Inphi (IPHI) Q4 2019 Earnings Call Transcript

Inphi (IPHI)
Q4 2019 Earnings Call
Feb 04, 2020, 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 fourth-quarter 2019 conference call. [Operator instructions] As a reminder, this conference may be recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Vernon Essi, senior director of investor relations and corporate development. You may begin.

Vernon Essi -- Senior Director of Investor Relations and Corporate Development

Good afternoon, everyone, and thank you for joining us today to discuss the financial results for the fourth quarter of 2019. A copy of today's press release can be found in the investor relations portion of Inphi's website at infi.com/investors. With me today is Inphi's president and CEO, Ford Tamer; and Inphi's chief financial officer, John Edmunds. On our call, I will first provide the safe harbor, and then, Ford will give you an overview of our business.

This will be followed by John with the financial results for the fourth quarter of 2019 and the outlook for the first quarter of 2020. John will then open up the call for questions and answers. 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 2020 and beyond to projected growth, size, and strength of our markets, our customers, market share, performance, and success of new products, design wins, customer demand, supply, impact of worldwide issues, and the success of related contingency plans and the integration of eSilicon, an acquisition we closed on January 10th, 2020. 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 the corresponding GAAP measures.

Before I turn the call over to Ford, I'd like to draw your attention to the media center in Inphi's website, which can be accessed by clicking on the news tab on our about page or at inphi.com/media-center. There you will find in-depth press coverage of our recent product announcements and developments. Now to begin a review of the quarter, let me turn the call over to our CEO, Ford Tamer. Ford?

Ford Tamer -- President and Chief Executive Officer

Thanks, Vern, and thank you for joining us for Inphi's fourth-quarter and year-end 2019 earnings update. Inphi closed out 2019 with a strong Q4. We finished the year with record quarterly revenue and operating and net income. Revenue and non-GAAP EPS were above the consensus estimates.

Strengths in several market areas and across several of our product lines contributed to a robust quarter. We are confident this demand will continue in 2020. Revenue for the fourth quarter of $102.9 million exceeded last year's quarterly revenue of $86.5 million by 19%. We booked $0.47 in fourth-quarter non-GAAP earnings per share, $0.02 better than consensus estimate, and as compared to $0.45 in the fourth quarter of 2018.

We generated $22 million in cash from operations in Q4. Looking at 2019's results, revenue was $366 million, a 24% improvement over 2018's $295 million. We delivered 70% non-GAAP gross margin for 2019, as compared to 68.5% for the full-year 2018. On a non-GAAP basis, fully diluted EPS for 2019 was $1.61 as compared to $0.86 in 2018.

This 87% increase in non-GAAP EPS, compared to the 24% increase in revenue, demonstrate the continued positive leverage in our operating model. The year-end strength came from several sources, which demonstrates the value of Inphi's continuing revenue diversification. We saw robust demand for our cloud solutions, specifically, our PAM platform and Tier 1 customers. In Q4, we also saw accelerated demand out of China, in particular, Huawei.

Before I discuss the strong results from our growing product portfolio, let me address China's supply chain inventory and its recent coronavirus outbreak. As you may have read, some believe that some customers in China are building inventory ahead of a potential tightening of the export administration rules. Our sales to Huawei in Q4 2019 have been ahead of plan. Along with a strong Q1 2019, this resulted in Huawei accounting for approximately 11% of Inphi's revenue for 2019.

We expect the strength to continue in Q1 2020. However, taking a conservative approach, we assume a significant drop off in revenue from Huawei starting in Q2. This will result in our forecast for Huawei for Q2 through Q4 2020 to be in the low-single-digit percentage of Inphi's total revenue for that period. We expect the strength of our continued client engagement to more than offset those dynamics.

Our total forecasted revenue also contemplates what we know so far about the potential impact of the coronavirus. First, we don't have any indications from our customers in China that their demand requirements have shifted as a result of the virus. On the supply side, some of our partners have already resumed their manufacturing operations. We are assuming, overall, China return to work on February 10 after an extended lunar break.

So, we currently expect that there will be minimal impact on the supply side if any. However, to be safe, if these assumptions change, Inphi and our partners in China have put contingency plans in place to maintain the supply side of critical components for our products and our customers. Now let me turn back to our product strength and diversification. In Q4 and so far in Q1, we're seeing a continuous ramp of demand from top U.S.

cloud vendors for our PAM products. This includes our 50-gig PAM DSP Polaris, along with 28 gigabaud TIAs and drivers; our 100-gig PAM DSP Porrima, along with 56 gigabaud TIAs and driver, and our PAM retimer, Vega. We again expect demand for each of these platform solutions to remain strong for the duration of this year. The operating characteristics and production maturity of these products, combined with our first-mover advantage, are the primary reasons for the high adoption rate of Inphi solutions at our customers.

We also have important Q4 announcements. First, the newest star in our growing product constellation is our new low-power 7-nanometer, 400-gig coherent DSP chip, Canopus. This release generated a high amount of interest from a wide variety of industry observers. Canopus has now been sampling for over two months to module partners and OEM customers.

