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

Welcome to the third day of Morgan Stanley's Technology, Media and Telecom Conference. I'll start with a quick disclaimer before we kick it off. For important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Thanks again, everyone, for joining. I'm Jacob Wheeler, part of our global semiconductor investment banking team, joined today by Steve Litchfield, CFO and Chief Strategy Officer at MaxLinear. Thanks, Steve, for joining. Look forward to a good discussion.

Great. Thanks, Jacob. Appreciate you having us.

Yes, pleasure is ours. So why don't we kick it off with a high-level question just to kind of set the table. Maybe for those in the audience who are less familiar with MaxLinear. Could you start by just providing a quick overview of the company, where you play in the ecosystem?

Sure, sure. Absolutely. Yes. So look, MaxLinear is an analog mixed-signal semiconductor company that went public in 2010. And at the time, going public, I mean, it kind of goes back a little ways, but much more focused on kind of broadband applications and have since -- over the last probably 2 to 3 years have really invested very heavily into the infrastructure segment and started to shift with a big focus on data center and 5G applications and starting to get some really nice traction there. We're very excited about that. And then last year, in the depths of COVID, did acquire a small carve-out of Intel, which gave us some WiFi capability. And so I'm sure some of your questions today, Jacob, will relate to WiFi, but WiFi is a big growing market. That was really the primary driver behind that acquisition. It was fairly large, more than double the revenues of the company. And that's the reason I mentioned it here. But I mean, so there's really 3 big drivers of the company right now. One is in the center with our PAM4 product, our 5G massive MIMO transceiver and then our WiFi solution that sells into gateways. And those are kind of 3 big growth drivers of the company and very excited about the progress we've made on that front and the outlook for those products.

That's great. That's great. So the big topic today in the industry is obviously around the supply chain. Can't kick off any...

Yes. Yes. I'm sure all the meetings start with the supply chain topic. I'm sure.

Exactly. So maybe just touch on your latest views on the supply chain. How it's impacting MaxLinear and how you're feeling about it near term?

Sure. Yes. No, no. This is an important topic. And it's something that's affected the industry for a while now. We were talking about it, I think even early in November. And kind of anticipated having some modest impact in Q4, which ultimately ended up being the case. But did expect a bigger impact in Q1. And unfortunately, that is playing out. But that was incorporated into our guidance. It seems to be kind of across the ecosystem, as I'm sure many of you know at this point. Clearly, the wafer supply is probably the biggest problem just because it's the one that has the longest lead time and takes the longest to get back up. I would say where we're seeing the biggest short-term impact is more on the back end. Substrates are very difficult to get a hold of lead times. They're extremely long. So getting substrates and even back-end assembly and test capacity is very limited. So we're -- our operations guys are kind of working their magic, trying to navigate the best that we can. And then there are -- we do see some modest changes or, I guess, challenges on the wafer side, which -- I mean, I would anticipate seeing throughout the year. We gave our guidance really reflecting that, not to say that's without some risk, but it was captured. And I would say our team is working very hard to address that in really the out quarters, particularly next quarter. And I guess, probably the -- I mean, we're also -- we view this as an opportunity as well. Because wherever we can take advantage of it and have additional capacity, we want to be able to supply that and address our customer needs. And so we're doing our best that we can, but there's definitely challenges all around us.

Got it. Got it. And you mentioned the broadband and infrastructure businesses, really big part of the overall story, a big part of the business. COVID has been an accelerator for both of those businesses, right, over the last year or so. How are you feeling about the demand environment today in those businesses as well as the industrial business?

Yes. Look, I mean, I do think this work-from-home scenario has benefited some of our gateway business that has picked up. It was a business that, frankly, I think, was underinvested in over a couple of years and had some challenges where the operators, in particular, weren't investing, weren't spending. They're really spending those dollars on content rather than infrastructure. And so they've kind of played catch-up a little bit. And you've definitely seen some benefits of that. I think on a go-forward basis, I think -- also, I mean, we've all been impacted by this, and I'm sure everyone's lives have changed. It doesn't feel like we're going back to normal anytime soon. But I think that's -- it's an opportunity that we've been able to take advantage of. I think there's also been some pretty big market shifts where there's going to be some capacity needed at home. It's also something -- a dynamic that's been changing in the home for a while, right? So you've historically had all your download speed to home has always been an issue. But upload is also something that, as we all do Zoom calls from home, becomes more and more important. So -- but that's applied to Zoom calls, it also applies to your door bells and gaming and AR/VR applications. There's more and more of our homes that are dictated by that, which demands not just better downloads but uploads as well. And so that's changing an upgrade in the entire infrastructure not just, say, a modem in your house, but also the infrastructure of the network itself. So lots of dynamics there. We're excited to participate in that. We're seeing an uptick in our business. And yes. I mean, I think we're going to see this for some time to come.

