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

Good afternoon, and welcome to this afternoon. I'm Vivek Arya, I cover semiconductor semi-cap equipment at BofA Securities. And really delighted to have Steve Litchfield, the Chief Financial Officer and the Chief Strategy Officer of MaxLinear, join us this afternoon. A very warm welcome to you, Steve. Glad you could join us.

Great. Thank you, Vivek.

And maybe just because there are a number of people on this webcast who may not be as familiar with MaxLinear, I thought it would be useful to perhaps give a quick overview of MaxLinear, because the business has gone through a fair bit of transformation, including some M&A in the last year, right, but with all the other excitement and challenges going on. So maybe just bring everyone up to speed. Give us a sense of what MaxLinear is today, right, what your strategy is. And then we will walk through some of the demand drivers.

Great. That sounds great, Vivek. Yes. Thank you for having us, and thanks, everyone, for joining today. Yes. Just maybe a little bit of background about MaxLinear. So the company was founded in 2003, went public in 2010. If I go back in the earlier days, mostly focused around broadband. We did a front-end solution that had a big growth driver for us over a number of years and had grown the company. Also did a number of acquisitions over the years to grow the company, large and small. And then just probably 3 years ago, really focused a lot around the infrastructure market and made some fairly sizable investments in wireless and wireline infrastructure as well as some optical products going in the data center market, which we're very excited about and have made some recent announcements at OFC with our new 5-nanometer product. So there's a lot of efforts going on there. Our infrastructure business is -- did about $76 million last year. It grew a little over 60% in Q1 of this year. So things are really picking up nicely with some of the newer areas like optical. But on also our 5G products, we have a massive MIMO solution or a transceiver that's going into those markets. It's getting a lot of traction. Early days, but a big market opportunity for MaxLinear. And so we're very excited for those infrastructure products. That said, we still are in -- very much in the broadband market. And Vivek, I mean, that was one of your comments about some of the acquisitions that we did. We did do 2 acquisitions last year, 1 of which was a carve-out of Intel, fairly sizable acquisition for MaxLinear, more than doubled the revenues of the company. And it's been quite exciting. It was a market that we had already been participating in. But 2 things that, that particular acquisition brought us. One was scale and, like I mentioned, more than doubling the revenues of the company, but it also gave us some really unique WiFi offerings in the access point. And so that's a -- it's a big opportunity because we've been selling -- or we're selling gateway SoCs as well as front ends. But now having WiFi and even Ethernet, those are 2 big growth drivers for the company. And we're excited right now because we're seeing a tremendous amount of attach to our existing gateway products in some of the cable modems in the home, which, as you're probably familiar, Vivek, just really huge demand drivers within the home. You're seeing operators investing heavily. There's been quite a shift in the overall market. That market, historically, we had viewed it as kind of lower single-digit growth drivers. But just over the last, say, 6 to 9 months, you've seen operators kind of shift directions a little bit. But it's -- over the last couple of years and not invested much. We're expecting that to really stabilize. But now they seem to have kind of moved away from some of the content drivers. A lot of the big operators were buying content companies and really shifting directions. Now you've seen that flip a little bit, and you've seen them even divest some of those assets and focus a little bit more on the infrastructure. They've increased their CapEx spend and then you've also got a lot of subsidies and things that are happening. There's a lot of money for some of these rural networks that were being deployed. Now the most recent Biden plan has about $100 billion proposed for broadband infrastructure. So I think that, along with some of the CapEx that the operators, are deploying is pretty exciting. We see it kind of moving the market opportunity to be more of a mid to high single-digit grower. One of our larger competitors, Broadcom, has highlighted as a double-digit grower over the next 5 years. I mean we don't disagree with that. I think the outlook is very positive. We're very excited about that. There's been a lot of consolidation over the years in this market. So now it's really kind of down to us and Broadcom. And I think really post-pandemic, most of the operators really want to have a healthy ecosystem. And so the engagement that we've had there has been extremely good. We've got great feedback. We're really working closely with our customers and our customers' customer to really understand road maps and needs over the next 3 to 5 years. And the outlook is very good. So that's a bit of an overview. Happy to, Vivek, kind of take it in any direction that you'd like to take it.

