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Inphi (NYSE:IPHI)
Q1 2019 Earnings Call
April 30, 2019 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Inphi's first-quarter 2019 conference call. [Operator instructions] As a reminder, this conference call may be recorded.I would now like to introduce your host for today's conference, Mr. John Edmunds.

John Edmunds -- Chief Financial Officer

Thank you, Crystal. Good afternoon, everyone. Thank you for joining us today to discuss Inphi's financial results for the first quarter of 2019. I'm John Edmunds, Inphi's chief financial officer, and with me today is our president and CEO, Ford Tamer.

I'll begin the call with the Safe Harbor and then Ford will give you an overview of our business. After that, I will provide a financial summary of Q1 2019 and the outlook for Q2 2019. Then we'll be happy to take your questions. To begin, please note that during the course of the conference call, we may make projections or other forward-looking statements about Inphi, including references to our prospects and expectations for 2019 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 Tamer -- President and Chief Executive Officer

Thanks, John. And thank you for joining us for Inphi's first-quarter 2019 earnings update. Inphi got off to a fast start in 2019. Revenue and earnings in the first quarter exceeded our expectation from a GAAP and non-GAAP basis and, I'm pleased to say, in almost every other financial metric.

When I think back to the challenges we faced in the first quarter of last year, I'm even more pleased to present you with a year-to-year comparison using this year's Q1 results. Revenue in Q1 '19 exceeded $82 million as compared to the $60.1 million we reported in Q1 2018, an increase of 37%. Even more impressive is the 19% non-GAAP operating margin we achieved this Q1 as compared to the negative 3.5% non-GAAP operating loss in last year Q1. The 22.5% improvement illustrates the leverage available in our operating model.

We did this by continuing to heavily invest in R&D to keep developing competitive product roadmaps required by our Tier 1 cloud and telecom customers. Over the past year, we also streamlined operating expenses and became more diligent about process efficiencies. I'm very proud of our team at Inphi for their fiscal discipline and commitment to quality and timely innovation. You can clearly see the effects of the efforts in our financial performance.

The bottom line this quarter, earnings per share of $0.33, a result that exceeded our outlook by nearly $0.05 per share or 18%. Next, let me talk about the drivers of our revenue growth this quarter in both telecom and data center. Leading the way in Q1 was our M200 coherent DSP for module and line card applications. We experienced a step function increase in Q1, where revenue nearly tripled from the levels of one year ago.

We remain on track to nearly double the revenue from '18 to '19 in coherent DSP and grow significantly in future years. Also in the coherent space, we saw robust demand for our 64 gigabaud TiA and driver for 400 gig, 600 gig and 1.2 tera application. We remain confident that this 64 gigabaud family will continue to be a significant and a growing contributor throughout this year and next. As expected, the production ramp of PAM technology for 200 and 400 gig optical communication took a breather in Q1 after a very strong Q4 last year.

We expect PAM products to resume growth in Q2 and drive low to mid-teens percent overall data center growth. This consists of the ongoing ramp of Polaris 50 gig DSP with associated TiA and driver, which originally began shipping in the cloud data center in 2018. In addition, we have now started to ramp deployment of our Porrima 100 gig DSPs in Q2, with associated TiAs and driver as well as our 50 gig Vega PAM retimer. Because our customers of these products are predominantly based in the U.S., you can see that we continue to make progress on one of our stated goal for 2019, geographic diversification of our revenue.

In addition, our customers have aggressively ramped their use of 50 gig Polaris DSPs, TiAs and driver for 5G field trials. While that market remains nascent, the prospects are compelling. The magnitude of the field trials have surpassed our expectation and we're still expecting to hit the inflection point in 5G production in the second half of 2020. Our results this quarter and our forecast reflect meaningful demand again from our long haul and metro customers in China.

We're pleased with this continuing strong demand for our product but do want to be a bit cautious here. We believe there may be a small level of inventory, which we estimate to be in the high single digit millions of dollar building incrementally throughout the course of 2019. We have adjusted our internal forecast in the second half to potentially absorb part of what we see as a buildup. So far, the numbers we're estimating for this potential accumulation appear to be manageable.

Back to Q1, I'd be remiss if I don't also speak to our success at this year's OFC or Optical Fiber Conference in San Diego. On a qualitative note, hopefully indicative of good things to come, this year, for the first time, we expanded our footprint by adding a second story to our booth on the show floor. We still had more interest that we could easily accommodate. Even with the 50% incremental capacity, our booth was packed throughout the week.

