Inphi (IPHI) Q3 2018 Results - Earnings Call Transcript

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About: Inphi Corporation (IPHI)
by: SA Transcripts

Inphi Corp. (NYSE:IPHI) Q3 2018 Earnings Call November 1, 2018 4:30 PM ET

Executives

Deborah A. Stapleton - Deborah Stapleton Communications

John S. Edmunds - Inphi Corp.

Ford G. Tamer - Inphi Corp.

Analysts

Quinn Bolton - Needham & Co. LLC

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

Thomas O'Malley - Barclays Capital, Inc.

Joseph Moore - Morgan Stanley & Co. LLC

Ross C. Seymore - Deutsche Bank Securities, Inc.

Harlan Sur - JPMorgan Securities LLC

Vivek Arya - Bank of America Merrill Lynch

Mark Lipacis - Jefferies LLC

Operator

Good day, ladies and gentlemen, and welcome to Inphi's Third Quarter 2018 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 follow at that time. As a reminder, this conference may be recorded.

I would now like to introduce your host for today's conference, Ms. Deborah Stapleton. You may begin.

Deborah A. Stapleton - Deborah Stapleton Communications

Good afternoon, everyone, and thank you for joining us today to discuss the financial results for the third quarter of 2018 for Inphi. I'm Deborah Stapleton, handling Investor Relations for Inphi, and with me today is Ford Tamer, Inphi's President and Chief Executive Officer, and John Edmunds, Inphi's Chief Financial Officer.

John will begin the call with the Safe Harbor and then Ford will give you an overview of our business. After that, John will provide a financial summary of Q3 and the outlook for Q4, then we'll be happy to take your questions. John.

John S. Edmunds - Inphi Corp.

Thanks, Deb. Please note that during the course of this conference call, we may make projections or other forward-looking statements about Inphi, including references to our prospects and expectations for 2018 and beyond, the projected growth and size of our markets, our customers, market share, new products, and design wins.

These forward-looking statements and all other statements made on this call, which are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. These forward-looking statements speak only as of today's call. We do not undertake any obligation to provide updates after this conference call.

For further information regarding risk factors for our business, please refer to our registration statements as well 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 company website 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 - Inphi Corp.

Thanks John, and good afternoon. Thank you for joining us for our third quarter 2018 earnings report. We appreciate your time and continued interest in Inphi. I'm pleased to announce that we're on track with our projected growth for 2018. In Q3, we delivered revenue of $78 million, a 12% increase over our June 2018 revenue of $69.8 million. Also in Q3, our non-GAAP operating income was $13.5 million or 17.4% of revenue as compared to the $7.1 million or 10.1% of revenue we reported in Q2. This translates to earnings of $0.30 per share in Q3, a 100% increase over our Q2 EPS of $0.15 and $0.01 better than the consensus estimates of $0.29. Additionally, we're guiding to Q4 revenue of $86.3 million at the midpoint, which would be the third consecutive quarter of double-digit sequential quarterly revenue growth this year. We're also guiding to Q4 EPS of $0.42 at the midpoint, which would represent a 40% increase over our EPS in Q3.

When we started 2018 with a challenging inventory situation in the long-haul and metro market in China, we set ambitious goals for our business recovery throughout the year. And now, with our Q3 results and Q4 guidance, we're confident that we're on track to achieve the goals we communicated in early 2018.

I thank our investors and customers for their support and our team for their hard work to enable us to achieve this fantastic comeback. One reason for the results is our additional focus on the cloud business. I'm pleased to report that we diversified our business over the past year so that 50% of our revenue in Q3 now comes from our data center market in the cloud business. This market diversification also gives us geographic diversification and that's because our data center customers are more U.S.-centric as compared to our long-haul and metro customers, which are more China-centric.

With that, let me start our business highlight by discussing our inside data center products and market progress. We attended the European Conference on Optical Communication, or ECOC, in Rome in September. We were very pleased to see that six years of investing in our Pulse Amplitude Modulation, or PAM, technology bore fruit in market share. In poker terminology, we drew the strongest possible five card hand with the top five components in the PAM market.

In no particular order, we showcased in combination with our module and OEM partners the following five products: first, our Polaris 50-gigabit per second PAM DSP; second, our Porrima 100-gigabit per second PAM DSP; third, our companion PAM linear transimpedance amplifiers, or TIAs; fourth, our companion PAM linear drivers; and finally, our Vega PAM retimer.

