Inphi (IPHI) Ford G. Tamer on Q4 2015 Results - Earnings Call Transcript

| About: Inphi Corporation (IPHI)

Inphi Corp. (NYSE:IPHI)

Q4 2015 Earnings Call

February 04, 2016 4:30 pm ET

Executives

Deborah A. Stapleton - President

John S. Edmunds - Chief Financial Officer and Vice President

Ford G. Tamer - President, Chief Executive Officer & Director

Analysts

Quinn Bolton - Needham & Co. LLC

Joe L. Moore - Morgan Stanley & Co. LLC

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Srini Sundararajan - Summit Research

Doug Freedman - Sterne Agee CRT

Mark Lipacis - Jefferies LLC

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Operator

Good day, ladies and gentlemen, and welcome to Inphi's Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Deborah Stapleton. Please go ahead, ma'am.

Deborah A. Stapleton - President

Thank you, good afternoon everyone. Thank you for joining us today to discuss the financial results for the fourth quarter of 2015 and year-end 2015. I'm Deborah Stapleton, and with me today are John Edmunds, Chief Financial Officer; and Ford Tamer, our Chief Executive Officer. John will begin with the Safe Harbor, then Ford will give you an overview of our business. After that, John will provide a financial summary of Q4 and the outlook for the first quarter of 2016. Then we'll be happy to take your questions. John?

John S. Edmunds - Chief Financial Officer and Vice President

Thanks, Deborah. Let me begin by apologizing on behalf of the company for the inadvertent premature release of our earnings release on our website today. Like most companies, we have a third party that manages this for us, and they had a technical problem that caused the release to be made available on our website before it should have been.

Now for the Safe Harbor, 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 the conference call.

For further information regarding risk factors for our business, please refer to our registration statements as well as our most recent annual and quarterly reports on Forms 10-K and 10-Q, all filed with the Securities and Exchange Commission, accessible at www.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 CEO, Ford Tamer. Ford?

Ford G. Tamer - President, Chief Executive Officer & Director

Thanks, John. Good afternoon. Thank you for joining us for our fourth quarter and year-end 2015 earnings update. We are delighted to report that we capped off a healthy year with a strong fourth quarter, during which we outperformed both the Street's and our own expectations.

I'm pleased to report the 15th consecutive quarter in which Inphi has met or exceeded our expectations to you, our shareholders. We achieved $64.4 million in Q4 revenue, a 10% increase on a year-over-year basis. For the full year 2015, we reported $247 million in revenue, a 54% increase over the $160 million in 2014. Furthermore, we recorded an exceptional gross margin of 72.1%, compared to 68.7% in the same period last year, a result amplified, if you'll pardon the pun, by our amplifier business. This resulted in a 21.8% operating margin, the highest level we've achieved since I joined the company even after funding an employee 401(k) match.

Bottom line, after taxes, which included an R&D tax credit, we are delighted to report $0.31 in fourth quarter earnings per share corresponding to $0.27 excluding the impact of the tax credit. This resulted in annual earnings of $1.03 per share versus $0.62 per share for 2014. I am proud of the performance of our Inphi team, because we also always focus on consistent performance, both today and in the quarters to come.

Last year, at this time, we told you that we were pleased with our progress and that the best is yet to come. Today, I can make the same statement again, demonstrating the strength of Inphi's investment strategy.

It is clear that we operate in a very competitive arena and the macro environment is challenging, making it hard to predict the future. Nonetheless, I'm cautiously optimistic about 2016. While there are some warnings of impending market weakness, particularly from China, we at Inphi have seen a resumption of growth based on the renewed build-out of telecom and cloud infrastructure. We firmly believe that Inphi is in the right place at the right time, with the right team to deliver the right products for both the cloud and telecom service providers. This is evidenced by five awards Inphi received in 2015 from our customers, specifically Cisco, Fiberhome (06:09), Huawei HiSilicon, NeoPhotonics, and Sumitomo Electric. And we started 2016 with a new award from a memory customer. I just returned from Seoul where Samsung Electronics honored us with an award for our long-term partnership.

These awards were across our optical, networking, memory and transport segments and from across the globe. Inphi was recognized by our customers for excellence in technology, quality, delivery performance and long-term partnership.

The focus on being in the right place, at the right time with the right product also resulted in the continued growth of our communications business, which accounted for about 80% of our revenue in Q4. For the full year 2015, our core communications product again grew 50% organically, significantly faster than the overall infrastructure market.

I will now use the same familiar FedEx analogy of the planes, trains and trucks that you've heard me use before to describe Inphi optical, networking and memory data movement interconnect. Starting with our planes, our optical interconnect accelerating the movement of data between data centers, we're excited about three growth drivers. First, the new metro products are growing nicely in both system OEM line cards and module applications. Second, our linear amplifiers and drivers continue to take share. Specifically, the adoption of our multi 100-Gigabit linear drivers continues to drive our business growth.

Our linear driver business revenue ended up 2.3 times larger compared to one year ago, growing much faster than Infonetics' forecasted underlying market growth of 50%. This market share expansion is happening at an accelerated pace relative to our expectations even six months ago.

