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

Guys, why don't we go ahead and get started? It's my pleasure to introduce the management team of MaxLinear. Steve Litchfield, who's the CFO and Chief Strategy Officer, he's going to go through a very brief slide presentation to help position the company and the strategy, the core IP. There's also Nick Aberle, who's the VP of Finance. We'll move from that presentation into a fireside chat. It's a relatively intimate room here. I've been screwing up the instructions around asking a question. If you have a question, you actually have to walk up to the mic to ask the question. We don't want to be passing around the mic just given the current environment. With that, I'll turn things over to Steve. It's great to have you here this morning. Thank you.

Great. Thank you, John. Intimate, I don't know. It feels like we should be closer together to be intimate, but -- grab this. I'll -- just got a couple of slides that I'll flip through for those who are unfamiliar with the story. So just a quick snapshot, kind of found in 2003, went public in 2010, a large portfolio of patents, a little over 1,400 employees, we did a fairly large acquisition that closed in August of 2020, doubled the number of employees in the company and we made tremendous progress, and I'll talk a little bit about that. But you can kind of see some of the key products, end markets, broadband connectivity, infrastructure, and industrial multi-market are kind of the key areas of focus. Here's the kind of four end markets and kind of highlight a little bit broadband, for example, big gateway SoCs, broadband going into cable, which is the majority of that business today, but are moving into fiber now. As that market really expands, we got a nice play there. On the connectivity side, this is really our Wi-Fi Ethernet products, tremendous traction with Wi-Fi 6. We were pretty underpenetrated in Wi-Fi 5. That is going extremely well with some of the attach that we get in the gateways, and then even in stand-alone routers as well around the world. Industrial multi-market is kind of a broader portfolio play. We do interface, power management products in those markets, pretty diverse, goes through distribution. And then the last one, infrastructure. So we've been investing very heavily in infrastructure. As of late, we got a big play with our optical products, with our PAM4 DSP, and then we have a transceiver going into the 5G access market. And then we've also -- for some of you may be familiar with some of our backhaul products, that's also seen tremendous growth this year and expect it to continue that growth next year. I think this is my -- actually my last slide, but gives you a little bit of a perspective on the size of the markets and the growth of the markets. Now this goes -- on the left-hand side, this is 2018 going to '22. So these market sizes have grown tremendously in some respects because of that acquisition. So now we have SoC products that we offer. Now we have processing capabilities. We've got RF capabilities. And so you can see that connectivity, so the light blue, is going from $500 million to $2 billion. So that's that big Wi-Fi opportunity, Ethernet opportunity that we're exploiting right now. The other one that I would probably highlight is broadband going from $400 million to $2.1 billion. Again, having that SoC capability now enables us to go after a much bigger portion of the market and a lot more dollars in those applications. So there's my brief overview, John.

Steve, please join us on...

I'll turn it back to you.

Perfect. I'll kick things off on the fireside chat, and we'll see if we have any questions in the audience. I mean, clearly, I think the overarching concern or theme in this conference is where are we in the supply situation? Where are we in the cycle? This is arguably the worst supply shortage that we've seen in the semiconductor industry. I don't know if that's actually true. It seems to be exacerbated by the fact that autos are now a big enough part of the market and the auto industry is pretty politically connected. And so when they scream, a lot of people hear I guess. But if you can talk a little bit about kind of what you're seeing on the supply side and just generally your thoughts on the overall cycle?

Yeah. Yes, yes. So like many of our peers, I mean, we've definitely been impacted by this. It's been quite a challenge, I mean starting in Q4 of last year. For MaxLinear in particular, very kind of a backend-driven challenge, say at the beginning of last year. Now we're starting to see our own wafer challenges as well. I think we've been pleased we've done, I think, better than originally expected. We're seeing nice progress. We're seeing things -- I would say starting to ease. I think we still got a lot of challenges in the first half of next year. But my sense is in the second half of next year, things get quite a bit better. And yes, we'll see. I think it's -- costs are going up. I think that's the other challenge that we're all dealing with. Fortunately, most of our businesses were able to pass those costs along to the customer, and I think that will continue for some time.

Steve, you're in a lot of longer duration end markets. But typically, at this point in time, when things get tight or sort of this odd dynamic that when you can't get what you want, you always order more than you need. How do you safeguard against sort of the dreaded double ordering that tends to happen as supply tightens?

