Inphi Corporation Announces Q4 and FY 2016 Results

SANTA CLARA, CA--(Marketwired - Feb 7, 2017) - Inphi Corporation (NYSE: IPHI), a leader in high-speed data movement interconnects, today announced financial results for its fourth quarter ended Dec. 31, 2016. On Dec. 12, 2016, Inphi completed the acquisition of ClariPhy Communications, Inc.

GAAP Results

Revenue from continuing operations in the fourth quarter of 2016 was $80.9 million on a U.S. generally accepted accounting principles (GAAP) basis, up 14% sequentially from $70.7 million in the third quarter of 2016 and up 53% year-over-year, compared with $52.9 million in the fourth quarter of 2015. The growth in our revenue reflects the increase in consumption of Inphi linear transimpedance amplifiers, linear driver products and CMOS semiconductor-based 100G physical layers (iPHY) products.

Gross margin from continuing operations under GAAP in the fourth quarter of 2016 was 67.1%, compared with 69.1% in the fourth quarter of 2015. The decrease in gross margin was primarily due to amortization of acquired intangibles, amortization of inventory step up fair value related to the acquisition of ClariPhy and change in product mix.

GAAP income from continuing operations in the fourth quarter of 2016 was $2.5 million or 3.1% of revenue from continuing operations, compared to a GAAP income from continuing operations in the fourth quarter of 2015 of $1.5 million or 2.9% of revenue from continuing operations.

GAAP net income included a tax benefit of $16.6 million driven primarily by the $16.7 million release of valuation allowance triggered by the establishment of deferred tax liabilities associated with the step up to fair value of assets acquired in the acquisition. GAAP net income from continuing operations for the fourth quarter of 2016 was then $19.1 million, or $0.42 per diluted common share, compared with GAAP net loss from continuing operations of $2.2 million, or ($0.06) per diluted common share, in the fourth quarter of 2015.

Inphi reports revenue, gross margin, operating expenses, net income (loss), and earnings per share from continuing operations in accordance with GAAP and on a non-GAAP basis. A reconciliation of the GAAP to non-GAAP revenue, gross margin, operating expenses, net income, earnings per share from continuing operations, as well as a description of the items excluded from the non-GAAP calculations, is included in the financial statements portion of this news release.

Non-GAAP Results

Gross margin from continuing operations on a non-GAAP basis in the fourth quarter of 2016 was 73.3%, compared to 75.9% in the fourth quarter of 2015. The decrease was largely due to change in product mix.

Non-GAAP income from continuing operations in the fourth quarter of 2016 was $23.4 million, or 28.9% of revenue from continuing operations, compared with $13.1 million, or 24.8% of revenue from continuing operations in the fourth quarter of 2015.

Non-GAAP net income from continuing operations in the fourth quarter of 2016 was $20.8 million, or $0.47 per diluted common share. This compares with non-GAAP net income from continuing operations of $12.7 million, or $0.30 per diluted common share in the fourth quarter of 2015.

"Reporting 53% year-over-year revenue growth in Q4 of 2016 and strong gross margins reflect the strength of Inphi products in addressing the growing demand for optical components in worldwide communications networks," said Ford Tamer, president and CEO of Inphi Corporation. "We're also excited about the prospects of ramping ColorZ products into production and now being able to offer a more complete optical platform solution thanks to the acquisition of ClariPhy. With new products available for a market that continues to grow, 2017 holds great promise for another year of strong growth and opportunity for Inphi."

Full Year 2016 Results
Revenue from continuing operations in the year ended Dec. 31, 2016 was $266.3 million, compared with $192.7 million in the year ended Dec. 31, 2015. GAAP net income from continuing operations in the year ended Dec. 31, 2016 was $26.5 million, or $0.60 per diluted share, on approximately 44.1 million diluted weighted average common shares outstanding. This compares with GAAP net loss of $16.0 million, or ($0.41) per diluted share, on approximately 38.6 million diluted weighted average common shares outstanding in the year ended Dec. 31, 2015.

