-year growth. As our revenue base expands, we are confident that the incremental investments we are now making will also lead to sustained feature growth. We expect our Q2 operating spending to raise approximately $1.4 million plus or minus 200,000. About $1.1 million of this is primarily due to ongoing hiring for more technical depth in R&D and customer support.

We will also see a reversion to a norm in spending for third party foundries, packaging and test development expense. In addition, we will also invest about $200,000 more per quarter in patent portfolio development and approximately $100,000 more in rent to expand our facilities.

With regard to the non-GAAP tax provision in the first quarter, the projected effective tax rate for the year is coming out at 28.3%, which is down from last year’s 31.5%. The improvement was based on higher forecasted taxable income leveraged to our offshore structure offset by the exploration of the Federal R&D tax credit. In addition we are now prospectively excluding approximately 200,000 per quarter in non-cash amortization of an inter-company deferred charge.

The tax on this has already been paid, hence we have decided to prospectively exclude this from the non-GAAP rate. The 2014 rate can then be further reduced from 28.3% if and when the Federal R&D tax credit is basically reinstated. Other income in Q1 was approximately 200,000, coming mainly from interest income consistent with Q4.

Now turning to the balance sheet, cash and investments, and marketable securities decreased by 5.6 million; from 122.6 million we reported in December to $117 million at the end of March. This represented a slight decrease per share from $3.83 to $3.59 per diluted share at March 31st.

The net decrease of 5.6 million in cash and investments was essentially driven by a $5 million expansion in working capital for accounts receivable based on more shipments taking place in the latter half of the quarter. We expect to see this coming back in future quarters as the timing of shipments reverts back to the norm. We also invested about 1.5 million in prepaid [CAD] [ph] license subscriptions and we paid out a little more than $1 million in annual bonuses that were accrued last year.

Our capital expenditures including mask sets was $3.2 million and their depreciation for the quarter was $2.4 million. We are confident our cash flow will be positive for the year as we endeavor to have more of our working capital continue to remain efficient in 2014.

Accounts receivable increased $5 million from $13 million to $18 million due to sales growth and timing of shipments in the quarter. This represented an increase in days sales outstanding from 41 day sales to 52 days at the end of March.

Inventory also increased from $6.8 million in December to $7.2 million at the end of March. However, inventory days was actually down from 62 days in December to 59 days at the end of March. This implies an inventory turns measure improving from 5.8 times at the end of December to 6 times at the end of March.

Total inventory has generally been lean, but have increased by 1.2 million in Q4 and again by 400,000 in Q1 to accommodate larger swings and surges in individual products demand.

Payables increased from 7.3 million to 8.6 million and day’s payable outstanding went from 67 days at the end of December to 70 days at the end of March.

Now let me recap the business outlook for Q2. 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.

As a range of guidance for Q2, we forecast revenues to be up sequentially 6% to 11% or $33.8 million at the midpoint plus or minus 800,000. We expect non-GAAP gross margin to decline 20 to 40 basis points based on the mix of business which would put them in the range of 64.5% to 65.5% for Q2. We expect non-GAAP operating expenses to increase 1.4 million in the second quarter plus or minus 200,000.

We are currently estimating the non-GAAP effective tax rate to be 28.3% for the year. We are confident these components should then align resulting in non-GAAP net income of between $2.7 million and $3.4 million which on approximately 33 million estimated diluted shares would result in estimated non-GAAP earnings per diluted share of between $0.08 and $0.10.

We also estimate non-cash stock compensation expense to be between 5.6 million and 5.8 million. This would imply a GAAP net loss in the range of 800,000 to 1.3 million. GAAP earnings per share will then be a loss in the range of approximately $0.02 to $0.04. We will not update this outlook during the quarter and up until the time of the next quarterly earnings release unless Inphi publishes a notice stating otherwise. So please ask any questions you may have today during the general Q&A period. And now we’d be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. (Operator Instructions). Our first question comes from the line of Doug Freedman with RBC Capital Markets. Please proceed.

Doug Freedman – RBC Capital Markets

Great, thanks for taking my question and congrats on a strong results guide. Could you give us an update on sort of what you are seeing in your markets in terms of price pressure, the optical market is sort of known for pricing and then in the memory market I know that there is the upgrade to DDR4, could you talk about what you expect that to do to your ASPs?