And we confirm some very significant design wins while there. Visitors at our booths saw our 50 gig to 400 gig Gen 2 PAM solutions for inside data center, our M200 DSP demonstration; our refreshed coherent 45 and 64 gigabaud TiA and drivers for 400 gig to 1.2T interconnect, and our planned extension of the 400 gig ZR product line. The ZR family continues to grow, supporting the standard base 120 kilometers ZR as well as ZR plus extensions for interconnect up thousands of kilometers. As a final note, on OFC, it's worth pointing out that our products were also on display at over 10 partners and customer booth on the show floor.

Over the past three months, we're honored to receive two additional industry and customer awards. This included the Best Cooperation Award from H3C in China, and the 2019 Lightwave Innovation Award for our Porrima PAM platform. This brings the total number of awards to 17 for the past two years. Kudos to the Inphi team for their continued dedication to innovation and customer support.

Looking out to the rest of the year, we remain optimistic as our products continue to support the critical production ramp of our Tier 1 customers across the globe. We continue to effectively diversify our revenue base, while maintaining our customer and application focus. As the year advances, we feel we're very well-positioned for the road ahead.With that, let me turn over the call to John for the financial discussion. John?

John Edmunds -- Chief Financial Officer

Thanks, Ford. Now let me recap the key financial results. In the first quarter of 2019, Inphi reported revenue of $82.2 million, which was up 37% year over year and down 5% sequentially or $4.3 million from Q4 as expected. This was slightly better than the midpoint of our guidance of $81 million.

Our telecom products were strong in the quarter, growing 13% sequentially and comprising 46% of total revenues in Q1. Both the coherent DSP and five gig PAM DSP and drivers experienced sequential step functions in growth. This offset seasonal weakness in other long haul and metro components. Telecom products include coherent amplifiers, drivers and coherent DSPs and PAM DSPs for 5G, all of which contributed to the growth in telecom year over year.

Overall telecom more than doubled from the $16.5 million or 28% of revenues, which telecom reported one year ago. At the same time, data center products including COLORZ, the optical PHY business and data center TiAs and drivers represented 46% of total revenues. This was down seasonally $8.9 million or 19% sequentially, reverting back to Q3 2018 levels as expected. However, due to the newer PAM products introduced in the past year, it was also up 14% year over year compared to Q1 2018.

The legacy transport business represented 6% of revenue in Q1 2019 and was flat with Q4 2018. In Q1 2019, the GAAP gross margins were 57.9%, up from Q4's 57.2%. The GAAP gross margins include $9.7 million in acquisition-based adjustments and $0.8 million of stock compensation expense, whereas the non-GAAP numbers do not. Please see the reconciliation in the press release for more detail.

Gross margins on a non-GAAP basis in Q1 came in at 70.7%, up 140 basis points from the 69.3% reported in Q4. The Q1 gross-margin improvement is the result of better revenue mix and related absence of excess and obsolete inventory reserve charges experienced in each of the prior two quarters. Q1 GAAP net loss was $22.7 million. We then add back adjustments of $37.9 million of certain standard GAAP expenditures.

The standard adjustments of $37.9 million are for stock compensation, acquisition-related accounting and convertible debt cost amortization, which compares to the $35.6 million reported in Q4, the difference coming from higher stock compensation expense in Q1. There was also a reduction to other income reflecting approximately $0.3 million gain, which is a remeasurement on one equity investment. Finally, we add back the associated additional tax deduction for GAAP of approximately $5 million to arrive at Q1 non-GAAP net income of $15.4 million. The $15.4 million was down 25% from the $20.5 million for Q4 2018, and was up dramatically from the loss of $1.97 million reported in Q1 2018, again, showing leverage in our business model.

Now let's look at the remaining components of non-GAAP reporting that led to this Q1 2019 non-GAAP result. Non-GAAP operating expenses for Q1 totaled $42.5 million, which was up $3.1 million or 8% compared to the $39.4 million reported in Q4. The increase was driven by $1 million higher payroll taxes in Q1; $0.6 million less in vacation take in, in Q1 than Q4; and $1.3 million test chip tape-out expense in Q1. Overall, the non-GAAP opex was less than the midpoint of our guidance by approximately $1 million due to less hiring than was planned.

