Inphi (IPHI) Q1 2020 Earnings Call Transcript

Inphi (IPHI)
Q1 2020 Earnings Call
May 07, 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 first-quarter 2020 conference call. As a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Vern Essi, senior director of investor relations and corporate development. You may begin.

Vern 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 first quarter of 2020. A copy of today's press release can be found in the Investor Relations portion of Inphi's website at inphi.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, then Ford will give you an overview of our business.

This will be followed by John with the financial results for the first quarter of 2020 and the outlook for the second quarter of 2020. John will then open up the call for question and answer. 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, forward-looking financial information, the 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 10, 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 statement, 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, Vern, and thank you for joining us for Inphi's first-quarter 2020 earnings update. Before I begin, let me take a few moments to discuss the unprecedented global impact of COVID-19. First, to thank the true heroes of the past few months. The medical professionals, first responders, emergency personnel and law enforcement officers who put themselves in jeopardy on the front line every day in their relentless effort to keep the rest of us safe.

Every last one of them is a hero, and every last one deserves all the gratitude and appreciation we can demonstrate. We pray for their well-being. We also recognize the many service employees working in our communities, providing the basic needs for the rest of us. At many companies, Inphi included, we are very grateful to our own critical employees who enter the workplace to maintain basic operations through these challenges.

Ensuring the safety of our employees and our customers remains our No. 1 priority. Inphi mission continues to be the global leader in high-speed data movement interconnect. Simply put, we are in the bandwidth business.

Never before has our mission been more important to the lives of everyone impacted by this pandemic. We move data not just for commerce, but also within communities, metro areas, countries and around the world. Our cloud and telecom customers have witnessed a large spike in bandwidth demand for their applications. And despite their extreme dislocations over the past couple of months, Inphi is enabling them to connect everyone, everywhere.

We could dedicate hours walking you through examples of how bandwidth demand has increased due to COVID, and we encourage you to read our blogs accessible from the Inphi homepage at www.inphi.com/blog. As some of you know, our Inphi sites in Wuhan, China and Pavia, Italy gave us a view of the pandemic as early as January. And we responded immediately. We set up a corporate task force and began monitoring our employees, our customers, our production and our supply chain.

I'm pleased to say that these monitoring efforts yielded positive results and feedback. We always measure our employee productivity and discovered that in some cases, efficiency increased as a result of work from home measures. Our demand is still solid and improving. Our product pipeline is intact, and we are increasing our R&D investments and continuing to hire.

To date, we have not experienced any major material disruptions. Nonetheless, we have implemented contingencies in some supply chain areas. The industry is currently experiencing significantly longer lead times in some areas of the supply chain, and we have notified our customers of these issues. We continue to work with our suppliers to meet the increasing demand for our products.

Now let's look at our Q1 results and Q2 guidance. Inphi had record revenue of $139 million in the first quarter of 2020, which was a 70% increase over last year's Q1 revenue of $82 million and exceeded our original guidance midpoint of $132 million. This higher result in the first quarter was due primarily to higher revenue than anticipated from our Cloud customers. Also, revenue contribution from our January 10 acquisition of eSilicon was slightly higher than originally anticipated.

We recorded record non-GAAP earnings per share of $0.62, above the midpoint of our original guidance of $0.47, an 88% increase over the $0.33 in non-GAAP earnings per share reported one year ago. This clearly demonstrates the increased leverage in our operating model. As we look to Q2, the midpoint of our revenue guidance shows a 7.5% sequential growth and further demonstrates the robust demand for our bandwidth business in this time of crisis. While we remain cautiously optimistic for continued growth, we will also work to verify the sustainability of this new demand.

So please note that to account for any presently unforeseen future events, we are being somewhat conservative in our Q2 revenue guidance. Also to strengthen the balance sheet in this volatile COVID-19 crisis, we raised a $506 million convertible note on April 21, including the underwriter's over-allotment. This will provide sufficient fund to pay off both the $230 million convertible note due this December 2020, and our $287.5 million convertible note due in September of 2021. The terms were very favorable, given the current environment, and John will explain in detail in a moment.

We believe COVID-19 will transform our business considerably. Our growth driver at the bandwidth consumption layer are accelerating, and we are adapting our business model to address these opportunities. Our original drivers included cloud computing, artificial intelligence, 5G wireless, social networking, e-commerce, virtual and augmented reality and Internet of Things. The demand for these capabilities is now being augmented by multiple new powerful trends: work, learn, collaborate, play and socialize from home; increased streaming across many devices; telemedicine, telehealth and virtual fitness; shopping, food and meal delivery; security and new factory automation and control.

