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

Hello and good afternoon, and welcome to day 2 of JPMorgan's TMC Conference. My name is Bill Peterson. I'll be hosting MaxLinear today. We're really pleased to have Steve Litchfield, the CFO and Chief Strategy Officer with us today. Welcome to our conference. It's live for the first time in 3 years. Steve is going to spend a few minutes just kind of introducing, recapping maybe recent earnings, and then we'll go into Q&A. We have a microphone in the back for those in the room, and we can take your questions there. And obviously, we have several questions. So Steve, thanks for joining.

Great. Thank you very much. Thanks for having us. Thanks for everybody joining us today. Don't have a huge introduction. But for those unfamiliar, MaxLinear's mixed-signal semiconductor company went public in 2010. And continue to grow organically as well as through acquisition, we did have a good recent quarter. As we continue to get more supply -- as more supply comes online, demand has continued to be very, very good. A couple of standouts. Our WiFi business has been performing extremely well, expect to double that business this year to north of $100 million and excited to see more and more traction with our Wi-Fi 6. And even -- well positioned to even see potentially north of $200 million next year. And that's over the last couple of -- about 2.5 years growing from somewhere in the $20 million range, north of $200 million. So it's been great kind of getting traction there. The other, I think, stand out in the quarter, we're also getting more wins on the fiber or PON market. And so that business is executing. Bill may have a few questions. I won't go in too much depth on that. But the financials have been good, beat our revenue and earnings last quarter. Our guidance also was above the Street estimates. As we continue to get more supply and demand, visibility is extremely good out through mid-2023. So we're pleased with the progress, the market share gains that we're getting and the profitability of the company continues to move up as well.

Well, thanks to intro. And the one thing, the big 1 you left out was the intention to acquire Silicon Motion. I guess, first off, can you tell us why you believe this acquisition will benefit MaxLinear?

Sure. Yes, no problem. Yes. So we did announce the acquisition or the intent to purchase Silicon Motion in early May. It was about a week after our earnings announcement. And -- so what's exciting, I mean, it does put together 2 companies and built more than $2 billion worth of revenue. Gross margins also -- they're a little bit lower than our existing gross margins, but we have a lot of excitement around some of the synergies that we expect to realize and overall profitability of the business, operating margins move up as well. The synergies themselves, I mean, #1 is scale. So scale is probably the biggest thing. We've been acquiring, getting bigger ourselves. We've been growing organically. But as many of you know, I mean, there's been consolidation in the industry, I expect that to continue. So having more scale is super important. On both the supply side, these guys do 3x to 4x more wafer volumes than we do. So that will be helpful in negotiating future wafer prices down the line at all of our suppliers. And so that is extremely helpful. But also on the IP side, building new products, we're moving to 5-nanometer. We're already building our first 5-nanometer chip, extremely expensive. And so we want to be able to leverage some of the R&D investment as well. So scale matters. Financials, I mean, accretion, a very accretive transaction. We said that it would be greater than 25% accretive. And I think what we've found, gotten a fair amount of feedback, that includes about $100 million of synergies, $30 million of which comes from the COGS side and then $70 million of which comes from OpEx. And I think we've been relatively conservative on the synergies that we'd expect to realize. But naturally, if you have that much more wafer volumes then you would expect to see some nice benefits on the price side. And then I think, thirdly, I would highlight the product mix and where we're going. So we've been investing heavily in the data center. We also have some storage compression technology that we've had for a number of years. And so kind of some of the customer relationships, we want to expand and grow the portfolio, grow the toolbox itself and Silicon Motion enables us to do that. They -- also, while they have a fair amount of consumer exposure, they've been investing heavily in the enterprise space. Enterprise storage is a huge market. Storage as a whole, growing at 15% CAGR over the next 3 to 5 years. So an exciting big market to be a part of, and it's a place that MaxLinear is a company that's continuing to look for more and more market opportunities that expands our TAM from $8 billion to $15 billion. So expanding the TAM into some new areas with high growth potential. And we see that the ability for us to kind of help penetrate some of these enterprise markets further -- enterprise as well as the hyperscalers in the U.S. So those are probably 2 to 3 strategic rationales for the transaction.

Yes, makes sense. And you mentioned the strong accretion for the combined entity. How did that factor into the comfort level around leverage that you'll be taking on and I guess, especially considering the current environment.

