Maxlinear Inc

NASDAQ:MXL

Earnings Call Transcript 2019-Q4

[Operator]

Greetings, and welcome to the MaxLinear Fourth Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Brian Nugent. Please go ahead, sir.

[Brian Nugent, IR]

Thank you, operator. Good afternoon everyone and thank you for joining us on today's conference call to discuss MaxLinear's fourth quarter 2019 financial results. Today's call is being hosted by Dr. Kishore Seendripu, CEO; and Steve Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer. After our prepared comments, we will take questions.

Our comments today include forward-looking statements within the meaning of applicable securities laws, including statements relating to our first quarter 2020 revenue, gross margin, operating expense, tax expense, tax rate, and interest and other expense guidance, as well as statements relating to trends, opportunities, and uncertainties in various product and geographic markets, including, without limitation, statements concerning growth opportunities for our wireless, infrastructure, and connectivity markets, and for improved revenues in our broadband markets.

These forward-looking statements involve substantial risks and uncertainties, including risks arising from competition, the outcome of global trade negotiations, export restrictions, potential supply constraints, our dependence on a limited number of customers, average selling price trends, risks that our markets and growth opportunities may not develop as we currently expect, and that our assumptions concerning these opportunities may prove incorrect, and numerous other risks outlined in the Risk Factors section of our recent SEC filings, including our previously filed Form 10-K for the year ended December 31, 2019, which was filed today.

Any forward-looking statements are made as of today, and MaxLinear has no obligation to update or revise any forward-looking statements. The fourth quarter 2019 earnings release is available in the Investor Relations section of our website at maxlinear.com.

In addition, we report certain historical financial metrics, including net revenues, gross margins, operating expenses, income or loss from operations, income taxes, net income or loss and net income or loss per share on both GAAP and non-GAAP basis. We encourage investors to review the detailed reconciliation of our GAAP and non-GAAP presentations in the press release available on our website.

We do not provide a reconciliation of non-GAAP guidance for future periods, because of the inherent uncertainty associated with our ability to project certain future charges, including stock-based compensation and its associated tax effects.

Non-GAAP financial measures discussed today do not replace the presentation of MaxLinear GAAP financial results. We are providing this information to enable investors to perform more meaningful comparisons of our operating results in a manner similar to management's analysis of our business. Lastly, this call is also being webcast and a replay will be available on our website for two weeks.

And now, let me turn the call over to Kishore Seendripu, CEO of MaxLinear.

[Dr. Kishore Seendripu, CEO]

Thank you, Brian, and good afternoon everyone. Thank you all for joining us today. Our Q4 2019 revenue was $70 million consistent with our guidance. Non-GAAP gross margin improved 150 basis points sequentially, and operating expenses declined on disciplined execution. We also delivered $28.1 million in strong cash flows from operations.

As a percentage of our overall revenue, our connected on business stood at 43%, infrastructure was 29%, and industrial multimarket was 28%. We continue to successfully execute on our critical engineering and customer engagement initiatives in our strategic 5G wireless infrastructure, optical datacenter and I performance analog markets.

In the near term, we are solidifying our position with the Tier 1 hyperscale data center and customer and they're also increasingly confident in the ramp of the industry's first 400 gigabyte M4 deployments in the second quarter of the year.

Additionally, our second generation Tilera PAM4 DSP SoC fiber optic portfolio, optimized for single lambda 100 gig band for QSFP and SFP modules garnering significant traction. We believe single lambda 100g, 400g PAM4 solutions will dominate datacenter and 5G front-haul deployments over the next several years.

On the technology front, we are excited about tapping out our first 5 nanometer CMOS test chip, which sets the stage for our continued technology leadership in the optical data center and 5G wireless markets. In the 5G wireless infrastructure market, we are excited to announce the second win with a large Asian customer, in addition to the Tier 1 OEM designing we announced in the last quarter.

We expect to realize initial revenue for our 5G wireless RF transceiver in this year, which will position us for strong growth beyond 2020. This design win momentum further confirms our traction in the 5G wireless massive-MIMO RF transceiver market. Over the past couple of months, European operators are pushing aggressively towards 400 megahertz bandwidth 5G architecture.