You can find further detail about these changes in our April 22 blog posted on the Inphi website. These trends are speeding the move to a new communication infrastructure as detailed by our co-founder, Dr. Loi Nguyen in his new blog published today entitled The Rise of Internet 3.0. Specifically, Inphi is benefiting in three areas in which we've been investing for the past few years.

First, the increase in bandwidth of cloud data centers is accelerating and benefiting our inside data center solutions. We are seeing a continuous ramp of demand from top U.S. cloud vendors for our PAM product. Last quarter, we reported momentum across all of our PAM solutions.

We've seen that momentum continue this quarter in our 50-gig PAM DSP Polaris, along with 28-gigabaud TiAs and driver, in our 100-gig PAM DSP Porrima, along with 36-gigabaud TiAs and drivers and in our PAM retimer, Vega. We expect that momentum to accelerate in the second half of 2020 with additional U.S. and China mega cloud vendors transitioning to PAM inside the data center. Second, the continued move to edge computing and increase in metro access bandwidth has resulted in accelerated adoption of our ZR Data Center Interconnect or DCI for connections between data centers.

The demand for our 100-gig COLORZ continues to be robust across multiple worldwide geographies. The immense benefits brought by this new ZR architecture are now widely accepted, including power, density and opex and capex reduction. By getting rid of transport boxes, ZR also frees up space to allow data centers to populate more servers that can generate top-line revenue growth. Using Inphi's COLORZ solution, our No.

1 customer has generated hundreds of millions of dollars in cost savings and revenue increase benefits. As we look toward our recently announced COLORZ II solution for 400-gig ZR, we are increasingly confident that we'll capture significant market share in cloud provider accounts. The pluggable form factor technology is much more cost competitive than incumbent technologies. And third, further investments in 5G infrastructure are driving demand for our telecom solutions.

The major China mobile operators have awarded tenders to our China-based system OEM customers. As a result, we're seeing a pickup in demand for both our PAM and coherent solutions. Now let me turn to the product news. Although the COVID-19 crisis impacted OFC attendance, we were still busy with virtual meetings with customers, partners and investors.

We announced our new Spica 800-gig PAM4 electro-optics platform. This enables doubling bandwidth per lane and meets the requirement for 25.6 terabits per second switch silicon. This solution is well ahead of competitors' offerings and is built at the leading edge seven-nanometer process geometry. We also announced our third-generation Porrima with expanded features.

This solution is also built at seven nanometers and offers lower power and lower total cost of ownership. Finally, the eSilicon integration has gone very smoothly and is now complete. Their design teams are now part of the Inphi family and are working side by side with our team on Inphi-specific product road map. What is even more impressive is that all this has happened in the middle of this challenging remote working environment.

Now let me cover two topics that are likely on your minds in this environment. First, the longer-term impact of COVID-19 on Inphi's business. While we're seeing demand that's positively biased in this environment, we are, of course, unable to predict the overall impact this would have on the global economy. There is a lot of discussion on the depth of the recession that began in the first quarter of 2020 and is likely to reach its deepest level in the second or third quarter of this year.

Regardless of whether the shape of the recovery is U, V or L, it will still be a changing road back. However, it also seems clear that Internet bandwidth will continue to be critical, and we continue to be cautiously optimistic about the short, medium and long-term positive impacts to Inphi's business. Second, the impact of potential hoarding of components, whether the data center will continue to be an area of investment, and whether after a certain lag, a deeper recession would impact infrastructure spend. While we're very aware of these potential challenges and are keeping a close eye on inventory, we expect that Inphi is benefiting from fundamental secular product cycles, driven by the transition to PAM and coherent technologies across multiple large cloud and telecom customers.

As a result, Inphi is continuing to hire and invest in the development of differentiated new products and to service multiple customers' ramps in both cloud and telecom. While we are fortunate to have good news to share with our investors, we're also very mindful of those less fortunate organizations and individuals who have been adversely impacted by COVID. In these most uncertain times, we instituted programs to assist our valued employees with the challenges that may arise for their families, their communities and themselves. Inphi has also provided financial support to communities in 11 of Inphi sites in nine countries for nonprofit organizations focused on medical supplies and food.

Winston Churchilll once said, "Never let a good crisis go to waste." Inphi electro-optics data movement solutions are in the right place at the right time to support our customers' needs. We are optimistic about strategic growth opportunities and are confident we'll emerge from this crisis as a stronger company. And with that, over to you, John.

John Edmunds -- Chief Financial Officer

Thanks, Ford. Now let me recap the financial results. In the first quarter of 2020, Inphi reported revenue of $139.4 million, which was up 35.5% sequentially and up 70% year over year. This Q1 result was also $7 million or 5.3% better than the midpoint of our guidance given on February 4.