Sure, sure. Yes. So just to familiarize everyone. So we did announce the transaction. We do intend to use debt. I mean it's like about an 80% cash transaction, a little less than 20% equity. And so in turn, we'll take on some Term Loan B debt and lever the company up. At announcement, it's about 4.5x. At close, we expect it to be less than 4x and then 18 months. Post close, we expect it to be below 3x levered. So both businesses generated a tremendous amount of cash. There's not that much CapEx needs. We're both fabulous. So we don't have tons of equipment, investments or things like that. So pretty lean from that perspective, and we do expect both to throw off a lot of cash and be able to pay down that debt quickly.

Sure, makes sense. And we've seen obviously a lot of M&A in the space. I guess, almost none of these closed exactly when they are first announced. But I guess, how do you look at the regulatory environment and the poses or any challenges that might create? And maybe just remind who needs to approve this...

Yes. Sure. So look, regulatory, you have to go through standard regulatory approvals. HSR is one of them, which expected to go pretty quick. From an antitrust perspective, we really don't have a lot of overlap in the business, and so we don't expect any challenges. The one that we expect to be the longest would be China. So their SAMR regulatory process that we'll have to go through, same thing applies. We don't have a lot of overlap in the business, so I don't expect it to be problematic, but they have been slow in the approval process. And so what we've said, although we said it would be the first half of next year, it could be sooner. I mean, we'll, of course, do everything that we can even filing as quick as possible in order to get approvals as quick as possible. And again, no overlap in the business. I think the other thing I would highlight is it's relatively -- I mean, both of us are relatively small in the whole scheme of things. So often, China will have concerns around bundling and things like that. And we're not quite big enough to be on those radar screens. But nonetheless, we've got to work through the process, and we'll see. We'll do our best to get it closed in less than a year for sure.

Understood. Before moving on to the core business, again, I want to remind if anybody has any questions, you raise your hand, we can certainly take your questions via the microphone. Okay. Let's move on. So -- yes, again, the core business. You talked about doubling your Wi-Fi product revenue in fiscal '22 and the trajectory to deliver at least $200 million as you pointed out in fiscal '23. And I remember 1 year ago and that was pretty aggressive back then, but in fact, it's -- the growth has been coming true. So what's driving that growth in the business?

Yes. So it is pretty exciting, and we've had a lot of success. And do expect to see that continue as we win more market share. So the first place is really, we're bundling this with our existing SoC solution. So a lot of our gateway customers, particularly on the cable side, have always had a third-party WiFi solution. And if you go back from the history, we were late to market with our Wi-Fi 5 product, got in early with a very differentiated Wi-Fi 6 product. And so we've been winning these opportunities and ramping aggressively over the last 1.5 years. We've more recently started to win on the PON side as well. So we're seeing gateway starting to be deployed with our WiFi solution there. And then lastly, we have some third-party routers that worldwide are ramping. In particular, we're winning some of those in Asia. They're expected to ramp in the second half of this year. Some of this has been very supply constrained. So we've just not had enough product in hand in order to see this deployment even faster. But it is -- we've done a number of things on our side as far as improving the mix there, requalifying additional vendors. And so that's helped in getting more product out to the customers. And so we expect to see more of the growth kind of continue throughout this year and into 2023. I think maybe 1 other point I would make on why that growth is the content itself, right? So your -- historically, if you go back to like Wi-Fi 5, Wi-Fi 5 was a lower ASP. So the ASP itself was $5 to $7. Now you're seeing ASPs up in the $10 or $11 range, expected to continue even as we look out into Wi-Fi 6E product, Wi-Fi 7 products. And so not only your unit volumes and share growing, but your ASP and your content increases also.

You just mentioned PON. So fiber PON relatively new market. What's the opportunity there? And how does that relate to your core business?

Yes. Yes. So PON is something that's pretty exciting that we've been talking about a lot more lately. So new market for us. We've had a product for some time, but it really wasn't a focus. We had really spent most of our time and energies around the cable operator market. Now with the telcos investing much more heavily in this space, we really put a lot of attention on that market. And we started to see success. We've won several Tier 2 guys in North America, got a big Tier 1 guy in North America expected to ramp in the second half of this year. That will go into 2023, again, another situation where we're somewhat supply constrained. But that will definitely help out. And then you're seeing also a pickup in business in Europe. I mean, Europe is starting -- their telcos are starting to upgrade to fiber next year. So you're seeing CapEx deployments in North America and Europe, and for that matter, even Asia, this year, next year. So it really does feel like kind of a multiyear cycle where everyone is upgrading their networks. There's a lot of government subsidies going along here too, like you've got a lot of this RDOF money, which is for rural deployments. You've also got the recent Biden infrastructure plan, which has like $60 billion allocated towards broadband. So the -- and for that matter, even in Europe, you're seeing some of these subsidies happen as well. So this is subsidizing some of the CapEx and some of the infrastructure builds that these guys are going through, which is beneficial to us just from a simple standpoint, that we supply into all of these markets. And it doesn't really matter whether it's fiber or cable or fixed wireless access. We benefit from all of them. What's good is that they're competing against one another. And so I think when these guys compete then MaxLinear wins.