Excellent. Steve, so maybe let's quickly touch on the supply side, and then we will go through all the development drivers and on the growth side. So widespread supply constraints that the industry is dealing with, what are you seeing in terms of the constraints you're facing? Where are you directing your focus so that you are adequately prepared to meet customer demand?

Yes. No. That's a hot topic right now as we all know. So from our standpoint, we definitely were impacted in Q1 from some of those supply chain dynamics and limited what we could ship. We're definitely going to see it again this quarter and Q3, hoping that things will ease a little bit in Q4. But no doubt, I think we'll see these constraints throughout even next year. So for us, at least in the short term, we're having a few more challenges on the back end. So assembly tests, packaging, substrates, not dissimilar from many of our peers. But we haven't seen too much of a problem on the wafer side just yet. I'm not saying that, that won't happen. But at least in the short term, we've been more limited by those other back-end constraints. We're working through that. We're getting more suppliers up and running. We're also -- we've looked at what we can do as far as changing packages, moving to more standard packages, changing tests, I mean looking at different substrates. And so we've looked to redesign where we can. Now that requires qualification and different things, but we're -- our operations guys are working diligently, just to see if we can solve as many of those issues as we can. In the short term and even in the long term, even looking out into next year, if we can make some of these changes, it will mitigate some of the risks that may kind of persist into '22. So working very hard. There's no silver bullet, I don't believe right now, but we're doing our best.

Excellent. And you mentioned that you're taking actions that hopefully you'll get back on trend next year. Have you quantified, I don't know, whether it's in terms of lead times that you have right now, what they have been historically? Just what are you hoping to do by next year in terms of lead times?

Yes. I mean, so I don't -- we haven't seen lead times really change much. We don't comment too much, but I mean it's up in the 50-plus week range and it has been extremely challenging. I mean I think the good thing is, is that -- well, the demand has been extremely good, but we've also seen customers come in and kind of place orders out over the next several -- all the way throughout next year. And so we've got more than a year's worth of backlog. And so we're trying to kind of navigate that the best we can. The good thing is we've got the orders. And so then that helps just from a planning perspective for our operations team but in all of our suppliers as well. So we're doing again, doing what we can. Those lead times, hopefully, will start to subside a little bit. But I think this is going to be pretty tough over the next 2 quarters. And then, as I mentioned, hopefully, we'll see a little bit of easing in Q4.

Got it. Now let's go through the more interesting and exciting part, which is on your growth drivers. So pretty broad-based business, of course, right? Broadband is the big part, but broadband infrastructure, right, multi-market. What's the mix today? And where are you targeting mix to be in the next handful of years? I know you have identified about a $5 billion-plus kind of addressable opportunity. So how do you see this mix play out over the next few years for you? What is the ideal mix that you would want it to be?