Roughly half the sequential growth and approximately 70% of the year-over-year growth was organic. And the balance was due to the eSilicon acquisition that closed on January 10. To address the growth in more detail, our cloud products, including PAM DSPs and retimers, companion TiAs and drivers, COLORZ and eSilicon data center ASICs comprised 56% of total revenues in Q1. This represented growth of 18% sequentially and 112% year over year.

About 70% of our sequential and 90% of our year-over-year cloud growth was driven by organic products, both 200-gig and 400-gig PAM inside data centers and COLORZ between data centers. The other 30% was from the acquired data center ASICs from eSilicon. Our telco products, including PAM-based 5G chipsets, coherent TiAs, drivers and DSPs and eSilicon 5G ASICs represented approximately 34% of revenues. This also represented a 37% increase sequentially and 18% year over year.

About two-thirds of the sequential growth and one-third of the year-over-year growth was organic. Telco grew primarily because of trends in 5G, both from the PAM DSP, TiA and driver chipset, as well as the eSilicon, ASIC and coherent DSP. If you're maintaining a model, please note that we have reclassed a small amount of cloud revenues in the first -- for each of the quarters of 2019 to the telco grouping due to more attribution of certain PAM product configurations as being used in 5G applications. Please let us know if you need any help with these adjustments.

The legacy businesses represented 10% of revenues in Q1 of 2020. This was up $11.4 million from the $2.2 million reported in Q4, approximately $10 million of that was from the legacy business at eSilicon, which we expect to extend for several years. The other $1.4 million in growth pertains to 40 and 100-gig transport products from the 2014 Cortina acquisition, which, as expected, grew slightly in Q1. In Q1 2020, the GAAP gross margins were 52.9%, down from Q4's 59.9% due primarily to the acquisition of eSilicon.

The GAAP gross margins in Q1 include $11.4 million in acquired technology amortization as compared to $7.8 million in Q4. In addition, in Q1, there was a step-up in inventory value of eSilicon inventory that added $2.5 million in GAAP purchase accounting-related costs. Please see the reconciliations in the press release for more detail. Gross margins on a non-GAAP basis in Q1 came in at 64.2%.

This was at the low end of our Q1 guidance of 64.2% to 65.2%. This came about due to the relative product and customer revenue mix of the actual versus the forecast gross margins for Inphi core products came in at the high 60% range, just slightly lower than Q4's 69.2%. This was expected given the customer product mix, as well as the impact of annual telco pricing adjustments. eSilicon products came in as expected in the low to mid-40% range, which when blended to an overall non-GAAP gross margin, yielded 64.2%.

Q1 GAAP net loss was $28.3 million. We then add back adjustments of $48 million of certain standard noncash GAAP expense for stock compensation, acquisition-related accounting and convertible debt cost amortization. This compares to $38.1 million recorded in Q4. The difference of $9.9 million is due to a $3.8 million higher figure in stock compensation and $6.1 million in higher purchase accounting.

Again, to get to non-GAAP net income, you need to first add back the $48 million in standard adjustments. You also need to deduct approximately $4 million in net gains from the sale and standard remeasurements of private and public equity investments, and then add back approximately $9.4 million in acquisition-related expenses due to eSilicon, and then add back $600,000 from noncash rent expense required for GAAP accounting purposes, which, consistent with Q4, relates to a pre-move and construction period to prepare a new office in San Jose, California. Finally, we deduct the additional tax charge associated with these non-GAAP adjustments of approximately $2.1 million to arrive at Q1 non-GAAP net income of $31.5 million. Q1 non-GAAP net income was up 36.4% sequentially and 104.3% year over year.

This year-over-year improvement is both a function of a 70% increase in revenues and a nearly 30% improvement in operating leverage. Now looking at the remaining components of non-GAAP reporting. Non-GAAP operating expenses for Q1 totaled $55.3 million, which was up $7.5 million or 15.6%, compared to the $47.8 million reported in Q4. This was due largely to the inclusion of eSilicon since the acquisition closed on January 10.

The opex came in at about $5 million below the midpoint of our guidance. The lower spending was due to approximately $3 million more in synergy than expected with eSilicon due to lower program, foundry and consulting spend than we expected. We believe roughly half of these savings are sustainable going forward. We also had lower travel, consulting and development program spend for Inphi in Q1 due largely to restrictions from the public health crisis and general slowdown in project spend.

Overall, Q1 non-GAAP operating margin was up 1.8% to 24.5%, compared to 22.7% in Q4 and up 5.5% from the 19% in the first quarter one year ago. GAAP net interest expense and other income for Q1 2020 totaled $3.9 million of expense. If you add back $7.4 million in convertible debt noncash expense and then deduct a gain of approximately $4 million in GAAP equity investment income, you'll arrive at $580,000 non-GAAP other expense. This was due to a combination of net interest expense of $143,000, as well as $310,000 of GAAP imputed interest on capitalized leases and license agreements and another $130,000 of other losses from nonoperating activities such as foreign currency remeasurement.

