MaxLinear, Inc. (MXL) Earnings Call Transcript & Summary

Hello. Good morning, everyone. It's Vivek Arya. I'm the Senior Semiconductor Analyst at Bank of America Securities. I'm really delighted to have Steve Litchfield, the Chief Financial Officer and the Chief Corporate Strategy Officer for MaxLinear, joining us this morning to share his insights about MaxLinear and the industry. And what I was hoping to do was just maybe start with Steve giving us a quick overview of MaxLinear for those of you who might not be as familiar with the company, and then we will go into Q&A. But if during the Q&A, if you have any questions from your side, please feel free to e-mail them to me through that Veracast console, and I'll be sure to feed them in. So with that, a very warm welcome, Steve, and let me turn the floor over to you for opening remarks.

Okay. Great. Well, thanks, Vivek, and thanks, everyone, for joining us this morning. I'll just give you a couple of highlights. I'm sure many of you are familiar, but those who aren't, MaxLinear is an analog mixed-signal business. We've been -- we went public in 2010, founded in 2004 and really have stayed true to that analog mixed-signal focus from a technology standpoint. Grown the company, we've been very focused on -- there's primarily 3 markets that we participate in: the infrastructure market, which includes data center and wireless and wireline infrastructure; as well as Connected Home, which is close to 50% of our business; and then our industrial multi-markets business, which actually has a lot of high-performance analog component products that we offer in that particular business. So we just reported earnings. It seems like not that long ago, but things are going pretty well. We kind of, given the coronavirus, I mean everything that the world continues to throw at us right now we are trying our best to navigate. But I actually feel like we're in a really good position. Frankly, our infrastructure business that we've invested in heavily, it's getting close to on about 1/4 of our business and growing. But couple of these bigger investments for data centers, so our PAM-4 DSP as well as our massive MIMO chip, the transceiver that's going into the access market, just coming out, early design wins. So that's a pretty exciting time. And infrastructure doesn't kind of ebb and flow quite as much. And -- so we've seen a relative amount of stability. Connected Home has actually held up well. You've got a work from home environment, where people are really recognizing the need for, for bandwidth in the home. And so I think that's opened up a lot of buys, and we're seeing some demand there. Industrial Infrastructure -- the industrial multi-market segment is probably the one area that we've been exposed although kind of given some of the demands there, we've seen definitely weakness in Q1, started to see some really nice recovery late Q1, early Q2 that we spoke about on our call. And a fair amount of exposure in Asia. So we see, as Asia comes back to work and things stabilize a little bit, we're starting to see a recovery there. So maybe with that, Vivek , I mean, I don't -- I could go on forever, but maybe we could shift over to you and happy to maybe have some questions from you or any of the other folks.

Sure. Excellent. So that's a great overview. Steve, so let me start with a few near-term topics, and then we'll go to the longer-term growth drivers. On the near-term side, I think you did mention like everyone else in the industry, you're also exposed to the COVID-19 headwinds. Where are you from a supply perspective? And what demand headwinds have you seen? And have any of those things started to change, just because from the outside looking in and it seems like things are starting to improve at the margin. But I just wanted to get your perspective on what impact have you seen so far and if you have seen any change in it for the better?

Sure, sure. Yes. So we definitely saw supply constraints in Q1, particularly, there's a variety of those as we're -- I mean, us like many others, supply chain, mostly in Asia. Our main suppliers, I mean, big TSMC, UMC, Global Foundries and then a handful of other foundries as well and all your normal kind of back-end assembly and test facilities as well. We did have some impact in Q1, which we talked about. Not -- we didn't quantify it exactly, but definitely saw some challenges to get some of the products out, especially on our industrial side, some of the component HPA products. We did see some challenges. But that's started to recover. I think we've also been fortunate in that we're not in a couple of these countries that have had bigger challenges, where they've shut down the entire country and the like. But I would say things have really improved on the supply side. The demand side, and we talked about that, I mean, absolutely saw weakness in Q1, especially on the industrial side. And -- but since then, I mean, the first 3 to 4 weeks of the quarter, I mean, really saw strong bookings and sell-through through our channels, some of that industrial multi-market business goes through distribution. But the sell-through itself is very strong. So I've been really encouraged to see some of the pickup. We had actually had a number of our businesses where backlog has been growing. Many of you are familiar, but we had -- our Connected Home business had struggled in 2019, for a number of reasons, tariffs and our customer had some challenges, unfortunately, but we had kind of expected to get through that, and it feels like that indeed has happened. And even in early January before this COVID had really started to get a lot worse, if you will, we had started to see backlog grow. And we've continued to see that backlog grow. So kind of backlog coming into Q2, going into Q3, actually in a much better position than we have been in several quarters. So frankly, pretty encouraged by that business right now.