It is a high throughput low-power solution that can support traffic at 100-gig, 200-gig, and 400-gigabit per second. The first mode of operation, referred to as ZR, satisfies the need for faster, lower-power interconnects between data centers for distances up to 120 kilometers. We expect broad adoption of the 400-gig ZR mode by cloud customers. Most of 2020 will be spent in qualification and field testing with production ramp starting in Q4 2020 and into 2021.

Canopus is also designed for long-distance transmissions over fiber networks for 5G, access, and metro and long-haul telecom customers. The second mode of operation, referred to as ZR+, covers distances spanning hundreds to thousands of kilometers. We expect strong adoption of 100-gig, 200-gig, and 400-gig ZR+ mode by both cloud and telecom customers. Second, we also announced sampling of the COLORZ II module, which uses Inphi's Canopus DSP chipset.

This represents the industry's first 400-gig ZR pluggable coherent transceiver to sample to cloud and OEM customers. COLORZ II will enable cloud operators to connect Metro data center at a fraction of the cost of traditional coherent transport systems. I could not be more proud of our engineers, and once again, have helped us to be first to market with these industry-leading next-generation interconnect solutions. We expect a healthy demand for our 100-gig COLORZ one solutions to continue through 2020.

And we expect our customers would have already purchased more than 100,000 COLORZ one units to date to transition to COLORZ II in 2021, driving our business in the years ahead. Last, we are pleased to announce that our TIA linear driver shipments have now exceeded 5 million units, further underscoring our leadership position in the optoelectronics signal path. We're pleased with our current market positioning, both for the near-term with an eye toward the future. Much of this outlook is based on organic growth from existing products.

We're also pleased to welcome the eSilicon team and associated products and IP into the Inphi family. We officially closed the eSilicon acquisition just a few weeks ago and look forward to merging the team and company into our operations. The eSilicon addition is expected to contribute in the mid-teens percentage to our Q1 2020 revenue. What is even more significant is a very healthy demand for our organic product portfolio in what's typically a weak seasonal quarter.

The combination of Inphi and eSilicon revenue results in our outlook of $132.4 million at the midpoint for Q1 2020. This translates to a 29% sequential increase from Q4 2019. In summary, I'll leave you with these messages, our investments in leading-edge R&D is paying off with a rich pipeline of excellent quality product. We enter 2020 with a very strong adoption and production ramp of our products by our Tier 1 customer.

Our business is continuing to scale, both organically and with the addition of eSilicon talent and resources to accelerate our strategic road map, and we're consistently demonstrating financial leverage in our model as our revenue continues to grow. With that, I again thank every member of the Inphi team for their efforts that led to the results we just discussed. I have every confidence in the projections for what lies ahead for the company. And with that, over to you, John.

John Edmunds -- Chief Financial Officer

Thanks, Ford. Now let me recap the financial results. In the fourth quarter of 2019, Inphi reported revenue of $102.9 million, which was up 9% sequentially and up 19% year over year. This result was $3.1 million or 3% better than the midpoint of our guidance.

To address the growth in more detail, our cloud products, including PAM DSP, gearboxes, CDRs, COLORZ, cloud TIAs, and drivers, grew 26% sequentially and 43% year over year. Together, they comprised 65% of total revenues in Q4 '19. Our cloud growth was primarily led by 400-gig and 200-gig PAM business, aided by some additional growth in COLORZ. For the year, telco represented approximately 40% of revenues, which was remarkable given the trade war challenges we faced throughout the year.

For the fourth quarter, telco declined 8% sequentially and 2% year over year, and represented 33% of revenues. Telco declined sequentially in Q4 because Q3 2019 had been a particularly strong quarter. In addition, if you look at the last three-quarters of telco in '19 versus 2018, they were essentially flat. This market is undergoing tremendous change by moving from 32-gigabaud to 64-gigabaud speeds, as well as, changes occurring in component packaging.

We are pleased to continue to lead the market with these product changes, and at the same time, transforming our approach from selling just components to selling chipset and DSP platform solutions. The legacy transport business represented 2% of revenue in Q4 2019, down $2.1 million from Q3. This pertains to 40- and 100-gig transport products, which have now been shipping for more than eight years and are declining over time. We expect this revenue stream to increase in Q1, but to decline by approximately 15% overall in 2020.

In addition, we are estimating about 40% of our eSilicon's overall revenues in 2020 will flow into the legacy revenue line. These are mostly one per customer, single-sourced ASICs generally sold outside of the telco and cloud markets. In Q4 2019, the GAAP gross margin was 59.9%, up from Q3's 57.8%, due in part to lower technology amortization. The GAAP gross margins included $7.8 million in previously acquired technology amortization in Q4 as compared to $9.7 million in Q3.

