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

Good afternoon and welcome back to the Barclays Global TMT Conference. I'm Tom O'Malley. I cover SMID [ capped ] semiconductors here at Barclays. We're happy to have MaxLinear here; and Steve Litchfield, the CFO. Steve, thank you for joining us this afternoon.

Great. Thanks, Tom.

So I think that the best way to start -- I think you had a couple slides. Why don't you walk through those? And then we can just hop into Q&A afterwards.

Sure. Sounds good. I don't know who is controlling the slides, but maybe we can -- if someone can help me navigate that.

Operator, do you want to go to Slide 1 there?

Yes, there we go, perfect. Thank you, yes. So just a bit -- thanks, Tom. A bit about MaxLinear, for those unfamiliar. Founded in 2003, we did go public in 2010. And you can kind of see a brief overview. We've been growing nicely over the last several years; did a couple of big acquisitions in 2020, which has kind of ramped up the scale of the company; tons of patents; employee base up to 400 employees. And kind of see the mix of our end markets. We do focus on connectivity and broadband as well as infrastructure and our industrial multimarkets, and we'll go through a few of those here in the next couple of slides. So maybe next slide then. It looks like there is a little bit of a -- I don't know if everyone is seeing that or not, but I'll roll with it. Here's the 4 end markets that we participate in. So broadband and connectivity. So these are the 2 biggest markets. They're growing double digits; really exciting times right now as you see carriers as well as operators starting to upgrade networks around the world. I mean we're seeing that happen in North America. We happen to have a big PON customer that we recently won that will ramp next year, but we're seeing numerous PON guys, which we historically haven't played much in, but that's a -- it's a market that's quite sizable. And it's getting a lot of this government money. We've seen some of the RDOF money come through last year and this year. And then now we're starting to see the new Biden infrastructure bill that's supposed to throw another $60 billion, a lot of which goes to a lot of these fiber build-outs, but I think one of the things that's interesting here is that you do see these infrastructure guys rolling out around the world and we're seeing more broadband needs in general. And so we do benefit from that with our broadband SoCs, but we also have WiFi. So WiFi has been a big grower for us, and that's kind of highlighted here. We're expecting double-digit growth here for some time. I mean WiFi, this year, will double over our previous year, which we don't break it out specifically, but it kind of implies a $50 million-ish number, which [ you ] do expect to see another doubling next year. And then based on the size of the market and the share gains that we're seeing, hopefully, we can even take that further and see it doubling again, but there's a big market opportunity. Not only are the units growing, but we're also seeing content grow, right, where WiFi 5 historically was lower dollars -- I mean maybe in the $5 to $7 range. And now that's bumping up to $10 to $12 for WiFi 6 and even higher than that for WiFi 6E and WiFi 7. So that's kind of some of the drivers within broadband and connectivity. Our industrial multimarket is another area that we focus on, power, analog and a lot of interface products. And then lastly, infrastructure. And I'm sure Tom will have tons of questions for me on infrastructure, but this is our PAM4 DSP. We've also got 5G transceivers that we're selling in this market. And then as of late, I mean this year, I think our -- I'm sorry. Our infrastructure business should grow -- 55%, 60% is where most of the folks are landing. I mean the year is not over yet, but that's we've seen substantial growth happening there. A lot of it's even been driven by our backhaul business, which has performed well not only from a market perspective, but we're also winning new content. So we've got some transceivers that we've not had historically that are driving some of that revenue ramp. Next slide. All right. So it's a little challenging if these slides don't throw -- show up correctly. I can roll with this, Tom, but -- and the slide...

Yes. I mean, if the tech isn't there, the tech isn't there. We can hop into -- I mean, from a broad-level overview, I think maybe -- do you want to just hop in? And then we can...