No, that's very good because I think, as you described, I imagine both your infrastructure business and the Connected Home business is kind of in the sweet spot of the growth drivers, right, parts of the market that are more resilient. Though one of the near-term topic that's on top of mind for investors is all the U.S.-China trade tension as one part that relates to Huawei and the other part that relates to any potential impact from increasing Department of Commerce restrictions. Give us a sense for how MaxLinear is exposed to those two kind of related issues?

Yes. No problem. That's a hot topic right now. I know that we're all trying to navigate that as well. So maybe I'll start with the Huawei piece and talk about China as a whole and Department of Commerce. So we -- so Huawei is a customer. We have shipped into Huawei for a year, I mean, for several years, and I guess when this really hit, which is about May of last year, at the time, and frankly, even today, we were really at the early stages of a relationship with Huawei. And so it had never been a substantial amount of revenue for the company. Now we were counting on a fair amount of growth in 2019 that really never materialized. We, like others, shut down and had to really dig in to make sure that we were meeting all the Department of Commerce rules and export compliance, which we were and ultimately ended up shipping again in late Q3. And -- so we have shipped, but it still hasn't materialized as a significant customer and so we're watching that closely. We are -- the majority of our products, and we have a variety, we sell high-performance analog. We sell -- I mean, some transceivers into this market. And -- so that's something that we'll continue to sell. So that hasn't changed at all but we're watching it closely. I mean, a lot of our content, our IP, our design teams in a lot of cases, are all offshore. So we're developing IP. It's something that's pretty unique about the company, and I think it differentiates us from the standpoint that we are developing a lot of IP offshore as opposed to just kind of lower-end product that many companies would do offshore. And so that's helped. But by no means does it mitigate the risk altogether. I mean, China as a whole and how we're navigating it, I mean, we do -- it has been something that we've continued to build the company and make sure. It's something else that's really attractive about building MaxLinear and hiring talent because they're doing real meaningful work, no matter what region you're in. I mean, we have a design facility in Spain. For example, we have some folks in Canada. We have some folks in Bangalore that are doing really substantial work. And that helps and that helps at least the current rules and regulations. Now that could all change. Coming into 2020, we are very cautious, just knowing a lot of the uncertainty. And so we've taken a lot of that Huawei risk out of our plans. And so I think it's relatively small at this point.

Got it. And any evidence that you might have seen of any pull-in by Chinese customers, Huawei or otherwise, given that, just as you said, the trade tensions have been there for the industry for nearly a year plus now. So I have seen in many other companies, right, some of the demand signals, right, have been somewhat distorted, just given the trade tensions. But anything you might have seen over the last 1 or 2 quarters in terms of pull-ins that could have an impact later during the year?

Yes. I don't -- so I wouldn't say that we've seen a lot, like I said, kind of coming into this year, like in our Q1, Q2, I mean, relatively small for us. I mean we are aware and we have seen what you're referring to. So we're not surprised and definitely heard about it. But I wouldn't say that we've seen good pull-ins at Huawei, and every component is different for those guys, right? I mean -- and that's part of the challenge, and we even talked about it in our earnings call in January. And I think we -- it came up again in the April call. But the dynamics are very challenging because Huawei's demand itself has changed. You don't know what inventory they have in place, what they don't have in place. And so in some cases, they're buying product ahead. But then at the same time, in a lot of cases, they don't have product either, and so they're not going to be able to ship and, therefore, don't want to take any more inventory on. So it's definitely uncertain and -- right now.

Got it. Now let's go through your longer-term drivers and the 3 markets that you mentioned, so starting with the biggest one, which is Connected Home. Talk to us about what trends you are seeing there. And I believe you recently acquired an asset from Intel, their Home Gateway platform division. So give us a sense for what your portfolio looks like and what you're hearing from your customers in terms of their spending priorities?