Yes. I mean, that's a tough one. So you're right. In a lot of the markets that we play in, longer life cycles, less players, there's one or two guys in most of the end markets that we play in. So -- and for a lot of these places, we've got pretty good visibility on the number of units that are typically going to ship. And so we can manage it to some extent. I think the good thing or kind of how we've handled it, we've really pushed customers to place orders out several quarters. So we're seeing backlog -- great visibility throughout all of next year and into 2023. So they've kind of placed orders on us throughout that time frame. And so that's helped. I mean, rather than just putting it all in Q4 and saying, hey, we need it right now, they've been somewhat responsible. Not to say that there's not any over ordering at all, and we do try and keep a close eye on it. At this point, we're still shipping well below overall demand, and I think that's probably likely to continue throughout the first half of next year.

No, that makes a lot of sense. M&A has been sort of a dominant theme in semis for the -- over the last decade, I think there's been 250 mergers and acquisitions since 2010. You guys have clearly not been shy about doing that. You've done different size M&As. Can you talk a little bit about kind of the philosophy around M&A? And is there more to be done out there?

Sure. Yes, lots of consolidation. We've seen that over the years. I think that's one of the things that I think MaxLinear has done well. I mean they've not been shy about being aggressive. And we have -- to your point, John, I mean we've done big and small, I mean, where big things can be transformative, similar to the ones we did last year, but we've also done some smaller tuck-in acquisitions where we bought technology or we've accelerated product development efforts. And we've done that through our -- the history of the company, frankly. And so we did a small one, a company called NanoSemi last year. It was a small tuck-in, but it really accelerated, gave some more features to existing products that we had. Sometimes we've done things where we can -- in this world, it's hard for new guys to enter a market, right? And so if you can get ahead of that with the customer relationship or through a company that's already developing something, we did that with a small company. It was a carve-out of PMC-Sierra and that accelerated product development effort that we had. So big and small, and I think we'll continue to look for both. There are less assets out there, things are expensive, so I think we're cognizant of price. But at the same time, we want to continue to get bigger. And I think the one thing we don't want to do is stand still. So we'll continue to really push on our organic efforts, but we'll absolutely continue to execute on the acquisition strategy also.

And then it's been a while since I think you guys had an Analyst Day and your SAM chart was '18 to '22, and we're about to turn the calendar on to '22. A lot of your peers in the industry have had Analyst Days in recent months. And a lot of them have been sort of accelerating their growth rate targets. Can you help us understand kind of how you're viewing the forward growth? I mean, by the way, it's always a little bit dangerous to step up your long-term growth rate in a year that's benefiting from cyclical tailwinds, but people are doing it anyhow. So I'd love to get kind of your impression of where MaxLinear's growth rate has been, where do you think it's going to go, and what are the key drivers there?

Sure. Sure. Yes. So you're right. We've not done an Analyst Day. I feel that pressure already. Kishore is not here. He would echo the same thing. So I think you could expect to see an Analyst Day at some point from us. With regard to the long-term growth rate, I mean, I think that's something that has changed a fair amount. I mean, look, the product offering that we have, the markets that we're participating in, there have been quite a bit of change over the last 1.5 years. I mean some of our Wi-Fi products -- I'll say our broadband and connectivity products together, we've talked about growing it double digits. And we see that lasting over the next several years. These are network build-outs that are happening that are just beginning, and that's on the cable side, it's on the fiber side. All of that comes with a lot of Wi-Fi content, Ethernet content that we've not had historically. So the underlying unit growth is expanding and has expanded over the last couple of years. We expect that to continue. But then our content growth is also -- frankly, it's more meaningful just because we've not had that level of content. Wi-Fi content alone, if you go back to Wi-Fi 5, I mean they're $5 to $7 worth of content. Now you're looking at $10 to $12, and even going higher than that as Wi-Fi 6E and Wi-Fi 7 comes about. So that gives us confidence around that double-digit growth rate. Other areas, I mean, our infrastructure business grew, will end up growing somewhere in the 55%, 60% rate this year, and we would expect that to continue to see strong double-digit growth next year and beyond. I mean, that's a place with our optical products, our 5G products and backhaul, all new opportunities for us. These things are pretty slow to develop. So I mean we believe that, that business can be hundreds of millions of dollars over the next three to five years. So I think between that, the broadband connectivity, that double-digit growth rate is something that we're very comfortable with. The one market that I'd say we're probably below that -- I think as a company, we get above that double-digit rate. But the one end market is probably the industrial multi-market. And we've historically talked about that as more of a GDP-type grower. And I don't see anything substantial that's going to change that. Maybe it's mid-single digits over the next couple of years.