Yes, yes. I'll just make one comment here. I mean I think you can see this on our website, but you -- I will just emphasize this reiterates some of the market SAMs that we're pursuing in broadband, connectivity and infrastructure. And that's where we're seeing substantial -- the markets themselves are growing, but then our content and our market share is growing in each of these markets. So with that, Tom, I'll [ field the ] questions here.

Perfect. So first, great to have you here. And thank you for putting up with some of the technical difficulties today.

So appreciated, but before we hop into all the fun and markets, I just -- I wanted to start on the high level and kind of where most people are talking about in the market today, which is supply. And we've even talked about this in the past, but could you just start with just general comments, the health of the market today in terms of supply and demand, anything that you're seeing that's changed over the past couple of months? Let's just start there, and then I can ask a couple of follow-ups.

Sure, sure. So well. So supply chain dynamics have been particularly challenging for us. No doubt about that, as many others have seen as well. I think we've done a pretty good job. I mean we've been at this a year now and we've started seeing these constraints. It's kind of amazing that we're sitting here in Q4 of '21 still talking about this, but it has been challenging. And -- but we've seen increases sequentially each quarter and making continued improvements. I think you're seeing the industry pick up and deliver more capacity, but I think from a MaxLinear standpoint we've also been very diligent about -- I mean early, early on, we put a lot of resources in this and tried to move, get up new suppliers, change packages. I mean packaging has been a particular challenge with some of the substrates out there, so we've made changes on that front. We've gotten things requalified. We've gotten up new vendors back end. I mean even foundries. Even foundries, we've looked to explore as well. So I think we've done a pretty good job. I think we're going to see this persist through at least the first half of next year and to some degree probably all of next year, but I think the bigger headwind is probably Q1 and Q2. And -- but I do think that you'll continue to see increases of capacity. And you'll see volumes continue to go up in that time frame.

Okay. So we've had this conversation in the past which is just the handoff of supply and demand, right? So supply seems to be -- it's still an issue, but you're seeing the end of -- maybe the light at the end of the tunnel as you make your way through next year, but then you have demand as well, right? So you have customers out there who are like, "I want to get every piece of product I possibly can," so the question that you always get from a [ straightforward ] perspective is do you see any double ordering. Do you see the supply chain kind of stocking up on parts? Obviously that's a really difficult question, but can you talk to the data points that you use when you say, hey, like maybe we aren't seeing that? And how do you see that supply dynamic shifting over to a rationalized demand environment into next year?

Yes, yes. I mean, look, I think everyone is naturally concerned about the over-ordering. I mean, I guess, a couple of things about our industries that we participate in. It's not a commodity-like industry or where you have a lot of competitors. In most of these cases, there's maybe 1 competitor or 2 competitors. And so both of those are pretty rational. And these are industries that we've been in for a long time, so pretty good visibility. Early on, we encourage our customers to start placing orders in the out-quarters so that we could in turn pass that along to our suppliers. And that was helpful. And so I think it's been managed a little bit better. I mean I'm not saying that it's not perfect by any means. Some of the pickups that we saw early on. I mean, if I go back to some of our broadband business and WiFi business, for that matter: We saw a big pickup in 2020. And I think we've seen really the numbers moderate or kind of normalize to some degree this year. Now our revenues are up substantially, driven by those market share gains, driven by those content increases. So I think that kind of explains a lot of our growth, but as far as the underlying industry growth, it doesn't seem completely out of hand to me. I mean we're not shipping to the demand levels yet. I mean I think I'm sure, sometime next year, we'll see that catch-up happen, but I think it's -- I mean we're getting through this. I think the order situation is probably a little more challenging than some of the other broader markets, automotive markets. I think those dynamics are pretty challenging, but some of the places that we play, I think, are a little more straightforward.

Okay, fair enough. So why don't I check off the last box on the question you guys always get? So in terms of M&A, you guys did a pretty transformational deal. I think, from a timing perspective, you really couldn't have timed it any better than you did, so can you talk about that market? It's obviously been very strong, but what are the underlying trends that have driven that success? And then can you talk about what you guys are doing uniquely to kind of take that business from where it was from an investment perspective and kind of turn it into your own growth driver?