Lastly, we also saw progress in the ramp of our new 45-Gigabaud product, from which we look for solid contributions in 2016. These three trends further increase our confidence in the growth outlook for our fleet of optical interconnects.

Moving to our trains, our networking interconnect inside data centers, we saw very solid growth here as well with another three growth drivers for 2016. First, we're pleased with our customer transition to the faster 100-Gigabit speeds and the corresponding ramp of our 100-Gigabit NRZ Clock Data Recovery and Gearbox solutions. And we expect this to continue throughout the rest of the year. Second, looking ahead, we remain confident in the ramp of our 40-Gigabit and 100-Gigabit PAM4 Solution in the second half of 2016. And third, based on the recent IEEE meeting in Atlanta, we remain confident that PAM will become the standard for 40-Gigabit, 50-Gigabit, 100-Gigabit, 200-Gigabit and 400-Gigabit for copper, multimode fiber and single-mode fiber interconnect in 2017 and beyond.

Finally, let's look at what was accomplished and continue to target for our trucks, our memory interconnects inside server and storage systems. We continue to see the memory interconnect market growing to $300 million and expect to be an increasingly important part of that growth. As we said throughout last year, we regained market share in 2015, doubling our quarterly revenue from the first half to the second half of the year. And we are not finished yet. We expect to continue to gain register share in 2016, doubling again our quarterly revenue from the second half of 2015. In the buffer market, we are working on new designs in 2016, which should enable us to expand buffer share in 2017.

Looking out further, again, we expect you will see the results of our R&D strategic investments as we ramp up new products into 2018. Our consistent view has been and continues to be that the explosion of Big Data and the need for its rapid transmission is an ongoing trend and an enormous opportunity for Inphi. We firmly believe the transition to higher speed data movement enabled by Inphi is ongoing and inevitable. We are strategically positioned both for today and for the years ahead across and within our product segments, planes, trains and trucks.

Now I'll turn over the call to John to speak to Q4 2015 and the financial outlook. John?

John S. Edmunds - Chief Financial Officer and Vice President

Thanks, Ford. Now let me recap the financial results. As Ford mentioned, in the fourth quarter of 2015, Inphi reported revenues of $64.4 million, which was up year-over-year by approximately 10% from the non-GAAP revenues reported in Q4 2014 of $58.6 million. For the 2015 year, we reported $247 million in revenue, which represented 54% growth compared to non-GAAP 2014 revenue of $160 million.

Let me remind you all that we had $3.9 million of non-GAAP revenue in Q4 2014 related to some deferred revenue from Cortina that would have been recognized in Q4 if it were not for the GAAP purchase accounting rules. While the growth of the company was due in part to the October 2014 acquisition of Cortina, even when we add the Cortina 10-Gig and 40-Gig SerDes business for the first nine months of 2014 into the base, the core communications business continued to show approximately 49.5% organic year-over-year growth and we expect that growth to continue in 2016.

We define our core communications as amplifiers, drivers as well as 10-Gig, 40-Gig and 100-Gig physical interface products, all of which support the service provider and data center interconnect markets. Our communications business continued to represent roughly 80% of our total revenues through Q4 of this year. The core communications products continue to represent approximately 70% of communications while the legacy communications products represented the remaining roughly 30%. Although transport and legacy was down slightly in the fourth quarter, on the whole, the business was stronger through the course of the year than we had first predicted. We remain confident that this business can meet or exceed the forecasted $47 million we have been anticipating for 2016.

As reported in the news, some server and memory OEMs saw their business soften toward the end of Q4 2015. We were able to absorb some of that softness late in the quarter, so we could be ready for growth in Q1. As expected, Q4 sales of our DDR4 product into high speed memory applications was up sequentially in Q4 and rounded to $4 million in revenue. We expect this to grow again in Q1.

Sales of DDR3 began to fall off in Q4 and we expect this mix change with DDR4 will keep high-speed memory revenues relatively flat through the first two quarters of 2016 and lead to more dominant DDR4 growth in the back half once Broadwell ships in higher volume. We expect sales of our DDR4 products to keep growing throughout 2016. This should bring us to revenues for the 2016 year in high-speed memory in the range of $55 million to $60 million.

Gross margins on a non-GAAP basis came in at 71.4%, ahead of where we expected. 2% of that was based on favorable year-end manufacturing variances and about 1.2% was attributable to a temporary favorable mix toward higher margin die-based solutions.

Based on the current forecasted mix for Q1, we expect the gross margins in Q1 to be in the range of 68.2% to 69.2%. At the midpoint, this is down 2.7% compared to Q4, of which 1.7% is due to a revision back to a more normal mix of components and about 1% is due to estimated non-recurring year-end manufacturing variances. We believe that we should be able to maintain gross margins in this approximate area through the balance of 2016.

On a GAAP basis, we had GAAP positive operating income in Q4 at $2.6 million versus a $200,000 operating loss in Q3 and compared to a $17 million GAAP operating loss in Q4 one year ago. The delta between GAAP and non-GAAP operating income is approximately $11.5 million, made up of several basic recurring adjustments.