Can you spend a little bit more time talking about the infrastructure opportunity, especially around 5G? So sort of who do you see as your main competitors? And kind of what's the driver for socket wins in that business?

Sure. Yes, yes. So I mean, this has been a big focus for the company for a while. We just moved into production with our 5G access product. It's a transceiver. We have a 4x4, four transmit, four receive, and then we also have an 8x8, and then we'll keep progressing on the technology front. But from a competitive landscape, ADI and TI, we're just listening in prior to this. But -- so those are the two guys that have been in this space for a long time. It's interesting, right, over the last kind of 1.5 years, I mean, with some of the trade war situations around Huawei. I mean Huawei is a big -- was a big driver on the technology front, really driving the leading edge with regard to some of these base stations. That's definitely slowed things down and which is unfortunate, but I mean we still see things growing throughout the world. We had a lot of -- we were very excited to see that ramp in China specifically, and that slowed. But we did move into production in the first quarter of this year, expecting to -- we've seen sequential increases each quarter in '21. Expect to see that continue in '22, expecting a pretty good uptick in Q4 of this year or the current quarter that we're in. We highlighted that on our earnings call.

And where do you think we are in the 5G deployment? I mean the bad news is it's been pushed out a little bit. The good news is that the peak is still multiyear...

I was going to say...

Multi-years away.

Yes. No. And that is the -- it's interesting, right, because I think from an investment standpoint, you've heard about the 5G hype for a long time. But in reality, if you look below that, we all know that this is going to be a very long multiyear cycle. And I would say it's still early days. I mean, I don't -- it's the third or fourth inning to use a baseball term, I guess.

And if you look in the analog space and the connectivity space, it's unclear to me that scale has mattered as much as it's mattered in other markets in the semi market like the digital space. And so as you think about ADI and TIs being your main competitors here, why do you win?

Yes. So with regard to those two -- I mean, so there's a couple of dynamics going on there, right? I mean so it is that analog, but we're integrating more and more on a single piece of silicon, right? You got four for transmit, four receive, we're actually seeing -- we're in 16 nanometer CMOS today where some of our optical products are going down to 5 and 7. There's a digital component here that's going to -- that will become more important. We're already seeing a lot of integration between the digital front end and the transceiver itself. So seeing more transceivers on a single piece of silicon is something that is what we've done our entire careers and it's not purely an analog play, but there's a digital component of this. So melding these two together is really why we ultimately win. And even if I look at the two big behemoths in this space, I mean they typically shy away from this. So like, for example, this digital predistortion technology, that was the technology behind the NanoSemi acquisition actually, that's becoming more and more important. Linearizing these PAs in a base station is something that's super critical. And that's something that historically you haven't seen an ADI or a TI do. Not to say they wouldn't do it. In fact, ADI bought a company a year, 1.5 years ago as well, trying to pick up their efforts here. Haven't seen TI do that, haven't focused on that. So I think as you see more integration with some of the digital pieces of it and having to move down that node, it's not exactly in their wheelhouse, whereas I think it is something that we can differentiate with.

I wanted to switch gears back to the sort of the broadband part of the business. And you -- one of more recent acquisitions was the Intel Home Gateway business. I'm just kind of curious, how is that acquisition going? Oftentimes, you'll find good pieces of IP stuck in really large businesses. And once you extract them out, there's a lot more value there to be had.

Right. Yes. No, I think it's been a tremendous success thus far. We've been very pleased with the performance. They had -- look, you're right. I mean, some of these bigger companies, they had been making some very substantial investments over a number of years. And I think we are fortunate in that, we kind of caught them at the right time when they were trying to clean up some things. And we're able to pick up the asset at I think a reasonable price. But I think more importantly, they had put a lot of investment into their Wi-Fi business, into their Ethernet business, into the SoC business for that matter. And so they were very well positioned to not only take share within the broadband space on the cable side. So the majority of that business comes from cable. But also, we're starting to win more and more on the fiber side. And we have the right SoC, I think, at the right time. So that piece of it is enabling us -- I mean, the fiber market is probably twice as big as the cable market, and it's a place that we really haven't participated. And Broadcom really dominates...

It seems like a market ripe for a second player when you talk to customers...