Yes, yes, sure. No, it is something that -- it's always good -- during tough times, like in 2020, during the pandemic, we were able to get 2 deals done, 1 of which was the Intel deal. The other 1 is a DPD technology that we bought called NanoSemi, but I think your point is a little around the Intel deal. And look. I mean this is a business -- we highlighted the WiFi and connectivity piece of the business, Ethernet as well as PON. These are all capabilities that Intel invested in heavily and was very committed to, but then I think, during kind of a cleanup process at some point with -- when Bob Swan was there, it just felt like it wasn't going to get -- they had bigger problems, if you will, which I think it's probably turned out to be the case, but nonetheless, I think they wanted to clean things up quickly. We were able to kind of step in at the right time. We -- this business -- while it had been invested in heavily, especially getting WiFi 6 technology and Ethernet technology up and running, they had not done -- the profitability of the business was poor. And so I think, when we came into it, we were pretty cautious not to get ahead of ourselves. And so we kind of came out -- and we also announced the deal in April of 2020, which was a pretty dark time in the industry, so came out with some pretty conservative estimates, but that being said, this business was running upwards of $400 million previous. And so we kind of caught up, but we needed to see gross margins improve, right? They were running the business in the 40% gross margin range, so we negotiated a pretty good supply agreement. And then we also kind of recognized that we were going to have to raise prices. We were going to have to move foundry, processes. And so we're going to have to do a lot of work, so we're pretty cautious in that regard, but we've gone off. We've executed. The WiFi business has definitely gotten a lot of traction. Our customers are very excited about the product. And keep in mind those gateways are taken -- it's like $15 worth of content going to $30 worth of content, a lot of which is driven by WiFi, so we had to make sure that we have the right product, the right performance. And we are seeing tremendous performance out of our WiFi 6 products, soon to be our WiFi 6E products. And then we're already working on WiFi 7. So performance criteria on the WiFi product, on the SoCs as well. I mean one of the real differentiators we have right now is our processing capability. So these gateways are having to do more and more. And so I think the team had done a very good job in architecting the chip, and having that horsepower there today is really paying some nice dividends. So our customers are excited to have that capability to be able to do more within the home. And then the distribution, I mean, this is more of a market dynamic than the asset itself, but WiFi within the home is really expanding. I mean not just in the home. I mean enterprise as well, but in the home in particular, you're seeing more and more needs from a security standpoint, from a health standpoint. I mean there's all these applications from AR, VR, security really expanding there. And I think Intel had invested smartly in those areas, and so our job is just to go up and clean up the asset. So I think we've streamlined the product road maps and even some of the architectures as well, making sure that we're designing these products for -- with the right architecture that are cost effective for our customers and, frankly, our investors because our intent here is to get this thing up into the mid-60% gross margin range, which we feel confident that we can do. When we bought the asset, this was -- the consolidated number was probably around 57% gross margins. We highlighted that we wanted to get to 60% gross margins by the end of this year, which we got to 6 months early at 61.3% gross margins last quarter, but we've got -- we see a path to continue to execute on that. I mean that was done in a pretty tough environment where costs are going up. And so I think that will ultimately subside, but also our architectures will continue to improve, so I do see the ability to continue to make improvements on gross margins. So we'll improve margins. I think the traction with the customer has been incredible. The other thing that I think that this asset brought us is a much, much tighter relationship with the operators. Intel had a tight relationship with their operator, but having the entire platform for a carrier or for an operator is very meaningful, right, because they want to have one guy to come to that is handling all of the firmware and software. They want one guy that controls everything. And so that, what has that done? I mean that means they're very reliant on us. We're working closely with them. They're making commitments to us, whether it be on share or NRE dollars. We're -- I think you've probably seen this time a lot across the industry right now. I think everyone is seeing more NRE dollars being deployed. I think that kind of speaks to the fragileness of the ecosystem, right? I mean they recognize post consolidation that there's -- that they need to kind of nurture this. I mean they've lost some of the pricing power that they used to have. And so now semis are really taking that pricing leverage, and -- but at the same time, we've got to invest heavily and make sure that we're supporting the future development of these programs.