The non-GAAP numbers do not include these non-cash adjustments. So, instead of a 2.1% improvement, rather we see a 1% decline in non-GAAP gross margins in Q4. Please see the reconciliations in the press release for more detail. Gross margins on a non-GAAP basis in Q4 came in at 69.2%, which was down 80 basis points from the midpoint of our guidance of 70%.

This was primarily a function of the relative product revenue mix. Q4 GAAP net loss was $13.4 million. We then add certain standard adjustments back of $38.1 million non-cash GAAP expense for stock compensation, acquisition-related accounting, and convertible debt cost amortization. This compares to the $39.5 million recorded in Q3.

The difference of $1.4 million is due to lower amortization and acquired intangibles as the 2014 acquisition of Cortina is now beyond five years old. To get to non-GAAP net income, you need to add back the $38.1 million in standard adjustments. You also need to deduct approximately $1 million in gains from the sale of standard remeasurement of private and public investments, and then, add back approximately $1 million in acquisition-related expenses due to the eSilicon acquisition. And then, add back $0.4 million from non-cash rent expense required for GAAP accounting purposes, which relates to a premove-in construction period to prepare a new office space in San Jose, California.

Finally, we add the tax benefit associated with these non-GAAP adjustments of approximately $2 million to arrive at Q4 non-GAAP net income of $23.1 million. Q4 non-GAAP net income was up 7.4% sequentially and 12.4% year over year. Non-GAAP net income for the year was $76.6 million, which essentially doubled from the $38.8 million reported in 2018. Now looking at the remaining components of non GAAP reporting, non-GAAP operating expense for Q4 totaled $47.8 million, which was up $3.1 million or 7% compared to $44.7 million reported in Q3.

The opex came in at the midpoint of our guidance. The growth, as expected, was due to a full quarter of Q3 new hires plus Q4 new hires, as well as, higher consulting and higher project spend. Overall, Q4 and Q3 non-GAAP operating margin was up -- I'm sorry, was flat at 22.7% and down 1% from the 23.7% in the same quarter one year ago. GAAP net interest expense and other income for Q4 2019 totaled $5.4 million of expense.

If you add back $7.3 million in convertible debt, non-cash accretion and amortization expense, and then, deduct a gain of approximately $1 million in GAAP equity investment income, you will arrive at $0.9 million non-GAAP other income. This was due to a combination of net interest income of $0.4 million, as well as, $0.5 million of other gains on nonoperating activities related to mask sharing. The GAAP income tax expense benefit for Q4 was $0.9 million, however, the GAAP tax expense for the year was a charge of $0.4 million. The GAAP effective tax rate for the year was a negative 0.5%, which represents a small charge in some jurisdictions, primarily Singapore, even though we had a loss worldwide.

As we have said in the past, we find the GAAP tax rate to be difficult to forecast. The non-GAAP effective tax rate for Q4 was 4.8% and represented a charge of $1.2 million. Our non-GAAP effective tax rate for 2019 was 3.6%. This was up from 3% we projected in Q3, and reflects a catch-up in Q4 of approximately $0.4 million.

This was primarily due to a more conservative estimate of the amount of U.S. federal R&D tax credit being available for 2019. Worldwide cash income taxes paid across a variety of jurisdictions for the year was $144,000, which was then reduced by a $300,000 refund received in the U.S. for the AMT tax as a result of the 2017 Federal Tax Cuts and Jobs Act.

Now turning to the balance sheet. Overall cash and short-term investments was $422.9 million at December 31st, 2019. This was down $1.9 million from the $424.8 million at September 30. We were also up $15.5 million for the year from the $407.4 million at December 31st, 2018.

In Q4, the cash flow from operations was $21.8 million, offset by $12.2 million in capex and $4.4 million in financing payments for software licenses, and it gave us free cash flow of $5.2 million. The free cash flow then combined with $3.4 million in investing income, which came from $2.5 million in revenues collected in common stock, and then, sold for a $0.9 million gain, and finally, adding $0.7 million from option exercise brings us a total of $9.3 million in positive cash flows for the quarter, which was then offset by $7.9 million used to buy back shares via stock withholding and $4 million in private company equity investments. At an adjustment for a change in market value and interest on investments of $0.8 million brings us back to $1.8 million in net use of cash in Q4 '19. Cash flow from operations in Q4 was $21.8 million compared to $25.6 million in Q3.

The decrease of $3.8 million was driven by an increase in EBITDA of $1.9 million, offset by an expansion of working capital of $5.7 million. Capital expenditures of $12.2 million in Q4 was up compared to the $4.6 million reported in Q3 due to a payment for our first 7-nanometer mask set. Accounts receivable increased by $5.5 million. DSOs at the end of December were up one day to 53 days from the September figure of 52 days.

Inventory decreased by $1.7 million in the quarter. As a result, inventory days was down 24 days to 156 days at the end of December from the 180 days at the end of September. Conversely, inventory turns went up to 2.3 at the end of December from the 2.0 at the end of September -- I'm sorry, it went up to 2.3 at the end of December from the 2.0 turns at the end of September. As previously forecasted, the previous buildup of inventory is beginning to sell through and convert back to cash.