Yes. Yes. So I mean I can kind of just at a high level maybe hit each of those end markets and talk about where we're going. So I'll start with the infrastructure, right? Infrastructure, I mentioned previously, kind of that $76 million last year out of the -- I'm sorry, last quarter, out of the $209 million that we shipped. That business is expected to grow. I think a lot of the analysts have this doing close -- a little over $130 million this year. So it's a big growth opportunity for the company. We've made some big investments, as I mentioned earlier. Look, this end market, I think, for us, we can see it running $300 million, $400 million over the next 3 to 4 years. These are big market opportunities. And so that's clearly where our focus has been and will continue to be, right, as we continue to expand more of our product offerings here and as 5G really starts to take off in earnest, same thing with the optical and data center. I mean 2 of the bigger drivers within infrastructure where our backhaul business and our analog business as well that falls under infrastructure. Backhaul has been extremely strong. Last year, it was kind of held back by some of the trade war issues around Huawei. Huawei was a large backhaul customer. And -- but we also had some other big customers like NEC and Ericsson and Nokia that had pushed out programs. And so they really started to hit in Q1. We also have some new products. We've got a new transceiver in the backhaul space that's just now beginning to ramp, and that will continue to progress throughout the year while optical and while 5G really starts to come on in earnest. So that's kind of the infrastructure piece. Now broadband, and I'm going to lump in together broadband and connectivity. So broadband, historically, that's been over 50% of our business. If I buckle it with connectivity, it's even more than that, right, because you still got close to 15% or so that's coming from connectivity. I buckle those together because as you're familiar, Vivek, I mean, the broadband piece is really our gateway SoCs and our front-ends. So those are going into the gateway that front-end really takes the signal in, and then the processor processes that data, right? And that is really driven by that the box growth that I mentioned a little bit earlier. But really more exciting than that is the connectivity side of the business, right? Connectivity -- what we got through the acquisition of Intel and what we've been investing in, the WiFi and Ethernet products. So now if I think about a gateway in your home that historically we had $15 of content in with the new content of Ethernet and WiFi and ultimately even some of our power management solutions on top of that, we can see that going up to, say, $30-ish of content. So it's a big content increase. The WiFi solutions, our new products -- WiFi 6 is really just coming to market. We just started last year. We talked about our WiFi business doing on or about $25 million last year. Expecting that to double this year and then really has the potential to even double again next year. So we're getting tremendous amount of traction and really pleased to see a product line -- always exciting to take a product line from less than $20 million north of $100 million. And I think we've got our sights on $200-plus million in the not-too-distant future. It's a big, big market opportunity. Connectivity alone is north of a $2 billion servable market for us. And so -- and some of the low-hanging fruit are these gateways with operators, telecom providers that is all new business to us, right? We really didn't have much content historically. WiFi 5, I mean, the ASPs are running $5 to $7. And we were a little bit late to market. So we came early to market with our WiFi 6 solution. That content is kind of $10 to $12, WiFi 6E, which is probably starts to really get introduced next year. Now that bumps up closer to $15. So not only do we have a content play within the gateway itself, but we've also got a content play with just WiFi, ASP just continued improvement. So whether that's in a single box or like in a router, either way, you're going to see continued content improvement. So broadband connectivity, big growth driver for the company. While the box growth, call it, mid- to high single digits with the content, you're talking easily double digits. And so that will definitely be a big grower along with the infrastructure. Our last end market is really industrial multi-market. This has historically been -- it's a broad 10,000-plus customers, diversified power management, interface products and had historically grown kind of GDP-like 2% to 4% a year. I think we'll start to see that. We saw some last year challenges around COVID, some of the trade war dynamics. We saw a couple of sockets kind of move over to domestic supply. But I think going forward, we had a really nice quarter in Q1, and I'm expecting to see continuation, get back to some normalcy in that business. So those are kind of my 4 end markets. Your specific question was, what do we want that mix to be? I don't know that we care necessarily what that mix is as long as each of those drivers continue to get bigger, and we're growing. But I think that should give you a perspective on what the growth rates of each of those are.

Got it. On the 5G side, Steve, what is your kind of China versus non-China exposure because there has been a difference in the pace of rollouts in the different regions? So what have you experienced? And how does that kind of guide your thinking about growth on the 5G side over the next year or so?

Yes. So we're very excited about our new 5G part. We just actually announced that we just moved into production last quarter. That was the first production part. It was 5G transceiver. It's a 4x4 solution. We also have an 8x8 solution that's coming -- well, customers have them now. I don't expect revenues really just to be material this year, probably much more so next year. So -- but it is an encouraging market. Look, I mean, we were kind of anticipating China really ramping more this year, and that's clearly -- I mean, it pushed out last year, it's pushing this year to some degree. We're -- there's 4 or 5 of these guys that really matter in the world. You've got your Ericsson, Nokia, Huawei, ZTE, kind of your Tier 1 guys. And then you definitely have Tier 2 guys like a Samsung or NEC and [indiscernible] that are starting to really get a little bit more traction, particularly post the Huawei dynamics. So we're not necessarily picky. I mean what we saw previously is that China was really leading on the 5G side. And since that's slowed a little bit, we've seen everyone slow down, right? Huawei was always -- always has been a really strong technology leader. And so that's -- I think that's slowed the market, slowed the other competitors as well because they're not necessarily pushing the limit on technology. I think some of the encouraging signs in North America clearly, with the C-band auction behind us, I think you can see more activity there kind of pick up throughout this year and into next year. So I think '22 and '23 should be big years, I should say, as far as the rollout happening. I think that's consistent with what our views are. And so we're working with all the major guys globally. But we're new to this market. I mean to answer your question, we weren't in -- this is our first 5G access product. We weren't in 4G. So we don't have as much exposure to the previous generations.