Maybe coming back to the market first -- sorry, you've got a question back there. Please wait for the microphone.

Sorry. So just dovetailing on that last point about the core business. Obviously, sounds like things are growing really, really well. It has to do with partially the M&A, but the core business as well. Given the uncertainty that the world is immediately or the stock markets trying to price in a recession, how do you keep your eye on the ball with your core business while doing the M&A that you're looking forward to try and close, that's one. Two, just your thoughts about -- it seems like the world has dramatically changed over the -- I don't know, a couple of weeks since you've announced the deal. So just your thoughts on the forward look of the combined companies now that you're excitement on? And then lastly, you've been acquisitive in the past with tremendous success and upside, what do you think the market is missing about this opportunity around with Silicon Motion combined with you guys versus maybe -- basically what they're missing?

Yes. On the first one, I mean, how do we stay focused. It's an important question, and it's something that we talk about a lot in trying to make sure we've kind of segmented our teams and making sure that we've got the organization focused on executing where we are today. I mean a lot of what we were talking about earlier about the WiFi and the PON infrastructure executing extremely well. And so we've got to keep that going. I mean I just visited interesting -- amidst all of this, I had some travel into Europe last week with some of our design centers there, just making sure that the focus is on executing on these existing business plans. As much as we would like to close this deal as soon as possible, it's going to take some time. And so that allows us to continue to stay focused on the existing business and -- because we can't really move forward on the integration plans quite yet. So we continue to look to win more market share. We've gotten a lot of momentum, and that's super helpful, and we're doing our best, struggling to hire and get more people in-house as quickly as possible to address the existing needs. Your question with regard to the market environment and what's changed over the last few weeks? I mean, look, the stock markets have definitely been worrisome. But that being said, I think if I look at our own business and our visibility that we have in bookings and backlog, it's remained very strong. Outlook is very good. You saw that in our recent earnings announcement and the guidance that we gave. And I think that's really reflective of a lot of work that's gone on already, right, as far as the market share gains. I mean, I mentioned some of that on the fiber side. But even on like backhaul, for example, that business has continued to do extremely well. As far as us winning more market share, we'd still like to get more supply. We're doing a better job. We've been pretty proactive early on in getting more suppliers up and running. And I think that's been helpful. The last part of your question, yes.

Sorry. Can you use the mic, please?

Just a follow-up to that. When you were going through that -- the markets are -- they've been in a bit of a gyration for prior to the announced M&A, and then they've proceeded to get more volatile post. The confidence to do this like this acquisition or potential acquisition. Does it speak to the confidence in your business as well as the prospects for the acquired -- the company you acquired Silicon Motion, like. It seems like you both have really strong backlog, really good visibility. Recessions are bad for everybody and bear markets aren't good for no friends. So can you just speak, I guess, to that would be like the confidence you have in your business as well as the potential -- I mean you're speaking again on someone else's business, but you're buying it will be your -- so just if you could just comment on that would be helpful?

Sure. No problem. So your -- I mean I think what you were implying, our existing business with the visibility that we have is extremely good. I think it does reflect on -- I think if we didn't feel confident in our existing business; one, I don't think you would see us doing a big deal like this, that confidence that we are executing, that we are winning more market share gives us the comfort to move forward, doing a big acquisition. The leverage that we took on, I mean I think it also reflects in that in our core business throwing off a lot of cash going forward and then also the target. And your question about the target and our confidence in their business. I mean, we've not given -- I mean, I think we've given some conservative guidance, not specific guidance around revenues and the like. We've talked about accretion guidance is really the only number that we've given. And I think we've got a number of folks that have kind of run numbers based on existing Street estimates that are out there. And I think you'll find that our estimates are relatively modest. And I think that takes into account the environment that we're in. Silicon Motion has some exposure to the consumer market, PCs, handsets, and so we've tried to reflect upon that. I think we've also tried to be conservative in our expectations on gross margins. We intend to move gross margins up. And in order to realize that, we want to make sure that we're not getting too far ahead and have the ability to drive for higher profits and potentially walk away from some potentially lower-margin business where it makes sense. And so we'll be careful on that front. But I think, naturally, we did diligence here. I mean, we've seen what the rest of you have seen over the last 6 to 9 months and had our concerns, did our diligence and have discounted appropriately. But at the end of the day, I mean, look, this isn't about tomorrow. I mean, I know -- we all have lived through stock volatility and they come and go, right? And we're trying to build a company. I think we had similar conversations back when we did the Intel carve-out as well. A lot of questions, a lot of concerns, why are you doing this at this time in the market, you're levering up the company, a very similar conversation as we're sitting here today. And I think it's -- I think if you look at the track record and what we did, we went off and drove gross margins up. We went off and drove operating margins up and drove the top line as well. And so that's our intention here also with the Silicon Motion transaction.