Non-GAAP net income from continuing operations in the year ended Dec. 31, 2016 was $66.5 million, or $1.51 per diluted weighted average common share outstanding, on approximately 44.0 million diluted weighted average common shares outstanding. This compares with non-GAAP net income of $38.8 million from continuing operations in the year ended Dec. 31, 2015, or $0.93 per diluted weighted average common shares outstanding.

Business Outlook
The following statements are based on the company's current expectations for the first quarter of 2017. These statements are forward-looking and actual results may differ materially. A reconciliation between the GAAP and Non-GAAP outlook is included at the end of this press release.

• Revenue from continuing operations is expected to increase 14.3% to 16.8% sequentially in Q1 2017, in the range of $92.5 million to $94.5 million. 
• GAAP based gross margin is expected to be 53.4% - 54.7%.
• Non-GAAP gross margin is expected to be approximately 72.5% to 73.1%.
• Stock-based compensation expense is expected to be in the range of $9.7 million to $9.9 million.
• GAAP results are expected to be in a range between a net loss of $10.0 million to net loss of $11.2 million, or ($0.24) - ($0.27) per diluted share, on 41.5 million estimated basic shares outstanding.
• Non-GAAP net income, excluding stock-based compensation expense, amortization of intangibles and inventory step up fair value related to acquisitions and noncash interest on convertible debt, is expected to be in the range of $19.2 million to $20.2 million, or $0.43 - $0.45 per diluted share, on 44.9 million estimated diluted shares outstanding. 

Quarterly Conference Call Today
Inphi plans to hold a conference call today at 5:00 p.m. Eastern Time / 2:00 p.m. Pacific Time with Ford Tamer, president and chief executive officer, and John Edmunds, chief financial officer, to discuss the fourth quarter 2016 results. 

The call can be accessed by dialing 844-459-2451; international callers should dial 765-507-2591, participant passcode: 57791159. Please dial-in ten minutes prior to the scheduled conference call time. A live and archived webcast of the call will be available on Inphi's website at http://investors.inphi.com for up to 30 days after the call.

About Inphi
Inphi Corporation is a leader in high-speed data movement. We move big data -- fast, throughout the globe, between data centers, and inside data centers. Inphi's expertise in signal integrity results in reliable data delivery, at high speeds, over a variety of distances. As data volumes ramp exponentially due to video streaming, social media, cloud-based services, and wireless infrastructure, the need for speed has never been greater. That's where we come in. Customers rely on Inphi's solutions to develop and build out the Service Provider and Cloud infrastructures, and data centers of tomorrow. To learn more about Inphi, visit www.inphi.com.

Cautionary Note Concerning Forward-Looking Statements
Statements in the press release and certain matters to be discussed on the fourth quarter of 2016 conference call regarding Inphi Corporation, which are not historical facts, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by terms such as outlook, believe, expect, may, will, provide, could, and should, and the negative of these terms or other similar expressions. These statements include statements relating to: the Company's business outlook and current expectations for 2017, including with respect to the first quarter of 2017, revenue, gross margin, stock-based compensation expense, operating performance, net income or loss, and earnings per share; the Company's expectations and belief regarding continued growth in the first quarter of 2017 and for the year, the Company's expectations for increased consumption and production of their products, the growing demand for the Company's products, features and benefits of the Company's solutions; the prospects of ColorZ and benefits of using non-GAAP financial measures. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those anticipated as a result of various factors, including: the Company's ability to sustain profitable operations due to its history of losses and accumulated deficit; dependence on a limited number of customers for a substantial portion of revenue and lack of long-term purchase commitments from our customers; product defects; risk related to intellectual property matters, lengthy sales cycle and competitive selection process; lengthy and expensive qualification processes; ability to develop new or enhanced products in a timely manner; development of the markets that the Company targets; market demand for the Company's products; reliance on third parties to manufacture, assemble and test products; ability to compete; and other risks inherent in fabless semiconductor businesses. In addition, actual results could differ materially due to changes in tax rates or tax benefits available, changes in government regulation, changes in claims that may or may not be asserted, as well as changes in pending litigation. For a discussion of these and other related risks, please refer to Inphi Corporation's recent SEC filings, including its Annual Report on Form 10-K for the year ended December 31, 2015, which are available on the SEC's website at www.sec.gov. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof. Inphi Corporation undertakes no obligation to update forward-looking statements for any reason, except as required by law, even as new information becomes available or other events occur in the future.