That's right. Yes. And look, for years, I mean, Broadcom -- we love competing against Broadcom. They're a very rational player in the market, and so that's always good. But frankly, I think some of what the kind of pandemic and some of the supply chain challenges that we've seen over the last couple of years, I think, has highlighted some of the fragileness of the ecosystem itself. And I think some of these operators are recognizing that and they're trying to cultivate now these relationships. So I think it's just been pretty amazing to see the dynamics change with a lot of the operators and some of the carriers because they're coming to us and they're making long-term commitments, they're working with us on road maps. And I'm not talking about box guys, I'm talking about the operators and carriers themselves, right? And so we're working very closely with them on the road maps and underlying technology, starting to look even at the infrastructure side rather than just the CPE side. These guys are writing -- I mean, they're writing checks, they're making long-term share commitments. So there is a really long-term relationship. So that's open in a lot of doors. The other big one for us is the Wi-Fi side, and I think that's one that Intel had made a big investment in. I mean, in this market, it's really Broadcom, us and Qualcomm, and to some degree, MediaTek. MediaTek does play in Asia. But this is an area -- I mean, we're expecting to grow that business this year, which we don't break out the number exactly, but that implies going from mid-20s up to kind of north of $50 million and then doubling again next year is what we've highlighted. And that's really based on what I'll call low-hanging fruit. I mean, these are gateways that we're shipping SoCs in today that historically say we didn't have the Wi-Fi 5 product, and now we have the Wi-Fi 6 product. They want to have one gap. And they had that in Broadcom, they want that in MaxLinear. So we've got the product now, we can deliver that. And so when you see that box going from $15 to $30, a lot of that is driven by Wi-Fi content, right? And Wi-Fi, as I mentioned, we're going that $5 to $7 going to $12, $14, $15 is a big deal. And we can win it on the gateway. We can win it outside the gateway, right? I mean a lot of applications in Asia, for example, that we've been winning will drive nice growth in revenues next year are coming from stand-alone routers as well that sit alongside an ASIC or an SoC in China or in Asia, for example.

And Steve, just help me understand the business -- that business particularly a little bit better. Is it a relatively long design cycle? So when you think about your growth aspirations for next year versus the pipeline, is it a pretty definable pipeline at...

It is. It is. Yes. I mean these are long-term plays. I mean these gateways, for example, have been designed in almost a year in advance. So we do have good visibility. I mean, for example, on the fiber side, we've talked about ramping with the North America carrier next year. That design was one kind of mid this year and expecting to ramp what amounts to is about nine to 12 months later.

And your share position there today is still relatively small...

Well, on the fiber side, I mean, again, Broadcom owns 90%-plus of it. On the Wi-Fi side, also, even within cable is fairly underpenetrated. We are playing some catch-up right now. That's driven some of the success that we've already seen. But I do expect to see quite a bit more. I mean, even when I say, I'm sure you know this, John, the $100 million that we're talking about, I mean, a lot of people are familiar with the Quantenna assets. I mean those guys are doing north of $200 million in essentially the cable operator market. And so I always kind of felt that seeing $200 million, $300 million, $400 million pretty clear over the next couple of three, four years in this market kind of dependent on how things roll out.

Any questions in the audience? Steve, maybe we can switch focus a little bit to the P&L and specifically kind of the gross margins. I mean, clearly, there's sort of a tug of war right now. You mentioned it earlier in one of your comments that fortunately -- you've been fortunate enough to be able to take inflationary cost pressure and kind of pass that on to customers. Why not take this opportunity to actually just raise pricing in a margin-accretive way?

I didn't say we wouldn't do that. Look, in all seriousness, so gross margins, and I'm going to step back since we've talked a little bit about the acquisition, but the Intel acquisition, Intel asset was kind of underperforming on a gross margin standpoint, and it was due in kind of mid-40s. And so we had a lot of work to do, frankly. And when we came into it, we were, of course, willing to do that work. We were looking to move things around just from a supply standpoint, which has been challenging. Clearly, with the supply constraints out there, people don't have extra bandwidth or capacity to be able to help us to move things. So we've been somewhat limited in what we could do. We've seen some pricing increases. We highlighted that early on when we did the acquisition. Frankly speaking, we were willing to take a smaller business at higher gross margins than what really Intel was doing. That was kind of an original philosophy that we had. And I think that's -- we've been able to execute on that. When we announced the -- I should say, when we closed the acquisition, we were running at 57%, 58% gross margins. We had a target to be at 60% by the end of this year. We got there six months early. And so I think that indicates -- I mean our mix is good, but we're also passing along some of these costs and more is what I often say. So in some cases, we can pass along more of these increases to improve the gross margins. We've got more work to do. I mean, I've said all along that I think this is a business that we ought to be able to get up into the mid-60s. So I think there's more work to be done. It will take a little bit of time for the same reason we talked about. I mean, there are capacity constraints and so our ability to move things is somewhat limited. But we are moving forward with it, and I do expect to see continued progress on the gross margin.