We have secured over 75 different design wins and a very clear leading number one market share position. These PAM products were demonstrated in a variety of modules from our partners at speeds ranging from 50, 100, 200 and 400 gigabit per second data rates. Inphi products are winning in the market because we provide faster time to market, high quality, high performance, low power, low cost and platform design attributes. With 12.8 terabit switch silicon now in mass production, the ecosystem is ready for a ramp with our PAM products.

Staying with the data center, let's discuss our progress with the between data center interconnects. At the same ECOC show, multiple industry experts, including Andy Bechtolsheim of Arista and Andrew Schmitt of Cignal AI, made very compelling presentations, showing the clear advantages of the upcoming 400 gig ZR and 400 gig ZR plus interconnects. Inphi's next generation coherent 400 gig ZR offering is very well-positioned to enable efficient IP over DWDM in data center routers and switches.

This will enable our customers to transport traffic from 120-kilometer ZR distances, up to thousands of kilometer long-haul distances in the same port used for gray, less than 10 kilometers inside data center interconnects. We believe this differentiated capability and 7 nanometer process technology will dramatically lower the power, cost, and latency while increasing the density of between data center interconnects for cloud customers. Those customers are telling us that we're ahead of the competition. Based on realistic schedule, we expect both 400-gig ZR between data centers and 400-gig ZR plus long-haul and metro solutions to be delivered in 2019.

Moving to the long-haul and metro market, I'm happy to report that, so far, we have not felt any direct impact from the China tariff situation. We continue to see solid demand in China, both in Q3 and, looking ahead, we're right on track for Q4. That said, we know the situation is fluid and we remain vigilant in the event that current political circumstances change.

As usual, we forecast seasonality in 2019, with the second half of 2019 being stronger than the first half in the long-haul and metro markets. At the same time, new product development is running full steam ahead. At the ECOC show in September, we introduced small form factor 64 gigabaud TIAs and driver for 400 gigabit and 600 gigabit per second applications.

Across the spectrum of these new products, we're approaching 50 design wins with customers worldwide. These products are another clear example of our strategy to first launch innovative new product lines with a time-to-market advantage. Then with our customers already enabled, we add new members to each family with different form factor and more specific use cases.

As of the end of Q3, we shipped 4 million cumulative units of coherent TIAs and driver in the market more than all our competitors combined. The new 64 gigabaud offerings are well positioned to solidify our market leadership and share. On the coherent DSP front, we're currently ramping in production with close to 10 customers in China, Europe and North America. These customers have selected Inphi's M200 coherent DSP for both OEM and module applications primarily because of its superior performance compared to our competition.

As you have heard in our between data center market review, we have a strong 7 nanometer coherent DSP roadmap to ensure continued customer success. Finally we're starting to see first field deployment of 5G which over time will drive demand for our components in front, mid and backhaul applications.

All in all it was a very solid quarter from a financial end product standpoint. We continue to be pleased with customer adoption of our new solutions and the implications of that on our financials.

Now I'd like to turn the call over to John for a deeper discussion of our financial results in Q3 and our outlook for Q4. John?

John S. Edmunds - Inphi Corp.

Thanks, Ford. Now let me recap the financial results. In the third quarter of 2018, Inphi reported revenues of $78 million, which was up $8.2 million or 12% from the $69.8 million we recorded in Q2. Overall, Q3 was another step in the right direction toward recovery in year-over-year growth. We are confident we can continue our growth trajectory as we move through the fourth quarter of 2018. Long-haul and metro products including the coherent DSP represented 42% of the business in Q3 and was essentially flat relative to Q2.

At the same time, data center products including COLORZ and the Optical PHY business, which now includes data center TIAs and drivers represented 50% of total revenues. This was up $8.8 million or 29% sequentially to a comparable number in Q2. The PAM business continued to ramp with early PAM design wins and should continue to grow in Q4 2018 and grow overall for the year in 2019.