As discussed previously, the GAAP loss includes stock compensation expense of $7.4 million, purchase accounting related adjustments totaling $3.6 million as well as some acquisition transition expenses. In this case, amortization of modest short-term retention bonus was about $500,000, which were part of the purchase agreement for Cortina and go away at the end of Q1 2016. This all nets down to $11.5 million additional operating expense in the GAAP books.

Finally, we have an additional $600,000 of non-cash debt cost amortization associated with the convertible bond issue and then the related tax effects of all of these additional GAAP expenses totaling about a $3.5 million tax charge. The Q4 GAAP based result, a loss of $2.2 million or $0.06 per share compares to a net loss of $17.4 million or $0.47 per share in Q4 2014. The Q4 2014 GAAP net income was more negative primarily as a result of purchase accounting adjustments, primarily the $11.8 million amortization of the step up in the related Cortina inventory that was acquired at the beginning of that quarter. A more telling comparison was the GAAP operating loss of a year ago of $17 million, which now compares to a Q4 2015 positive GAAP operating income of $2.6 million. In fact, when we make the adjustments to a non-GAAP measure, we can then see an underlying year-over-year improvement of $2.6 million in the fourth quarter non-GAAP operating income, which was $14.1 million or 21.8% of revenue in Q4 of 2015 as compared to $11.5 million or 19.6% of revenue in Q4 2014.

Non-GAAP operating expense for the quarter totaled $31.9 million. This was up $1.9 million from the previous quarter, and based on our favorable financial results for the year includes a new contribution of $1.3 million or 2% of salaries to our retirement plans for employees. This finally check the box for us in a longstanding deficiency we had in recruiting in comparison to other companies who make these types of contributions to their retirement plans for their employees. The other additional operating expenses were driven largely by $400,000 in additional sales commission in Q4 and approximately $200,000 legal expenses that related to the Netlist patent disputes.

While one of three Netlist patents is close to completing the re-exam process, we continue to maintain that our technology does not infringe and that even if it did, we believe the exposure at the circuit level is small compared to system level exposure and that any exposure would be limited prospectively to DDR3 LRDIMM platforms, which at this stage is a small $20 million market that it's in decline. Overall in Q4, we were able to deliver an operating income margin of 21.8%. In Q1, with slightly lower gross margins and slightly higher operating spending from payroll taxes and modest hiring, we expect Q4 operating expense to be in the range of $32 million to $32.7 million. We believe we can continue to deliver operating income margin at or near 20%.

With regard to the Q4 non-GAAP tax provision, the good news is that the R&D tax credit was permanently restored in Q4 and will now be in place through 2016. Our non-GAAP effective tax rate for 2015 dropped from 18% to 14.3% and the cumulative effect of adjusting for the year all flows through Q4 of 2014. This is somewhat higher than the 13.2% rate for 2014 due in part to crossing our threshold for non-GAAP that would raise the applicable statutory rate from 34% to 35%. In addition, based on mix of business we have a higher percentage of profit in the higher tax rate U.S. jurisdiction as compared to international in 2015 as compared to 2014.

Now turning to the balance sheet. Overall, cash was up $225 million in the quarter from $101.7 million to $326.7 million. $206.2 million of the increase was from our December 3 convertible debt offering leaving nearly $19 million increase, which was primarily from operations. This was due to strong cash flow from operations in Q4 of $22.9 million, up from the comparable cash flow from operations in Q3 of $19.8 million. The improvement is largely due to favorable changes in the working capital, which generated about $12.6 million of this positive operating cash flow.

The company also had capital expenditures of $4.4 million, which was down slightly from the $5.4 million in Q3. The balance of cash flow represented a positive $300,000 which constituted the proceeds from stock option exercises, less payroll taxes paid for employees in lieu of stock being issued through RSU vesting. This also allowed us to generate $18.5 million of free cash flow in Q4, which is up and consistent with the $14.2 million in free cash flow we generated in Q3. We continue to expect a similar level of cash expenditures in Q1 of 2016.

Accounts receivable came in at $30.4 million or 43 days sales outstanding in September compared to $33.2 million or 48 days sales outstanding at the end of September.

Inventory on the balance sheet at the end of December was $17.8 million, which included 240,000 of acquisition related step-up in inventory as compared to $20.8 million at the end of September, which included 700,000 step-up in inventory value. Excluding the relative step-up in inventories, inventory days was down to 86 days or 4.2 turns at the end of December compared to 92 days or four turns at the end of September.

Although the inventory balance is down, we will continue to work on bringing it down further over time. Payables increased to $8.4 million or 41 days in December from the $5.4 million or 24 days at the end of September.

Now, let me recap the business outlook for Q1. I remind everyone 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.

Our forecast of Q1 revenues is expected to be in a range of up approximately 1.4% to 4.5% or $65.3 million to $67.3 million. We expect non-GAAP gross margins to be in a range of 68.2% to 69.2%. We expect non-GAAP operating expense to be in a range of $32 million to $32.7 million. We are currently estimating the non-GAAP effective tax rate to be 14.3% for 2016. Again, this includes the benefit from the restored U.S. R&D tax credit. We are confident these components should then align resulting in non-GAAP operating margin at or near 20%. This does then lead to non-GAAP net income of between $10.8 million and $11.6 million, which on approximately $42.6 million estimated diluted shares would result in estimated non-GAAP earnings of between $0.25 and $0.27 per diluted share.