The GAAP income tax expense was a charge of $45,000. This represents a small tax charge in some jurisdictions primarily in Singapore, even though we had a loss worldwide. As we've said in the past, we find the GAAP tax rate to be difficult to forecast. The non-GAAP effective tax rate for Q1 was 6.3% and represented a charge of $2.1 million.

Our non-GAAP effective tax rate for 2020 is expected to be in the range of 6.3%, which is up from the 3.6% we experienced for the year in 2019 primarily due to higher income. Worldwide cash income taxes actually paid in Q1 was $586,000. Now turning to the balance sheet. Overall cash and short-term investments was $238.2 million at March 31 as compared to $423 million and December 31.

The net change principally represents a net use of cash of approximately $185 million, which was comprised of the following. In Q1, the non-GAAP cash flow from operations was $41 million, which excludes $6 million of acquisition expense that are included in the GAAP number of $35 million. This was offset by $13.4 million in capex and $11.2 million in non-GAAP financing payments for software licenses. Again, this excludes $4.7 million in GAAP acquisition-related financing payments that would be in the GAAP number.

Combined, this resulted in non-GAAP free cash flow of $16.4 million versus the GAAP number of $5.7 million. We also spent non-GAAP $202.3 million of cash on acquiring eSilicon. This includes the $4.7 million and $6 million of non-GAAP acquisition-related spending adjustments noted above. We also invested $5 million in an early stage private company equity investment.

And finally, adding $2 million from financing cash flows, which came mainly from employee stock purchase plan, net of cash used for stock withholding. This, plus $4.3 million in timing differences in settlement of investment in marketable securities and a change in unrealized loss, brings us back to a net use of cash in the quarter of $185 million primarily for the purchase of eSilicon. Non-GAAP cash flow from operations in Q1 was $41 million, compared to $22 million in Q4 of '19 and that's compared to $25.9 million in Q1 of '19. Please note that Q1 '20 includes approximately $6 million in non-GAAP acquisition expenses.

I'm sorry, please note that Q1 excludes approximately $6 million in non-GAAP acquisition expenses. The increase of $19.2 million was driven by an increase in EBITDA of $10 million, and this was improved by a smaller expansion of working capital by $9.1 million. Capital expenditures of $13.4 million in Q4 was up slightly compared to the $12.3 million reported in Q4. To further bolster our liquidity, on April 24, we closed a new five-year convertible note offering for $506 million.

This will provide ample cash to retire the principal portion of the two existing notes coming due in December '20 and September '21. The rate on the new note is 0.75% per annum. Conversion premium was 32.5% up or an exercise price of $125 per share, the note also callable at the company's option after three years if the price has been consistently 30% or more above the exercise price. We also entered into a cap call structure to synthetically raise the economic exercise threshold to $188.

The IRR on our note was 3.14%. This compared favorably to the 3.16% that Slack, a larger company with a better credit profile, received on their $862 million similar offering and structure about 15 days prior. Accounts receivable increased by $2.6 million in Q1. DSOs at the end of March were down 13 days to 40 days from the December figure of 53 days.

Inventory at March 31, 2020, included a $2.7 million step-up in fair value. Without that step up, inventory increased by $21 million in the quarter. Of this amount, $23.4 million was from eSilicon. So core Inphi inventory actually decreased by $2.4 million in the quarter.

As a result, inventory days were down 20 days to 136 days at the end of March from the 156 days at the end of December. Conversely, inventory turns went up to 2.6 at the end of March from 2.3 at the end of December. As forecasted, the previous buildup of inventory is coming to -- is continuing to sell through and convert back to cash. Now let me recap the business outlook for Q2 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. Revenue in Q2 is expected to be in the range of $147.8 million to $152 million or approximately $150 million at the midpoint.

For GAAP reporting in Q2, excluding potential purchase accounting adjustments, we are currently forecasting GAAP gross margins should be in the range of 51.6% to 53.9%. GAAP operating expense should be in the range of $88.9 million to $89.9 million. Absent non-income-related tax adjustments, we would expect a GAAP effective tax rate to be approximately a negative 1.45%. GAAP net loss would then be in the range of $15 million to $21.5 million.

GAAP earnings per share would then be a loss in the range of $0.31 to $0.45 per basic share on 47.8 million forecasted basic shares. A more complete reconciliation of the forecast of Q1 GAAP net loss and gross margin compared to the forecast of non-GAAP are included in the press release. For non-GAAP reporting, in Q1, we are currently forecasting gross margins are expected to be in the range of 63.5% to 65.5%, which at the midpoint of 64.5% would be approximately a 30 bps improvement from Q1. Operating expense should be in the range of $57.9 million to $59.9 million.