Got it. On the broadband side, Steve, how much of you think the growth that you have seen, sort of the stay-at-home effect that could perhaps get to a more normalized level of growth? I know you folks have been pretty conservative, right, about modeling that business, right? I know Broadcom has given a bigger number, right? You're kind of sticking with the mid to high, right? But you're saying mid to high because you are conservative or because you really think that perhaps there was some incremental boost last year? Or you think that just addition of WiFi 6, right, 6E to gateways and whatnot, that this could be an extended growth cycle for you on the broadband and connectivity side?

Well, so I don't think there's any doubt that it is an extended growth cycle for us. I mean just because we have a -- our bigger growth drivers are -- the content, definitely, we've talked about some share gains as well. So that's happening. I have no doubt that we're going to continue to outpace the market just because these are all new products for us, right? I think the basis of your question, though, is, did we see -- so we definitely saw a greater demand kind of in the second half of last year, expected to see some moderation in the midpoint of this year. Now with supply constraints, I mean, it's kind of different challenges now because we basically can't meet those needs and won't be able to meet those needs for another couple of quarters, right? So while we're making improvements and we're trying to meet that demand, we haven't quite gotten there yet. I think my commentary about the mid to high single digits and even for that matter Broadcom's comments of double digits, all that commentary is really how the market has shifted. And that outlook, not just over the next quarter or 2, it's a little more of a 2-, 3-, 4-year outlook. And the dynamics that are happening, you're seeing the cable guys really step up and invest further. They're looking at DOCSIS 4.0. You're seeing the telecom carriers invest more. You're seeing more fiber rollout. I mean you probably remember this that when Google Fiber was rolling out aggressively, you saw all the cable guys really step up with their own investment cycles, right? They had to upgrade that technology themselves in DOCSIS 3.1. I think you're seeing the same thing right now as fiber is getting more traction. You're seeing the cable guys going, hey, well, we've got to respond to this. You're hearing a lot more activity around DOCSIS 4.0. And for that matter, you're seeing upgrades in DSL. You're seeing upgrades in fixed wireless access. And so in our mind, I mean, it's good, right, because we're supplying to all these guys. I mean we're that arms dealer. Just kind of keep all of them deploying more products, and they're all upgrading. I think one of the differences is that what you've seen from the operators, the telecom carriers, they want to own that home, right? And they want to own those services within the home. And as -- historically, it was kind of all about bandwidth and just downstream bandwidth. Now you've got to have downstream and upstream. You've got a lot more activity. You've got security cameras, where those are services that, of course, the operators want to capture. There's gaming, there's AR, VR. You've got -- of course, we've got Zoom calls as well. But all of these dynamics are driving more needs within the home. The operators also seem to want to really control the quality of that experience in the home also, right? Historically, you bought your own router. You just got the pipe coming in, and then you took care of everything else. But now they want to control that. They want to make sure that distribution is happening within the home, that quality is better as well. And that's where I think it's interesting, right? Because historically, we would just have the cable modem. And I mean the great thing about that market has always been it's very mature. It's us and Broadcom. We only have -- the product cycles are long. There's only 2 of us. They want to kind of keep us close to 50-50. So what's changed there, I mean, now they want to deploy the Wifi. They want to have the Ethernet. They want to -- we have MoCA in the home. So you've got this wireline distribution as well to improve quality. And so it's just -- the dynamics have changed quite a bit. Now we're, of course, mostly exposed on the cable side, but we're selling into the fiber guys. We've actually -- we've talked about 1 North America carrier. We just won another North American carrier recently that will start to ramp in the mid part of next year. It's a sizable one. We've gotten great traction in Europe as well. And that's a place that -- I mean, fiber is actually probably 2, 2.5x the size of the cable market. And so Broadcom has a substantial position. We've not focused much on this, but we see a nice opportunity to continue to grow there. And that market is growing at double digits every year. So I think we can take that. And it has the same attach rate or the attach opportunity, if you will, right, where you can win the WiFi, you can win the Ethernet in these gateways. In some cases, those gateways can run north of $30 per box. And so that content is a big play for us, and I just can't stress enough how the operators, the telecom carriers want to deal with one provider, right? They don't want to have multiple providers. I mean they've been pushing us for that for years. And so to be able to deliver on that, just the stickiness that you get with that is super important.