Yes, I agree. I've certainly been a contributor of that demand. So I see that going forward. Maybe let's touch a little bit on the competitive dynamics at a high level. MaxLinear in a number of different areas, really punches above its weight, right, relative to some of the large competitors in the space. Could you just touch on kind of what are the key differentiators and how you are able to go head-to-head with some of the larger players in the ecosystem?

Yes. Yes. So I mean, I'll hit on the broadband side first. I appreciate those kind words. But I -- yes, we do go head-to-head against some big guys. I think we do exceptionally well against them. I mean I -- look, at the end of the day, MaxLinear is very much just tied at the core of being a mixed-signal technology company, and I think that's what we do best. And it's what we've always done best. I mean, even going back to tuners that we did, whatever, 15 years ago, that mixed-signal capability, the RF capability is something that's very unique within MaxLinear, and that's really how we differentiate. I mean, the consolidation that's happened in the industry, I think we've all benefited from. And frankly, you've been seeing some pricing benefits today as everyone's trying to get more product. But I think that's a dynamic that has really increased the value of our product offering, which is good. In the broadband space, the primary competitor is Broadcom. And they're -- in this particular space, I mean, they're really the only competitor. So that broadband SoC is typically MaxLinear and Broadcom. And how do we continue to win there? I mean we have differentiated over the years. I think we've done exceptionally well. This is where we've always had a front-end, and our -- the Intel acquisition that I referenced earlier, they had historically done the SoC. So that processor capability that Intel had was and is very unique, and we've been able to take advantage of that with our customer base. The front end piece, more -- the mixed-signal side of the equation, the digital side is really what intel did. But we ourselves, I mean, like many semiconductor companies that came from kind of analog beginnings have to embrace the digital domain because it's becoming more and more part of the solution today. And so we're addressing that. We've adapted, and I think we do very good even on the digital process. But more integration is one of the ways that we differentiate in the broadband side. The other couple of areas that I'll highlight the competitive landscape there. So one is in the PAM4 DSP. So this is the part that's going into the data center today. How do we differentiate? There, too, you've got big guys like Broadcom, like Inphi, those are really the 2 primary competitors there. And there, too, it's integration. So we came out with our PAM4 chip, I guess it's been 2 years ago now in 16 nanometer. So we came out early. We had an integrated driver there, which none of our peers Broadcom or Inphi, had been able to do in 16 nanometer. So that kind of proved our technical chops. And that's also kind of shown in the 5G massive MIMO market as well. So that's another area where we've got technical differentiation. We're able to integrate more in CMOS. CMOS at the core of where we are. That keeps costs down. We're not doing silicon germanium [indiscernible] any of these 3, 5 compounds. But sticking with CMOS, that's what is unique in our capabilities. In the 5G space, you're seeing more and more transceivers integrated on to a single platform or a single piece of silicon. So we -- the industry has been at 2 x 2, 2 transmit, 2 receives. Now that's moved to a 4 x 4, going to 8 x 8, 16 x 16. So you're going to see more and more of these transceivers integrated into CMOS. That's where I think we really stand out. And this -- it shows what we're really good at as we move from 16, even potentially that goes down to 7 or 5 nanometer as well. But integrating more of this analog capability into CMOS is something that we differentiate with, and that's how we beat the competition at the end of the day.

Got it. That's helpful. And then circling back to broadband, it's a business you've been in for a long time. You mentioned some of the challenges more recently given underinvestment by the operators. Can you talk a little bit more about the rationale around the Intel acquisition? You touched on the benefits of integration and some of the drivers there. But maybe just talk through kind of the strategy and go down a bit in that area?