Yes. It sounds like a bit of a virtuous cycle where you're getting some investment dollars and then maybe you get a locked-in contract longer term where you have a little bit more visibility, so it does sound like things are going a bit better, yes.

That's right.

So the obvious question is -- you do a really good deal at the right time in the market. People always come back and say, okay, so when is the next one, right? So when you look at M&A: You've obviously done some tuck-ins, and you've done some more transformative deals. Can you talk about what your criteria is when you're going to look at a new asset? What's the time line looking like from the health of your core financials to go out and do one of those? And are you starting to look already?

Right, yes. No, it's a good question. So yes, that has been a part of our strategy, to do acquisitions as well as grow organically. So kind of post deal -- I mean we did this asset transaction. And it did require some working capital, so we were fairly cautious in the beginning, but I think we've gotten past that. Cash flow has improved nicely, to the extent that we're paying down debt aggressively. We're -- we authorized a buyback, so we've been buying back the stock as well. And then yes, acquisitions. I mean we absolutely want to get back in the market. We have been looking. Things are expensive to some degree, especially during -- some of the private sector areas has been expensive with some of the SPAC developments that have happened there, but we are looking. What are the criteria? I mean I think ideally we look in places -- we're not looking for yet something way adjacent to what we do, something with mixed-signal technology where we can really differentiate on the technology front. Ideally it's products that we can sell into the same customer. I mean, semiconductors, as you know, it's all about scale. And so to the extent that we can find more products to sell to the same customer or more products into the same application, where we can have an application engineer add another block onto that board, that's what ideally that we look for. With regard to end markets, I mean, infrastructure is a place we've been investing heavily. We've done some acquisitions. We'd like to continue to do acquisitions there. Broadband, connectivity, I mean that's another area that we do intend to continue to invest. We'll look at acquisitions there also, particularly on the connectivity side. And industrial multimarket, I mean that's more of our power and interface. And it's easy to kind of beef things up there, so we could definitely do that. I don't think you'll see us move way far out of our kind of core competencies. We'd like to just be -- bring more product to the same customer.

Awesome, all right. So I held off as long as I could before jumping into the infrastructure side, so why don't we [ turn it over? So ] within infrastructure, let's start on the optical side. So we're on this precipice of this [ big speed ] transition within the data center. Can you talk about what you view that market as for you guys? Potentially what are you looking at in terms of the size of the opportunity? And just what is your product offering to kind of meet that market right now?

Sure, sure, no problem. That was good. You're -- you constrained yourself very well. So yes. Look. Optical is something that is very exciting for us. I mean we've been investing in it for probably the last 3 years. I think -- we've got a PAM4 DSP chip. We've -- look. We've been investing for, I guess, 3-plus years now. We've seen a lot of the competitive dynamics change. I mean it's really narrowed down to kind of the Broadcom, Marvell and MaxLinear. Look. It's a new market for us. We -- as you're aware, Tom, we didn't target the 200 gig market. We thought that would be somewhat short lived. Being the first one, we wanted to target the 400 gig market. That's what we've done. Admittedly, it took longer for that market to roll out, and -- but it is rolling out. And I think the market size hasn't changed. We've kind of identified this. The 400 gig-plus market is a $300-plus million market. This ultimately says that it can be an $80 million to $100 million product line for MaxLinear, kind of split somewhat. You get 25% to 30% of that business kind of almost shared equally with Broadcom and Marvell, and so it can be very meaningful to us. I think it is growing. I think it fits with our core competencies. We've made a lot of traction. To date, Amazon has kind of been, as you know, the only guy rolling out a 400-gig data center, so we've been somewhat kind of waiting on them. We talk about modest revenues this quarter and then really ramping more next year. It's nice to finally see Amazon kind of deploying product more aggressively. We -- I would say, from a competitive landscape, I think we're doing extremely well with our existing solutions, soon to be our 5-nanometer solutions, but right now, on our existing solutions that are being deployed, competing head-to-head against the big guys. I think where we -- not being the incumbent, we were probably slightly behind by not having enough of these module guys up and running. As you're aware, some of the big hyperscalers, they want to have 4, 5, 6 module vendors, so we've had to get up to speed. While we've had 1 or 2, they want to see us having 3 or 4 module guys. And that's important in the short term and the long run, so that's something that we've jumped on and made some nice improvements just resourcing-wise and getting those -- expanding the relationships, the knowledge of our technology and our capability with those partners. And so we've seen good progress. Moving forward, the other thing with those partners are starting to work with our 5-nanometer solutions, so...