Got it. The other part of your business, Steve, that I find very interesting is the optical business, right? You recently had some product announcements at OFC, the 5 nanometer. Coming out with 5-nanometer products, I imagine, is a pretty big investment. And there has been a lot of consolidation, right, in that industry, Cisco-Acacia, right, Marvell-Inphi. How would you describe your competitive positioning in these PAM4, DSPs? What's the strategy for growth? And do you think you have the end-to-end, right, so not just the DSP, but the amplifiers, drivers, like the ultra band to really go after a customer with the same intensity as some of these other larger?

Yes. So it is an exciting market and particularly exciting right now with OFC going on announcing the 5 nanometer chip. Look, a couple of years ago, we entered this market, targeting the 400-gig data center inside the 400-gig data center. And yes, there were a lot of competitors, right? There were 6 or 8 guys that were coming to market. Now since then, that has consolidated or guys have kind of moved away and just kind of focused on smaller parts of the market. We've continued really resolute, and I think we've executed on performance. The differentiation, I mean, on power, on integration, we were the first to market with that 16-nanometer integrated driver. Now we're the first to market on a 5-nanometer solution ahead of Broadcom, ahead of Inphi. And so really excited about the positioning that we have. We are new to the market. We came with 400. Amazon is really the first data center to really roll out 400 gig. And Google and Facebook came out with 200 gig, and now they'll be transitioning over to 800 next. And so we'll be able to intersect those guys naturally with our new Keystone product, which we're very excited about. So then we'll have Amazon. I mean we can start to focus on the bigger guys. I mean, the other big one is Microsoft, right? Now they're the next one coming with a 400-gig data center. Now they're still lagging, right? There's still probably at least another year behind Amazon. So still early days in this market, frankly. Our Telluride solution, what we've said is that we'll start to ramp in the second half of the year and then more material contribution in '22. But I think we've done extremely well. We're building out more kind of module partners that was -- Amazon has kind of been guiding us as well. We're working closely with them and the respective module guys that will sell into Amazon. It is a big investment. No doubt about that. But it's also a big market, right? We've identified this to be kind of a $300 million to $400 million market opportunity. It's really us, Broadcom and Inphi. And so I think we're really well positioned. We talk about the portfolio, yes, we're coming with a DSP right? And really the only guy -- so as this is transition, Broadcom has really moved to be more vertical right? I mean, obviously, they've got the top of rack switch, but they also have -- I mean, they're moving towards co-packaged optics, and so they've really got a vertical play. Same thing with Inphi, right? They've got a vertical -- I mean they've got the optics as well as the DSP. And so we don't -- I mean, we've kind of chosen stay away from the optics, and so we'll do that through partnerships, which really is beneficial to the customer, right, a customer like any of these hyperscalers rather than to be beholden to one guy. It's been very helpful to them to have an individual guy that they can go to on the DSP front. And so we think we're executing on the performance side and really excited what's to come. I mean we'll build out the portfolio, kind of specific question that you asked. We'll continue to grow and build that portfolio going forward. We don't have everything. Where we don't have everything, we'll partner. We're partnering with other guys on the chip side. We're partnering with other guys on the optical side -- I mean, I'm sorry, the optics side. So -- but I think that's just kind of smart business where we can partner that makes a lot of sense to us, and in this case, to our customer as well.

Got it. Yes. And to the point, I saw the partnership with MACOM, right, as an example on optics.

Yes, that's a great example.

Yes. Right. So Steve, talk to us about kind of the overarching strategy now in that do you -- so you made this very interesting acquisition of the carve-out from Intel's assets, right? Do you see other such opportunities in the future, right? Not asking you to name specific names per se, but do you see other such opportunities? And if there are, how do you go about them? Like are there certain markets you think you want to target, are there sort of technologies you want to target? What is guiding that thinking, right, from your kind of strategy hat?