Yes. Yes, so I mean -- so our Connected Home business, a large portion of that is sold into cable data and that's the biggest portion. It's typically up front end that we sell. And we actually sell it alongside of Intel's SoC product, and that competes against an integrated offering from Broadcom. And so that is probably the biggest offering. Those cable operators definitely are seeing an increased demand. This is an area that's been a little bumpy. Their operator spending in 2019 was really low. It came down quite a bit more than I think what the entire industry had expected. So it was a struggle. We definitely saw numbers come down in 2019. But coming into this year, as I kind of alluded to this a little bit earlier, but really, bookings have picked up. And some of this is just their spending is starting to improve. There's a little bit of share improvement on our side. And then there's a couple of bigger programs that are expected to ramp in 2020, some of which will happen kind of Q3, Q4 of this year. So that's part of that building backlog, so I do see things improving. That's the cable data aspect of it. We do have a connectivity piece, like there's MoCA, which is more of a wireline solution, so often implemented with the cable modem in your home, where you don't have good access with your Wi-Fi, often you can put in a MoCA system, which is really a backbone that will work as kind of like a sprinkler system. And MoCA is something that has gotten a lot of traction. We had a big win at Verizon, ramped really well in the second half of last year. Saw a pause in Q4. Really picked up in Q1 of this year, and we're expecting things to continue to improve there. So MoCA is another piece of that. Our G.hn, which is more of a power line technology, if you're not familiar, that's really attractive in Europe. And so that's a nice growing segment of our business that a lot of time sells into a variety of end applications. So MoCA, G.hn, going real well. Now we're finally starting to see cable data really kick in and that work-from-home environment picking up. On the -- maybe just a couple of minutes on the Intel Gateway acquisition. So exciting acquisition for us and fairly sizable piece of business really brings a substantial amount of scale to MaxLinear that we're very excited about, very accretive, tons of technology. And really, I think there's a few pieces of that business that are quite exciting, the Wi-Fi business. And Wi-Fi is an exciting area, that tremendous market right now with a lot of growth potential in it. Wi-Fi 6 just now starting to roll out. So we've got solutions there that will begin to ramp. And that's driving some of the interest within the home as we were just talking, right? And -- so it's a natural progression in that Wi-Fi path, where we see substantial share being gained there. But also the markets are growing also. And then PON or fiber, I mean, that's another area that we do have products and then Ethernet. Ethernet is a big growth component of the business. Early stages doesn't have a lot of penetration yet, 2.5 gig, 5, 10 gig going forward. So that's an exciting area also, and it builds out the entire offering, right? And so, historically, we've just had a front-end that kind of sold alongside of an SoC from Intel. Now we've got the entire solution and so much more compelling. We paid just a kind of maybe a quick highlight of the deal, but we paid $150 million for the asset. And what we've -- what we talked about on the last earnings call is the expected revenues. This is what we put out in April when we announced this, $60 million to $70 million a quarter in that first quarter. And we -- it's gross -- from a gross margin standpoint, less -- a little bit lower than our gross margins today, but we do see a path in getting that above $60 million over the next, say, 12 months. And then just from an operating margin standpoint, this is probably low 20% operating margins in that similar time period. So within 12 months, get to the low 20% op margins. And then just to kind of walk you through the accretion math, the last piece, well, we did take on some debt to do this. It was about $140 million of a term loan A, which has a rate of LIBOR plus 4.25%. So you count on about 5% for that interest rate. The math comes out to be a very accretive deal. But quite frankly, it's very transformative from a MaxLinear standpoint just because the size and scale that it brings us and then a lot of the technology attributes that it brings really kind of changes the game for us and allows us to be a lot more aggressive. We're very excited about it. It gives us another growth driver so you put Wi-Fi along with our PAM-4 DSP, along with the massive MIMO chip for 5G. We got 3 big growth drivers for the company going forward and a lot more scale in order to really drive that growth.

Got it. I got one question from an investor, which is, what does MaxLinear think about DOCSIS 4.0 technology? Will the cable companies ever launch that? Or will it -- will you guys or Broadcom need some incentive from the cable companies? Or just what does DOCSIS 4.0 mean for MaxLinear?