Ford Tamer

Thanks, Doug. The ASPs are actually increasing in Q1 versus Q4. On average we do see on a part to part basis although we haven’t seen this in all of the memory interface business but some of the business as you can imagine LRDIMM ramping customers would expect somewhat lower pricing, sometimes on the order of 10% or so. And that was expected in our forecast, so there wasn’t anything we didn’t look for in that area. So, in general you know customers certainly in competitive environments are looking for anywhere from 10% to 20% in ASP support every year in terms of lowering their own cost and it just depends on how competitive the environment is in terms of where you are in that spectrum.

Operator

And your next question comes from the line of Sundeep Bajikar with Jefferies. Please proceed.

Sundeep Bajikar – Jefferies

Hi, guys thanks for taking the question. Can you give us an update on progress in your new quad linear driver, how many platforms is it designed into and how many of them are ramping, what level of revenue should we expect this year and next year? As part of that maybe just talk about the competitive landscape specifically in quad linear driver, what do you see on the horizon in terms of new product announcements from competitors? Thanks.

Ford Tamer

Thanks, Sundeep. We are very pleased with the progress on the quad linear driver. We were the first ones to ship actually that product and supported a major customer going to production. We have a very strong design win pipeline. We are not at liberty to announce it and discuss them because we’ll be pre announcing our customer shipments, but I can assure you that we have got a very strong design win pipeline in that area.

This quarter we did talk about the 100 gigabit optical business growing about 50% quarter-on-quarter and we do expect that momentum to continue into Q2. So we are very pleased with the progress we are making in that area.

As far as competition, we do expect competition. I mean, as you know these are very competitive markets, but we do expect we are already very well positioned and the design wins we already have and hence are in a leadership position and expect to continue to be in a leadership position for the future.

Sundeep Bajikar – Jefferies

Okay, great. And then related to that, can you give us an update on pricing for 100 gig module, so whether it’s CPAC or CSP2 to the extent you have that visibility, maybe give us a bogey for what the dollar per gigabyte per second we should be looking for and where we might be at the moment relative to that?

Ford Tamer

I think that’s the right metric gigabyte per gigabyte per second you know overtime per dollar and you know as John gave a bit of a feel for what the average price per share would be on a sort of more regular market, more mature market.

And some of these more forward looking newer markets we do end up with additional price pressure that would have us to work with the customer a bit more aggressively and so you would expect a little bit more price pressure in these newer markets Sundeep. I’d rather not discuss the exact dollar per gigabyte per second because that wouldn’t tell you exactly the price war solution.

Sundeep Bajikar – Jefferies

That’s fair. And then last one from me, just turning this into gross margins, maybe just give us some color of the high levels in terms of which products carry gross margins higher than corporate average, which ones are below and then if possible maybe just give us a bridge from Q4 to Q1 if you could?

Ford Tamer

Sundeep, in general the communications product tend to run a little bit higher in gross margin than the server based products. With all of our products on both sides of the business we worked introduced them at levels above the corporate average and then they will come down overtime and so that’s the way the mix of margin works. The other difference between the two businesses is that in the communication side, it’s a lower volume and we tend to do some of the testing for that in-house on a fixed investment. So as volume ramps there we tend to be able to leverage it more effectively for gross margin. But there are new products and they have to ramp into production and we have to improve the yield overtime just as we would on any product being introduced.

The same is true on the service side of the business except that’s much higher volume and we do a lot more of that offshore through third parties, so there isn’t the opportunity to leverage off of fixed investments whether it’s on the communications business.

Sundeep Bajikar – Jefferies

And then in terms of mixed shift from Q4 to Q1 other than server versus communications, was there any other big moving parts?

John Edmunds

Well, I think we talked about the 100 gig components shipping entire volume particularly in the amplifiers and as you mentioned the quad linear drivers and as Ford mentioned we should see some additional growth moving forward into the second quarter particularly in the quad linear driver. The amplifiers are somewhat mature at this point, but they grew in the first quarter and obviously the 100 gig market will continue to grow in terms of volume.

The – on the server side we talked about the LRDIMM growth taking place in the quarter and so those are three main growth areas right now in the business. The other of course is the SerDes but it’s still shipping and some have lower volumes and so the online card business starts to ship in volume as our customers products actually become qualified in the second half of this year and then start to ramp in higher volume.

Sundeep Bajikar – Jefferies

Great. Thank you very much. Nice job in the quarter.

John Edmunds

Thank you, Sundeep.

Operator

Your next question comes from the line of Frank Keller with Morgan Stanley. Please proceed.

Frank Keller – Morgan Stanley

Hey guys, congrats on the quarter and guidance. Just wanted to maybe following up on some of the questions around the product mix. You know I know that you guys are achieving closer to 50-50 revenue split a little bit quicker than anticipated. So just kind of wanted to see if maybe there is a chance that one category may start to outpace the other in the back half of the calendar year or how should we think about that equilibrium? Thanks.