Overall, Q1 non-GAAP operating income and margin was decreased $4.9 million or 24% sequentially from $20.5 million or 23.7% of revenue in Q4 to -- it was decreased to $15.6 million or 19% of revenue in Q1 of '19. 60% of this decline or $3 million is due to a 5% sequential decline in revenue, in spite of the fact that gross margin percentage improved, representing $1.2 million improvement, and operating expenses increased by $3.1 million as expected. GAAP net interest expense for Q1 2019 totaled $6 million. If you add back $6.8 million in noncash accretion and amortization expense associated with the convertible debt and then subtract $300,000 income in noncash GAAP investment income, you will arrive at $0.5 million non-GAAP other income.

This is primarily driven by fixed income interest from our investments earning about 2.4% annualized, offset by the cash coupon expense of the convertible debt, which costs approximately 0.972% annualized. The result is a positive carry of income of $1.2 million in the quarter, offset by approximately $400,000 in imputed interest expense on CAD tool software leases. Then if you add in $0.3 million in other miscellaneous nonoperating expense, you'll come to the $0.5 million in non-GAAP other income. The GAAP income tax expense for Q1 was a charge of $1.2 million and the non-GAAP tax was a charge of $0.7 million.

We are currently forecasting a GAAP effective tax rate of negative 2.1%. In general, we find the ongoing overall GAAP tax rate, which changes throughout the year based on a number of factors, not all of which relate to income, to be difficult to forecast. The non-GAAP effective tax rate for Q1 was 4.4% and represented $0.7 million. We continue to forecast the 2019 non-GAAP effective tax rate for the year at 4.4%.

Worldwide cash income taxes across a variety of jurisdictions in Q1 2019 was less than $100,000. Now turning to the balance sheet, overall cash was $429 million in March 31, up $22 million from the $407 million at the end of December. This increase was primarily due to cash flow from operations as well as ESPP purchase and stock option exercises, which combined to contribute $4.1 million in the quarter. Also impacting the cash balance was the timing and settlement of certain investments, security purchases around the end of the quarter.

We also had lower capex and lower tax withholding in the quarter than in December. Cash flow from operations in Q1 was $25.9 million as compared to $29.8 million in Q4 2018. This represented a decline of $3.9 million, which is almost entirely generated by a decline in net income in Q1 versus Q4. Capital expenditures was $4.4 million in the quarter, down from $7.9 million.

Free cash flow at $14.3 million in Q1 represented a decline from the $17.7 million reported in Q4. However, this is not represent an improvement in the -- however, this does represent an improvement in the conversion rate of non-GAAP net income to free cash flow, which was 93% in Q1, up from Q4's 86%. Accounts receivable decreased by $3.2 million. DSOs at the end of March were flat at 64 days.

Inventory decreased by $1.3 million in the quarter, as a result, inventory days was 120 days at the end of March, up slightly from 113 days at the end of December. Conversely, inventory turns went down to 3.0 at the end of March from 3.2 at the end of December. Now let me recap the business outlook for Q2 2019. I'll remind everyone that, again, that the following statements are based on current expectations as of today and include forward-looking statements.

Actual results may differ materially. We do not plan to update, nor do we take on any obligation to update this outlook in the future. Revenue at the midpoint is forecasted to be up in Q2 by $6.6 million. This would represent 8% sequential growth compared to Q1 2019, and 27% year-over-year growth compared to Q2 2018.

The majority of the growth is coming from a resumption of growth in the data center, including the initial ramp of our 400 gig PAM DSP, Porrima. This would bring revenue to $88.8 million at the midpoint, plus or minus $2 million, resulting in a range of revenue between $86.8 million and $90.8 million. For GAAP reporting in Q2, we are currently forecasting gross margins should be in the range of 57.9% to 59.4%. Operating expense should be in the range of $64.2 million to $66.4 million.

Absent non-income-related tax adjustments, we would expect the GAAP effective tax rate to be approximately negative 6% to negative 8%. That is a charge against loss, anticipating we have to pay tax primarily on Singapore, and the net charge to the company will be approximately $1.3 million. GAAP net loss would then be in the range of $18 million to $23.9 million. GAAP earnings per share would then be a loss in the range $0.40 to $0.53 per basic share on 45.3 million forecasted basic shares.

A more complete reconciliation of the forecast of Q2 GAAP net loss and gross margin compared to the forecast of non-GAAP net income and gross margins are included in the press release. For non-GAAP reporting in Q2, we are currently forecasting gross margins to be in the range of 70% to 71% or approximately 70%. Based on a mix of product in Q2, we expect gross margins to decline by approximately 20 basis points to 70.5% at the midpoint. Operating expense should be in a range of $43.4 million to $44.6 million.