The legacy transport business representing 8%, was down sequentially $400,000. Gross margins on a non-GAAP basis in Q3 came in at 69.4%, up 100 basis points from Q2. This reflects both the mix of product shipped and the fact that we decided to recognize additional inventory reserves as the forecast for certain older technologies appears if they may rollover a little faster than we had previously anticipated. We expect the gross margins in Q4 to continue to improve by approximately 60 basis points to 70% at the midpoint. This is based on a stronger mix of new products expected to ship in Q4. All-in, the non-GAAP gross margins for Q4 are expected to be in the range of 69.5% to 70.5%.

In Q3 2018, the GAAP gross margins were 55.7% which was down slightly from Q2's 56.7%. This was due primarily to a step up in GAAP intangible amortization as in process M200 IP from the ClariPhy acquisition has now been put into production and begun to amortize for GAAP reporting. The GAAP gross margins generally include purchase accounting adjustments and stock compensation expense. Please see the reconciliations in the press release for more detail. Q3 GAAP net loss was $22.7 million. We then add back adjustments of $36.4 million of certain standard GAAP expenditures. The standard adjustments of $36.2 million are for stock compensation, purchase accounting related to acquisitions and convertible debt cost amortization. As we mentioned, the purchase accounting is up this quarter and going forward about $3 million due to increased intangible amortization. There was also approximately $700,000 net of other add back adjustments from GAAP to non-GAAP. Then we adjust for the associated additional tax expense of $500,000 to arrive at Q3 non-GAAP net income of $13.7 million.

The non-GAAP net income for Q3 2018 was more than doubled, the $6.6 million for Q2 of 2018, but was still down modestly from the $15.8 million reported in Q3 2017. Now let's look at the remaining components of non-GAAP reporting that led to this Q3 non-GAAP result. Non-GAAP operating expenses for Q3 totaled $40.6 million, which was down $0.1 million or roughly flat to the $40.7 million in Q2. We have been reducing our gross spending consistently over the last five quarters. However, we do expect non-GAAP operating expense to increase by 1.5% or about $600,000 at the mid-point in Q4 and be in the range of $39.8 million to $42.5 million. Overall non-GAAP operating margin was nearly doubled sequentially from $7.1 million or 10.1% of revenue in Q2 to $13.5 million or 17.4% of revenue in Q3. Virtually, all of the improvement explained by higher revenue and higher gross margins with a small percentage coming from additional operating expense savings.

Interest income, net of management fees totaled $1.9 million in the quarter, which was more than covered the cash cost of the convertible debt of $1.2 million. The convertible debt has a blended annual coupon rate of 0.972%.

Fundamentally, we had other non-operating expense of approximately $0.3 million for the quarter, which is also included on that line. The GAAP income tax benefit for Q3 was $203,000. In general, we find the ongoing overall GAAP tax rate, which changes throughout the year based on a number of factors unrelated to income to be difficult to forecast.

We brought the non-GAAP effective tax rate for Q3 down to 3.1% based on greater international income. This will bring the effective tax rate for Q4 of 2018, up to 3.1%. The 2019 rate continues to be forecast at 5.5%. Cash income taxes paid in Q3 2018 was $200,000 primarily in Singapore, similar to the amount paid in Q2.

Now turning to the balance sheet. Overall cash was $395 million at September 30, up $11 million from the $384 million at the end of June, primarily due to higher cash flow from operations. Cash flow from operations in Q3 was $22.3 million, as compared to $8.9 million in Q2. This represented an improvement of $13.4 million based on $9.6 million or 72% being generated by an improvement in GAAP net income plus add backs and the other also $3.8 million coming from an improvement in working capital. Capital expenditures were $6.2 million in the quarter, up from $3.2 million in Q2. Free cash flow also improved to $10.2 million in Q3 compared to $0.7 million in Q2.

DSO improved to 56 days at the end of September compared to 70 days at the end of June. Inventory increased by $0.6 million in the quarter due to changes in mix of inventory shipping. As a result, inventory days excluding the respective step-up adjustments was 130 days or 2.8 turns at the end of September, down from 140 days or 2.6 turns at the end of June.

Now let me recap the business outlook for Q4 2018. I remind everyone again that the following statements are based on current expectations as of today and include forward-looking statements. Actual results may differ materially. We do not plan to update nor do we take on any obligation to update this outlook in the future. Revenue at the midpoint is forecasted to be up approximately $8.3 million or up 11% sequentially in Q4.