We are currently estimating the non-GAAP effective tax rate to be 6.3% for 2020. We are confident these components should then align, resulting in a non-GAAP operating margin to be in the range of 24.3% to 26.1% or approximately 25.2% at the midpoint. This should also then lead to non-GAAP net income of between approximately $33.2 million and $36.4 million. This would then result in estimated non-GAAP income per share of between $0.62 and $0.68 based on approximately 53.1 million estimated non-GAAP diluted shares.

We will not update this outlook during the quarter or 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. Let me add one additional comment. Ford and I both have 10b5-1 plans that were filed two to five months ago.

It's likely that sales from these could be taking place in Q2 and future quarters this year. As full disclosure, our intention is to diversify our personal investment risk as individuals and in a way that hopefully does not affect the market. We both remain fully confident in the outlook of Inphi's business, and we are also both maintaining substantial stakes in the future of the business and have every interest in seeing that continue to grow. And now we'd be happy to take your questions.

Andrea?

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Tom O'Malley with Barclays.

Tom O'Malley -- Barclays -- Analyst

Hey, guys. Thanks for taking my question, and congratulations on the really nice results. I just want to start with the PAM opportunity. Clearly, Ford, you described an environment which your spend is robust in the cloud.

Can you talk about what you see that TAM at for 2020? Has that expanded? And then can you talk about your share of that TAM? Do you see yourself being more successful in that market than, say, three months ago?

Ford Tamer -- President and Chief Executive Officer

Thank you, Tom. So it's early in the year. This is still Q1. So we're not yet ready to announce a new market size.

So we're still going to stick to our 300 or so market size for the year. Our share is slightly better than we had discussed in the past. So right now, we would probably be more confident to discuss a 65% share in that market. And this is not a market where you're going to see a sole source vendor.

This is a market where you're going to see multiple competitors. It's too large for one company, and multiple competitors are being qualified as we speak. So we do expect to maintain a majority share, and we're quite happy with where we are in our share at this point in time.

Tom O'Malley -- Barclays -- Analyst

Great. And then the second question is really related to your caution around inventory stocking and such at some of your customers. There's some concern that there are some build in China particularly related with the 5G product. Can you talk about how you're looking at the rest of the year? How much of that additional 5G from customers like Huawei is coming in, in Q2? And then when you're looking at your outlook, are you taking Huawei back out of the model? Or what do you think are the right run rate is for them looking on a go-forward basis?

Ford Tamer -- President and Chief Executive Officer

Yes. Very good question, Tom. So let me start and then turn it over to John to offer more detail. First, I think to put things in perspective, 5G for us right now is about 10% of our cloud revenue.

So if I were -- 5G is obviously, right now, classified in telecom. So the cloud PAM business, about 10 times the size of the 5G business for PAM. So to put things in perspective, so if there is a bit of a hoarding in 5G going on, it's not going to be material as compared to the overall cloud numbers that we're seeing for the year. Tom, I would point you to what happened in 2017, 2018.

Been there, done that. Us and the rest of the industry did not see the inventory correction coming end of '17, early '18. So since then, we have instituted very aggressive marketing and sales checks with our customer partners, customer customers to make sure that we have a good pulse on the inventory. And we do believe we've got a very good view right now of what's going on.

And yes, there is a bit of hoarding and inventory buildup but nothing to speak of that we're not going to be able to take care of in the rest of the ramp. So we're very early. We're in the early innings of this ramp. It's a ramp that's going to take quite a few years.

5G becomes bigger next year. The cloud is going to get bigger as we go through the year into next year because we're going to have some new cloud customers in both U.S. and China add themselves to that ramp. So we're still very optimistic that the second half will be better than the first half and that 2021 will be stronger than 2020.

Regarding the Huawei question. Huawei has been kind of flat from Q4 to Q1. And what we've done in our guidance is we've taken a lot of that out of the Q2 guidance, and we'll take it a quarter at a time. So we will take the revenue as it comes.

So we feel like we've done a good job staying somewhat conservative on our views moving forward. John, do you want to offer more detail here?

John Edmunds -- Chief Financial Officer

Tom, I think Ford covered everything, did he not? Is there something else?

Tom O'Malley -- Barclays -- Analyst

I think he did. Thanks for the comment, guys, and congrats.

John Edmunds -- Chief Financial Officer

Sure.

Operator

Your next question comes from the line of Harlan Sur with JP Morgan.

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

Good afternoon, guys, and congratulations on the solid execution and strong first-half performance. Ford, coming into this year, you were pretty confident given your design win pipeline that the team could grow quarter over quarter every single quarter this year. It's certainly playing out that way. And I know that there's a lot of uncertainty out there.