Our RF transceiver product is the only industry solution designed to meet this requirement. More broadly, we are engaged with all Tier 1 OEM and customer feedback continues to confirm that our 5G RF transceiver has the highest performance double bandwidth and superior system-level integration and up to 50% lower power consumptions versus competition.

In 4G and 5G wireless back-haul, our RF SoC is the only solution to support channel aggregation with double data capacity in existing available spectrum for current and future 5G wireless transport networks. As a result, the broad adoption of our disruptive RF SoC continues, which will drive back-haul revenue growth in 2020 and beyond.

In the near-term, we are experiencing some impact due to supply chain trade restrictions related to China. We are looking forward to share more details about 5G wireless and optical data center customer engagements and roadmap initiatives at the Mobile World Congress later this month and at OFC in early March respectively.

Moving on to the connected home market, as expected during Q4, we saw a temporary pause in our new flagship MoCA platform deployments by our major telco operator and customer. Connectivity remains an important growth driver for this market and our MoCA and G origin solutions business will benefit from that market dynamic.

Our cable data business improved in Q4 though we expect operator deployments likely to be muted for the next couple of quarters. However, we do have improving visibility in these markets and are confident in our positioning for the next wave of DOCSIS 3.1 deployments for North America and expansion outside North America.

Overall, we are on track with our strategic diversification initiative to drive strong future revenue growth in 5G wireless, optical data center, and high performance analog power industrial markets and establishing our 5 nanometer CMOS technology platform for continued leadership in these markets.

With that, let me turn the call over to Mr. Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer for a review of the Q4 business results and our forward guidance.

[Steve Litchfield, CFO and Chief Corporate Strategy Officer]

Thank you, Kishore. I'll first review our Q4 2019 results and then further discuss our outlook for Q1 2020.

On revenue of $70 million, the end market demand was consistent with our outlook. We saw our connected home business down 25% sequentially with step downs in MoCA due to the pause in the new product ramp and satellite, which is now deteriorated to an insignificant level.

Our infrastructure business increased 2%, driven by an uptick in our high-speed interconnect business with other product categories flat to slightly down. Our industrial multi-market business was down slightly sequentially, much like various peers in these markets.

GAAP and non-GAAP gross margins for the fourth quarter were approximately 52.3% and 64.6% of revenue, respectively. This compares to GAAP gross margin guidance of 52% to 52.5% and non-GAAP gross margin guidance of 63.5% to 64%. The improvement in the quarter was driven primarily by mix improvements during the quarter.

The delta between GAAP and non-GAAP gross margins in the fourth quarter reflects the amortization of $8.5 million of purchase intangible assets from previous acquisitions and $0.1 million of stock based compensation.

Fourth quarter GAAP operating expenses were approximately 44.6 million which was slightly above our GAAP guidance of 44 million to 44.5 million due to a small restructuring charge during the quarter.

GAAP operating expenses included stock based compensation and stock based bonus accruals of 8.6 million, amortization of purchased tangible assets of 5.7 million and restructuring charges of 0.2 million.

Non-GAAP operating expenses were 30 million which was down point 0.7 million sequentially and consistent with our non-GAAP guidance of 29.5 million to 30.5 million due to continued discipline expense management.

We have been successful managing the spend during the transitional period. After sequential reductions in the last four quarters, our quarterly non-GAAP OpEx run rate was down 18% year over year.

Moving to the balance sheet and cash flow statement, our cash flow generated from operating activities in the fourth quarter of 2019 was 28.1 million versus 21.8, generated in the third quarter of 2019.

Our loan balance remains at 212 million, but our net leverage ratio was reduced to below 1.5 times due to strong cash generation in Q4. We remain consistent and our intentions around our uses of cash with priorities on debt pay down and acquisitions.

Our day sale outstanding for the fourth quarter was approximately 66 days, which is slightly above the prior quarter day sales outstanding of 64 days. Our inventory turns increased to 4.1 compared to 3.8 in the third quarter.