I should also point out that we're anticipating about a $200,000 cost of carry on a non-GAAP basis – cost of carry associated with the convertible debt. That is the cost of carrying that debt will exceed the near term income we expect to reach from that debt by about 35 basis points and which would amount to about $200,000 per quarter.

We also estimate the stock-based compensation expense to be between $7.6 million and $7.8 million. In addition, we expect about $3.2 million from purchase accounting-related adjustments. In Q1, we will also have another quarter of flow through of stepped-up inventory value estimated at $300,000 and we expect $500,000 in one last quarter of the acquisition transition-based expenses.

Finally, we also have approximately $2.5 million of debt cost amortization in Q1 for GAAP purposes. This would imply a GAAP net loss in the range of $4.5 million to $5.4 million. GAAP loss per share would then be a loss in the range of $0.11 to $0.14 per share. A more complete reconciliation of the Q1 GAAP net income forecast is attached to the last page of the press release.

We will not update this outlook during the quarter until the time of the next quarterly earnings release, unless Inphi publishes a notice stating otherwise. So please ask any questions you may have today during the general Q&A period.

And now, we'd be happy to take your questions.

Question-and-Answer Session

Operator

Our first question comes from the line of Vivek Arya of Bank of America Merrill Lynch. Your line is now open.

Unknown Speaker

Hi, thanks for taking the question. This is Shankar (25:40) on behalf of Vivek. I just want to start the questions with the communication demand with the data center. There have been a lot of mixed views on the strength of the cycle, the comp cycle in China versus the data center, the near-term data center demand, which is kind of weak. So, if you could just talk about what you're seeing out there and kind of give us an overview of the puts and takes of how you look at it?

Ford G. Tamer - President, Chief Executive Officer & Director

Thanks Shankar. This is Ford. Most of our business is still driven by the service provider. For us the data center becomes a larger percent of our business starting in Q3 of this year. What we're seeing in the service provider business is that after a brief pause in Q3 the demand for 100-Gigabit and above coherent came back strong in Q4 of 2015 and Q1 of 2016 across all three important geographical regions: Asia Pacific, Europe, and North America. So we are optimistic that the industry would be on track for another strong growth year in the range of 30% to 50% for 2016.

Unknown Speaker

Got it. Jumping to the follow-up, for the PAM4 adoption you said second half 2016 seems to be – the adoption seems to be on track. But can you kind of talk about the confidence that it will be successful with this expectation because there have been other competitors who have been kind of open about saying the adoption might not happen as 100-G but more a 200-G. So any thoughts on that will be helpful?

Ford G. Tamer - President, Chief Executive Officer & Director

So, we have been very consistent in our views that PAM4 will start in Q3 of 2016 and we continue to be confident in the views that we've expressed all along. What gives us that confidence is really working very closely directly with a couple of customer. This is not going to be a product market adoption but we do believe that 40-Gigabit and 100-Gigabit PAM will start revenue in Q3 of 2016. And again, this is based on working closely with a few of the ecosystem partners that we have today.

And as I said in my prepared remark, based on the latest IEEE meeting in Atlanta, we're extremely confident that PAM then would become a very broad industry standard. When I say PAM, I talk about 28-Gigabaud PAM would become an industry standard for 40-Gigabit, 50-Gigabit, 100-Gigabit, 200-Gigabit and 400-Gigabit in 2017 and beyond.

Unknown Speaker

Got it. Thanks.

Operator

Thank you and our next question comes from the line of Ross Seymore of Deutsche Bank. Your line is now open.

Unknown Speaker

Hi. This is Gi (28:46) for Ross Seymore. Thank you for letting me ask the question. In the quarter the gross margin of 71.4% was well about guidance and I think you discussed some of the manufacturing variances and temporary mix benefits to higher margin die. Was any of that related to Cortina royalties as well and should we expect that to have any impact on the Q1 guidance?

John S. Edmunds - Chief Financial Officer and Vice President

Gi (29:15) thanks for the question. None of that was related to Cortina royalty income of any sort. It was driven, as we said on the call, by some yearend manufacturing variances that we were able to take advantage of and some of contractual relationships and it was driven by just a mix of components toward die-based product in particular amplifiers as Ford mentioned in his speech. And, we enjoyed a very rich mix but it was somewhat unusual and we'll continue to enjoy a healthy gross margin going into Q1 but the mix might be a little bit different.

Unknown Speaker

Okay. Thank you. And you referenced in the news that a memory competitor recently discussed expectations for muted growth in the next few quarters. I think you mentioned that memory is expected to be relatively flattish in the first half and increase in the second half. Can you discuss what you're seeing in the market here in terms of attach rate and market share?

Ford G. Tamer - President, Chief Executive Officer & Director

Yeah. So we discussed the overall memory business for us to be flattish, but we also discussed the DDR4 revenue for us to increase in the register business quarter-after-quarter. So all we could say is we are increasing revenue and others have seen a decrease in revenue. You could draw your own conclusion as to market share.