Inphi, the Inphi logo and Think fast are registered trademarks of Inphi Corporation. All other trademarks used herein are the property of their respective owners.

INPHI CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands of dollars, except share and per share amounts)

(Unaudited)

				Three Months Ended December 31,								Year Ended December 31,
				2016				2015				2016				2015
Revenue				$	80,912			$	52,874			$	266,277			$	192,710
Cost of revenue					26,623				16,358				85,581				72,694
Gross margin					54,289				36,516				180,696				120,016
Operating expenses:
	Research and development				30,808				24,182				108,013				87,774
	Sales and marketing				8,252				5,443				26,534				21,462
	General and administrative				6,765				4,690				21,201				20,322
Total operating expenses					45,825				34,315				155,748				129,558
Income (loss) from operations					8,464				2,201				24,948				(9,542	)
Interest expense, net of other income					(5,958	)			(662	)			(13,492	)			(562	)
Income (loss) from continuing operations before income taxes					2,506				1,539				11,456				(10,104	)
Provision (benefit) for income taxes					(16,558	)			3,765				(15,057	)			5,857
Net income (loss) from continuing operations					19,064				(2,226	)			26,513				(15,961	)
Net income (loss) from discontinued operations, including gain on disposal, net of tax					69				(515	)			72,943				2,410
Net income (loss)				$	19,133			$	(2,741	)		$	99,456			$	(13,551	)
Earnings per share:
	Basic
		Net income (loss) from continuing operations		$	0.46			$	(0.06	)		$	0.65			$	(0.41	)
		Net income (loss) from discontinued operations			-				(0.01	)			1.80				0.06
				$	0.46			$	(0.07	)		$	2.45			$	(0.35	)
	Diluted
		Net income (loss) from continuing operations		$	0.42			$	(0.06	)		$	0.60			$	(0.41	)
		Net income (loss) from discontinued operations			-				(0.01	)			1.65				0.06
				$	0.42			$	(0.07	)		$	2.25			$	(0.35	)
Weighted-average shares used in computing earnings per share:
	Basic				41,226,267				39,282,112				40,565,433				38,580,330
	Diluted				44,910,456				39,282,112				44,124,881				38,580,330

The following table presents details of stock-based compensation expense included in each functional line item in the consolidated statements of operations above:

		Three Months Ended December 31,								Year Ended December 31,
		2016				2015				2016				2015
		(in thousands of dollars)
		(Unaudited)
Cost of revenue		$	506			$	364			$	1,796			$	1,359
Research and development			4,942				3,589				17,390				13,268
Sales and marketing			1,379				789				4,405				3,213
General and administrative			1,293				1,438				4,407				5,473
Discontinued operations			(130	)			1,241				2,194				4,980
		$	7,990			$	7,421			$	30,192			$	28,293

INPHI CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
(Unaudited)
				December 31, 2016			December 31, 2015
Assets
Current assets:
	Cash and cash equivalents			$	144,867		$	283,044
	Short-term investments in marketable securities				249,476			43,616
	Accounts receivable, net				49,999			30,418
	Inventories				32,039			12,628
	Prepaid expenses and other current assets				23,139			3,901
	Current assets held for sale				-			5,268
		Total current assets			499,520			378,875
Property and equipment, net					44,471			33,624
Goodwill					97,704			8,440
Identifiable intangible assets (1)					327,063			66,289
Other noncurrent assets					14,464			14,448
Noncurrent assets held for sale					-			3,370
Total assets				$	983,222		$	505,046
Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable			$	14,039		$	5,851
	Deferred revenue				3,630			4,654
	Accrued expenses and other current liabilities				48,601			17,983
	Current liabilities held for sale				-			5,490
		Total current liabilities			66,270			33,978
Convertible debt					396,857			171,701
Other liabilities					57,571			8,697
		Total liabilities			520,698			214,376
Stockholders' equity:
	Common stock				41			39
	Additional paid-in capital				459,928			392,616
	Retained earnings (accumulated deficit) (2)				1,976			(102,741	)
	Accumulated other comprehensive income				579			756
Total stockholders' equity					462,524			290,670
Total liabilities and stockholders' equity				$	983,222		$	505,046

(1)	The identifiable intangible assets in 2016 include the acquired intangibles from ClariPhy acquisition and the effect of adoption of ASU 2015-05.
(2)	The retained earnings in 2016 includes the cumulative effect of accounting change of $5,261.