That leads me to our guidance. We currently expect revenue in the first quarter of 2020 to be approximately 65 million to 70 million, down approximately 3.7% sequentially at the midpoint of the guidance range. We expect connected home revenues to be flat to down slightly quarter over quarter with video-related products largely offsetting expected declines in DOCSIS demand.

We expect infrastructure revenue to be down approximately 10%, owing to weakness and HPA demand in this category, particularly in China as well as seasonality and other infrastructure categories. We expect our industrial and multi-market to be approximately flat to slightly down as we navigate a market recovery.

We expect the first quarter GAAP gross profit margin to be approximately 53.5% to 54% of revenue, and non-GAAP gross profit margins to be approximately 63.5% to 64% of revenue, down slightly sequentially due to the mix and negative leverage on lower revenue.

As a reminder, our gross profit margin percentage forecasts could vary plus or minus 2% depending on product mix and other factors. Even as we're focused on reducing our run rates spend levels, we continue to fund strategic development programs targeted at delivering strong top line growth in 2020 and beyond with particular focus on infrastructure initiatives and our stated goal of increasing the operating leverage in the business.

We expect Q1 2020 GAAP operating expenses to increase approximately 2.2 million quarter-on-quarter to a arrange of 46.5 million to 47.5 million, driven mainly by seasonal payroll increases and to a lesser extent tools supporting our product development roadmap.

We expect Q1 2020 non GAAP operating expenses to be up approximately 2.2 million sequentially to a range of 32 million to 32.5 million. We expect GAAP tax expense to be approximately zero and non-GAAP tax rate of 6%. We expect interest and other expenses in the quarter to be $2.5 million to $2.6 million.

In closing, we are pleased to report continued progress in our restructuring is highlighted by our expanding product portfolio and design engagements in 400 gig data center market, engineering and customer milestones in our 5G massive MIMO transceiver. While China markets remained turbulent, in the near-term due to multiple issues, we're beginning to see stabilization in our connected home business, particularly on the cable data side.

We will focus on maintaining strong profitability and cash flow generation as well as executing on our strategic investment. These infrastructure initiatives and strong engineering execution combined with upcoming upgrade cycles in the data center and wireless markets, position us well to deliver strong leverage in our business as many of our new product rollout start to layer in incremental revenue streams in 2020.

With that, I'd like to open up the call for questions. Operator?

[Operator]

Thank you. Now, we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question today is coming from Quinn Bolton from Needham & Company. Your line is now live.

[Quinn Bolton, Needham & Company]

Congratulations on the second 5G transceiver win. Just wondering, if you can give us a little bit more detail with that Asian customer, is that a global or world-wide platform? Or will it be targeting geographies -- specific geographies say China in particular? And then I've got a couple of follow-ups.

[Dr. Kishore Seendripu, CEO]

Hi, Quinn. The second design we have just announced in this call is the Asia OEM as we have mentioned and the platform is universal. Having said that, they're not a Chinese OEM, but they do have a worldwide presence. They currently ship products into 3G, 4G markets as well. So, geographically speaking, they're present in many places, but their primary focus is in Asia.

[Quinn Bolton, Needham & Company]

And then second on the data center business. You've said now for a while, you think that, that business starts to ramp in the second quarter of this year. Wondering, if you could just comment across your portfolio, is the ramp for both DR1 and DR4 modules? Or will that start with DR4, DR1 and then you have layer in the other overtime?

[Dr. Kishore Seendripu, CEO]

So, currently, I just want to remind everybody that, 400 gig PAM4 DSP is our first entry to data center interconnect products, right, and which is based on a single lambda 100 gigabit technology. So, we have two products that are trying to this market. One is 400 gig PAM4 DSP with the integrated driver and a Tia campaign chipset, and also we are the only one with an optimized 100 gigbit QSFP and VSP solution.

So, both of these initial ramps in these markets are going to be based on DR1 and DR4 and we expect the other categories on the FR4 side to happen following this particular ramp. But the initial ramp and the ramp that is going to happen in this major hyperscale data center is based on DR1 and DR4.