As far as attach rate for LRDIMM, we do not participate in that market on DDR4, so I'll leave it to others to comment. Just our history in that business, we were the first to come to market with LRDIMM buffers in the market and we've seen a very similar drop in attach rate when the whole industry transitioned from 2-Gigabit component to 4-Gigabit component. So as the market transitions now from 4-Gigabit component to 8-Gigabit component, we do expect the attach rate for LRDIMM to come down and we expect it to resume again after sometime. That's exactly what happened to us in the 2-Gigabit to 4-Gigabit transition when we were in the market on DDR3.

Unknown Speaker

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Quinn Bolton of Needham. Your line is now open.

Quinn Bolton - Needham & Co. LLC

Hi, Ford and John. Congratulations on the nice results and outlook. John, I just wanted to come back. You talked about that core 50% organic growth rate that you put up in 2015. And I thought you said you would be able to do that again in 2016. So I just wanted to come back and make sure I heard you right. Are you expecting that core 100-Gig business to grow 50% again in 2016?

John S. Edmunds - Chief Financial Officer and Vice President

I believe the phrase I used, Quinn, was that we did expect the growth to continue in 2016 and I would expect it to be in the range of probably 40% to 50%, something on that order.

Quinn Bolton - Needham & Co. LLC

Okay. So similar to what you saw last year?

Ford G. Tamer - President, Chief Executive Officer & Director

Very healthy growth, yes.

Quinn Bolton - Needham & Co. LLC

Fair enough. And then, I get a question from a lot of investors, wondering if you guys might be able to answer. Do you guys have a look at the split between the long-haul business and metro? I know some of the long-haul parts today are used in metro, so it may be difficult. But any sense you can give us in sort of the split between long-haul and metro in the business today?

And then, similar question about exposure to China. I think you guys saw a pretty nice recovery in demand out of China in the fourth quarter from all three of the major operators. But wondering if you could give us some sense how much of the long-haul 100-Gig or metro 100-Gig components do you think are going into China deployments versus North America or European operators? And then I've got a final follow-up question.

Ford G. Tamer - President, Chief Executive Officer & Director

Thanks, Quinn. So on the first two questions, the first one is on the metro versus long-haul, our business coming to the year has been mostly long-haul and it's hard for us to make a distinction between long-haul and metro. It's also hard for us to make a distinction on metro between service provider and data center to data center type of connection. So we got three different markets, if you wish, long-haul, metro service provider, and metro data center to data center. It's the same parts that are being used for three applications.

All I could tell you is we are very excited about the growth of metro into 2016 in both the system OEM as well as the module provider. So, on the system OEM, we have wins in three of the top four Tier 1 long-haul and metro service provider infrastructure system makers. And in the module, we have a healthy share of both amplifier and driver wins into the module business as well. So, on the metro, I think we see both of them grow.

As to the second question, as far as China versus the Rest of the World, we are seeing China for us being a very large driver of growth in 2016. Actually, our largest growth in a single customer will come from a Chinese customer for us in 2016. And you had a third question, Quinn?

Quinn Bolton - Needham & Co. LLC

It's just a final follow-up question just on the DDR4 business. John, you mentioned that you thought that business, given all the trends you discussed, would end up between $55 million and $60 million. I was just wondering if you could give us some sense how that splits between DDR4 and DDR3. I think in 2015, your DDR3 business was probably in the low to mid $40 million range. Is it more of an equal split in 2016? I guess, what's the outlook for DDR3 as the industry starts to ramp Broadwell-based systems later this year?

John S. Edmunds - Chief Financial Officer and Vice President

Yeah. Quinn, thanks for the question. Our DDR3 revenues in 2015 I think are roughly in the $40 million to $43 million – low $40s million range, as you mentioned, and we would expect that to decline to $25 million or so and we would expect the DDR4 revenues to grow from the low double-digits revenue level to about $35 million or so in 2016. So the combination of those two is obviously how you would get the $60 million in total revenues for the year.

Quinn Bolton - Needham & Co. LLC

And final question. It sounded like the vast majority of your DDR4 business in 2016 would still be register base that the buffer opportunity really comes in, in a bigger way in 2017?

John S. Edmunds - Chief Financial Officer and Vice President

That's correct.

Quinn Bolton - Needham & Co. LLC

Great. Thanks, guys.

John S. Edmunds - Chief Financial Officer and Vice President

Thank you.

Operator

Thank you. And our next question comes from the line of Joe Moore of Morgan Stanley. Your line is now open.

Joe L. Moore - Morgan Stanley & Co. LLC

Great. Thank you. I wonder if you could talk about a 100-Gig data center. In terms of the NRZ opportunity, how quickly does that ramp and what's the status of the switch silicon designed to support that ramp?

Ford G. Tamer - President, Chief Executive Officer & Director

Thanks, Joe. So, for us, the 100-Gig adoption, number one, has already started. We already sell some Gearbox product as well as clock data recovery product that go into that 100-Gigabit market. It just goes into either line cards or it goes on modules that are CFP and CFP2 type of form factor. So we already have a substantial amount of revenue that's coming from 100-Gig in our networking business in 2015 and we expect that to grow significantly into 2016.