This is primarily due to a strengthening in both data center and long-haul metro businesses. This would bring revenue to $86.3 million at the midpoint plus or minus $2 million, resulting in revenue in a range of between $84.3 million and $86.3 million. We expect non-GAAP gross margin to be in the range of 69.5% to 70.5%. We expect non-GAAP operating expense to be in a range of $39.8 million to $42.5 million. We are currently estimating the non-GAAP effective tax rate to be 3.1% for Q4 2018.

We are confident these components should then align, resulting in a non-GAAP operating margin to be approximately 22.3%. This should also lead to non-GAAP net income of between approximately $18.6 million and $19.5 million. This would result in estimated non-GAAP income per share of between $0.41 and $0.43 based on approximately 45.65 million estimated diluted shares. A GAAP net loss in the range of $15.7 million to $16.4 million, GAAP earnings per share would then be a loss in the range of $0.36 to $0.38 (sic) [$0.37] per basic share on 44.25 million forecasted basic shares. A more complete reconciliation of the forecast of Q4 GAAP net income is included in 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 let me correct the GAAP earnings per share should be a range of $0.36 to $0.37 per basic share. I misspoke earlier. And now, we'd be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Your first question comes from Quinn Bolton with Needham & Company. Your line is open. Quinn Bolton, your line is open.

Quinn Bolton - Needham & Co. LLC

Hi. Sorry about that; I was on mute. Congratulations, guys, on the nice results and guidance. Wanted to start with the third quarter data center business, it was up nicely quarter-on-quarter. Was that largely driven by the launch of the new PAM4 solutions or did you see strength across the entire data center business? And then, I've got a couple of follow ups.

Ford G. Tamer - Inphi Corp.

We see strength across, Quinn, but primarily driven by the PAM ramp in Q3.

Quinn Bolton - Needham & Co. LLC

Great. A follow-up on PAM, you guys talked about your 75 plus design wins, and so certainly looks like you've got a leading position. Some of your competitors have put out press releases or talked about their products and just kind of wondering, specifically, how you think you compete on a power basis, Ford? And then, also, MaxLinear has been stressing their sort of break out clocking mode. Is that an important feature and do you guys support it?

Ford G. Tamer - Inphi Corp.

Two great questions, Quinn. So first on the power, we're extremely competitive on power. We have, obviously, the 75 design wins going towards production. And 60 nanometer, we believe, is going to be within 10% of a 7 nanometer solution, but a year time-to-market advantage with a tremendous amount of roadmap products coming in for us. And then, I'll take you through all the advantages we have in a minute.

But on the second one, for the breakout, there's a lot of FUD out there. Reality is you could see our revenue guide, the growth from Q2 to Q3 was double-digits; the growth from Q3 to Q4 was double-digit. This is real revenue being driven by real products and production in PAM today. So where we are on PAM is we've got the 50-gig PAM in production today, 100-gig PAM will be in production in mid next year with breakout capability. We were the only ones that really showed actual compliant 400 gig 53 gigabaud operation with breakout capability at ECOC. No one else made the demo. There was a lot of talk.

The DSP and the breakout module with Inphi, it's very important to understand we have two chips. We have a chip for 400-gig. We have another chip for 100 gigabit DSP for breakout modules. And so, we're the only one to demonstrate this live at ECOC. Our competitors are starting a FUD campaign, because frankly nobody has any design wins today. So if you look at the market share in 2019, we're very strong leading market share. As we go into 2020, we should keep majority market share.

The way we see the market is five different players, two players coming from analog point of view. Two players, late-to-market on a digital point of view and we've got a whole portfolio. So I'm happy to take you through the different advantages in more detail, but I'll leave it at a high level.

I have 10 different advantages I'd go through: First, is time-to-market; second, in production today with FR8 and very soon in DR4, DR1; third, power is extremely competitive, we've got an offering with integrated driver already in production; number four, tremendous amount of knobs (24:56) to optimize performance; number five, interoperability, we're the only one successfully demonstrating interop across a range of module partners with DR4, DR1 breakout, FR4, FR8, SR8, list goes on; six, we're the only one with both 400-gig and 100-gig capability; number seven, firmware, the firmware is already done, people are going to production; number eight, PCB boards, 75 plus PCB already laid out; number nine, FEC capability; number 10, phenomenal roadmap that we've got. So we feel very good about our competitive position in PAM, Quinn. Long answer, but good question. Thank you.