Now let me recap the business outlook for Q1 2020. 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.

In Q1, we will be including the results of operations of eSilicon, an acquisition which closed on January 10th, 2020. We expect good organic growth in Q1 and eSilicon products as a percentage of total revenues to be in the mid-teens. As we stated when we announced the acquisition on November 11th, 2019, we expect eSilicon to add between $80 million and $120 million in revenue in 2020 and to be accretive to earnings. Revenue in Q1 is expected to be in the range of $130.4 million to $134.4 million or $132.4 million at the midpoint.

For GAAP reporting in Q4, excluding potential purchase accounting adjustments, we are currently forecasting GAAP gross margins to be in the range of 50.5% to 52.3%. GAAP operating expense should be in the range of $85 million to $87 million. Absent non-income related tax adjustments, we would expect the GAAP effective tax rate to be approximately 0.3%. GAAP net loss would then be in the range of negative $21.4 million to negative $27.3 million.

GAAP earnings per share would then be a loss in the range of $0.46 to $0.59 per basic share on 50.6 million forecasted basic shares. A more complete reconciliation of the forecast of Q1 GAAP and net loss and gross margin, compared to the forecast of non-GAAP are included in the last page of the press release. Our non-GAAP reporting in Q1, we are currently forecasting organic gross margins to be approximately flat with Q4, which was 69.2%. And then combined with eSilicon, total gross margins are expected to be in the range of 64.2% to 65.2% or approximately 64.7% at the midpoint.

Based on new eSilicon products that will be ramping primarily in the second half of the year, as well as, other planned pricing and cost improvements, we expect the eSilicon contribution to gross margins to improve overall gross margins by approximately 50 basis points by the end of 2020, and by something on the order of 100 basis points by the end of 2021. Operating expense should be in the range of $59.8 million to $60.8 million. We are currently estimating the non-GAAP effective tax rate to be 5.5% for 2020. We are confident these components should then align, resulting in a non-GAAP operating margin to be in the range of 17.6% to 20.7% or approximately 18.2% at the midpoint.

This should also then lead to non-GAAP net income of between approximately $22.7 million and $27.6 million. This would then result in estimated non-GAAP income per share of between $0.42 and $0.52 based on approximately 50.6 million estimated non-GAAP diluted shares. We will not update this outlook during the quarter until the next time of the next quarterly earnings release unless Inphi publishes a notice stating otherwise. So, please ask any questions you have today during the general Q&A period.

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

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Paul Silverstein with Cowen and Company. Your line is now open.

Paul Silverstein -- Cowen and Company -- Analyst

Thanks. I appreciate you all taking the questions. Ford and John, just on the risk side of the equation in terms of China, both with respect to coronavirus and with respect to any prospective buildup of inventory by Huawei. You've all been kind enough in the past to give the basis for your confidence.

I recognize that you're projecting much lower volumes from Huawei in the second half of the year. But can you all share with us the insight you have? You had some of your peers this morning and last night talked about expected demand impact, whether due to employees not being able to show up to work for their customers, etc. Any insight you could share with us on those two issues beyond the comments in the prepared remarks?

Ford Tamer -- President and Chief Executive Officer

Yes, Paul. Hi, this is Ford. So, first on the Huawei, we've shipped a significant amount to Huawei in January. So, we feel the risk to Q1 is minimum.

And as we discussed from Q2 to Q4, the sum of that revenue for us coming from Huawei is, again, very minimal compared to our total revenue. So, we feel the impact of Huawei has been mitigated and is not consequential for us for the remainder of the year. Regarding coronavirus, our primary vendors that are in the manufacturing of modules have already resumed work as of yesterday, as of February 3rd. And so, they're back to work, everything is normal.

We have one component that is being manufactured at a place where they'll be back to work on February 10th, and there is a contingency plan to move the manufacturing to outside of China, so, in case there is any issues. So, we feel that impact at this point should be mitigated.

Paul Silverstein -- Cowen and Company -- Analyst

And then, Ford, if I could ask on the upside, what are you most -- you've got obviously several -- a lot of win in your sales. What are you most excited about? Is it possible 400ZR to be upside? I assume it could be upside in pull forward or are you pretty confident that that's still in late 2020, with the bulk of revenue coming in 2021 in that?

Ford Tamer -- President and Chief Executive Officer

What we're more excited about, Paul, would be upside on the PAM. So, the 400-gig ZR is going to take about a year to go through qualification and field testing. There is no way to shorten that period of time. So, we expect it to go production on track in Q4 of this year.

As we've been saying now on multiple calls, we've been very consistent on the timing. We still stick to the timing. We're very excited about the quality of the product that we have sampled to customers. Superb.

No need for spend, very high-quality product came up out of the box in a couple of weeks. Just phenomenal execution by the team on the 400-gig ZR. And we -- not only by -- we sample module. We also have -- our own partners will sample module, and we're actually very excited to already be in field testing at both cloud and major mobile operator telecom type of customers.