The ramp, Joe, that you're referring to is the ramp of the NRZ into a new form factor, which is this QSFP, and we do expect some revenue starting in – for the NRZ as well as for the PAM for 100-Gig starting in Q3 of this year. On the 100-Gig NRZ, it's a more fragmented market. Last time I counted, there was like maybe 10 different competitors vying for that NRZ slot on the QSFP. And so we'll get some share, but not as much as we expect to get on the PAM side where we believe there is only two of us that today would have a 28-Gigabaud PAM solution in that same timeframe. As far as timing from a switch point of view, all we are being told from customers is that is on track.

Joe L. Moore - Morgan Stanley & Co. LLC

Okay, great. Thank you for that. And then in terms of the PAM4 opportunity, what's your best competitive intelligence about the competitive outlook in the second half? Are your main competitors going to be out with product? What's their timeframe relative to you?

Ford G. Tamer - President, Chief Executive Officer & Director

So, again, Joe, just to be specific on the competition, we refer as competition as 28-Gigabaud DSP based offerings. There are some in the market, they are talking about 56-Gigabaud PAM and we believe that's a very different market. As IEEE is voting on this, you could see the adoption of that 56-Gigabaud is a couple of years out. Others would disagree, but our view very much in sync with our data center customer view is that 28-Gigabaud is going to really be the majority of the market in 2016 and 2017. So, in addition, we very much focus on a DSP-based solution because we believe that provides a more cost-effective solution and allows you to yield the optics and go for longer distances. So, as we define competition as 28-Gigabaud PAM and DSP-based PAM, there's only two vendors, us and Broadcom in that market.

Joe L. Moore - Morgan Stanley & Co. LLC

Okay. Thank you very much.

Operator

Thank you. And our next question comes from the line of Tore Svanberg of Stifel. Your line is now open.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Yes. Thank you. Nice quarter. First of all, could you talk a little bit about your relative visibility for the March quarter, either by backlog or bookings trends or anything like that?

John S. Edmunds - Chief Financial Officer and Vice President

Hi, Tore, it's John. We typically don't quote a backlog number. But typically when we do the call, our backlog is about 60% in the quarter, looking forward Q1 and the current backlog for Q1 is actually higher than that right now. So it's in very good shape.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

That's helpful. And, Ford, when would the 45-Gigabaud driver be ramping into production? Has that already started or would that also be second half together with PAM4?

Ford G. Tamer - President, Chief Executive Officer & Director

It's currently ramping Tore. We haven't broken it up.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Okay, very good. And John, the inventory days are now down to the 80s and you said something in your prepared remarks that maybe that would continue to come down. I was just wondering sort of what level would you operate at from an inventory days perspective going forward.

John S. Edmunds - Chief Financial Officer and Vice President

Typically, Tore, I'd want to be – in the ideal case, we'd want to be down to 60 days. But I think in the semiconductor industry, anything between 60 days and 80 days is kind of normal operating status. So I'd like to continue to work on bringing it down. And one of the challenges for us now is, with Cortina, we have such a diverse set of products and we're introducing new products. And so with different types of products that we have to carry and upside that we're trying to make available for customers and so forth, the issue becomes more complex over time. But we continue do the best we can to focus on a just-in-time strategy that keeps that number lean.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Okay, very good. And sort of to jump back to Ford, but Ford you mentioned PAM4 for 40-Gig and 100-Gig, maybe I just can't remember this correctly, I know in the past you've always talked about 100-Gig and it just seems like 40-Gig is new information to me. But maybe you could talk about if those will be ramping together or will one start ramping before the other?

Ford G. Tamer - President, Chief Executive Officer & Director

We have customers for both. They're different customers. The biggest opportunity for us is 100-Gig, although 40-Gig would not be insignificant.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Very good. Thank you, guys.

Operator

Thank you. And our next question comes from the line of Srini Sundar of Summit Research. Your line is now open.

Srini Sundararajan - Summit Research

Hi, guys. Great quarter. Thanks for taking my call. I have a few questions, the first one being who was the 10% customer in 4Q 2015 and in 2015, who were the 10% customers?

John S. Edmunds - Chief Financial Officer and Vice President

We'll only have one customer that's over 10% and I think we've disclosed in the past that would be Cisco and they'll be in kind of in the mid-teens. When we publish the 10-K, you'll see that.

Srini Sundararajan - Summit Research

Okay. And then using the FedEx analogy, could you break down the percentage of revenues from each category?

John S. Edmunds - Chief Financial Officer and Vice President

It's sometimes difficult for us to do that Srini, because the lines between optical and networking actually become a little bit blurred with some of the sales that we do. And so we talk about communications overall being about 80% of our business and our core communications being the amplifiers, drivers and the networking products, in effect the planes and trains and the communications markets being about 70% of the 80%, so roughly 50% or so of the business is in those two buckets. And then of course the high-speed memory, the trucks on the other side, is the 20% of the business that we talk about.

Srini Sundararajan - Summit Research

Okay. And when you look at the portfolio of what you have, do you have any particular area that you think you could add like – or plug a hole by M&A?

John S. Edmunds - Chief Financial Officer and Vice President

We don't really think about it that way, Srini. We actually have a fairly robust palette of products that we can make available to the customers today. Of course, there's always things that we can add to that and we look and think about those opportunities. But there's nothing specifically that we would define as a whole.