INPHI CORPORATION

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(in thousands of dollars, except share and per share amounts)

To supplement the financial data presented on a GAAP basis, the Company discloses certain non-GAAP financial measures, which exclude stock-based compensation, legal, transition costs and other expenses, purchase price fair value adjustments related to acquisitions, non-cash interest expense related to convertible debt, indirect expenses associated with discontinued operations and deferred tax asset valuation allowance. These non-GAAP financial measures are not in accordance with GAAP. These results should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP measures. The Company believes that its non-GAAP financial information provides useful information to management and investors regarding financial and business trends relating to its financial condition and results of operations because it excludes charges or benefits that management considers to be outside of the Company's core operating results. The Company believes that the non-GAAP measures of gross margin, income from operations, net income and earnings per share, in combination with the Company's financial results calculated in accordance with GAAP, provide investors with additional perspective and a more meaningful understanding of the Company's ongoing operating performance. In addition, the Company's management uses these non-GAAP measures to review and assess the financial performance of the Company, to determine executive officer incentive compensation and to plan and forecast performance in future periods. The Company's non-GAAP measurements are not prepared in accordance with GAAP, and are not an alternative to GAAP financial information, and may be calculated differently than non-GAAP financial information disclosed by other companies.

INPHI CORPORATION

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(in thousands of dollars, except share and per share amounts)

(Unaudited)