Yes, yes, absolutely. Well, look, I mean, I think I kind of mentioned in those opening remarks that we had really shifted and invested heavily in infrastructure, and that hasn't changed. Our focus there, our commitment there,remains just as strong, if not stronger today than it was when we announced the acquisition. We had always said that we would opportunistically pursue assets within the broadband space. And this is a perfect example of one. We were selling alongside of an Intel chip. So Intel had the SoC, we had the front end. And so it was -- we had cooperated, we had gone to market together, so we knew the team very well. So it was an easy fit from that standpoint. But what was compelling about the product offering is, frankly, not the SoC per se. It was really more about the WiFi capability. So the WiFi was a big capability that Intel had invested heavily in over the last several years, and they had gotten in with WiFi 6 early in the process, early in those test beds. They had gone through all these interop trials that you have to go through with the WiFi alliance, and we're very well positioned. And so this is something that we saw as a very large market opportunity that we could grow within our operator platform, but even beyond that. So into retail, into enterprise applications. And even longer term, we can move into more of the client side. So today, it's more the access side infrastructure, which really fits with who we are. But longer term, I mean, we can definitely move into that client or even IoT space longer term. So we think it has tremendous amount of potential, and that's -- and we see it as kind of that third growth driver, which I often describe it as that third growth driver, along with our data center and 5G opportunities. So it's a big acquisition. We took it on right in the depths of COVID, announced this in April. But I think we were able to negotiate what I think will turn out to be a very favorable deal, at least from a multiple standpoint, we didn't pay a huge multiple for this. And -- but it also comes with some hair on it. So we're working very hard to clean the asset up, if you will. And we've been able to cut back on the spending already. But we've also been able to streamline the efforts. We're very committed on some of these growth projects like WiFi, like Ethernet. So naturally, we haven't pulled back. In fact, we probably increased the number of resources there in order to capture some of these newer opportunities because this market, WiFi 6 is happening fast. We got WiFi 6E right behind it and WiFi 7 right behind that. So this is a a pretty aggressive time frame. So we want to make sure that we're not slowing anything down on that front, and we're continuing to show the customers, our technical capabilities and our commitment to the space. And at the same time, we want to become more efficient, right? We want to get the profitability of this business up. Historically, Intel had run this. It was -- frankly, it was a pretty low profitable product, and why we were kind of cautious about dipping our toe in here. And it was even why we were cautious in some of our early revenue guidance. Our early revenue guidance reflected the fact that we wanted to make sure that we didn't overcommit on a business that didn't get to our consolidated 60% plus gross margin targets. Historically, we've run in the mid-60s, and we fully believe that we're going to get back to those levels and higher. But by taking this on, I mean, this is a business that was running below 50% gross margin. So it had a -- it's required a lot of effort on our front. We negotiated a good supply agreement with Intel. So I think that was the first step. But we also have to continue to negotiate with all of third parties. These are all existing suppliers to us. So I think there's a good potential to see improvements on costs there. There's also some pricing -- there's some pricing challenges that we have that we're working on. I think there's some opportunities that we can do better on that front. There's only 2 players. I think this is an area that the company hadn't focused on. I think we can get paid. I mean the space is consolidated. So I see some potential upsides just from the pricing environment. I think long term, we have the ability to design chips at lower cost points going forward. Not doing multi-chip modules, which were historically very expensive business. So there's a number of ways for us to do that.

Got it. That's great. And then just one other quick one on broadband. You had a really great quarter in December, but there's obviously a lot of moving pieces with the Intel business coming in. Can you just touch quickly on how much of that might have been share gains versus just demand and the underlying products? There's also the WiFi piece of it that's ramping pretty quickly. Any thoughts on...

I'm sorry, Jacob, you just mean in the current -- I mean, the current quarter or the next?

Yes, the current quarter. In the December quarter, what was driving sort of the outlook?

Yes. I mean, look, the December quarter, I mean, we really had very positive results. This is the first quarter that we had included Intel. And so there was upside in that broadband business, right, upside from what our original expectations were. Demand has been exceptionally strong. And so that definitely picked up from the previous quarter and up from our expectations. A couple of the, I guess, low lights of the quarter where our infrastructure business for one, which was light. A lot of that was driven by the Huawei trade issues. So export control, no longer able to ship into Huawei. Now we're going to work hard to see if we can get some licenses. But it did have an impact, and we saw a pretty good decline in Q4 there. Our industrial multi-market was also down. That's been -- 2020 was quite a bumpy year. COVID dynamics. We also -- due to some of the trade war situations, we saw some of our customers shift over to a domestic supplier. Now that being said, industrial as well as the infrastructure business, I do expect to see a nice recovery in Q1. Sell-through has improved. I think we're setting up very well on the industrial front anyway. Just inventories are very lean. Sell-through has started to pick up. And so I'm seeing -- the outlook there is much improved. And the infrastructure, for sure, much, much better visibility kind of going into this year. That backhaul business is a big portion of our infrastructure revenues today, hurt by the Huawei shut down last quarter. But coming into Q1, visibility with a lot of the other operators. Some of that has shifted away from Huawei to new suppliers and -- which we have captured that share. And so we'll see nice benefit in the first half of this year from that shift actually.