John Edmunds

Thanks Frank. I think as we have mentioned in the last earnings call we do expect communications to grow a little bit faster through the course of the year just based on the number of new product initiatives that are happening simultaneously over in that side of the business, and we do expect communications to be more than 50% of the business in the second half of the year that was the guidance that we gave at the end of January for the Q4 earnings conference call and we haven’t updated that guidance.

Frank Keller – Morgan Stanley

Okay and then just from the topline perspective you guys have thrown a bogey out there in the past that it might be possible to achieve quarterly revenue run rate of around 40 million exiting this calendar year and 50 million exiting next. What you guys exhibited in this quarter for guidance shows some degree of up tick, so just kind of wanted to think about how OpEx continues to grow in support of higher revenues? Thanks.

John Edmunds

Thanks Frank. We are actually very excited about the Tier 1 customers that are pulling us into these markets. We invest alongside Tier 1 customers. We only approved product investments after we secure a lead customer or multiple lead customers. So I think we do believe the product investments we are making are transformation in nature and can result in increased revenues for many years to come. So, we are committed to meet our guidance from our earnings point of view. But as we in our prepared remark did indicate we would be continuing to invest in our engineering and R&D to meet the increased demand for customers for these interconnect products. So, we are getting request for faster, better and more cost effective products and this is not just our team coming up with [these] kind of ideas these are sort of working very closely with Tier 1 customers, Frank.

Frank Keller – Morgan Stanley

Okay

John Edmunds

I’m not sure, did I answer your question.

Frank Keller – Morgan Stanley

Yes, that’s good. I’ll hop back in the queue if I have another... But thanks guys and congratulations.

Operator

Your next question comes from the line of Richard Shannon with Craig Hallum. Please proceed.

Richard Shannon – Craig Hallum

Hi, Ford and John once again I reiterate my congratulations on very nice numbers. A few questions from me, first of all following up on your commentary regarding the quad linear drivers in [Jay] is driving a lot of your positive first quarter results, curious about the breadth of customers that are – that drove that in the first quarter and I would guess that the TIAs in dollar terms are a lot bigger driver but if you can help characterize that, that will be great, please.

John Edmunds

On the TIA amplifier, it’s definitely a pretty big breadth of customer that is driving that growth. On the linear driver as I indicated we are still in production with a very limited number of customers. However, we do have a very strong design win pipeline and so do expect later this year and into 2015 to be adding more customers for our linear driver product and see further acceleration of this growth for the linear driver business.

Today, the business is mostly still amplifier, so if you were to break it up the amplifier business still dominates although the driver is growing faster and I’ll leave this to John if he wants to jump in with more detail.

John Edmunds

Is that what you were looking for Richard, or…

Richard Shannon – Craig Hallum

That was perfect. Thank you. Thanks for that and a couple other quick follow ups. On the OpEx side, should we be inferring any sort of increased rate of OpEx you talked about greater engineering resources here that we should think about for a few quarters or longer? Can you help us understand what the investments you are making how long they will last, and what that curve or the OpEx spending will look like there please.

Ford Tamer

Yes, Richard this is Ford. I’m going to turn it to John next. I think what we are trying to say is this is not going to be anything different than what we discussed in the past. We’re just trying to remind you of the opportunities we have and the fact that we if we do better on the topline please don’t expect as doing better on EPS. So we will meet the guidance sweep and discussing all along and we – there is no big difference in the spending, we just want to be, make sure we are in sync and that the same discussion we’ve had about the opportunities and the fact we would be investing those opportunities . We’re just reminding you of what we said there is nothing new or not a different course or (inaudible) step function in expenses. This is the same as we have been discussing, we just want to be cautious and make sure that earnings stays consistent with our prior guidance.

John Edmunds

So Richard, let me just tag on there for a second just to give you some sense. So while we will increase this quarter by $1.4 million we do expect some increases in Q3 and Q4 maybe closer to the norm for our business. But as Ford has mentioned we have sort of a unique opportunity and we are being drawn into some opportunities that we just think are very good investments for the technology and the opportunity that we have to leverage that and get into these spaces. So if we could talk about them more openly, I think everyone would agree that the investment is worthwhile and something that we should pursue. So that’s all, really nothing has changed from that point of view and we are where we can having customers contribute towards some of the investments that we are making. So that’s also a part of the mix and it’s something that we are trying to include so that everybody can benefit down the road.