Quinn Bolton - Needham & Co. LLC

No, Ford, I appreciate the detail and I'll jump back in queue. Thank you.

Operator

Your next question comes from Tore Svanberg with Stifel. Your line is open.

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

Yes. Thank you. And let me echo congratulations on the strong results. Ford, I was intrigued what you said about the coherent DSP in 7 nanometer as we start looking at 400 gig ZR. Could you just elaborate a little bit on that and I know you probably have a list of 10 competitive advantages once we get there too, but certainly that would have to be one of them?

Ford G. Tamer - Inphi Corp.

Excellent question, Quinn, and I'm sorry, Tore. Excellent question, Tore. So I appreciate the question on the 400-gig ZR, we are very pleased to see the industry experts at ECOC discuss 400-gig ZR and ZR plus and make that a central part of their presentation. So there was a phenomenal presentation by Andy Bechtolsheim, CTO and Co-Founder of Arista, where he talked about being able to have a – the power of post ZR at 120-kilometer and by the way we can go longer distances non-ZR as well as all kinds of different metro or long-haul in access mode, so you can have 100-gig, 200-gig, 400-gig, QPSK/8-QAM, 16- QAM, all in that same plug.

So in that same plug that a regular router and switch would be able to have a gray less than 10-kilometer data center type module, we're planning to have offerings now that could do anywhere from ZR to thousands of kilometers for both DCI cloud type of application as well as service provider, that's going to totally transform the landscape by giving back the power to router. So the router now will be able to do all kind of transport functions and at phenomenal much lower latency, much higher density, much lower power, much lower cost. There is too many stacks of boxes in these data centers. So you potentially can get rid of one or two boxes in that stack.

So it's just a phenomenal value proposition. And what we're finding out is because of this value proposition now we have, the router companies, OEMs are our best friends where they're seeing now that ZR module and ZR plus module either switch or router companies really want to adopt this to go expand their offering in the market. So I think the market is going to be very big. We also are going to go from a single source type of capability to a multi-source. So we expect Acacia to be in that space which is good because then the customers will have a dual source type of sort of vendor system which is good for everybody. Our 7 nanometer, we feel very confident. We've been working on our SERDES, our analog, our FEC, our PAM, our coherent for many, many years, ClariPhy, obviously before the acquisition, we've been working on there for many-many years. So we're going to get the best of all worlds here between performance power in that ZR and ZR plus offering and we're very excited about it.

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

That's very good. And my other question is on Inphi, the data center specifically for next year. I think in one of your slides you talk about maybe 7 million, 8 million ports between 100, 200 and 400. Just wondering how many of the 7 million to 8 million ports you think will be 200 or 400?

Ford G. Tamer - Inphi Corp.

Good question, Tore. So just to bring the question down then to served available market or SAM which is the portion we can service. Our estimate of those 200-gig and 400-gig ports and there'd be some 100-gig obviously for breakout. 2019 expect 1 million ports, 2020 expect 4 million ports. That's in terms of all the different PAM versions. So that's 50-gig and 100-gig PAM both DSP and retimer.

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

Okay. Very good. Just one last question. I think you've talked about the coherent long-haul DSP market being about $150 million next year. Is that the merchant market or would that also include some of the in-house?

Ford G. Tamer - Inphi Corp.

Sorry, can you clarify again, what is that number again one more time?

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

Yeah, I believe you've quoted a $150 million SAM for coherent DSP for the long-haul and metro and I was just wondering if that number is basically a merchant market or does it also include some of the in-house technologies?

Ford G. Tamer - Inphi Corp.

So let me refer you to, we post that SAM on slide number 26 and on the slide 26 we showed 2019 being the $150 million that you're discussing and this is really the merchant market, not the – it doesn't include the high end captive market.

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

Very good. Just want to clarify that. Thank you so much and congratulations again.

Ford G. Tamer - Inphi Corp.

Thank you, Tore.

Operator

Your next question comes from Blayne Curtis with Barclays. Your line is open.

Thomas O'Malley - Barclays Capital, Inc.