Yes. No, it's a hot topic a lot of folks are talking about. There's been some articles written about it as well. So I mean, we're absolutely working on DOCSIS 4.0. DOCSIS 3.1 is still rolling out, right? And we're still seeing upgrades right now in the home. I mean, that's part of what's driving this -- the current growth that we're seeing even. So I wouldn't say DOCSIS 3.1. And even in Europe and Asia, I mean, they're still on 3.0. So still a long way to go and a lot of runway there. But of course, engineering teams already thinking about DOCSIS 4.0. I guess the only thing that -- and some of this has been documented, I mean, Broadcom, very well known, supposedly not investing heavily here. I think our view of this is that at the right time, when this is coming, we're going to invest along the way. We've got to be prudent. This market is a lot more mature than a lot of other markets. And so the innovation cycles aren't quite as aggressive as they once were just because of the demand, right? So the -- if I look at even -- I mean, we've talked a lot about the Intel Gateway business, what's the growth expectation? There's low single-digit growth rates, right? And so this is something that you've got to really monitor the investment cycle. So we've been very careful not to overinvest in our own business. And naturally, with this new Gateway business from Intel as well, I mean, we'll be prudent as far as the level of investment. Absolutely, we want to partner with customers. We -- if they want to accelerate this and if we want to participate in that investment, we can absolutely consider. It's all an ROI analysis. It is pretty simple stuff.

Got it. Let's talk about 5G. How do those rollouts impact MaxLinear? What products will be involved? And do you think there is a level of cannibalization also for your Connected Home business as 5G rolls out? Or we are very far away from that just because we are very early stages of rollout. And people always talk about cannibalization, but these things end up being more complementary, right, than anything.

Yes. Yes, it's a great point, actually. On 5G, I don't see it cannibalizing. I mean, so probably 3 to 4 years ago, the company really kind of saw Connected Home and knew that we needed to go after larger, more mature markets and those who are emerging, such as 5G, as we definitely saw this occurring. But I couldn't agree more. This is years out, right? I mean, does it ultimately cannibalize some of it? Yes, I think it probably does. But I -- at the same time, the infrastructure that's been laid on the cable side, I mean it's going to be there for a long, long time to come. And so I don't see that changing dramatically. You can see fixed home wireless, things like that, 5G actually having an impact at some point. But for the time being, I think they're pretty complementary. With regard to our offering on the 5G massive MIMO side, just really early stages, what we've said, we'd expect some low level of revenues in the second half of this year, on track to do that. These are early design wins in our first chip in this market that was done kind of mid last year. Design wins are in place, revenues in the second half of this year and then start to see a more material ramp in the first half of 2021. For the most part, as I'm sure you and many of investors have heard, I think you don't see a big slowdown here. I mean, 5G is really happening and then in China, I think, first and foremost. And I think that's absolutely rolling out. And -- so we would see that and then in the U.S. following that. So that's where our efforts are focused. We've got great relationships on -- with the 2 big European guys as well as 2 of the larger Chinese guys. And really looking to roll those products out kind of over the next 12 months or start to see the fruits of the efforts. I mean, we've been working with customers for a long, long time, have those first design wins. And very excited to see this start to roll out.

Got it. Does it matter to you if -- again, if Huawei is constrained because of whatever U.S. restrictions and the share shifts to other players, whether it's Ericsson, Nokia, Samsung, NEC, ZTE, et cetera. Are you equally represented or well represented across the board? Or will it matter to you if there are share shifts in the market?

Yes. I mean -- so we have great relationships with all these guys, and we're working with all of them that you mentioned. And so does it matter? I mean, I'm sure it matters on the margin as there's some that we have more penetration with, et cetera, but I think in general, no, it doesn't matter. I would say that we've even prioritizing our own time, our own engineering efforts, we kind of see that same -- I mean while we're continuing to support Huawei as necessary, we're also seeing increase in demand. The other guys are really kind of chomping at the bit to get going and to take advantage of this opportunity, right? I think -- and so naturally, they're being more demanding in this environment of our support efforts. And so we're accommodating on that. I mean, I've talked a lot about even as people ask about our own OpEx. In these big early stages of a ramp, we want to make sure that we've got the engineering support for our customers. And so this is a great example of an area that we're having to commit additional engineering support in order to help our customers out during these early-stage ramps because they're trying to take advantage of a situation where they can take share in the market from the #1 guy.

Got it. Let's go to the industrial part of your business and the high-performance analog parts that you mentioned. What does MaxLinear do in the industrial market? Are there specific end markets that you focus on? And I know the results have, obviously, not been that great given all the macro headwinds, but they are still somewhat below what we have seen from some of your other semiconductor peers. So just give us a sense for where your industrial business is at? And how do you see the pathway to recovery?