Richard Shannon – Craig Hallum

Okay, I appreciate you clarifying that for me. One last question on LRDIMM, John I think in your prepared remarks you talked about kind of a run rate of 4% attach rate on that which if continued for this year would represent a 150% growth, if I heard you correctly. Are you confirming or do you see visibility getting your forecast from your customers about that kind of an attach rate or even better going forward or can you give us your view on those numbers?

John Edmunds

Well I think the attach rate is generally forecasted at this stage to be at that level through the balance of the year. But you never know what may impact that in the grand scheme of things so that the timing of the next the introduction of the next generation of Intel platform how people look at DDR3 versus DDR4 are both variables and the uptick and those. But we do think there is a good set of run way left in the DDR3 LRDIMM and we intend to continue to pursue being the leader in that market.

Richard Shannon – Craig Hallum

Okay, fair enough guys, appreciate all the comments.

Ford Tamer

Richard, I would add one more comment to John’s commentary is that we’re getting a little bit more excited about the potential of LRDIMM and datacenters, cloud datacenters. So far, the adoption of LRDIMM is being mostly driven by enterprise datacenters and virtualization applications. We have seen recent interest in cloud datacenters which potentially represent an increase in market potential for that technology.

Richard Shannon – Craig Hallum

Okay, if you wouldn’t mind if I followed up on that comment, Ford, what’s the time frame by which you think that could be translated into revenues? It sounds like more of a next year kind of a timeframe and perhaps later, but any thoughts on how to think about timing there would be great?

Ford Tamer

Yeah, definitely second half of this year and into next year, it’s a similar adoption rate that we’ve seen on the initial enterprise datacenter is that you know you have about a three to six months type of testing and evaluation period before it goes to revenue.

Operator

(Operator Instructions) And your next question comes from the line of Ruben Roy with Piper Jaffray. Please proceed.

Ruben Roy – Piper Jaffray

Thank you. John, I wanted to just follow up on some of the gross margin commentary and questions, specifically on the yield curve, and with communications ramping into the second half of the year, can you help me understand what the yield curve looks like, and if it starts to turn this year or if you expect continued headwinds into the rest of the year on the gross margin line?

John Edmunds

You know, I’m conservative by nature, Ruben. So I always anticipate some degradation of gross margin over time, and think of it in 30 to 50 basis points, and it’s really a function of how you are introducing new products and how the yields on those new products are coming into place. Generally as we introduce a new product, the yield for that product improves in the first six to nine months or so of production, so those are generally the curves that we’re on for our products. Sometimes, it takes a little longer, sometimes it happens a little sooner, but I think it’s -- again it’s a function of the introduction of new technology into the space, and we do have new products in both sides of our business that are shipping and ramping as we move in.

And DDR3 is getting a little long in the tooth, so that’s one of the attractive points of DDR4 as it comes in. It’s a newer technology, and it allows everybody to reset the pricing, so we’ll see how the year unfolds here, but we are fairly confident in our ability to manage the gross margin consistently as we have since the IPO in the sort of 64% to 66% range.

Ruben Roy – Piper Jaffray

That’s perfect. Thanks John for that and then just quickly for Ford, you guys are obviously executing very well on the topline. What’s your general sense for some of the markets specifically around the server? You mentioned some drivers, high performance computing enterprise storage, etcetera, how are you feeling about those markets outside of sort of your market share gains, etcetera, the strength of those markets for this year as you look into the rest of the ’14 versus how things are shaping up in 2013? Thanks.

Ford Tamer

So, we do like the DIMM form factor. We do believe the DIMM form factor is a great real estate, meaning that it’s a standard form factor that you’ve got 12 of them per server, and we’ve shown so far the ability to go from, you know unregistered DIMM to registered DIMM as RDIMM to a buffered DIMM with LRDIMM. We have announced our support this year for NVDIMM which is this non-volatile DIMM I discussed in my prepared remark which we believe is the next step in evolution of the DIMM form factor, and we are working on additional products that would go into that DIMM form factor.

So, in our mind, this is a long-term roadmap that we are working very closely with Tier 1 memory module and server OEM customers, and we are very excited about where this could take our business in 2014 and beyond.

In addition, in that same datacenter, we do believe that there is a very fundamental transformation happening in datacenter where these big warehouses are going to go from 100,000 servers per warehouse to about 1 million servers per warehouse, and that’s fundamentally so far the growth of up to 100,000 servers has been driven by software modules that these large cloud datacenters have been able to deploy.