This represents a 2% sequential increase or about $1.5 million additional at the midpoint in Q2. The increase is comprised of catching up with hiring plans at the end of Q1 and into Q2. There's also an annual merit increase in salary effective April 1, which is offset by relative savings and not having a test chip cost of $1.3 million in Q2, which we had in Q1. We're currently estimating the non-GAAP effective tax rate to be 4.4% for 2019.

We're confident these components should then align, resulting in a non-GAAP operating margin to be approximately 20.9%. This should also lead to non-GAAP net income of between approximately $15.8 million and $20.5 million. This would result in estimated non-GAAP income per share of between $0.34 and $0.44, based on approximately $47.1 million estimated non-GAAP diluted shares. We will not update this outlook during the quarter until the time of the next quarterly earnings release, unless 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. 

Questions and Answers:

Operator

[Operator instructions] And our first question comes from Blayne Curtis from Barclays.

Tom O'Malley -- Barclays -- Analyst

This is Tom O'Malley on for Blayne Curtis. Congrats on the great results here. Can we just start with the PAM business? Obviously, you're seeing some traction with the 400G product in the second quarter and you said it's the primary driver of growth. Can you talk about where you're seeing that traction? And do you have any update for the year? You initially said that you thought you would pretty much double in 2019.

Is that your current expectations? Or do you think that you're seeing some additional growth there?

Ford Tamer -- President and Chief Executive Officer

Tom, this is Ford. Thanks for the question. We're still on track to double revenue from '18 to '19 in our PAM business. From Q1 to Q2, we expect the PAM to be the major contributor back to growth from Q1 to Q2, and that includes all of the different vectors we have, which is the 50 gig Polaris DSP, 100 gig Porrima DSP primarily, and into a second order, the 50 gig PAM retimer.

Tom O'Malley -- Barclays -- Analyst

Great. And then just one of the amps and drivers business. You guys noticed that high single-digit millions impact potentially coming from China inventory build. Are you going to see that mostly in the second quarter? Or how are you guys thinking about in terms of timing? Is that something you're going to recognize across the year and are expecting now amps and drivers to be down in the back half? Can you just give us a little more color on what you're seeing there? Why there's a build? And kind of what you expect for the back half?

Ford Tamer -- President and Chief Executive Officer

Yes. Good question. On the commentary, we said we expect that build to progressively build throughout 2019. There was very little of it in 2019 -- in Q1.

We expect a little bit more in Q2 and Q3. The primary driver is the 5G acceleration. And a lot of this is the more aggressive field trials that are happening right now in China and then in Korea. And so a lot of this is really demand, actually, and people building some inventory in anticipation of the 5G ramp.

We have taken some of this down in the latter part of the year, like the Q3 and Q4 timeframe, as well as Q1 of next year. Overall, as I said, single-digit million is not a big number and we expect it to be very manageable for us. Thanks guys.

Operator

Thank you. Our next question comes from Harlan Sur from JP Morgan.Your line is open.

Harlan Sur -- J.P. Morgan -- Analyst

Good afternoon and congratulations on the strong results and solid execution. Maybe following up on that last question, given what appears to be a better first half of the year and maybe some slight inventory build by your customers on the telco side, sounds like you guys are going to absorb this in the second half, so maybe relative to your prior expectations, slightly lower second half revenue bias versus first half. But I guess the bottom line is that looking at your design win pipeline, timing of customer ramps, are you guys still thinking revenue growth 20%-plus this year and 85% EPS growth this year? Or just maybe a slightly lower second half bias? Is that kind of the way we should think about it?

John Edmunds -- Chief Financial Officer

Yes. That's correct, Harlan. We're -- we haven't adjusted the -- I think the adjustment that Ford referred to was really adjusting the internal forecast. We haven't really planned on trying to guide The Street that the second half forecast needed to be reduced.

Harlan Sur -- J.P. Morgan -- Analyst

OK. Got it. And then, nice to see the step up on the coherent DSP front in your view of doubling that business this year. You guys have previously talked about sort of 10-plus customers that are ramping.

You've also recently talked about some of the Tier 1 guys that are -- that typically do their own ASICs for their high-end platforms that are starting to use your M200 for mid end-type product families. Have you guys started to ramp into any of these Tier 1 opportunities yet? Or is that still going to come?