				Three Months Ended December 31,							Year Ended December 31,
				2016			2015				2016				2015
GAAP revenue to Non-GAAP revenue
GAAP revenue			$	80,912			$	52,874			$	266,277			$	192,710
Cortina revenue lost due to purchase accounting				-				-				-				408	(a)
Non-GAAP revenue			$	80,912			$	52,874			$	266,277			$	193,118
GAAP gross margin to Non-GAAP gross margin
GAAP gross margin			$	54,289			$	36,516			$	180,696			$	120,016
Adjustments to GAAP gross margin:
	Cortina revenue lost due to purchase accounting, net of cost of goods sold			-				-				-				303	(a)
	Stock-based compensation			506	(b)			364	(b)			1,796	(b)			1,359	(b)
	Acquisition related expenses			-				31	(c)			47	(c)			230	(c)
	Amortization of inventory step-up			851	(d)			337	(d)			1,092	(d)			7,913	(d)
	Amortization of intangibles			3,598	(e)			2,875	(e)			12,223	(e)			11,498	(e)
	Depreciation on step-up values of fixed assets			25	(f)			26	(f)			98	(f)			175	(f)
Non-GAAP gross margin			$	59,269			$	40,149			$	195,952			$	141,494
GAAP operating expenses to Non-GAAP operating expenses
GAAP research and development			$	30,808			$	24,182			$	108,013			$	87,774
Adjustments to GAAP research and development:
	Stock-based compensation			(4,942)	(b)			(3,589)	(b)			(17,390)	(b)			(13,268)	(b)
	Acquisition related expenses			-				(286)	(c)			(372)	(c)			(1,359)	(c)
	Depreciation on step-up values of fixed assets			(18)	(f)			(43)	(f)			(192)	(f)			(181)	(f)
	Impairment of in-process research and development			-				-				-				(1,750)	(g)
	Indirect expenses associated with discontinued operations			-				(816)	(h)			(1,904)	(h)			(3,264)	(h)
Non-GAAP research and development			$	25,848			$	19,448			$	88,155			$	67,952
GAAP sales and marketing			$	8,252			$	5,443			$	26,534			$	21,462
Adjustments to GAAP sales and marketing:
	Stock-based compensation			(1,379)	(b)			(789)	(b)			(4,405)	(b)			(3,213)	(b)
	Acquisition related expenses			-				(95)	(c)			(193)	(c)			(557)	(c)
	Amortization of intangibles			(595)	(e)			(205)	(e)			(1,207)	(e)			(817)	(e)
	Depreciation on step-up values of fixed assets			(30)	(f)			(17)	(f)			(102)	(f)			(78)	(f)
Non-GAAP sales and marketing			$	6,248			$	4,337			$	20,627			$	16,797
GAAP general and administrative			$	6,765			$	4,690			$	21,201			$	20,322
Adjustments to GAAP general and administrative:
	Stock-based compensation			(1,293)	(b)			(1,438)	(b)			(4,407)	(b)			(5,473)	(b)
	Acquisition related expenses			(1,626)	(c)			(28)	(c)			(1,663)	(c)			(743)	(c)
	Amortization of intangibles			(58)	(e)			(46)	(e)			(196)	(e)			(184)	(e)
	Depreciation on step-up values of fixed assets			(11)	(f)			-				(26)	(f)			2	(f)
	Loss on disposal of Cortina property and equipment at fair value			-				-				-				(508)	(i)
Non-GAAP general and administrative			$	3,777			$	3,178			$	14,909			$	13,416
Non-GAAP total operating expenses			$	35,873			$	26,963			$	123,691			$	98,165
GAAP net income (loss) from continuing operations to Non-GAAP net income from continuing operations
GAAP net income (loss) from continuing operations			$	19,064			$	(2,226)			$	26,513			$	(15,961)
Adjusting items to GAAP net income (loss) from continuing operations:
	Cortina revenue lost due to purchase accounting, net of cost of goods sold			-				-				-				303	(a)
	Operating expenses related to stock-based compensation expense			8,120	(b)			6,180	(b)			27,998	(b)			23,313	(b)
	Acquisition related expenses			1,626	(c)			440	(c)			2,275	(c)			2,889	(c)
	Amortization of inventory fair value step-up			851	(d)			337	(d)			1,092	(d)			7,913	(d)
	Amortization of intangibles related to purchase price			4,251	(e)			3,126	(e)			13,626	(e)			12,499	(e)
	Depreciation on step-up values of fixed assets			84	(f)			86	(f)			418	(f)			432	(f)
	Impairment of in-process research and development			-				-				-				1,750	(g)
	Indirect expenses associated with discontinued operations			-	(h)			816	(h)			1,904	(h)			3,264	(h)
	Loss on disposal of Cortina property and equipment at fair value			-				-				-				508	(i)
	Accretion and amortization expense on convertible debt			5,920	(j)			592	(j)			14,156	(j)			592	(j)
	Gain on sale of cost method investment			-				-				(1,138)	(k)			-
	Valuation allowance and tax effect of the adjustments from GAAP to non-GAAP			(19,158)	(l)			3,335	(l)			(20,390)	(l)			1,274	(l)
Non-GAAP net income from continuing operations			$	20,758			$	12,686			$	66,454			$	38,776
Shares used in computing non-GAAP basic earnings per share				41,226,267				39,282,112				40,565,433				38,580,330
Shares used in computing non-GAAP diluted earnings per share before offsetting shares from call option				44,910,456				42,246,379				44,124,881				41,525,023
Offsetting shares from call option				(369,196)				-				(92,299)				-
Shares used in computing non-GAAP diluted earnings per share				44,541,260				42,246,379				44,032,582				41,525,023
Non-GAAP earnings per share continuing operations:
	Basic		$	0.50			$	0.32			$	1.64			$	1.01
	Diluted		$	0.47			$	0.30			$	1.51			$	0.93
GAAP gross margin from continuing operations as a % of revenue				67.1%				69.1%				67.9%				62.1%
Stock-based compensation				0.6%				0.7%				0.7%				0.7%
Amortization of inventory fair value step-up and intangibles, Cortina revenue lost due to purchase accounting and others				5.6%				6.1%				5.0%				10.5%
Non-GAAP gross margin from continuing operations as a % of revenue				73.3%				75.9%				73.6%				73.3%