So, we see a big upside in both ZR and ZR+ for that in 2021. As far as 2020, there could be significant upside on PAM. As of right now, we do expect a higher share than what we had initially predicted.

Paul Silverstein -- Cowen and Company -- Analyst

Great. I appreciate that. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Blayne Curtis with Barclays. Your line is now open.

Blayne Curtis -- Barclays -- Analyst

Hey, say, on my questions and congrats on the results. Just a couple. Just curious on Huawei. Can you just remind us what it was in the beginning of the year? I thought it was high-single-digits.

You said 11% for the year. Just trying to figure out when that started to pick up, and for Q1, is it above that 11%? I was just unclear.

John Edmunds -- Chief Financial Officer

Blayne, we don't really break out our major customers, 10%-ters except once a year. I can share with you, I think, for 2019, it was a little bit more of a barbell. So, we had a big first quarter with Huawei, I think before the ban came in. And then, once the ban came in, second and third quarters tend to be lower.

And then, we did see more shipments again in the fourth quarter. So, that's kind of the -- and we just ended up for the year in total, then, slightly above 11%.

Blayne Curtis -- Barclays -- Analyst

That's helpful. Just, John, on eSilicon. I was curious. I thought you said legacy would decline 15%.

I'm assuming that's without the portion that you're going to allocate to it. And I guess, just curious how you plan on weaving this revenue in as you report it by segment. If you can give us any color there as to when that 40% would end up in legacy.

John Edmunds -- Chief Financial Officer

Well, you'll see it beginning as we report in Q1, Blayne, and we'll just blend all of the numbers together. That -- really the existing legacy revenue is only about $4 million a quarter. So, it's not that significant, and then, we'll be adding the eSilicon piece in the first quarter and we'll be taking the other portions of revenue that pertain -- do pertain to data center cloud-based products on the one hand and 5G on the other hand. Those will be added into the cloud and 5G businesses that we report as well.

So, we don't intend to break it out separately.

Blayne Curtis -- Barclays -- Analyst

Thanks. And then, just maybe finally, for Ford on the PAM market. It looks like a very strong end of the year and continues into Q1. Just any update on the size of that market, given the strength you're seeing early on?

Ford Tamer -- President and Chief Executive Officer

Thanks, Blayne. We expect -- at this point, we haven't changed our sizing for that market. As we progress through the year, we may very well do so. We're a bit, as I said, more bullish about our share of that market at this point.

Blayne Curtis -- Barclays -- Analyst

Thanks.

Operator

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

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

Good afternoon, guys, and congratulations on the solid execution and strong start here to 2020. Your comments on the press release, Ford, suggests organic revenue core Inphi momentum in Q1 and to the balance of 2020. Does that mean that you expect to grow sequentially through 2020 based on your design win pipeline ramps and new customer programs, even with the step down of Huawei in Q2?

Ford Tamer -- President and Chief Executive Officer

Yes, Harlan, we do expect to grow sequentially every quarter this year.

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

OK. Great. And then on the strong March quarter guidance. If I'd back out eSilicon, looks like core inside, growing 9% sequentially, up 36% year over year.

Can you just help us understand what's driving the quarter on quarter growth? Is it both your cloud and telco businesses? I assume it's PAM for with the ramp of 100-gig Porrima for 400-gig into your second cloud customer. But what are the other product categories that are driving the sequential growth?

John Edmunds -- Chief Financial Officer

Harlan, it's a combination of different things. But obviously, the cloud area is expected to grow through the course of the year. We do expect continued strong COLORZ business in the year. And long haul and metro, I think, will also still be lumpy, but it will have probably two good quarters and two flattish or slightly negative quarters in terms of sequential growth, just like it had been this past year.

But overall, we'd expect growth in long haul and telco for the year, as well as, growth coming in the cloud and data center. And then obviously, we'll layer eSilicon on top of that.

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

Great. And then just my last question. On the cloud and hyperscale side, you had one large hyperscaler ramping your 50-gig PAM4 last year, that's your 200-gig Polaris. You had another large cloud customer ramping late last year, early this year with your 100-gig PAM4 Porrima for 400-gig.

How many other cloud and hyperscalers do you see layering on in terms of ramping with either Porrima or Polaris solutions this year?

Ford Tamer -- President and Chief Executive Officer

So, thanks, Harlan. This is Ford. We expect two more customers this year, one in the U.S. and one in China, and we expect all seven major cloud customers to go to PAM next year, including the remainder, one in the U.S.

and two more in China. So overall, four U.S. and three big China cloud customers going to PAM.

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

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Quinn Bolton with Needham & Company. Your line is now open.

Quinn Bolton -- Needham and Company -- Analyst

Hey, guys. Congratulations on the nice results and outlook. I wanted to follow-up on Harlan's question there. Obviously, the PAM business seems like it could drive a lot of the growth and upside in 2020.