Any other questions from the audience? I got 1 from the webcast. It's following up essentially, but it's basically saying like at SIMO, their January call, they expected sales growth of 20% to 30% year-on-year for 2022, gross margins in the 50% range. And they also said there could be upside, assuming higher allocation from their foundry supplier. The 2 questions are, in your, I guess, negotiations, did you -- is that the forecast that you had? Or did you receive any kind of update to that forecast that was made again in January. And if they are different, than what are they? And I guess, I would add my other comment is that this is going to close presumably after 2022 anyway. So maybe the long-term view of their business.

Yes. So fair question. Look, the company made this guidance back in February, and it's made several comments around the backlog, I think, that was referred to earlier that they do have and the visibility they do have. They are also supply constrained. They've not been able to get sufficient wafer volume to address the demand that they have, and it's not expected to catch up this year. So it's probably into next year's where that expectation is. Yes, we've not given specific guidance as far as what our expectations on revenue. But yes, we've definitely kind of done our homework here and feel comfortable with the outlook that they have. I mean, I might emphasize where is that growth coming from or where has it come from? Because they've definitely seen some unit volume ramps, but they've seen market share gains. The merchant market itself is growing quite a bit. They've also seen transition from PCIe generations. They also see a higher ASP moving up as well. So there's various ways that the company has been growing, and we do expect that to continue, but that also gives us confidence, as we look out over the next couple of 3 years.

Maybe just another follow-on on Silicon Motion. They've talked about wanting to expand the enterprise market more meaningfully. And I think you're kind of alluding to that. What are the carriers of synergies you believe you can help them drive towards that business and maybe vice versa?

Yes. Yes. So you hit on this a little bit in the beginning. So they have been investing pretty heavily in the enterprise space, as we have different product set, but we've both been investing pretty heavily. Where do we think we can help. I mean they've been driving a solution sell. They've had some penetration in Asia. We think -- they've not had as much success in North America and Europe, and we think that we can help with some of those relationships that we have today. And so we think we can leverage that. We also see some synergies on the IP side. There's a number of IP blocks that we can -- are mutually beneficial that naturally, as we move from 16 down to 7 or 5 nanometers. We can definitely take advantage of and see some cost synergies on the IP development as well.

Yes. It makes sense. Yes, scale matters when you're in 5-nanometer and presumably at some point. Maybe pivoting to the infrastructure business and think back that you guys had, like, legacy backhaul as other parts of the infrastructure business that has expanded. How should we think about the trends this year? I believe you talked about some back half weighted and maybe tie into geographies and where your potential opportunities are in the back half of the year and maybe into next year?

Sure. Sure. Yes. No. The infrastructure business has been a big focus for us. We've been investing heavily over the last 2 to 3 years and seen a lot of success. Last year, we grew greater than 60%, expected to grow kind of 12% to 15%, is where most folks have us growing this year and then expected to see that continue in 2023. So various areas, server power management has been growing nicely. Our optical business, we've been investing heavily in PAM4 DSP technology, an emerging area. It's been a little late to develop, 400 gig is kind of our first entrance into this market. Had some success, but really probably starts to be more material in 2023. We have a new chip out. It's our 5-nanometer solution, as we were just talking about an expensive development at 5-nanometer. But nonetheless, a very big growing market and enables us to get into 400 gig as well as 800 gig data center opportunities, which is interesting. At 400 gig, there was really -- Amazon had been the primary guy over the last couple of years. Now you're starting to see some of the guys that were at 200 gig jump to 400 gig or 800 gig. And so now you've got a broader set of customers to address. And so that kind of broadens, diversifies that customer set, and it also allows us to build out the application. So more that IP can be leveraged into different applications as well. And so both of those, I think, give us a lot of comfort and confidence going into next year. We've had a lot of success that will start to -- kind of those rewards will be seen next year as those products ramp.

And on the wireless side as well.