Srini Sundararajan - Summit Research

Okay. Thank you very much.

Operator

Thank you. And our next question comes from the line of Doug Freedman of Sterne Agee. Your line is now open.

Doug Freedman - Sterne Agee CRT

Great. Thank you so much. And I echo the congratulations on very nice execution in the December quarter. If I could look at the business model that you guys are executing, really nice job on growing op margins, how should we think about sort of your target for operating margins going forward? Is there a growth rate that we should be thinking about or a goal post that you're shooting for?

John S. Edmunds - Chief Financial Officer and Vice President

Yeah. Thanks, Doug. I think the Street models we're going to be looking for is to get to 22% or 23% level by the end of the calendar 2016. And so in the near term, we'll be shooting for something in that range. But ultimately, I think we're focused over the next few years on trying to get into the mid 20%s and we're also continuing to want to invest in growth. And so it's always a balancing act between harvesting the existing product set and making investments for growth moving forward. And we do think of ourselves as a growth-oriented company and we want to continue to make those investments.

Doug Freedman - Sterne Agee CRT

Speaking of investments, intra-quarter did raise some debt. Can you maybe offer us some insights into the factors that made you bring on the additional leverage to your balance sheet and how we should think about maybe some of your balance sheet management priorities going forward?

John S. Edmunds - Chief Financial Officer and Vice President

Yeah. I think we occasionally look at opportunities in places that we could either add talent or technology or both to the portfolio. And it became apparent to us in the fall that – we felt that interest rates would be going up and that if we were to use debt for potential investments over the next several years, that would be much more efficient and cost effective than issuing shares as part of that acquisition. So that's what led us to look into and explore the potential of doing that and put us in a position where we could borrow at 1.125% over five years and have a convert that has a conditional conversion clause that suggested the stock would have to be – I believe it's over $52 for 20 days in a 30-consecutive day period for the first four and a half years of that instrument. So in effect, if that money is used and then ultimately does convert into equity, would it be a much higher stock price than if we just issued equity in a deal this year. So that was the motivation.

We're not really pressed for doing any one particular thing. The money is not burning a hole in our pocket and I've watched other companies in my history have that issue, and that's certainly not our problem here. We want to be very deliberate in investing that money. There is several different avenues that we can go down to make use of it.

Doug Freedman - Sterne Agee CRT

I guess my follow-up to that is, is there a minimum working capital that you need with the business given the growth that you've been operating with? It's hard to calculate given you are bringing your inventory down as well.

John S. Edmunds - Chief Financial Officer and Vice President

I've always thought that a company this size could be run with about $30 million of cash, if that's really your question, and we'd probably have a line of credit outside of that if we were going to go that route. But again, there's something warm and fuzzy about having $100 million of cash in the bank as well. So there's no reason for us to run and jump. We can cover most of the debt cost, the cash debt cost today within the investments that we're making and we could certainly drive to a longer tenure in those instruments and completely cover the debt costs. So it's a matter of having those resources available and having them convenient, and that's what we're sort of managing toward at this point.

Doug Freedman - Sterne Agee CRT

Terrific. Thank you so much for all the detail.

Operator

Thank you. And our next question comes from the line of Mark Lipacis of Jefferies. Your line is now open.

Mark Lipacis - Jefferies LLC

Hi. Thanks for taking my question. Ford, maybe for you, could you help us understand where is the industry in the deployment cycle for 100-Gig in the metro and the data center? And what has to happen for the industry to see 100-Gig really ramp in the volume? Is it just simply a matter of price points? And if so, where are we on the price points? Where do you think we'll be in a year or so? Thank you.

Ford G. Tamer - President, Chief Executive Officer & Director

Thanks, Mark. 100-Gig has been ramping very healthily in long haul and metro. As you could see, we've been significantly growing those revenue and industry and others like Infonetics are reporting a very healthy growth support that continues to accelerate at 50% year-on-year. So I think in the long haul and metro, we're well on our way for 100-Gig to be deployed and accelerate moving forward.

On the data center, the CFP/CFP2 type of form factor and line system that we've been deployed on have been mostly router type of offering. What we're talking about here was the 100 Gigabit coming into Q3 ramping really, has started already today, but ramping in a bigger time in the second half of the year is really the switch system in the data center with those new QSFP form factor that bring power and cost and density to a level that becomes quite interesting for a data center. And transition from the existing CFP2 where you could put eight of those CFP2 per sort of one RU Pizza box to 32 or 36 of this QSFP, so significant density increase. And the power that goes from significantly maybe 4x less to about 3.5 watt in the QSFP form factor. So, I think the cost, power and performance and density will get this QSFP to really ramp in the second half of the year. Along with the rollout of those 100 Gigabit switches that will have no choice but to deploy those 100 Gig module. So, I think you'll see that increase happen in the second half of the year, Mark.

Mark Lipacis - Jefferies LLC

Thank you.

Operator

Thank you. Our next question comes from the line of Richard Shannon of Craig-Hallum. Your line is now open.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Ford and John, thanks for taking my questions. I guess just a few for me. First couple on the PAM4 topic here. Ford, can you give us any way to think about or characterize the opportunity? I guess I am thinking more of the second half this year but if you want go further out, what does the real opportunity look like for PAM4 for you? Any thoughts of how we can think about that and apply that to our modeling?