Yes. I was going to ask...

Yes. I was going to say I'm sure that's on your list. 5 nanometer is coming, coming fast. Very excited. We had silicon out in the summer -- and first one to come out with 5-nanometer silicon, ahead of Broadcom, ahead of Marvell. I usually say, look, they're coming. They're working with 5 nanometer IP, so not surprising when they do indeed come, but it's always good to have a lead to be able to have that first silicon in our customers' hands and they're working with it. So that brings lower power levels, which as you know is very important. Our differentiator has been in power. It's been integration levels. I mean that's how we entered the market originally, having more integration. That will continue to be a play for MaxLinear in optical but -- in all of our end markets. So I think it will -- 5 nanometer, my belief is it probably doesn't go -- at least material revenues probably don't come until '23, but we're making significant progress there and excited about it. It addressed -- it'll address the 400 gig market. Kind of the -- have talked a little about the 4x100 lanes versus -- as they move to 800, you're talking 8x100. So we can address that. We can address our 5-nanometer product. We'll be able to address the 800 gig market as well as the 400 gig market, which is pretty exciting...

Yes, yes. I was going to say you saw the advantage of being to -- a node, first, with Inphi; and now Marvell, right? And I think that being first in that market is really critical. When you look at your runway, right, there's a bit of a debate in the market right now. Once you get past 400G, at 800G to some of these -- the big companies kind of take things in house, right? So you've heard some guys say, "Hey, I think there's going to be a lot of runway for discrete suppliers." And then you hear some guys say, "Hey, maybe larger guys will internalize optics." What's your feeling on that runway? Obviously you've invested a lot in this product, so you do think that there is runway for this business to succeed, but can you just speak to kind of the future of your solution as you move past 400 gig, to the "800 gig and beyond" type speed?

Sure, yes, yes, absolutely. Well -- and I might -- maybe for clarification a little bit. So I think we do see more and more vertical integration. I mean Broadcom has been out talking about it. Marvell has been talking about it. I think you're also alluding to hyperscalers themselves are doing some development also, yes. As in do you have to vertically integrate? No. Do you have to partner and work closely with these guys? Of course, you do. And so as some of the bigger guys are trying to integrate, I mean, that to some degree works against what the end customer would like to have. I mean, a closer integration, sometimes it leads to better performance, but if there's a strong partnership there, I think we feel very confident. Our customers have pushed us in the direction just to continue some of the partnerships that we've already been doing, so I'm not concerned that we have to vertically integrate. In fact, I mean, you're already hearing rumblings that that's going to push out into 1.6T, which is fine. I don't think -- I think -- even at 1.6, I think a partnership still solves that as well, but does it help, having the top-of-rack switch, having the optics? Of course, those are all beneficial. And it does drive closer integration, which frankly, it's always been a must. I mean you have to have close integration with each of these suppliers regardless.