Ford Tamer -- President and Chief Executive Officer

Yes. Great question, Harlan. So you're referring to Tier 1 OEMs that are doing their own ASICs that are migrating to the M200, and we've seen definitely a ramp by some of them in Q1, and actually, we have entered into very strategic partnership with some of them moving forward. But there are some more new design wins that we expect to actually start ramping in the second half of the year.

So there's more to come in the coherent DSP, and that should kick in, in the second half of this year, driving growth in the business for '19 and years to come.

Harlan Sur -- J.P. Morgan -- Analyst

Great. Just one last question. On the 400 gig ZR solution for DCI, was good to see your demo at OFC. Is the team still on track to start to sample the solution in Q3 of this year? And I know that you're working with some lead customers and some partners here.

How are these relationships progressing? And what's sort of the current thoughts and timing of the initial ramp?

Ford Tamer -- President and Chief Executive Officer

Thank you, Harlan. We had a very successful demo, as you refer, of 400 gig ZR silicon photonics at OFC. We are still on track to the delivery schedule we had discussed with our customers. And we believe our sampling schedule is going to put us ahead of our competitors in that space.

There's a tremendous interest in the ZR solution because the customers believe this is going to be a far more cost effective and power effective solution for that ZR distance between data center up to 120 kilometers for the standard, as well as going to longer distances for the ZR plus. We're getting increasingly high amount of interest because of the fact that I described, plus the spectral efficiency that we can achieve of a 25.6T is very impressive and very welcome. And we're still working with all the partners we discussed in the past.

Operator

Our next question comes from Quinn Bolton from Needham & Company.

Michelle Waller -- Needham and Company -- Analyst

This is Michelle on for Quinn. Congrats on the quarter and the solid guide. Maybe to start off, in terms of the 200 gig and 400 gig PAM4 silicon TAM, I think you guys had kind of estimated around $120 million in 2019, growing to $320 million in 2020. I'm just wondering if that's still in line with what you would expect.

And maybe if you could provide any color on the split between 200 gig and 400 gig ports in that TAM, that would be good.

Ford Tamer -- President and Chief Executive Officer

Yes. Thanks, Michelle. We're still on track for $120 million in TAM for this year growing to $320 million for next year. So this is the overall TAM for the whole market.

And this year, we expect the 50 gig to take the lead early in the year. However, the 100 gig will rapidly catch up and we end up on a DSP split, almost 50-50 between that 50 gig and 100 gig DSP, with the Vega retimer growing in the second half of the year to, overall, maybe look at 15% of the overall TAM revenue coming from the retimer.

Michelle Waller -- Needham and Company -- Analyst

OK. Great. And one last one on the telecom business. Are there any headwinds to the telecom business with these growth drivers that you guys have in 2019? Just wondering if there's other parts of the business that maybe you offset some portion of growth that you guys expect to see from the new products?

Ford Tamer -- President and Chief Executive Officer

We're encouraged by the new tenders in China, Michelle, actually, for 200 gig long haul by China Mobile that are going to be using our 64 gigabaud TiA and driver product. It's the beginning of a new upgrade cycle for the telecom providers around the world, and that should accelerate in the second half of '19. So that's one factor that's helping us grow the TiA and driver business. In addition, for the metro market, we continue to see growth in the 100 gig CFP DCO, and that will transition to the smaller form factor CFP2-DCO later this year.

As I said initially, it's going to be 100 gig, but it will be followed by 200 and 400 gig and be able to help us grow that coherent business further throughout the year.

Michelle Waller -- Needham and Company -- Analyst

Great. Thanks.

Operator

Thank you. Our next question comes from Tore Svanberg from Stifel.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Congratulations on this nice recovery. First question, it seems like Porrima is maybe coming a little bit earlier than expected. I don't know if I'm wrong with that perception. And if so, why is that the case?

Ford Tamer -- President and Chief Executive Officer

I don't think it's coming earlier, Tore. It's coming on schedule. It's just that the Porrima ramp could potentially be larger than the Polaris ramp just in terms of units. So that's probably why it ends up catching up for the year with Polaris.

The Polaris is really the dominant revenue for the first half, Porrima catches up later in the year.

John Edmunds -- Chief Financial Officer

Tore, this is John. Just one other comment there. I think you will hear some people talk about a 400-gig ramp coming later, which there are certain people in the market who aren't planning to do 400 gig inside the data center until 2020. I think most people know who those are.