Hey guys, this is Tom O'Malley on for Blayne Curtis. Congratulations on the nice results. Two quick ones here. First, can you talk about the COLORZ business, you obviously saw a nice uptick in September. How are things progressing with the other customers outside the larger one? And then second, in terms of timing on 400-g revenue, obviously that's becoming more significant into the back half of this year. When you think that contribution becomes more significant into 2019? Thanks a lot guys.

Ford G. Tamer - Inphi Corp.

So, I'll go through your first question, and then maybe just repeat quickly the second question, Tom. The first question on COLORZ, we have actually a pretty good confidence that that first COLORZ customer will remain stable through mid-2021. As far as adding other customers, we're making continued progress with OEMs and the China cloud guys that should result in revenue in 2020. And can you start again a second – the second question, first part of your second question, Tom?

Thomas O'Malley - Barclays Capital, Inc.

Yeah. So you guys have talked about 400G becoming a more significant contributor of revenue at the back half of this year. Can you talk about if that's going to be significant in Q4, or you think that's more of a first half 2019 story?

Ford G. Tamer - Inphi Corp.

So yes, 400G will become a significant portion in Q4, but there's seasonality and there is trials in there. So there'd be a first wave of 400G in Q4. And then we may see a little bit of seasonality in the first half of next year, and then see that ramp in the second half of next year. So the main 400G ramp would be second half of next year.

Thomas O'Malley - Barclays Capital, Inc.

Great. Thanks a lot.

Operator

Your next question comes from Joe Moore with Morgan Stanley. Your line is open.

Joseph Moore - Morgan Stanley & Co. LLC

Great, thank you. I wonder if you could talk a little bit about the China trade issues that you referenced. Specifically, do you see, do you see any signs of your customers building up inventory to sort of insulate themselves from potential future tensions around ZTE type situations and then is anything else that we should be worried about on the trade front with China. Thank you.

Ford G. Tamer - Inphi Corp.

Yes, thank you, Joe. The good news – the customer business that we're doing is predominantly with the large OEMs in China that ship primarily actually mostly 100% outside of U.S. So I mean the Huawei, the ZTE, the Fiberhome, they don't ship anything into the U.S. So that's primarily the business we do in China. And we haven't seen an impact so far. The demand for our coherent TIA and driver component returned to normal in Q3. The China demand has been stable and the volume has been driven in Q3 by 100-gig CFP-DCO.

We think there's about a regular type inventory situation in the market right now, Joe. We don't think anything unusual and we see a next phase of growth in China to be driven by the 100-gig CFP to DCO and the 200 gig CFP-DCO for both metro and 5G backhaul market. And we expect to see these products begin deployment in 2019, so that should give us another leg of growth in 2019 for that long-haul metro and metro's business in China.

Joseph Moore - Morgan Stanley & Co. LLC

Great. Thank you. If I could just a quick housekeeping follow up. John, you had mentioned the inventory reserve. Is there anything, any revenue ramifications down the road and just any more color you can give us on that will be helpful? Thanks.

John S. Edmunds - Inphi Corp.

No, Joe. I think these are mostly on older technologies and we're looking out at the forecasts. We have a lot of growth coming. And so, it's just a matter of blending that mix and looking at whether some of the inventory we have is going to sell through as we get to the end of the product life cycle or whether we want to be more conservative at this point. So we just elected to be conservative and start to take some reserve and recognize that some things are shifting more quickly and we'll just keep an eye on that as we move forward; but don't really expect a large revenue impact from any of that.

Joseph Moore - Morgan Stanley & Co. LLC

Great. Thank you very much.

Operator

Your next question comes from Ross Seymore with Deutsche Bank. Your line is open.

Ross C. Seymore - Deutsche Bank Securities, Inc.

Hi, guys. Echoing the congrats others gave you, nice job in the quarter and the guide. A big picture question similar to the China side, but potentially a little bit broader scope, Ford, I know you have a bunch of new product introductions and next-gen technologies that can insulate you from this, but there's significant fears about the data center spending, in aggregate from the cloud guys, potentially slowing, hitting a little air pocket late this year, early next year. It doesn't sound like you're seeing any of that at all in your guide. But any color you could give on that trend if you're seeing any aspect of it would be helpful.

Ford G. Tamer - Inphi Corp.