However, as you’ve got to scale from 100,000 servers in a warehouse to 1 million servers in your warehouse, you will need some hardware solutions, and this is where some of our optical interconnect and memory interconnect will complement our memory interconnect product in a very nice way, and this is where we are having all three types of interconnect is going to be phenomenal for the growth of our business in 2015 and especially 2016 and beyond, so we are getting very excited about what this datacenter transformation could mean, and we do believe it’s a very fundamental transformation that would be with us for years to come, so when we talk about the investments that we are making are relatively measured compared to the opportunity that’s ahead of us to really work with our Tier 1 customer to expand this market and the revenue for Inphi in a very fundamental way.

Ruben Roy – Piper Jaffray

Okay, thank you Ford.

Operator

Your next question comes from the line of Tore Svanberg with Stifel Nicolaus

Tore Svanberg – Stifel Nicolaus

Yes, thank you and nice quarter. First question Ford, you talked about Cloud starting to get more interested within LRDIMM, and I was just wondering what that does to the attach rate, I mean are we talking from like 4% to 6% or you know could this be sort 4% going to 8% or even higher than that?

Ford Tamer

You know Tore, we got bit once, and so we’re once bit, twice shy. We are not going to go and try to forecast percentages as you know we are going to probably be careful here. I think you know as we discussed on the earlier question, if this happens, this will happen in the second half of this year and into 2015, so there is a sort of gestation period for the testing to happen and the value prop to be proven, and then for the new applications to translate to revenue. So, we are probably early in the adoption cycle, and it took us longer for the adoption in LRDIMM, but the good news is that 2015 is around the corner, and so whether it happens in the end of this year or early next year, we still believe that a part of the market will stay at DDR3 and continue to adopt LRDIMM in a big way.

Tore Svanberg – Stifel Nicolaus

Fair enough. And on the second gen SerDes business, where are we in the ramp for that business? Are we still in the beginning and we have multiple quarters to go, and on that as well when is the design win build for Gearbox 3?

Ford Tamer

So, we do believe that the major opportunity for the next generation SerDes Gearbox will be in the second half of this year, so we should see that contribute more meaningfully to revenue in the second half of this year and especially into 2015. So again, this would be another gross factor that we have that will help 2015 grow, so second half this year into 2015.

Tore Svanberg – Stifel Nicolaus

Okay, last question you talked about non-volatile DIMM. I assume this is several years out, but when does this potential become a storyt? Is it 2016 or later than that?

Ford Tamer

So, the discussion at the standard body, which is the [Gedek] which is the memory body that – standard body that sort of governs a lot of what we do and the DIMM form factor, standard DIMM form factor thus attended obviously by you know Intel, by the server OEMs, by all major memory module OEMs, by ourselves, and our industry sort of competitor, but in that case partner in that DIMM form factor. We are solely converging to – we hope to a standard for the next generation, what’s called [Gedek 2.0] definition to include that non-volatile standard, nonvolatile as part of the standard.

And that would be targeted for generation beyond (inaudible). So whether it’s – we don’t want to preview our partner’s roadmap, but it definitely would be a generation beyond (inaudible), so the revenue impact will probably be in 2016 in our mind, but we are currently working with different partners on sort of early proof of that -- of the value proposition, so that we don’t end up with that delay from the time the part is available to the time the revenue ends up hitting like we had on LRDIMM, so we do believe that we’ve done a lot of ground work and a lot of machinery work with memory module vendors with server OEMs and datacenter partners to approve that value proposition and that hopefully will translate into a faster time to revenue

Tore Svanberg – Stifel Nicolaus

Okay, very good. I actually had one last question for John. John you talked about the $1.4 million more in OpEx for the June quarter, but then you also listed a few items; I assume those items are included in that guidance, right?

John Edmunds

That’s right. So, I think I said $1.1 million was really in the salary and benefits area, and another 200,000 would be in the patents area, and another 100,000 in rent, so that adds again [1.4].

Tore Svanberg – Stifel Nicolaus

Very good. Thank you.

Ford Tamer

All right, thanks Tore.

Operator

Ladies and gentlemen, thank you so much for your questions. I will turn it back over to Mr. John Edmunds for any closing remarks.

John Edmunds

Thank you. Ford and I would like to thank you all for joining us today. Inphi plans on attending the Jefferies TMT Conference in Miami, Florida, on Thursday, May 8th; the Deutsche Bank Access Day in San Francisco on Thursday, May 15; and the Craig Hallum Conference in Minneapolis on Wednesday, May 28. Again, we would like to thank you, and we look forward to speaking with you again in the future.

Operator

Ladies and gentleman that concludes today’s conference. We thank you for your participation. This concludes the presentation and you may now disconnect. Have a great day.

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