And so as a result, you'll hear different people talk about different ramps for 400 gig and it just depends on whether they're selling to those customers or selling to some of the folks that we're working with.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Understood. And during OFC, I think there were some talks about maybe another potential company using 50 gig. Are you going to be in production with more than one company for a 50 gig?

Ford Tamer -- President and Chief Executive Officer

Yes, we would be. There would obviously be some players that are much larger than others, right?

Tore Svanberg -- Stifel Financial Corp. -- Analyst

OK. Very good. And then, lastly on the 400 ZR, you talked about the timing but is there going to be a difference between ZR and ZR plus from a timing perspective? Or will they sort of sample and contribute to revenues around the same time?

Ford Tamer -- President and Chief Executive Officer

We believe the initial interest will probably be more focused on ZR, with ZR plus to follow. So there will probably be a lag.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Very good. Congratulations again. Thank you

Operator

And our next question comes from Ross Seymore from Deutsche Bank

Unknown speaker

This is Ji for Ross Seymore. Thanks for letting me ask a question. Within the data center segment, you mentioned that PAM took a bit of a breather. Could you help us with a little bit of color on the split between data center products, which is COLORZ and the PAM DSP products?

Ford Tamer -- President and Chief Executive Officer

Ji, we don't split the products by segment. We -- so we won't give a split between COLORZ and PAM inside data center or -- and for data center segment. What we can say is that in Q1, the telecom sector ended up being slightly larger than the data center segment, which is different than the situation was in Q4. So the breather in the data center ended up being picked up by strengths in the telecom sector.

Unknown speaker

OK. Great. And John, how should we think about OpEx during the rest of the year now that this quarter -- the June quarter is benefiting from lower testing costs. But as new products ramp, should we think about OpEx ramping a little bit higher as well? Thanks.

John Edmunds -- Chief Financial Officer

There may be some additional expense, Ji. But we wouldn't -- we expect to be relatively mild into the back half of the year. For overachieving at some stage, we may make some additional investment. But we're mindful of trying to both invest in the company and provide upside in the numbers.

So I'd expect the numbers to be relatively similar to what people have been forecasting, maybe up slightly in the back half.

Unknown speaker

OK. And just a question, it seems like stock-based comp stepped up a little bit into Q1 and it's again expected to increase in Q2. Can you talk a little bit about the dynamics there, how we should think about it for the rest of the year?

John Edmunds -- Chief Financial Officer

Yes. The stock-based comp is a function of vesting. So we have some grants that vest in Q1, and it's the additional -- it's the initial grants themselves that give rise to the value and then as they vest, we recognize additional expense. So we generally have more vesting in the first quarter and second quarters of the year and less in the third and fourth.

So you'll find -- in addition, we have some additional grants that layer in, as we do typically annually in April, and those add additional expense into the course of the year. And then things will fall off after a while, but as the stock price goes up, the stock compensation expense increases and so that's another factor in the rise in that particular number.

Unknown speaker

OK. Thanks. Congrats on the quarter.

Operator

Our next question comes from Mark Kelleher from D.A. Davidson.

Mark Kelleher -- D.A. Davidson -- Analyst

Let me add my congrats to a good quarter. I want to go back, first of all, to the inventory ramp and make sure I understood that. It seems you were saying, correct me if I'm wrong, that the carrier -- the China telecom carriers were anticipating a more aggressive 5G ramp and that's why they built inventory. Did I get that right?

Ford Tamer -- President and Chief Executive Officer

Yes. That's partly correct, yes.

Mark Kelleher -- D.A. Davidson -- Analyst

So is the timing of 5G, in your opinion, kind of being delayed, the build-out delayed?

Ford Tamer -- President and Chief Executive Officer

No. On the contrary, the timing of 5G is being accelerated. So what we actually said is that there is a 5G field testing currently going on that has exceeded our expectation. In addition, we are getting orders for Q2 and Q3 delivery, which we weren't able to fulfill in Q1 that would anticipate potentially production orders for 2020.

This is consistent with the business practices maybe of some of the customers we have in China where they aggressively build inventory and actually get parts ahead of their competitors to be able to better fulfill a fast ramp. We've seen this in both the cloud data center and we're seeing it on 5G, where some of these competitors do end up having a higher inventory stock to enable them to compete more aggressively against other competitors. And so it's -- we're not too concerned about it. If anything, Mark, this is -- we're seeing acceleration of 5G, not a slowdown.