You've talked about the 50-gig Polaris, 100-gig Porrima. You've got Vega. You've got an IP licensing business. Is there any way you can give us some sense of how each of those contribute to your overall outlook? Or are they all similar size, is the 200-gig Polaris the biggest piece of the bucket? And then, a follow-up on the U.S.

cloud and the Chinese cloud customer ramping this year. Will that be 200-gig PAM or is that for the 400-gig PAM. Thank you.

Ford Tamer -- President and Chief Executive Officer

Thanks, Quinn. For the breakout, we don't break it up. But the way I'd characterize it is the two biggest contributors are the 50-gig PAM Polaris inside the module and the 100-gig PAM Porrima inside the module. They're -- both of them are each quite larger than the retimer business.

Between the two, the 50-gig PAM is ahead this year. So, we will see the 50-gig PAM Polaris for 200-gig ahead of the 100-gig, although, the 100-gig is going to grow very nicely. As far as the new customers, one of them will go toward Polaris. The second one is still undecided and could go either Polaris or Porrima.

TBD, yet.

Quinn Bolton -- Needham and Company -- Analyst

And then just a final question. Just -- you sort of mentioned Huawei was an 11% customer in 2019. Wondering if you had any other cloud or particularly module vendors that broke above the 10% threshold in calendar '19. Thank you.

John Edmunds -- Chief Financial Officer

Quinn, the other one will be Microsoft this year and they were in the mid- to low-teens range. I don't remember the specific number as we sit here, but they will also be reported as a more than 10% customer.

Quinn Bolton -- Needham and Company -- Analyst

Thank you.

John Edmunds -- Chief Financial Officer

Obviously, because of the COLORZ business, right?

Quinn Bolton -- Needham and Company -- Analyst

Yup, yup. OK. Thank you.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Ross Seymore -- Deutsche Bank -- Analyst

Hey, guys. Congrats on the strong end of the year and the beginning of this year. Just had a question on your telecom portion of your business. I believe you talked about Huawei being strong in that barbell approach, you said, John, with the end of the year, finishing strong.

But that segment overall, you said went down 8% sequentially. So, correct me if I'm wrong, but if Huawei is a big portion of that and it was strong, I guess, what was weaker in the quarter? Is it just lumpiness? Or was there anything going on in the fourth quarter there?

John Edmunds -- Chief Financial Officer

I don't know that I'd point to anything specific, Ross. I think for us, it was just lumpiness in certain product areas that we think will return and show growth again in the first quarter. That's why I say that that business seems to seesaw back and forth. We'll have a strong quarter, and then, a little bit weaker quarter, and then, come back with a very strong quarter again.

So overall, we'd expect -- I think we've had a growth of about 18% for the year and we'd expect something a little better than that for next year. And there's just a mix of things moving back and forth, but our platform growth are going to continue to grow. The coherent DSP in particular and some of the other components, the 5G business also grew nicely this year. It's expected to grow again next year.

So, there's several good growing pieces there. And then, the more sort of germane components that we've sold in the past, that we've done well on. We're looking to collect together on platforms and sell in chipsets and platforms more effectively, just as we do in the data center and also in the coherent platforms.

Ross Seymore -- Deutsche Bank -- Analyst

Thanks for the details. I guess, my second question, I don't know if this is for you or for Ford. But as we think about eSilicon, you talked about 40% of that business, at least initially being in your legacy segment. So, I guess, two parts to this.

One, could you parse out even a little bit how the remaining 60% of that business in the first quarter is going to parse between your two other segments? And then much more importantly, as we go throughout the year, as we work from this roughly $20 million number toward that total year revenue level at about $100 million. Can you just talk a little bit about the lumpiness of that and kind of the linearity of it, back half versus front half? Because I know that business has a bunch of company-specific design wins that will kick in at different times and probably doesn't look perfectly linear.

Ford Tamer -- President and Chief Executive Officer

Yeah, thanks for the question. We do expect eSilicon to sequentially grow again every quarter for the remainder of 2020 and to step up really in the second half as the production, ASIC at both the data center and the 5G go to production about midyear. So -- and then furthermore, we expect this to step up -- another step-up into 2021, even if we have a full year of production for those ASICs. So, as we -- when we closed the acquisition of eSilicon, we did say that the revenue growth be accretive to our growth, so, from 2020 to 2021.

At the time, we said we expected the revenue from eSilicon to grow about 50% from 2020 to 2021. So, as you can see, we see sequential growth this year and we see sequential growth year over year.

Ross Seymore -- Deutsche Bank -- Analyst

Perfect.

John Edmunds -- Chief Financial Officer

I think, Ross, just to try to answer your question. Initially, I think we'll see more 5G business come on. And then, back half of the year, it will be split relatively evenly between data center and 5G.

Ross Seymore -- Deutsche Bank -- Analyst

Perfect. Thanks, John.

John Edmunds -- Chief Financial Officer

Yeah.

Operator

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

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Yes, thank you and congratulations on the record results. Ford, could you talk a little bit about COLORZ II versus 400ZR. Just so I understand this correctly, COLORZ II will still be only for your largest customer, right, while 400ZR is basically sampling to everybody?