[Quinn Bolton, Needham & Company]

And then lastly for Steve. You've mentioned multiple issues in China, kind of wondering if you might be able to give us a little bit more color. Is this still more trade related? Is it more coronavirus looking forward or a combination of both? Or are there other factors affecting that China business?

[Steve Litchfield, CFO and Chief Corporate Strategy Officer]

Yes, Quinn, I mean actually just mentioned multiple factors. They both are probably influencing our business at this point. So, as you're familiar, I mean, we've definitely had the export issues, but we've also seen a fair amount of slowdown just in the recent weeks around the coronavirus as well so we wanted to highlight both.

[Operator]

Thanks. Our next question is coming from Gary Mobley from Wells Fargo. Your line is now live.

[Gary Mobley, Wells Fargo]

I wanted to focus a bit on the connected home business and think about the different moving pieces; and if we're not mistaken, the two remaining most influential pieces that business with the cable data and the MoCA businesses perhaps have concentrated with Verizon. And so, as we look back for your 10-K filed for the close that looks like your cable data business specific to your one-main customer might have been down with 35% in 2019. As you think about how you have your trailer hitched to perhaps the right horse in 2020, how should we think about the growing diversity of that cable data business? And what the growth prospects may look like in 2020?

[Steve Litchfield, CFO and Chief Corporate Strategy Officer]

Yes, Gary, not a problem. Yes, so, we definitely have had our struggles with our largest customer over the last, say, year and a half. I'd say that we're in a much better position. As we sit here going into 2020, I think we're much more confident, have much better visibility in kind of that, as they ramp products and kind of regain share that they really lost in the previous year. So, while it has been disappointing, to-date I mean, I really I do feel like things are improving and we'll see that get back on track in the current year.

[Dr. Kishore Seendripu, CEO]

And also to mention that was the most significant contributors to the revenues have down in this category. It has been also the operators span itself has come down and that is a bigger contribution than our major customer specific issues related to acquisition and so.

[Gary Mobley, Wells Fargo]

As you think about your MoCA business, we believe we're perhaps in the middle and correct me, if I'm wrong, of maybe some inventory digestion as your one main customer sort of built the channel had a service launch and equipment launch. Where do we stand on that front with maybe a return in that business?

[Dr. Kishore Seendripu, CEO]

Yes, Gary, I mean, I think we brought this up even last quarter, as we saw some softness in that ramp, right. They took a lot of product ahead of time, anticipating a much faster ramp. So, what we've been pretty clear about from our expectations and really where we see this today, we think we see it moving sideways in Q1 and then we'll start to see some return to growth in Q2.

[Gary Mobley, Wells Fargo]

Okay. And the infrastructure business somewhat starting a hole in the first quarter was expected to be down 10% sequentially. Do you think this business can grow in 2020 and we see a rebound off the Q1 base, in addition to the PAM4 ramp and maybe some contribution from the 5G RF transceiver? Are there other factors that will help drive the rebound as we look into the balance of 2020?

[Steve Litchfield, CFO and Chief Corporate Strategy Officer]

Yes, absolutely. I mean, so maybe just to get to your first question, I mean, do we expect it to grow? Absolutely, we expect it to grow. I mean, I think it can grow on the order of 15% to 20%. That said, we've had a lot of challenges with China and you're familiar, we do have a couple of more than a couple, but so several customers in China that make this out, but there have been some headwinds.

So, I don't think that comes as any surprise, but we do have these new products. We do expect to see them ramp in the coming year and we absolutely are, as Kishore mentioned earlier, confident in the PAM4 ramp for this year. So, that'll start to contribute starting in Q2 and then you've got massive-MIMO probably coming in the second half of the year. So, yes, we remained very excited about the infrastructure business and anticipating growing it nicely this year.

[Operator]

The next question is coming from Tore Svanberg from Stifel. Your line is now live.

[Tore Svanberg, Stifel]

So, first question on the connected home, sounds like maybe, it's going to start growing again sequentially in Q2. I know you're just kind of set a little bit of expectation in your infrastructure growth this year. How about connected home? Should we think about sort of down 5% to 10%? Any color there would be helpful?