But at the same time, it seems like you have confidence on PAM4 continuing to expand into the second half. So from where you sit today, I wanted to get your confidence level on sequential growth in Q3 and Q4 for the entire business just given what you see in your pipeline and the significant pickup in data traffic that we've seen just through the first half of this year.

Ford Tamer -- President and Chief Executive Officer

So Harlan, as a short answer, we're confident we're going to continue to grow quarter on quarter every quarter this year.

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

Great. Thank you. And then on the timing of the cloud and hyperscale customers making the move to 200-gig or 400-gig, wondering if the COVID-19 pandemic has actually accelerated the adoption of your solutions just given the significant step-up in compute and data traffic activity, as you pointed out in your recent blog. I know that you had anticipated that beyond your two existing cloud customers, you would have one additional U.S., one additional China customer firing this year with all of the top seven cloud guys firing next year.

But is that still your view or might we see some pull-ins of some of these deployments?

Ford Tamer -- President and Chief Executive Officer

So two good questions, Harlan. So first, the trends that we discussed in the blog I published in April 22, we have further expanded on those. And I'd recommend if you have a minute to read the blog published by Loi Nguyen, our co-founder, about Internet 3.0, we see a bunch of new applications that are being developed that could increase the bandwidth around the world as we see it today. We were on the phone with a customer just a few days ago, and he was talking about Factory 2.0.

So people are trying to reinvent how you actually have an experience to even do some of these virtual conferences. So a lot of innovation is starting to happen around new applications that we do believe are going to come to market over the next few months that could reinvent some of the way we do things that make us even more excited about what Loi calls Internet 3.0. So the best way to increase bandwidth is to increase bandwidth. And so fundamentally, what PAM and coherent technologies do is they do exactly that, allow you to double or even allot more with coherent, put a lot more bits per the same fiber with coherent.

And so we're seeing an acceleration on both PAM and coherent. And we're still on track to have the same customers deploy second half this year and next year. Trying to move these customers faster is harder, but the customers that are already deploying PAM are accelerating the deployments of PAM because some of them are seeing need to increase the bandwidth inside their data center. So we may see a pull in, although we don't really need to pull in right now.

I think if we continue to grow as stated with another U.S. customer, our China customer in second half this year and all seven going on the PAM bandwagon next year, the market will grow very nicely for everyone.

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

Great execution. Thank you.

Ford Tamer -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Quinn Bolton with Needham & Company.

Quinn Bolton -- Needham and Company -- Analyst

Hey, guys. Congratulations on the nice results and outlook in a challenging environment. Ford, I wanted to – clearly, you haven't seen longer lead times affecting the business today. But I think Broadcom has sort of published the fact that it's lengthened its lead times to as long as six months.

Obviously, they're the volume leader in the Ethernet switch market. Wondering if longer lead times at Broadcom is changing the availability of some of these high-speed data center switches. And could that have any impact as you look into the second half on sort of some of the ramps at either existing hyper-scalers or some of the new hyper-scalers Harlan just mentioned?

Ford Tamer -- President and Chief Executive Officer

Thank you, Quinn. We are seeing exactly the same trends. The lead times right now are anywhere from six months to 12 months. If you look at the substrate right now, it's a huge issue where some suppliers are quoting you 52 weeks to get substrate, so the lead times are extremely long.

We gave a warning to all our customers and we've been giving warning to customers for the past few months about this. So yes, the lead times are very long. We're working very closely with our suppliers. We've been working with our suppliers since January when we saw the beginning of this crisis to put buffer in place at multiple places in the supply chain.

So we do believe we'll do as good as anybody in this, but it's definitely a very big challenge, not just for us but the whole industry. We do not expect this to, at this point, change the outlook on the second half. We're still on track as far as you know. There'll be challenges, and we're going to continue to work with customers to overcome those challenges at our suppliers.

Quinn Bolton -- Needham and Company -- Analyst

And then I guess maybe a follow-up. To the extent that everybody in the supply chain has seen lead times stretch, obviously, your orders have been very strong, and maybe that reflects the stretching out of lead times. Can you talk to us at all about the orders, maybe a book-to-bill? I mean, obviously, it sounds like you're trying to be conservative with the second-quarter guidance. But I mean, were orders even much stronger than the second-quarter level that makes you think that -- take since there has been some double ordering, you may not be able to fulfill some of that demand, and so it sort of naturally resolves itself?

Ford Tamer -- President and Chief Executive Officer

John, you want to take this?

John Edmunds -- Chief Financial Officer

Yes. I think, in general, Quinn, orders are strong right now, and we are trying to sort through and understand what's behind those and make sure that this is not double booking or not hoarding per se of inventory. They're not always obvious. We try to be good suppliers and make sure we're in good close communication with our customers.