Ford Tamer -- President and Chief Executive Officer

Yeah. Thanks, Tore. COLORZ one is really the name we gave our 100-gig product and we're calling this COLORZ II to stress the fact that there's a good amount of leverage that we can have on the firmware and some of the labs and interop testing that, as we move forward the 100-gig ZR to the 20-gig ZR. COLORZ II is the name for the module and Canopus really is the name for the DSP.

And so, what you're saying is Canopus -- you're suggesting Canopus is having a larger adoption just because it's going to go to more customers. They go to more module customers outside of Inphi or go to more OEM customers as well. And so, from that point of view, yes, Canopus may have a larger adoption compared to COLORZ II. COLORZ II, though, is going to have a higher ASP.

So, did I answer your question?

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Yes, you did. That's very helpful. Second question is I know you're sampling your 7-nanometer coherent DSP right now. Any further thoughts on the PAM4, 7-nanometer product?

Ford Tamer -- President and Chief Executive Officer

We have plenty of thoughts on that, but we haven't announced them yet, Tore. So, stay tuned. I think we will have some news very soon.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

OK. I'll try another one then. So obviously, the eSilicon acquisition is not just important for revenue, but having custom silicon and 2.5D packaging technology is important as well. Could you just talk a little bit more about how that positions Inphi, not just here for 2020 and 2021, but perhaps from a more scalable offering and where the landscape is today with all the different acquisitions going on? That would be really helpful.

Thank you.

Ford Tamer -- President and Chief Executive Officer

Yeah. Thanks, Tore. So, the eSilicon acquisition gives us a tremendous amount of flexibility because it brings a lot of resources. To projects where the customers are requesting for us to customize and we didn't have in the past all the resources required.

So, right now, it gives a lot of flexibility and potentially taking on incremental projects for these current vendors or telecom vendors. They are very strategic in nature.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Great. Thank you.

Operator

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

Richard Shannon -- Craig-Hallum Capital Group LLC -- Analyst

Hi, Ford and John. Thanks for taking my questions as well. Ford, you mentioned you're expecting better share in PAM4. I'm not sure if that was related to the entire year or just the start of the year.

But maybe you can give us a sense of why that is? I know you're first to market. Are there reasons of interoperability or competitors not be executing? Or can you give us an understanding on what's going on there?

Ford Tamer -- President and Chief Executive Officer

Yeah. Thanks, Richard. So, the first reason is you heard about the different variance of PAM. So obviously, there is a 50-gig PAM DSP, a 100-gig PAM DSP, we got a 50-gig PAM retimer, we've got IP, and we've got a portfolio of 28-gigabaud TIA driver and a portfolio of 56-gigabaud TIA driver for quite a few different optics form factors.

So, some customers are taking [Inaudible] to market. Some other are taking directly modulated laser DML to market. Others are using externally modulated laser or EML, and finally, silicon photonics. So, that gives you quite a few variance of TIA drivers for these four different optics variance.

We are the broadest portfolio of anyone in the market. So in some markets, we've got competition in some markets, we've got no competition. So, we enjoy, in some market, a higher share that so far has not been matched by a competitor. And in the markets where we are matched by competitors, we have enjoyed, as you suggested, and we suggested a first-mover advantage, which has allowed us to capture this higher share.

So, I think it's a combination of a broader portfolio, a high-quality product, phenomenal performance in power, and then, first-mover advantage.

Richard Shannon -- Craig-Hallum Capital Group LLC -- Analyst

OK. Fair enough. Thank you for that. Second question is for John.

John, you made in your prepared remarks, you talked about something related to gross margins that, frankly, went by very quickly. Something about 50 and 100 basis points of help, I think, throughout 2020. Can you repeat that? And then, I'll probably have a follow-up based on what I heard there, but I completely missed that.

John Edmunds -- Chief Financial Officer

Yes. Richard, basically, what I suggested is that our gross margins, as we integrate eSilicon are going to step down in the near-term, but that they will improve -- the total gross margins would improve 50 basis points by the end of 2020 and by something in the neighborhood of 100 basis points in 2021. That's based on a combination of new products shipping coming out of eSilicon that have higher gross margins and it's also based on some cost and price improvements that we expect to achieve through the course of the year on their existing base business.

Richard Shannon -- Craig-Hallum Capital Group LLC -- Analyst

OK. And to be clear on that, John. Is this a measuring point of the 1,500 basis points -- excuse me. Is that based on your first-quarter guidance or some other measuring point?

John Edmunds -- Chief Financial Officer

It's based on the -- the improvement will be based on total gross margin improvement. So in other words, just those improvements should drive a total gross margin improvement at that level. And obviously, they're only going to be mid-teens kind of percentage of the overall business. So, they would have to have much greater improvement in order to drive the total gross margin improvement and that's through the course of the year, not just the first quarter.

Richard Shannon -- Craig-Hallum Capital Group LLC -- Analyst

Got it. OK.