[Steve Litchfield, CFO and Chief Corporate Strategy Officer]

Hey, Tore. So, I think our outlook on the connected home side -- so we've been cautious, this has been a tough market to call for us. Clearly, as Kishore had commented on earlier, the operator spend has been the biggest challenge in 2019. We do anticipate that starting to move in the other direction. But that said, I mean, we expect it to be somewhat muted, you know in the first half of the year. But I do expect to see improvements in cable data, but it's probably in the second half. Hopefully, we'll see the MoCA business, particularly a Verizon pickup as well.

We've been very fairly cautious here and saying that, even if it kind of moved sideways from the Q4 results throughout the year that I think that'll be a good progress towards stabilization. And I think that's what you've heard from us, that we see this business stabilizing. And I'm really optimistic that probably in the second half and into 2021 that operators spend picks up and we'd get back to some normal growth levels.

[Tore Svanberg, Stifel]

That's fair. And as it relates to the second design wins, the Asian customer for the 5G transceiver, will that start to generate revenues already this year or is that more 2021?

[Steve Litchfield, CFO and Chief Corporate Strategy Officer]

We expected to generate revenue towards the end of this year? I think definitely, provided data on production ramp is on track. We are ready to supply so to speak. And, because the long lead time market, we've already much earlier than these wireless OEMs take to qualify and go to production. So we will have some revenue at the end of this year from this particular OEM.

[Tore Svanberg, Stifel]

Sounds good. And last question, I think you mentioned 5 nanometers. So it sounds you're doing a little bit of leapfrog, not really working on 7 nanometer. Could you maybe elaborate on a little bit on sort of your position behind that leapfrog?

[Dr. Kishore Seendripu, CEO]

So, one of the interesting things of all these markets is, they take a long time to bear fruit. They're a long lead time markets. In the meanwhile, the long rev lead time, it does not track the rate at which the technology on the CMOS side has moved. So, one of the things we have learned in this it market is that, the incremental gains in changing the node, does not really affect the data center decision making process.

For example, there was a power limit at 16 nanometer which was required to enter the market and range, the first one to demonstrate their product is 16 nanometer 400 gigabit. But then, it seems that the power differentiation was not only determinant of the situation. The maturity of the technology and readiness to product and need to multiple vendors, right. So, going to the next technology node is 7-nanometer does not at all create a leap in power reduction.

Now the latest bid is for data center companies wanting to go to the next leap in technology 800 gigabit data rate. So, the 7 nanometer is neither here nor there, right? It doesn't improve the power consumption and 400 gigabit nor does it give you the kind of integration levels and powered power NCP reductions you need at 800 gigabit.

So, it seems in my conceded opinion, leapfrogging one technology node going to the alternate advanced technology, there is a much better idea to have a roadmap where the products all convert generation leads and being in the immediate what I call incremental technology node. And the cost development differences between 7-nanometer and 5-nanometer are very marginal, at best, its 10% to 15% difference.

So, you rather do one investment then do two separate investments simultaneously and that would not fit well with their OpEx discipline philosophy.

[Operator]

Thanks. Next question is coming from Bill Peterson from JP Morgan. Your line is now live.

[Bill Peterson, JP Morgan]

Just wanted to come back. You said that in China, you obviously have trade issues and you mentioned coronavirus. Can you help to quantify at least to the extent that your guidance is taking into account the coronavirus itself? And I guess more specifically, what areas would you see adding potential weakness in this industrial and multimarket or more infrastructure, if you can help us to understand it better, that would be great?

[Steve Litchfield, CFO and Chief Corporate Strategy Officer]

Hey, Bill. This is Steve. So, I don't know that, we can separate out that impact. So, we definitely see some impact there, but the trade situation in general continues to weigh a little bit on the infrastructure as well as our industrial market multimarket. As your familiar in the industrial multimarket just a much broader base of business and we're definitely seeing weakness in China have some impact there, but we do expect to start to see a recovery on that particular business.