Yes. So we've done big acquisitions, carve-out, stand-alone companies. We've done small tuck-in acquisitions. And each one kind of has a different methodology. I mean we've done smaller things that we can really accelerate our existing product development efforts or maybe it brings a customer relationship or both. We've done sizable things. We did a company called Exar where we got power management capabilities. And that diversified us, made us bigger. As we look forward, I mean, we're still very much interested in growing in kind of the existing markets where we play. Look, semiconductors, as you well know, it's all about scale. And we're competing against these big gigantic companies. And so -- which means that we've got to continue to focus on the technology, execution. And we don't want to spread ourselves too thin, right? And so if we can pick up more assets, more capabilities, even more technologies to some degree, that we can lever into these same customers. And more products to sell to the same customers is kind of the way I think about it. It's a simple concept. But if we can continue just to bring more. It's exactly what we did with Intel, right, because we could -- we bought that out. We were already selling to that entire customer base. Now we have the Intel assets, and we can sell more products to the same customer base, right? We did the same -- I mean, even the Exar acquisition that we did, I mean a big part of that play is to bring power management and sell it into a remote radio head, where we were already focused on the 5G access space. So those are good examples of what we want to do more of. I mean I don't -- we don't want to kind of go into this adjacent market. I think there's less assets out there. But there are still plenty of stand-alone assets. Some of the private company valuations are quite high right now, but we'll continue to work there. I think there will be more carve-outs over time. So we're always on the hunt for carve-outs as well or a stand-alone company, either one.

Got it. Final question, Steve is, how is the business model in terms of gross and operating margins? Where are you today? What are kind of the points of leverage from here?

Sure. Yes. So our gross margin guidance for this quarter was 59%. Historically, prior to the acquisition of Intel, the company was running 63%, 64% and kind of moving our way back up to the mid-60s. The acquisition of Intel -- Intel was running this business at low gross margin. Frankly, that was what kind of deterred us in the beginning, but we were able to negotiate a favorable agreement, a favorable supply agreement. But they were running in the low 40s. And so with that supply agreement, along with a couple of other tweaks, we were able to get that number up closer to 50%. But we still have a lot of work to do. We see the ability to raise prices to kind of focus on more profitable aspects of the business. And then, of course, more efficiencies. We think that longer term, we can redesign parts. We think we can be more effective in the cost efficiencies that we're going to be able to design with, right? I mean just simple things like not doing custom substrates or not doing multi-chip modules where yields are low. I mean there's -- we can move to other suppliers, right, and get a little more leverage. I mean there's a lot of things that we can do and intend to do. We don't see any fundamental reason why we can't get that business up well north of 60%. And so the long term, I think we can get -- I mean we're talking 3 to 4 years kind of get back up into the mid-60s. In the short term, we've said that we expect the consolidated business to hit 60% by the end of the year. And we remain comfortable with that. Despite some of the price increases that we're seeing with our supply base, a lot of that we can pass along to the customers. On the operating margin side, so operating margins, when we did the acquisition, we were running kind of low 20s. Historically, MaxLinear had run-up into the 30s before, kind of prior to some of the bigger investments in infrastructure. Now the infrastructure investments are starting to moderate a little bit. Those were big investments. So they'll moderate a little and revenues will start to take off. And so there'll be a lot more leverage in the model from infrastructure. And then secondly, on the broadband side or specifically, in this case, the Intel business, I mean, that's a -- Broadcom runs this business like north of 40% operating margins. So I don't see any reason -- I mean, we're not as big as Broadcom, naturally. But we can definitely run this business up in the 30s. And so I think the consolidated business can get up into the 30% range in the not-too-distant future, a couple of years out. It seems very reasonable as we continue to get more leverage with more revenues and as the integration continues to take place as well.

Great. On that positive note, Steve, thank you so much. Really appreciate your time. Thanks for sharing your insights about the industry and about MaxLinear. Really appreciate it. Thanks to everyone who joined the call.

Great. Well, thank you, Vivek, and thanks, everyone, for joining.

Take care.

Yes. You too.