Yes, thank you, Ross. So if you look at the growth in the data center, it's being driven by really two major application. The first application is AI and that's what's really driving a lot of the volume right now. And the second application is the deployment of the 12.8 terabit switch from silicon partners, and that's in production. That those switch ramps are planned way in advance, buildings get put in the ground. The whole roll-out gets planned around that. So we don't see a slowdown in those areas. I mean, those are the two hottest areas of, number one, AI, number two, increased bandwidth needs and deployment of these 12.8 terabit switches. At this point, we don't see any slowdown in those two areas. So we – given where we are right now, we are confident in our 2019, except for that seasonality that we talked about.

Ross C. Seymore - Deutsche Bank Securities, Inc.

That's helpful. And then, one for John, you talked a bunch, Ford, about the 7 nanometer products that are going to be coming out and the lead you're going to have with that. I know that can create some lumpiness in the OpEx trajectory in given quarters. Is there anything we need to be appreciative of as we think about the OpEx as we transition not just to the fourth quarter, which you guided for, but even conceptually during 2019?

John S. Edmunds - Inphi Corp.

In general, Ross, we capitalize production tape-outs and amortize those over five years, at least in the newer technologies, but we do have some R&D tape-outs. In fact, we'll have $1 million or so in the first quarter from a particular new technology tape-out. So we do have little perturbations on the R&D line for those sort of developmental tape-outs usually done on a shuttle. So that's why we could see an extra little blip in the first quarter here.

But other than that, we'll be capitalizing, and then you'll see it in CapEx over time. But we're still of a size where we have to kind of pick and choose, and hopefully pick the right products to make those investments in. And so, far we're doing well in terms of pleasing our customers and gaining design wins in these technologies, so we just need to keep that up.

Ross C. Seymore - Deutsche Bank Securities, Inc.

Great; one last question. Ford, you've mentioned a couple of times about seasonality in the first half of the year. That's not particularly a surprise to us. But if we use any historical trends as the template, there's bigger moving parts that oftentimes swamp seasonality. So I know you're not guiding for the first quarter, but conceptually, the seasonality you're talking about, can you just kind of walk us through what drives that and any general magnitude parameters around it would be helpful?

John S. Edmunds - Inphi Corp.

Ross, this is John again. So it just so happens, I had looked at this before the call and for the last four years and as we look into 2019, the mix has generally been in the range of 52% to 57% in the back half of the year, with the exception of 2017 where we had a big first quarter, and then we started the inventory absorption adventure. And so, that year only 49% was in the back half. But in every other year, it's always been a 52% to 55% back half driven sort of business. And you'll see price adjustments that come through in the first quarter. In some cases, capital spending – you're on new capital spending budgets and so people take more time to implement and be putting those in place. And then you'll also see sometimes the effect of Chinese New Year or you'll see people in the China or Asia markets push towards the end of a given fiscal year up through Chinese New Year and then they'll have a slow start beyond that. So all of those factors tend to give us a slower first quarter with some growth into the second and that kind of mix between first half and second half.

Ross C. Seymore - Deutsche Bank Securities, Inc.

Perfect. Thank you very much. Congrats, again.

Operator

Your next question comes from Harlan Sur with JPMorgan. Your line is open.

Harlan Sur - JPMorgan Securities LLC

Hi, good afternoon and congratulations on the solid execution and it's good to see the diversification of the business, on the cloud data center side with the formal production release of Tomahawk 3, 4, next-gen 200 and 400-gig and you also had the production release of 200-gig InfiniBand. We're hearing that Google, Amazon and Facebook are kind of the big early adopters of Tomahawk 3 and that seems to be sort of consistent with your commentary on the U.S. focused customer mix. You guys had mentioned the potential last earnings call for upside in your target of $20 million to $25 million of PAM4 sales this year. Seems like this business is strong, so, Ford, wondering if you could for us update us on this target and then with 75 design wins combined with the strong adoption cycle. Do you guys anticipate that cloud data center is going to be the fastest growing part of your business next year?

Ford G. Tamer - Inphi Corp.

Thanks, Harlan. Appreciate the question. So, yes, the PAM has some upside this year compared to the numbers you just mentioned. And yes, cloud will be the fastest growing segment for us next year, so yes to both questions.