On the infrastructure side, it had a bigger impact. And then in some respect, seeing that customer base start to look for alternatives, you know, is another thing that we've been cautious about, and our expectations and we try to be conservative and kind of our outlook and the potential for replacement is there.

[Dr. Kishore Seendripu, CEO]

And the other thing is that, currently, the Chinese New Year keeps getting extended due to coronavirus. It is very, very hard to have meaningful dialogues with the customer base. So, going into this call, we worry about how the pattern returns to bookings and backlogs and that sort of thing. So, did we -- can we quantify everything? No. Did we take a cautionary approach? Yes.

But having been cautionary enough that is a mystery, right? So, and I think that'll be true for all our peers as well and because for sure for sure it's like all our manufacture happens overseas. Are we going to be supply constraint or demand constraint is very difficult to get guess now. So we are being cautious, but we don't know if you have quantified that properly.

[Bill Peterson, JP Morgan]

Okay. That's fair. Thanks for the color there. Next question coming back to the optical business, obviously, your lead customer and obviously the other large US hyper scalars already wrapped at 200 gig. I guess we expect that Microsoft and maybe Alibaba while your peers said that another U.S. and China would be ramping later this year than the rest of the big three, two in China, one in the U.S. next year. So I guess the question is. Can you give us an update on where your attraction is on the other hyperscalers that you're working with, recognizing that revenue maybe later on, but just trying to get a feel for your design when pipeline with some of the other large hyperscalers?

[Dr. Kishore Seendripu, CEO]

So, Bill, I just want to clarify here that we entered this market by leapfrogging on the 400 gigabyte product, which is the next generation product. And at that point, we made a determination whether it was right for us to enter at 200 gigabit or 400 gigabit, and we chose 400 gigabit. So, it's really not -- we're not in a position where we changed the designers that are ramping now, but we are in a position to change the landscape on data centers that have not made those decisions.

So, we are engaged with all of them and we have our own unique value proposition and we are I mean, very constructed meaningful dialogues with them. But I do see the market's split. And even if you fast forward three to five years from now, you'll have products that are 400 gigabyte, 200 gigabyte and 100 gigabit. So I think it's going to be a, a colorful market in that sense. But we hope to have the entire forest portfolio to have presence in all of these markets. So the timings will be very different when we come out with what, but there is room for us to do which influential changes in the market directions and all the parties spin what already set in the market.

[Bill Peterson, JP Morgan]

Okay. Thanks. So I can ask one more, can you help us understand how we should think about OpEx through the year, if there's any? I guess, are there large tap out that you anticipate in 2020 and just give us a feel for how we should think about that?

[Steve Litchfield, CFO and Chief Corporate Strategy Officer]

Sure. Bill. I mean, I guess without going quarter to quarter. I mean we do have some mass costs. So, the front half of the year is probably more heavily weighted, and then it starts to decline a little bit in Q3 and Q4 as we've progressed up here.

[Operator]

Thank you. Our next question is coming from Christopher Rolland from Susquehanna Financial Group. Your line is now live.

[Christopher Rolland, Susquehanna Financial Group]

Hey, guys, thanks for the question. So, on infrastructure and the pace of the 5G roll out there, you guys talked about China. If I understand that correctly, maybe you're implying it's a 5G push out in China. And do you believe that's the case for all OEMs in China right now or just the ones that you're exposed to? And maybe if you could talk about your customer exposure there, how that works into the ramp? Thanks.

[Dr. Kishore Seendripu, CEO]

Chris, we're not implying anything to do with 5G at all. We're referring to a slowdown related to supply chain impacts with the trade restrictions and other multiple factors, so to speak which is, I don't want to bring up the wires every time. But the impact is more to do with our existing business that is already designed and ramping, which is primarily related to our wireless back-haul, radio, transceivers and some operates in this industrial multi-market solutions that ship in China.