(a)	Reflects the Cortina revenue lost due to purchase accounting and corresponding cost of goods sold. The Company includes this item when it evaluates the continuing operational performance of the Company.
(b)	Reflects the stock-based compensation expense recorded relating to stock based awards. The Company excludes this item when it evaluates the continuing operational performance of the Company as management believes this GAAP measure is not indicative of its core operating performance.
(c)	Reflects the legal, transition costs and other expenses related to acquisitions. The transition costs also include short-term cash retention bonus payments to Cortina employees that were part of the purchase agreement when the Company acquired Cortina. The Company excludes this item when it evaluates the continuing operational performance of the Company as management believes this GAAP measure is not indicative of its core operating performance.
(d)	Reflects the cost of goods sold fair value amortization of inventory step-up related to acquisitions. The Company excludes these items when it evaluates the continuing operational performance of the Company as management believes this GAAP measure is not indicative of its core operating performance.
(e)	Reflects the fair value amortization of intangibles related to acquisitions. The Company excludes these items when it evaluates the continuing operational performance of the Company as management believes this GAAP measure is not indicative of its core operating performance.
(f)	Reflects the fair value depreciation of fixed assets related to acquisitions. The Company excludes these items when it evaluates the continuing operational performance of the Company as management believes this GAAP measure is not indicative of its core operating performance.
(g)	Reflects the impairment of in-process research and development from the Cortina acquisition. The Company excludes these items when it evaluates the continuing operational performance of the Company as management believes this GAAP measure is not indicative of its core operating performance.
(h)	Reflects indirect expenses which includes engineering software tools and lease expenses associated with discontinued operations. The Company excludes these items when it evaluates the continuing operational performance of the Company as management believes this GAAP measure is not indicative of its continuing operating performance.
(i)	Reflects the loss on disposal of certain property and equipment from the Cortina acquisition. The Company excludes these items when it evaluates the continuing operational performance of the Company as management believes this GAAP measure is not indicative of its core operating performance.
(j)	Reflects the accretion and amortization expense on convertible debt. The Company excludes these items when it evaluates the continuing operational performance of the Company as management believes this GAAP measure is not indicative of its core operating performance.
(k)	Reflects the gain on sale of cost method investment. The Company excludes this item when it evaluates the continuing operational performance of the Company as management believes this GAAP measure is not indicative of its core operating performance.
(l)	Reflects the change in valuation allowance and delta in interim period tax allocation from GAAP to non-GAAP related to non-GAAP adjustments. The Company excludes this item when it evaluates the continuing operational performance of the Company as management believes this GAAP measure is not indicative of its core operating performance.

INPHI CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP MEASURES -FIRST QUARTER 2017 GUIDANCE
(in thousands of dollars, except share and per share amounts)
(Unaudited)
			Three Months Ending March 31, 2017
			High				Low
Estimated GAAP net loss from continuing operations			$	(10,000	)		$	(11,200	)
Adjusting items to estimated GAAP net loss:
	Operating expenses related to stock-based compensation expense			9,900				9,700
	Amortization of intangibles and fair value step up on acquired inventories			16,700				17,000
	Other acquisition and transition related expenses			1,300				1,500
	Amortization of convertible debt interest cost			5,895				5,895
	Tax effect of GAAP to non-GAAP adjustments			(3,600	)			(3,700	)
Estimated non-GAAP net income from continuing operations			$	20,195			$	19,195
Shares used in computing estimated non-GAAP diluted earnings per share				44,900,000				44,900,000
Estimated non-GAAP diluted earnings per share			$	0.45			$	0.43
Revenue from continuing operations			$	94,500			$	92,500
GAAP gross margin from continuing operations			$	51,730			$	49,413
	as a % of revenue			54.7	%			53.4	%
Adjusting items to estimated GAAP gross margin:
	Stock-based compensation			650				650
	Inventory Step Up			6,700				7,000
	Amortization of intangibles			10,000				10,000
Estimated non-GAAP gross margin			$	69,080			$	67,063
	as a % of revenue			73.1	%			72.5	%