But I think we do see robust demand, and that's reflected, I think, in the guidance we're giving for the quarter. But as you asked, we do have good, strong interest in growth in -- but at the same time, we're trying to remain cautious about it.

Quinn Bolton -- Needham and Company -- Analyst

Understood. Thank you.

Operator

Your next question comes from the line of Ross Seymore of Deutsche Bank.

Ross Seymore -- Deutsche Bank -- Analyst

Hi, guys. Congrats on the strong results. I want to stick on that conservatism theme. Ford, at the end of your comments on this call, you mentioned that the second-quarter guide, you're still injecting a healthy amount of conservatism.

And I think in answering a question on Huawei, you said that you were pretty much removing them from the second quarter. Is that the area where the most conservatism is being injected in? And I'm not really asking you to size what your guidance would be if you didn't inject that conservatism. But what are the areas where you think that conservatism is most warranted?

Ford Tamer -- President and Chief Executive Officer

Yes. Thank you, Ross. We haven't really removed one or another -- one of those vectors. I think we've injected some conservatism that would allow us to withstand one of those vectors not having some issues.

So whether hoarding or whether a China impact or whether double booking or whether another macro unforeseen event, we put all that in the basket, Ross, and took a conservative look at our Q2 guidance, which we believe is warranted given the very volatile and uncertain environment we're currently in. So that's really -- it could be conservative. It could be a realism. I mean, nobody knows right now, right, in this environment.

So we do believe we're doing the right thing here.

Ross Seymore -- Deutsche Bank -- Analyst

Great. And I guess as my follow-up, you had mentioned those three dynamics that would be changing coming out this COVID pandemic, and you talked about the Edge computing side. Can you just go a little bit deeper into the ZR and the COLORZ II opportunity in that? And how is Edge computing, whether it's a dollar item or a competitive dynamic where your solutions are better. Just dive a little bit deeper into that opportunity because I think it's a relatively newer evolution for people to think about.

Ford Tamer -- President and Chief Executive Officer

Yes. Thank you, Ross. So given the nature of the applications today, where there's a lot more local, if you wish, collaboration, streaming, metro access and Edge computing has seen a big increase in demand. And that's mainly linked under 100 kilometers.

So whereas before, some of our customers were more worried about having a transport box because they still had a fair amount of long hauling, where you go into some of these scenarios now where you're going to be predominantly worried about less than 100-kilometer lengths. The new ZR standard actually calls for 120 kilometers, which we support. We also, in that same offering, could support up to 400 kilometers. And so that's going to take care of the majority, 90%-plus of these customers' needs.

And so when you go into a scenario where 90% of your needs could be fulfilled, it will be much more cost effective, much lower power solution that is going to free up space in your data center where you could put some more servers, especially in an environment today where the fastest way to add drivers would be to plug in a module in an existing switch or router box supplied by your favorite vendor or by a white box maker in Taiwan. If you look at these dynamics, this is going to be favoring ZR, and we're seeing a lot more interest in ZR post-COVID than pre-COVID, especially in cloud provider type of environments. Obviously, when it comes to telecom, telecom is going to be still much slower to move, and it's going to be still dominated by the larger transport folks and design. And we'll respect their ability to compete there, but we see the cloud moving to ZR in a bigger way post COVID than pre COVID.

Operator

Your next question comes from the line of Tore Svanberg of Stifel.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Yes, thank you, and congratulations on the results. Ford, on the 50-gig versus 100-gig PAM market, has there been any changes there lately? Obviously, you have very, very high share in 50-gig. Just wondering if there's been any changes from your customers' decisions to go one way or the other.

Ford Tamer -- President and Chief Executive Officer

There's a couple of changes, Tore. The first one is as -- where three months ago, there was some controversy on whether 400-gig was going to market or not. When you look at our numbers, there is no doubt. And there's no controversy anymore that 400-gig has gone production, OK? So our customers in the cloud are ramping for 400-gig, and there's no doubt that this is happening anymore, OK? So the numbers don't lie.

As far as the mix between 200 and 400, I think it's still pretty much equal. And as the year progresses, we'd probably see more customers add on the 200. So the 200 could end up being stronger. And the 50G PAM has been -- what has been the workhorse on 5G cellular.

So you end up with that Polaris, which is the 50G being used for both 5G applications, as well as 200-gig inside the data center. So it has a bit of an edge. But as far as share, we still stick to what we said, which is there'll be a couple of other DSP vendors in the 400 gig that we're going to be competing against and a couple of analog guys in the 50-gig space that we compete against, but nothing to -- no changes at this point.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Very good. And just a follow-up on the ZR question. So I know you're sampling right now. You've talked about ZR kind of becoming a more material revenue middle of next year.