So, there is no difference in our mind to 5G. In fact, we believe that, we will be very correctly positioned, but the big ramp in 5G with our offerings bode on our 4x4 massive-MIMO RF transceivers and are soon to be offerings in 8x8 massive-MIMO RF transceivers. We hope to do the first one in the world to make that happen, too, for the next generation leap and integration. So, no, there is no qualification on the 5G ramp timing at all. We will be positioned very correctly for that.

[Christopher Rolland, Susquehanna Financial Group]

And then on the infrastructure side again, the second OEM that you guys were talking, even the first OEM, as we try to get our heads around the opportunity here at the economics, how do we think about it? Do we think about a 100% attach rate per base station across our whole portfolio or is this just for a portion of their portfolio and is there anything that we can think about in terms of chips for base station and ASPs for those chips? Just helping us to kind of broadly frame the opportunity for OEM if we know, roughly, are there share number of base stations shift? How can we as analysts just going to frame that opportunity better?

[Dr. Kishore Seendripu, CEO]

That's a pretty big question with lots of color there. But clearly if 5G itself is a fraction of what the worldwide base these stations today are, the big plays where ramp is being strongly pushed is in China. Then the other ones will follow America and Europe. So, there is a time delay between China and Europe, and China will peak probably in the next two years, and then close second will be U.S. and Europe. So, it's going to come in regimes.

I don't expect attach rate to be 100%. And secondly, it's going to be a layered process of penetration, right? So, if you really think about what happens in base station is much more than it base stations plus it is active antenna systems that are going to have a massive MIMO, much more chips content and that you should look as maybe a $400 million to $500 million inactive antenna assistance in the next two to three years. You can can do a nice growth to get there.

And then on top of that, you need to add DAS systems, macro base stations and small-cell configurations or let's call the micro cells and you get to about three-quarter billion dollars of addressable on radio transceivers, and that's the market we are be participating in.

And then our competition and each OEM would be yes the supplier. They're all choosing two suppliers to diversify their supply chain base. We hope to be the common factor given being smaller aggressive company and then less aggressive company as the other supplier. We hope to split the share with them at each OEM.

[Operator]

Thank you. Our next question today is coming from Alex Vecchi from William Blair. Your line is now live.

[Kamil Mielczarek, William Blair]

Hi, this is Kamil Mielczarek on for Alex. Thanks for taking my question. So, you've talked in the past about PAM4 potentially being a $100 million product line over the next 3 to 4 years. Can you provide some detail on the cadence of growth over that time and how 800 G factors in? Thanks.

[Steve Litchfield, CFO and Chief Corporate Strategy Officer]

Wow, you're now talking about 800 G because our top 9-nanometer CMOS technology as opposed. We live in this wonderful world where the richest people want the poorest people to give them all kinds of candies, you know, and that's the data center people, right? So we have to missing 800 gigabit to actually have them buy our 400 gigabyte right? That's the way to look at the problem.

So I don't a while first sample of 800 gigabyte will happen sometime in the next 15 months or so window without revealing our timelines to you, by the way. So, I would expect that 800 gigabyte really won't shape for until three years after today. Let's say, maybe once again, our current Tier 1 hyperscale data center company will be the first one to lead the charge on that. And that's what we are focused on, really penetrate our relationship with them, stronger, get closer to them.

I think the bulk of the shipments will really be 400 gigabit, 100 gigabit. And 100 gigabyte will permeate the entire data center space, the enterprise space, replace existing 25 gigabit and 100 gigabyte WDM markets. And you know, there is a play for 200 gigabyte, that’s going on right now, and those are the revenue I expect to be shipping for the bulk of the next five years.

Right, 800 gigabyte would be starting to ramp during that window. So whatever revenues we have talked to you about getting to $100 million over the next three years or so time period in optical data center interconnect is really based off our 400 gigabit offering, a 100 gigabit offering. And a few other things, but I would leave it there.

[Kamil Mielczarek, William Blair]

That's helpful. Thank you. Just as a quick follow-up. Your cash balance is now I think at a multiyear high. Can you talk about your cash capital allocation plans and share your thoughts around a potential M&A? Thank you.