John Edmunds -- Chief Financial Officer

OK?

Richard Shannon -- Craig-Hallum Capital Group LLC -- Analyst

That is all the questions for me. Thank you.

Thank you, Richard.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Fahad Najam with Cowen and Company. Your line is now open.

Fahad Najam -- Cowen and Company -- Analyst

Thank you for taking my question. If I can start with a very quick first question on -- what was the revenue in the year from your metro DSP business, the M200? And how should we be thinking about that business in calendar '20?

Ford Tamer -- President and Chief Executive Officer

So, I'll let John give you the number if he wants to, but I think we increased the business very significantly from '18 to '19. And then, we see still a very significant improvement from '19 to '20. John, do you want to give more specifics?

John Edmunds -- Chief Financial Officer

Yeah. The business overall, Fahad, I believe, increased around 84%. But we don't break it out separately, so, we're not going to give you the details.

Fahad Najam -- Cowen and Company -- Analyst

Got it. And do you see the same traction going forward in calendar '20 as you saw in '19, directionally speaking?

John Edmunds -- Chief Financial Officer

Yes. We continue to see a strong business and would be again, something probably on the order of 50% improvement.

Fahad Najam -- Cowen and Company -- Analyst

Got it. Ford, if I may ask you a big-picture question, specifically, regarding both PAM4 on one hand and also on the ZR side. We see a divergence in both these end markets with ZR, Acacia, and the group of pushing open ZR. And on the PAM4 side, we have the OpenEye expect being pushed by your competitors.

To what extent do you think that this impact the total TAM opportunity for you guys? And if you could comment on both the dynamics that you're seeing from here, especially, in the PAM4 side first? And then on the ZR, how do you see that play out?

Ford Tamer -- President and Chief Executive Officer

Yeah. I think these are -- thank you, very good question, Fahad. These are, in our mind, two very different trends, right? On the coherent side of the world, we're absolutely committed to interop and come to a joint forward error correction that would standardize across the industry. So, we're working, frankly, very closely with both Acacia and NEL to come to a joint proposal.

In the short-term, our CFEC has been adopted in quite a few standards and I believe Acacia and NEL will be putting them in their products. Their oFEC has been adopted as well, and we committed to put in our products. So in the short term, we're going to be cross-licensing each other and would both put the FEC in the product. However, longer-term, we do believe that it's in the industry interest to standardize on one FEC so we don't end up having to do twice the work and the customers end up having to do twice the firmware.

And so longer-term, we're committed to an interop and getting to hopefully one standard. And we've got a very good relationship with all the different players in the ecosystem, including Siena and others, and Nokia and others, Huawei that do these FECs. So, I think what we're seeing eye to eye with many of the industry players toward standardizing. And the cost of these DSP right now, Canopus at 7-nanometer, the next one is going to be 5-nanometer, the cost of doing a DSP is going to start approaching $80-plus million, and it's not sustainable to have all these different standards compete and increase the cost for everyone, right? So, I think you're seeing a very good convergence there.

I think there's a very good working relationship and a commitment to get to interop longer-term, and that's good for everybody in the market. On the PAM side of the equation, you see companies like Inphi and Broadcom and MaxLinear and others all following IEEE standard, which is what PAM is for. We're all collaborating and competing, if you wish, in different places, but that's fine. Again, I mean, a standard is good for the customers.

That OpenEye is a corner case where you've got some vendors that don't have enough strength in their solution to close the link and they define some kind of weird, non-standard book-ended solution that you'd have to have the products on both ends. If you put somebody else's product on the other end, it's not going to work. And it's really just an artifact of the fact that their solution is not strong enough to be able to be a standard solution. So, there again, we believe that this OpenEye is just a non-starter and doomed to fail.

We don't believe this is going to go anywhere.

Fahad Najam -- Cowen and Company -- Analyst

Thank you very much. That's all for me.

Operator

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to John Edmunds for closing remarks.

John Edmunds -- Chief Financial Officer

Thank you, Sarah. Ford and Vern and I would like to thank you for joining us today, and let you know that we plan on attending the Morgan Stanley conference in San Francisco on March 2nd. And we'll be at OFC in San Diego on March 10th and 11th. Although, we caution you that OFC is primarily an industry and trade conference, not an investor conference per se but we're happy to talk with investors while we're there.

And again, Ford and Vern 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 sign-off]

Duration: 59 minutes

Call participants:

Vernon Essi -- Senior Director of Investor Relations and Corporate Development

Ford Tamer -- President and Chief Executive Officer

John Edmunds -- Chief Financial Officer

Paul Silverstein -- Cowen and Company -- Analyst

Blayne Curtis -- Barclays -- Analyst

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

Quinn Bolton -- Needham and Company -- Analyst

Ross Seymore -- Deutsche Bank -- Analyst

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Richard Shannon -- Craig-Hallum Capital Group LLC -- Analyst

Fahad Najam -- Cowen and Company -- Analyst

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