Great, yes. I -- as much as I'd like to continue on this road all day, I will switch gears briefly [indiscernible] at least going to talk about a couple of areas. We'll stay in infrastructure for now and talk about the 5G side just really briefly. You've seen so much turbulence in that market with what happened in China and the ramp kind of being disrupted. And now you're hearing rumblings of a second kind of deployment with U.S. and European operators. Are you starting to see that dynamic from a 5G perspective? And can you just remind us, are -- do you feel as though you're well positioned versus your typical incumbents there? And why are you so well positioned versus guys who have been there for such a long time?

Yes, sure. So 5G transceivers or 5G access. We've had a product here. We just moved into production in Q1 of this year. I mean your last question there, the competitive landscape. I mean it is primarily ADI and TI. How do we differentiate? I mean these are big, large incumbents that have been there for a long time. I -- what I would say about that is you're seeing more and more. I know you're well aware of this integration that's happening within the base stations. And you're seeing integration even between the transceiver and the DFE. And so as that evolves, I think it actually fits our core competencies where we can do the analog -- I mean we're really pure mixed-signal guys, where we know the analog portion super well, but we also can do that digital side. I mean we can go to -- I mean we've just got -- finished talking about 5 nanometers, right?

Yes, and DSPs, yes.

That -- yes. That -- DFE is going to move to lower nodes, right? And that's not typically what ADI and TI love to do. Now I think ADI seems very committed, and TI to some extent also committed, but I think that's where we can really differentiate and bring something unique to the customer base. We -- I mentioned the DPD or digital predistortion technology. That's something else that I think we brought to the customer. These algorithms are making these power amplifiers much more efficient. That's a huge challenge for these operators. The power levels that these things are drawing are quite problematic; and so the linearization techniques that we're bringing are unique, does bring us differentiation. And coupled with the transceiver technology, I think we can win here. It's a big market, sizable. Now it's not growing quite as fast as I think the whole world expected. I mean [ we've seen things ] slow a bit. I mean it's happening. I don't want to imply that, but China clearly fell behind. The Huawei situation, with the trade war and the like, has been problematic, so we didn't see 5G roll out as aggressively in China. Now I mean they'll catch up. They're still running on either inventory or older technologies. And I think, over time, we'll see that change. And the good thing is we're starting to see North America deploy. Europe will deploy, so I'm -- I remain very optimistic. It's not like this market -- it's going to be a very sizable market, but it's definitely kind of pushed to the right a little bit.

Awesome. So we talked about 2 really awesome areas of growth for you guys, growth areas where you see a lot of opportunity in the future. We've got about 50 seconds left. I just want to give you the CFO layup question at the end. Obviously you've gotten a lot of leverage just from the outsized revenue growth you've seen, but when you look at the financial metrics inside of that, what areas are you most focused on in the next year where you're trying to drive the business towards some key -- some KPIs? And where should we be looking to kind of the company transformation below the line?

Sure, sure, yes, yes, yes. So yes, revenue growth has been important and we've shown a lot of success there. Gross margins, I briefly hit on that a little bit earlier, but gross margins are improving. I do expect to see continued improvement. I mean, over the long term, we see this kind of getting up into the mid-60s, so lots more work to be done there. Operating margins: I mean operating margins, when we did this deal, was in the low 20s. And our guidance this quarter kind of got to -- pretty darn close to 30% op margin, so we've seen that improvement. I mean our biggest competitor that we compete against all these markets is Broadcom. They're doing well north of 40% op margins. I -- look. We're not as big as Broadcom, but I have no doubt in my mind that we can continue to push to 30% and beyond on operating margins. We'll continue and invest because, at the end of the day, we want to grow the top line, but I think we can kind of grow that OpEx number kind of half the rate of the top line, which will continue to show material EPS improvements going forward.

Great. Well, with that, I think we are out of time. It's always a pleasure, Steve. Thank you for joining us today, and have a great rest of the day. And good luck as you go forward into next year.

Great. Thanks a lot, Tom. I appreciate the time.