Ford G. Tamer - President, Chief Executive Officer & Director

I think we should be able to be much more clearer on that at the next quarterly call. So next quarterly call, let's say, April timeframe, end of April, early May I think you should be able to have a much better view of that.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay. I'll certainly follow up then. Maybe second question on the PAM4 topic here. Clearly, as you look at the major components that go into these datacom module QSFP, there are certain components that are relatively more important that are more difficult to procure, and PAM4 seems to be reigning pretty high up there. Does this provide any sort of center of gravity for you that you can pull in your other components, TIAs and drivers in any meaningful manner? Are you seeing any evidence of that? How does that compare with the center of gravity of, say, like the lasers might bring into the same module? Any thoughts on that?

Ford G. Tamer - President, Chief Executive Officer & Director

Yes, for sure. Thanks, Richard, good question. If you do go PAM4, you will need linear amplifier and linear drivers and so that pulls that linear into the data center. So the same transition we've seen towards linear amplifier and driver in the coherent space for long haul and metro is going to happen in the data center as we transition to a PAM4 modulation and that puts Inphi in a good position because we supply both sides of the equation.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay, fair enough. Just a couple of quick questions for me. On the topic of the metro space, I see Inphi gaining some share there. What do you think like the current run rate or kind of share basis looking at metro components, TIAs and drivers as you go throughout 2016?

Ford G. Tamer - President, Chief Executive Officer & Director

Richard, I think the way to think about it is what I said during my prepared remark which is if you look at the growth rate we've seen, we ended up with our linear driver business growing at about 130% year-on-year versus the industry growing at 50%. So we're growing significantly faster than the industry and taking share from the other players because of it. So that's probably the best number I have to give you.

The difficulty in the market share is hard for us to break up long-haul and metro in exact market share, hence the difficulty in giving you an exact market share but we know we're taking share because we're growing much faster than the market.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay. That's fair enough, I think that's helpful and just last quick question for me. You talked about the core part of your communications business growing 30% to 50% I think this year. Obviously, you got legacy, your mainstream business that I think you characterized soon after you bought the Cortina business. What's kind of the revenue path there going forward? Is that still something of a decline? Is it greater than what you saw a year ago? Just any characterization would be helpful.

John S. Edmunds - Chief Financial Officer and Vice President

Yeah, Richard. I think what we said is the core communications would grow in the 40% to 50% range and that legacy, we were very comfortable with the forecasted revenue number that we've been talking about for 2016 of about $47 million. That business continues to be resilient and we continue to have customers who come back and order more technology. We're still talking with those same customers and they work very openly with our existing legacy transport marketing managers and teams and we have ongoing discussions with them about the future of technology in that space and we may develop the technology again for it. It's really more a question of finding the right equation from an investment point of view that balances the risk of that investment against the focus and the commitment of the customer to take the technology once it's developed. And so we're very happy and still participate in that market, very happy with the results.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay. Perfect. If I missed that number earlier, I apologize, but thanks for repeating that. That is all the questions from me, guys. Thank you.

Operator

Thank you. And we do have a follow-up from Doug Freedman of Stern Agee. Your line is now open. Please check your mute button.

Doug Freedman - Sterne Agee CRT

Hello. Sorry about that. Thanks, guys, for letting me circle back in. I noticed some of your peers/maybe partners and competitors commented recently about the concern over supply constraints. Is there any way for you to measure up or are you prepared for any supply constraints in the ecosystem in which you are serving having any impact on your ability to grow? If so, how should we think about that and how anything can be done to alleviate it?

John S. Edmunds - Chief Financial Officer and Vice President

Richard (sic) [Doug] (57:00) thanks for the question. I think most often we get that question, which is really centered around the newer CFP2 modules that are capacity constrained, and that has to do I think with the new indium phosphide modulators and just the ability of the market to convert from the older lithium niobate into these new indium phosphide modulators as we move forward. There are some people in the market that are better positioned for that than others. Otherwise, we don't see capacity constraints limiting us. In fact, we play with other people in the market who benefit from that capacity constraint and so it ebbs back and forth, and sometimes people have asked us about lasers. They'll think that we need to go out and buy a laser company and we really don't look and think about it that way. The minute you buy one laser technology, you're going to have to be in partnership with somebody else who has other laser technology that you need and so we have good partners and we continue to work with partners in the ecosystem. We think that's a better way to proceed in these markets than it would be to get ourselves tied down in one fashion or another.

Doug Freedman - Sterne Agee CRT

Great. Thank you.

Operator

Thank you. I am showing no further questions at this time. I would now like to turn the conference over to John Edmunds for closing remarks.

John S. Edmunds - Chief Financial Officer and Vice President

Thank you. Ford and I would like to and Deborah would like to thank you for joining us today. We plan on attending the Morgan Stanley Conference in San Francisco on March 1, the Northland Conference in New York on March 9 and the ROTH Conference in Los Angeles on the March 13 to 16 timeframe. Again, we would like to thank you for joining us. We look forward to speaking with you again in the future.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.

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