Harlan Sur - JPMorgan Securities LLC

Okay, great. And then, good to see the 10 customers ramping with the M200 here, I'm curious, relative to your expectations, let's say, in the first part of this year. Is the M200 ramping as expected in terms of dollar contribution here in the second half? And then, can you help us understand how you see the M200 ramp going into next year? And then, maybe just give us an update on your next generation 7 nanometer product?

John S. Edmunds - Inphi Corp.

Harlan, thanks. This is John. The M200 is doing just fine. We've got a lot of customer interest and we are shipping in production with multiple customers at this stage and we do see growth into next year, substantial growth for that product. And so, I think we'll see a larger contribution next year. But it's doing just fine right now.

Harlan Sur - JPMorgan Securities LLC

Okay, great. Thank you.

Operator

Your next question comes from Vivek Arya with Bank of America Merrill Lynch. Your line is open.

Vivek Arya - Bank of America Merrill Lynch

Thanks for taking my question and good job on the quarter and the guidance. Ford, you mentioned you're starting to see some benefits from 5G. Is this a 2019 driver or a 2020 driver? And do you expected, I assume more on the long-haul and metro side or do you think there are some data center benefits as well?

Ford G. Tamer - Inphi Corp.

Thank you, Vivek. So we see some of it in 2019, but most of that revenue Vivek would be in 2020 for 5G and as can be driven by really three markets, the access, mid-haul and backhaul for us. And it will drive both PAM and coherent type of revenue. So we're excited about it. It's mostly going to be an access 5G into a three market access mid-haul and backhaul not as much data center. Eventually it will drive traffic back to data center, there will be higher traffic. So I guess we'll get a benefit eventually from having higher traffic go to data center.

Vivek Arya - Bank of America Merrill Lynch

Got it. And just one other one clarification question. I think in the past you had mentioned perhaps the second COLORZ customer maybe we would have some more information about them towards the end of the year. If you are baking some of that in your Q4 guidance that and ZTE, how much are you anticipating in Q4? Thank you.

Ford G. Tamer - Inphi Corp.

So Vivek, thank you. So we're not baking a second customer in our guidance for either Q4 or in our forecast for 2019, but we are making good progress with second COLORZ customers especially with OEMs that are now adopting it as part of their approved vendor list for a long tail of enterprise and service provider type customers. So we're excited about this and that's a new vector that should bear fruit in 2019. But we'll discuss it more as we get closer to that date. As far as ZTE, we're looking at about $2.5 million in the Q4 revenue.

Vivek Arya - Bank of America Merrill Lynch

Got it. Thank you.

Operator

Your next question comes from Mark Lipacis with Jefferies. Your line is open.

Mark Lipacis - Jefferies LLC

Hi. Thanks for taking my question. Ford, maybe for you, with this talk of the or the concerns around trade issues in China. There's been some talk about the supply chain reallocating or repurposing manufacturing facilities from China to other places in the world. And I'm wondering if you are noticing any of this and as you think about your supply chain and if so, is there any impact that we should expect disruptions or anything? Thank you.

Ford G. Tamer - Inphi Corp.

So two parts of this question, Mark, I guess number one, the supply chain for our customers, and number two, our supply chain. So number one for our supply chain for our customers, we're definitely seeing our customers ramping up manufacturing and assembly and test outside of China for across the board. So I think everybody is getting ready and so eventually that would mean a minimal disruption to our customers, if the tariff situation continues and elongates. You'll see other country labels for even some of the manufacturer in China. So eventually they'll be a minimal impact from this tariff situation. The second one for our own supply chain, we don't see any impact and we're obviously very close to it, so no impact to us.

Operator

There are no further questions at this time. I will now turn the call over to John Edmunds for closing remarks.

John S. Edmunds - Inphi Corp.

Thank you, everybody. We just wanted to let you know we're planning to attend the Stifel Conference in Chicago on November 8. The Needham Conference in New York on November 13, I believe it is. The Citibank Technology Conference in New York on November 13 and I'm sorry the Needham Conference in New York on November 13. The Barclays Conference in San Francisco on December 5 and the Cowen Conference in New York on December 12. Ford and Deborah and I would like to thank you for joining us today and we'll look forward to speaking with you again in the future.

Operator

This concludes today's conference call. Thank you all for joining, and have a good day.