And I'm assuming at this point, you mentioned that the bottlenecks were initially in the back end, but now you're seeing wafer constraints as well. [indiscernible] clearly raising pricing, but it sounds like you can pass that along. I'm just kind of curious, as your costs come down because inevitably, this is a cyclical industry, how will you think about maintaining your pricing versus maybe cutting pricing? And again, is it margin accretive this cost going down?

Yes. So I think in most of these cases, probably those prices hold. I think there are certain areas where there's more competition or maybe there's a system cost that is somewhat restricted where we could get more volumes if we did lower. And there's going to be some natural competitive pressures I'm sure that will come into play. All that being said, though, I think most of these price increases do hold in our markets.

And then on the industrial market, you talked about it kind of being just a GDP grower. But if you look at some of the core IP blocks that you have, are they leverageable into that market over time given some of the mega trends that we're seeing? One of our big themes is that COVID probably makes supply chains a little bit more [ sob ] and a little bit more redundant. And if that happens, they're going to have to be a little bit more intelligent, a little bit more automated, which means that silicon content in general -- and I know industrial tends to be a catch-all phrase that all companies use. But is there opportunity to kind of leverage some of these core IP blocks into that market and as you see accelerating growth over time?

Yes. So absolutely. So it's mostly power management, interface products. And so everything you're describing fits a nice growth profile. We do see those end markets continuing to grow. Our portfolio itself, we've been really upgrading some of the regulated -- like point of load regulators that are -- but it's been more focused on, say, server power management, which falls into our infrastructure end market. That being said, all of those upgrades, those product families that we're developing right now, that will flow through and we will see those upgrades. We are seeing that market growth. So I do see -- if I look out over the next couple of years, I do see us improving that number beyond the GDP levels. I don't think it's just a low-single digits. I think once those product portfolios get deployed, I think you start to get into that kind of mid- to high-single digits over time.

We've covered a lot of ground this morning, but I'd be curious, what haven't I asked that you guys are getting asked with frequency from your shareholders or potential shareholders?

Well, I think you've covered most everything. I mean, one of the other areas of particular focus has been on the optical side. We do have a PAM4 DSP that will start to ship this quarter, see more ramp next year in a 400-gig data center. So that's getting a lot of attention right now. Fairly early days just because 400-gig is new to the market. I think you'll finally -- it's been slightly delayed, but Amazon started ramping kind of late this year, we'll see more growth in '22. We've got a 5-nanometer part that's coming right behind that where we compete there against Marvell and Broadcom, and we're there at 5. Those guys are both there at 7-nanometers. So we're excited to have a lead position, particularly on the power and performance side. So I think that's an exciting area of growth. I guess that would probably be it. If I flip back to cash flow, the P&L, I mean, OpEx in general, I think we've done a pretty good job. On our operating margins, when I go back 1.5 years, we were in the low-20s. We've seen nice improvement on that. A lot of that was driven -- I mean, it's driven by the top line and gross margins. But the OpEx, I think we've done a pretty good job. We've been very disciplined. Even when we did the acquisition, going back to -- I think we took a firm look at where they were spending money and smartly kind of rightsized the business at that time. And then -- and we've executed. And I think over time, we would expect to grow -- I mean, OpEx is going to continue to grow to support the overall top line growth that we intend to pursue. But I still think it grows at probably half the top line, which should get us north of this 30% number, which is kind of something that we've been striving for. I mean, Broadcom, for example, does -- in this particular business, they're doing north of 40%. And so I feel like there's a lot of room to -- I mean we're not at the scale of Broadcom, but I think we can continue to see more improvements from here. So P&L wise is good. Cash flow...

The high-glass problem as you get to that above 30% on op margin, what do you do with the use of cash? You've done a good job on the M&A front. How do you think about buybacks, dividends...

Right. Yes. So we do have a little bit of debt. So we've been paying down the debt regularly. It's not -- it's less than -- it's right around a turn of leverage. So we'll continue to pay down the debt. The Board authorized a stock buyback of $100 million last year, relatively small, but we have been active with our buyback, and we'll continue to be active there. And then ultimately, we want to do more acquisitions.

Great. I think with that, we've come to the end of this session, but I would like to thank both Steve and Nick joining us today and everybody in the room. This was a great conversation. Thank you very much.

Great. Thanks, John.