Got it. And sticking with that infrastructure theme, what about on the PAM4 side? You talked a little bit about that, MaxLinear chose to sort of skip the 200-gig. And maybe just kind of touch on how that's playing out with the big hyperscale customers and how you see this playing out?

Yes, yes, yes. So PAM4 is a very exciting area for us. We've been investing in it for some time, expected it to ramp in the second half of last year. That really pushed almost a whole year. Most of that is just -- so this is the Amazon 400-gig PAM4. So I want to be specific just because there's a lot of PAM4 products out in the market. Ours is 400 gig. So Amazon is the first data center guy to start to ramp 400 gig. And so we're excited to be a part of that. Amazon has been pushing us very hard. And with our new product, we're working with multiple vendors right now. We announced, I guess, this actually goes back to the November time frame, that we would start to ramp in the second half of this year. That is on track to ramp in the second half of this year. We've been working with multiple module vendors lately. That's where a lot of the time is being consumed right now as Amazon wants to build out its entire ecosystem as well because they ultimately want to have leverage over all of us, of course. And -- but that's going very well. We do expect it to ramp in the second half. The other exciting thing going on in PAM4 for us is we did announce a 5-nanometer solution, which is expected to start to sample in mid this year. We'll be the first out with the 5-nanometer solution. The competitive landscape here, as I mentioned earlier, is Broadcom and Inphi. I would say Inphi is probably edging us all out right now. They're -- they have been shipping in the 200-gig market for some time. And so they've done a good job with their module vendors of getting them up on the 400-gig quickly. So we're anxious to catch up and ideally exceed them down the road. I think we're moving very fast. This 5-nanometer solution is a perfect example of that. Their next-generation solution, they've gone from -- we're both in the market today with a 16-nanometer solution. And that next node, they're moving to 7 nanometer, we're going to move to 5, which gives some particular performance benefits such as power. And power is what all these data center guys are really driven by. And so we're -- those data center customers are ultimately very excited to be using our 5-nanometer solution, also the module vendors. So we would sell -- Jacob, you're probably familiar, we sell into a module guy, the module guy will sell into the hyperscalers. So right now, we want to build more and more of those partnerships with those module vendors so that we can address a bigger part of the hyperscaler market.

That's great. Makes sense. And then maybe, Steve, one last question from me on sort of the financial capital allocation front. You've done a couple of acquisitions over the last year, the Intel acquisition and then one more recently. You've also been focused on paying down debt. And then I think I saw an announcement around a share repurchase program. So how do you see the priorities going forward?

Sure. Yes. So not a whole lot has changed. I mean, maybe a little bit of perspective is worthwhile here. We -- so we've had a net debt position. So you're absolutely right. We have been paying down the debt and looking for acquisitions. That's been our tact to date. When we did the acquisition of Intel, we were able to pay -- or I should say, I think we paid a reasonable price. But ultimately, we didn't lever up much. I mean, we were down in the 2x range at the time of the acquisition. And with the -- with this acquisition, the cash flow that was coming with it, it wasn't going to change that leverage ratio much. And so we'll continue to pay down the debt as well as look for acquisitions. Look, as you well know, in the acquisition -- in the semiconductor world, acquisitions are key, bigger is better, scale matters more and more today than ever. So we recognize that. That's why we've been acquisitive. I mean the company has done 7, 9 acquisitions since going public. So very excited. I think that's a capability that we have in-house, and we want to continue and continue to own that capability going forward. So that's all very important, and we'll continue to do that. We did announce the buyback last week. I think there's not a huge takeaway because we'll continue to pay down debt, do acquisitions. But really just -- since we did the Intel acquisition, there were some cash needs that we needed to address and -- because we weren't getting receivables, and we had some cash costs such as there were some masks as well as just some facilities move that we had to to pay for. Now that we've got that essentially behind us, we've got some additional cash flow coming in that we can allocate. Buyback is one way we continue to trade at a discount to a lot of our peers. And so I think the Board felt that the commitment there, to be clear that, one, cash flow is improving; two, that we believe the stock is a good buy here, and so we'll look to do that; and then lastly, I think really a prudent move from -- or message from the Board is that we want to -- we've got annual dilution just from employees. And so we would want to offset some of that dilution that we've had historically with some of these buybacks as well.

Sure. That's great. Well, thanks, Steve. It's a really exciting story, really exciting opportunities. So thanks for joining us today. We look forward to hopefully doing this in-person next year in San Francisco.

I hope so. I hope so.

But it's been great. Thanks for the time today.

Sounds good. All right. Thanks again, Jacob. Thanks, everyone.