Mark Kelleher -- D.A. Davidson -- Analyst

That's great color. Did you have 10% customers in the quarter? I'm sure you did. How many?

John Edmunds -- Chief Financial Officer

We actually only review the 10% customers once a year, Mark, annually.

Mark Kelleher -- D.A. Davidson -- Analyst

Not even how many?

John Edmunds -- Chief Financial Officer

I don't have it in front of me, but no, we don't disclose how many.

Mark Kelleher -- D.A. Davidson -- Analyst

OK. You said you had some new design wins coming for PAM4 in the back half of the year, can you just tell us a little bit about what the competitive environment is there? It sounds like you're doing well. Is it very competitive? Is it price sensitive?

Ford Tamer -- President and Chief Executive Officer

It's a very competitive environment. We have strong competitors that are constantly trying to unseat us and the design wins we have. So we have to keep running fast. We have a fantastic product roadmap with a very strong platform offering and very close relationship with our customers and very committed to see them win share in the marketplace.

So we've got to keep running fast. It's a very competitive environment. And so we stay humble and paranoid and keep running.

Mark Kelleher -- D.A. Davidson -- Analyst

OK. Great. Thanks.

Operator

Thank you. And our next question comes from Mark Silverstein from Cowen.

Paul Silverstein -- Cowen -- Analyst

I've been called worse. Guys, I apologize we're training to the issue, but just I think it was clear from your comments, but to sort of make sure there's no room for doubt, you all clearly are not seeing any extraordinary inventory build by Huawei relative to the geopolitical situation.

Ford Tamer -- President and Chief Executive Officer

Paul, what we've said is we have seen inventory starting to build. We have orders that would be coming for Q2 and Q3 that, progressively, throughout the year, as we go through these orders in Q2 and Q3, could end up being in the high single digit millions. Relative to the type of upside we expect in the second half of the year, which is quite pronounced, we don't expect any issue of being able to consume that inventory if the demand were to fall short. Does that make sense?

Paul Silverstein -- Cowen -- Analyst

Yup. Thanks, Ford.

Operator

Thank you. Our next question comes from Mark Lipacis from Jefferies.

Mark Lipacis -- Jefferies -- Analyst

Thanks for taking my question. Ford, I really appreciate the commentary and the work you're doing trying to identify the inventory risk in China. I don't think I've ever heard of a semiconductor company giving us the heads-up this far in advance. So congratulations on that.

And I guess my assumption was that the reason that this has been so hard to figure out in the past is because your customers and/or your customer customers have just been reticent to share exactly what's going on. So I was wondering if you could share with us like how -- did you make some kind of breakthrough with your customers or the supply chain? Or is your -- did you have a particularly much better forecasting capabilities? How are you able to tune in to that? Because that's sounds like a very specific high single digit millions by the end of the year. That's a high -- that's a really specific number. And there's times when companies get this by orders of magnitude wrong.

So if you could share any color on how you're getting to that, I think that would be very helpful. Thank you.

Ford Tamer -- President and Chief Executive Officer

Thank you, Mark. It's a great question. You can imagine, after being hit with a two by four in end of '17, early '18, we have spent a considerable amount of time putting in place processes and checks with not only the customer but the customer customers on what is available in the channel, at our customers, across the supply chain. We're spending just a tremendous amount of time.

So let me try to break this up for you to make you more comfortable, OK? So first, in the long haul and metro market, in the past, we have had an issue with inventory of TiA. So if you look at the end of '17, early '18 issue that the industry had seen, this was, for us, mostly inventory of TiA. And we've had our main marketing guy for the TiA has spent a tremendous amount of time in the market, at ICR vendor, at the customer, at the customer customers scrubbing all these numbers. And we feel we've got very good handle on it.

And right now, there is no inventory of TiA or ICR, and part of the reason is Huawei has been growing so fast. They grew 39% in Q1 over last year. And the carrier side has seen a very fast growth. And so their -- we're seeing very regular inventory type of levels right now at Huawei for the TiA or driver and the long haul type of market.

And the reason why we're able to identify 5G as a separate vector is this is based on a specific SKU of our PAM DSP. So today, the 5G that has been growing has been three products has been a specific SKU of our 50 gig PAM DSP along with a TiA and driver that goes along with that, OK? Just to give you a feel, in Q4 of last year, that 5G revenue was less than $1 million. So very small. In Q1 of this year, we actually are in the mid-single digit million and expect that to be significant throughout the year.