[Steve Litchfield, CFO and Chief Corporate Strategy Officer]

Yes, sure. Actually, yes, cash flow during the quarter was actually very good. We were very pleased with the progress that we're making on that front. With regard to our uses of cash, I mean remains the same continue to look at acquisitions as well as debt pay down. We're very pleased to see the progress on the leverage, getting it our net leverage down to 1.5 times. So we've really made nice progress on that over that over the last 18 to 24 months. And so definitely want to build up cash so that we can look at acquisitions, so we're optimistic that we can get something done in 2020.

[Operator]

Thank you. Our next question is coming from Tim Savageaux from Northland Capital Markets. Your line is now live.

[Tim Savageaux, Northland Capital Markets]

Hi, good afternoon, a couple of questions. First on the PAM4 side, I guess the commentary, early in the call, was about increasing confidence in the PAM4 ramp. I'd ask what's driving that increase in confidence as we get closer to it, any comments on the kind of initial magnitude of that ramp.

[Dr. Kishore Seendripu, CEO]

Hi, Tim. We've not met before, but look, these are dragged on for a long time and as more information comes out, it's very clear that we are farther along in the maturity of the levels of interops and at the module level qualification and things like that. So, we do feel that there are two vendors that are at the threshold of being fully ready to go. And so, there are a few more things that need to happen in this quarter, but there's a lead time to order patterns here and we are very hopeful that really results in a ramp in Q2.

And having said that of the, the size of the ramp, obviously, that's a little bit mysterious, but we expect an initial spurt and then slow down and then pick up later on in the second half of the year. That's the usual way things play out. But please keep in mind, the first time entering we're into markets. This is new for us. How it plays out, right? And we're also looking to see to be extra prepared in case the demand moves much faster than we think.

[Tim Savageaux, Northland Capital Markets]

Okay. Thanks. And if I could follow up and maybe beat this China horse to death here and really was a focus on China discern between kind of demand versus supply side impacts. I think if anything, we've seen pretty notable strengths across the ecosystem in terms of 5G, perhaps 5G driven mobile front-haul and back-haul off late in China. And so, with that in mind, is where I trying to get a better sense of whether you're seeing changes in the demand picture or inability to supply demand, and just maybe as an aside, whether we might be seeing a shift from microwave to fiber in China that might be having an impact?

[Dr. Kishore Seendripu, CEO]

I'll address the last one later. But, first and foremost, the demand spikes you're seeing as you said in front-haul. There is a really legacy fiber optic solutions for the telecom market. They are not the new enhancement in bandwidth for transport market. So, we are not participating in the older technologies. Our offerings in 5G are really by the enhanced bandwidth, the usage cases that is going to be a little bit later, right?

So, regarding the ability to supply, we will be able to supply, but it's a careful balance between what we have to supply versus which product the demand is noble so to speak, right? So given that most of the customers are really on a holiday and there can be no consensus in terms of how their demands are picking when they return really cannot speak for what that plays out to be. But, but I wanted, there is last one which you said that, is China moving microwave backhaul to fiber optic?

No, no, no. China was never a microwave backhaul country for transport. It was always a fiber based country just like the U.S. is. However, the Chinese millenniums are one of the biggest exporters of microwave backhaul transport technologies for the rest of the world, and the rest of the world outside the U.S. and China are very wireless backhaul oriented and those are the markets they ship into, and one of the biggest markets is India which itself is evaluating its options with millimeter microwave both of each have solutions and they're are the only provider in both these cases as a merchant vendor for the silicon for millimeter wave and microwave back haul.

[Tim Savageaux, Northland Capital Markets]

Thanks a lot.

[Dr. Kishore Seendripu, CEO]

So with that, I want to wrap up this conference call here. So, thank you operator. We also want to let everybody know that we are participating in the SIG 9th Annual Technology Conference in March 12th, in New York; the 2020 Roth Conference at Dana Point, California; and we'll also be hosting investor meetings at the Mobile World Congress on February 25th in Barcelona, Spain and at OFC on March 10th in San Diego, California. We hopefully will see many of you there.

With that being said, we thank you all for joining us today and we look forward to reporting on our progress to you next quarter.

[Operator]

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.