No problem. Yes, so industrial multi markets, mostly high-performance analog, power management, specifically, interface products. So it's a wide variety of applications, I mean, thousands of applications, hundreds of customers and a lot of exposure into Asia, China as well. And so we see -- it was definitely down more in Q1 than a number of our peers. But at the same time, we've really seen a nice recovery began in Q2, and so the follow-through on that product is really improving now. Still down year-over-year, but at least with this quick recovery and even the sell-through that we've seen, it is leading us to believe and I guess, I would say it's consistent with the geographies that we sell into. So I -- I'm encouraged to see the bookings and the backlog grow in the current quarter. And so optimistic that we start to see that return. It was definitely down more than what we had expected and down more than a number of our peers. There are a handful of reasons of that, but I would say, primarily due to the regions that we're selling into and that seems to be recovering right now.

So when you saw your friends at Microchip positively pre-announced a day or so, were you like, yes, that makes sense or it doesn't make sense?

I think -- look, I think everyone is encouraged right now from the standpoint that demand has continued to be reasonably good. I don't know that I can comment specifically. I mean, we have a slightly different -- they have a lot more industrial automotive exposure than we do. So I mean, we had seen a lot of that pickup on the industrial multi-market side. So from a standpoint of that end market, I'm not surprised at all. I mean, we've seen similar levels of pickup. And we've seen it for a while, right? And they even started talking early on about some of the mixed signals in the market, right? Orders were up, but yet they were really anticipating a slowness. This is back in their earnings call. So not surprised at all. And so -- and I think it's consistent with what we've seen in some of the overlapping areas. I mean, I think we're really encouraged just by what we're seeing on the Connected Home side of our business as well as -- and that applies to our business as well as kind of the Gateway business that we're buying. Everything seems to be lining up. We're very cautious -- and naturally, when you do a big acquisition, pretty cautious, but that has continued to look very good right now from just a pure demand standpoint and that's consistent with what we're seeing in our business. So really excited about kind of the second half of the year and going into 2021 sets up nicely with some of these bigger growth drivers.

I see. The industrial markets that you're in, I know Chinese, the domestic industry has focused a lot more on memory and some of the smartphone and base station processors. But do you think the products you sell could face more competition from domestic Chinese suppliers or other Asian suppliers?

I mean, potentially, so this is -- I mean, our high-performance analog products, if you recall, I mean, it was an acquisition of Exar. And we've actually spent the last probably almost 2 years now really innovating there, bringing more, really, a more robust portfolio, particularly on the power management side. And so that's really just the beginning there. And some of those products, those high-performance analog, I mean, power management, specifically going into some of our infrastructure applications like a remote radio head or the server market. So that's been our primary focus. But there's this trickle down, right, that those products end up being able to enter into the industrial multi-market segment as well. And so once that -- it's a little bit of a -- it's taking a little bit to work through that because the original offering was more focused around data centers and the wireless infrastructure market, but that -- as that product portfolio grows, we'll be able to engage with a lot more of those industrial customers. So that's pretty exciting. It just hasn't quite gotten there yet. So I don't -- we have to focus, right? I mean, high-performance analog and industrial for that matter, it's a big, big market, right? So you can't be everything to everybody. You're competing against big guys like TI and ADI. And so we have to be very selective on where we're going. And I think we've done that with the road map. Our marketing team has done an exceptional job of really identifying places that we can win rather than trying to build a -- just kind of a shotgun approach where you're trying to be everything to everybody. And we just can't compete there, right? So we have to be very selective.

Got it. And just in the last 1.5 minute or so, Steve, one other question that I got was, what does MaxLinear think about just cloud spending in the first half, it's been very strong. Do you think the trends continue in the second half or there could be a period of digestion? Hello? Hello. I think we had some technical difficulty. But since we are at the...

I apologize. I am back. Yes.

If you heard the question, Steve, it was just about just cloud spending trends in the back half?

Yes. Yes. So I mean, look, we're very encouraged. I mean, all of the business that -- so cloud spending, in general, we see server demand pick up. We've seen data center demand pick up. One of the biggest things that we didn't discuss much with our PAM-4 DSP, that demand from the -- our largest customer, largest data center guy, Amazon, very exciting. They're continuing to push very hard. So I'm -- so we don't do a ton of data center business today, right? That's just emerging for us. But the demand seems very substantial and they're pushing us very hard.

Got it. So no like any deceleration or any big digestion type moves actually from where you sit today?

So we don't -- so I wouldn't say that we see any of that today? No, no.

Okay. That's perfect, short and sweet. I think we're at the end of our time, Steve, but really appreciate you're joining us, sharing your insights about the company and the industry. And if investors -- thank you for joining us as well. If you have any follow-up questions, please feel free to call or write. And with that, let's close the call. Thank you so much again.

Thank you. Vivek. Appreciate it. Thank you. Thanks, everyone.

Bye.