So that 5G is happening. We're able to track it separately from our coherent because it's tied to a totally different DSP TiA and driver SKU than our coherent. So they're totally different products, OK? And then we have a very good estimate of what we think the 5G number are. And so we know exactly how much and how many we've shipped and so we can assess it.

So our view right now is that the carrier space right now is about 100,000 units for the year. OK? And we demand -- the market demand, we estimate it to be about 150,000 U. So you can see, we're pretty precise on how many units we think are going to be built and when they're going to be built and we know when we're delivering them. So this is where the confidence is coming from.

Hopefully, that answers the question.

Mark Lipacis -- Jefferies -- Analyst

That's very helpful. And congrats on the great work. Thank you.

Operator

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

Adam Gonzalez -- Bank of America Merrill Lynch -- Analyst

This is Adam Gonzales on for Vivek. Thanks for taking my question. Just wanted to follow up on some of that very helpful 5G color you gave in the last response. I believe all that commentary you gave was about 2019.

But if I were to think about your 5G opportunity longer term, either from unit or revenue perspective, can you give us any idea on what the incremental opportunity can be once we get to that inflection you spoke about in 2020? Thank you.

Ford Tamer -- President and Chief Executive Officer

Thank you, Adam. So I'd like to refer you to an updated slide on our corporate deck. If you could, please, you could look it up at your own time, but it's Slide no. 13 and 14 on our corporate deck.

These are updated. And you can see that we're now starting to break out 5G as a separate segment, where we didn't do this in the past. And you could see that we're estimating the demand for 5G to be significantly higher than the demand for long-haul coherent. So right now, the long haul metro type of ports is about 500,000 ports.

We estimate the 5G access cable could be about 1 million ports. So it could be significant demand, but really starting in the second half of 2020, Adam.

Adam Gonzalez -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

Thank you and that does conclude our question-and-answer session for today's conference. I'd now like to turn the call back over to John Edmunds for any closing remarks -- and I'm sorry, we do have a follow-up from Quinn Bolton from Needham & Company. Your line is open.

Quinn Bolton -- Needham and Company -- Analyst

Hey John and Ford, just a quick follow-up on this 5G opportunity that's PAM4-based. Is that included in your PAM TAM that you've previously talked about being about $120 million in '19 going to $320 million? Or is that an additional TAM that's going to be captured in your telecom segment? Thanks.

John Edmunds -- Chief Financial Officer

So what we've done, Quinn, when we reported the numbers, right now, we're reporting 5G under our telecom space, OK? So when we discuss the breakout of telecom versus data center, we're going to include the 5G in the telecom space, as you could see from the presentation on the website. However, that 5G number is part of the $120 million TAM we had for PAM.It could be -- given the current strengths, it could be incremental to $120 million. I mean, right now, the $120 million included a more regular type of field testing. If the current strengths we're seeing in the 5G continues, then that $120 million could grow, right? But it was part of the $120 million.

Quinn Bolton -- Needham and Company -- Analyst

Got it. Thanks for the clarification.

Operator

Thank you. And that does conclude our question and answer session for today's conference. I'd now like to turn the conference back over to John Edmunds for any closing remarks.

John Edmunds -- Chief Financial Officer

Thank you, Crystal. Inphi plans on attending the JPMorgan Conference in Boston on May 14; the B. Riley Conference in Los Angeles on May 22; the Craig Hallum Conference in Minneapolis on May 29; and the Cowen Conference in New York on May 30; the Bank of America Conference in San Francisco on June 4 or 5; and the Stifel Conference in Boston on June 11. Ford and I would like to thank you for joining us today and we look forward to speaking with you again in the future.

Operator

[Operator signoff]

Duration: 59 minutes

Call Participants:

John Edmunds -- Chief Financial Officer

Ford Tamer -- President and Chief Executive Officer

Tom O'Malley -- Barclays -- Analyst

Harlan Sur -- J.P. Morgan -- Analyst

Michelle Waller -- Needham and Company -- Analyst

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Mark Kelleher -- D.A. Davidson -- Analyst

Paul Silverstein -- Cowen -- Analyst

Mark Lipacis -- Jefferies -- Analyst

Adam Gonzalez -- Bank of America Merrill Lynch -- Analyst

Quinn Bolton -- Needham and Company -- Analyst

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