Is it safe to say that that is not getting a little bit pulled in? Or is that still the time line for material ZR revenue?

Ford Tamer -- President and Chief Executive Officer

It's being pulled in, Tore.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Great. Thank you very much and congrats again.

Operator

Your next question comes from the line of Vivek Arya of Bank of America Securities.

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

Yeah, hi. This is Adam Gonzalez on for Vivek. My first one, I was just wondering if you can give us a sense for what your overall China revenue exposure is now, and if you see any of the new restrictions issued by the Department of Commerce last week as having an impact on your business moving forward.

Ford Tamer -- President and Chief Executive Officer

John?

John Edmunds -- Chief Financial Officer

Yes. Thanks, Adam. So we're generally up in the 40% range of shipping into China. And I think we're slightly higher than we were in Q4.

And the bulk of that is really for data center, actually. So it's coming back to Google or Amazon, and the Huawei numbers, for instance, are maybe a fifth of that overall number. They're not a big piece and they've been relatively flat from Q4 to Q1. In terms of your question about the Commerce Department, we're not impacted by the latest new ruling.

It's primarily focused on RF kinds of transmissions, and so it doesn't -- based on our understanding of the new rule, it didn't look like it will impact us. And so we'll just continue under the current Export Administration Regulation rules. So those allow some de minimis shipping and so forth. And so for the time being, things will continue the way they are.

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

Great. Thanks. And then for my follow-up on eSilicon, with that business coming in ahead of your expectations in the quarter, I was wondering if maybe you'd had any change to your outlook for the full year for that business versus the range you had identified before.

John Edmunds -- Chief Financial Officer

Well, I think we're still comfortable with the -- I think you're speaking about the expectation for about $100 million of revenues this year from eSilicon. And we're still comfortable with that number. We're not looking to change guidance around that right now. It does look good and robust and certainly able to hit that particular threshold.

Operator

Your next question comes from the line of Richard Shannon of Craig-Hallum.

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

OK. Thanks for taking my questions. John, maybe a quick question on the guidance here. In the press release, you talked about looking for both organic and inorganic growth here.

Wondering if you could kind of discuss from a -- just from a dollar growth point of view, whether it's more organic or from eSilicon.

John Edmunds -- Chief Financial Officer

We're not really breaking the expected growth up. I just gave you an indication of what we thought eSilicon would be for the year, which is kind of what we've said in the past. And so we are thinking that we have growth potential on both sides of the business. And we're, I guess, bullish about the opportunities in both sides.

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

OK. Fair enough. Second question for Ford. Ford, when you talked about the acquisition of eSilicon, you talked about the need for more custom work here.

As you look out a year or two, whatever time frame you'd like to, how important will custom work be? I know you've done some for many years in the past, but is this going to be a majority piece of your business within both -- collectively within cloud and 5G/telco networks? Or you can give us some understanding of the importance of that dynamic in your business.

Ford Tamer -- President and Chief Executive Officer

Very good question, Richard. We are already seeing the need for this. So we already are working hard at work at delivering some custom DSP for our customers. Not all cloud are created equal and not all telecom are created equal, and they all have different architectures.

And so ideally, they all have slight different tweaks and slight different features that they'd like to have. And our ability to customize those offerings for them by incorporating some of their own IP into our offerings to provide them interoperability with what they have in the field is becoming a weapon for us to compete. And so yes, we're seeing that need increase and very excited about it. And stay tuned.

We'll have hopefully more announcement in the future along those lines.

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

OK, great. We look forward to hearing from that. That's all my questions. Thanks.

Operator

And your final question comes from the line of Joe Moore with Morgan Stanley.

John Edmunds -- Chief Financial Officer

You're having trouble with that line.

Ford Tamer -- President and Chief Executive Officer

Joe, we're having a hard time hearing you.

Joe Moore -- Morgan Stanley -- Analyst

OK. Sorry, I'll just [Inaudible]

John Edmunds -- Chief Financial Officer

Andrea, I think we can't hear him. Sorry about that.

Operator

And that question has been withdrawn. I'd like to turn it back over to Mr. Edmunds for any closing remarks.

John Edmunds -- Chief Financial Officer

Thank you, Andrea. Inphi plans on attending the virtual J.P. Morgan Conference on May 12; the Cowen virtual conference on May 26; the Craig-Hallum virtual conference on May 27; the Bank of America Merrill Lynch virtual conference on June 2; and finally, the Stifel virtual conference on June 8. Ford and Vern and I look forward to talking with you in the future.

And I want to thank you for joining us today.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

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

Ford Tamer -- President and Chief Executive Officer

John Edmunds -- Chief Financial Officer

Tom O'Malley -- Barclays -- Analyst

Tom OMalley -- 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

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

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

Joe Moore -- Morgan Stanley -- Analyst

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