And on the wireless side. So wireless -- so there's kind of 2 pieces of this. There's wireless access as well as wireless backhaul. So backhaul, I think you were kind of talking about this, Bill. Wireless backhaul, we sold microwave modems into this market for some time. So these are the microwave links that are between cell towers and as opposed to running fiber, they would run these microwave links. And tremendous amount of success over modems. We're really the only modem supplier in this market today -- a merchant modem supplier today and had a lot of success with your bigger infrastructure guys. Now we have a new transceiver. That's also started to add to our growth from last year in 2021, expected to contribute in 2022 as well. And so while as you see more and more base stations deployed in the market, there's more microwave links. So we're benefiting from that. But you're also seeing content increases, as we deploy a transceiver as well as a modem.

Yes. And then geographically?

Yes. Geographically, on this front and on backhaul specifically. I mean it is a global footprint. We are seeing more and more backhaul throughout the world. You have some greenfield opportunities like in India, for example, that utilize our products. Maybe a little bit less in Europe just because -- well, I shouldn't say -- I'm sorry, a little more in Europe just because often, they won't use fiber because it requires them to trench and the like. And so microwave is often used in Europe. In the U.S., a little bit less so. But -- so I might hit on, Bill, the other 1 wireless access -- I didn't mention, wireless access and so these are also transceivers that are going into access applications on base stations for massive MIMO with 5G deployment. So that business started ramping early last year, ramped throughout the year, continues this year. We're still trying to get more supply. We've got more demand than we can address right now. We've been constrained on the substrate side in particular. Unfortunately, we're not being able to get enough substrate. We have secured substrate, expecting to see that come online kind of late Q3 with more of an impact in Q4 and into next year. Fortunately, that demand is really not -- shouldn't be any perishable demand. I mean these customers move a little bit slower, and so they have been able, fortunately, to wait, and we should see that start to ship in Q4.

Great. Any -- again, I want to offer anyone in the audience if they have any questions? Maybe sticking on that supply, and it could have been even the first or second question. Obviously, it's been a constrained environment throughout. But maybe you spoke to the substrate issue. How would you rate the current supply constraints from wafer to substrates and maybe even across the product lines, where is it least acute and where is it most acute?

Sure. Yes. No, supply chain has been challenging over the last, I mean, more than a year now, which is kind of amazing to say. Initially, it was kind of more back-end related, not first -- if I go back to the first half of last year. And then it's kind of transitioned into more wafer-driven shortages. And I would say wafers are the bigger challenge that we have right now. I mentioned the substrate. Substrates are definitely holding us back, but we've been able to kind of narrow it down. We've requalified with some different packages. And so that's helped out. I think one of the ways -- I think we've done a pretty good job of navigating some of these shortages, not perfect by any means, are we addressing our customer needs. But we're doing our best. We've been getting out in front of customers. We mobilize pretty quickly to get other vendors up and qualified second source is qualified. And that's helped us get, I would say, more than our fair share. And so a lot of success with that. We intend to continue that, and I think that will continue to -- hopefully, we can continue to outpace some of those original expectations that were set.

Maybe coming back to the market environment. And you've obviously driven content gains and share gains on top of that. But if we think about the classic broadband business, remember this is -- it can be cyclical. And I was living through this, especially a few years ago before COVID happened and everything just went up and to the right. We had a company earlier today, one of your customers that talked about it, I'd say, they thought after a high-growth period, it is now returning more to, call it, seasonal aspect. So I mean, share gains and content gains at side, how is the demand environment as you look at it today?

Yes. Look, I mean, demand has continued to be very strong. It's hard for me to separate out what is share gains versus what is the market dynamics. I mean we're naturally watching the market growth rates. And as I mentioned earlier, I mean, I think we've got very good visibility. A lot of our confidence around what that demand looks like is really built on CapEx deployments that are intended to happen this year and next year and even into 2024. Most of our customers, I mean, especially some of these telcos and operators, I mean, they're building out these networks and these are plans that are -- I mean that are expected to -- that are in place for the next 2 to 3 years, right? I mean, could they be pushed? I mean, theoretically, of course, they can. But it's also hard -- I mean these things also don't get gained in any direction very quickly just because of the amount of money that they're deploying. So I think that's where there's a lot of confidence. You're also seeing a lot of these government subsidies, I think, influenced some of the telcos, in particular, to upgrade those networks because they've got money available to them. I mean the other thing, typically, these stipulations are they have to spend the money. They can't push it out. The idea is to stimulate the economy in a lot of cases or address an underlying need. And so they are being forced to spend this money. So look, we're continuing to kind of navigate that. I mean, at the same time, I can't help but go back to -- we also are continuing to grow our market share in these new markets. I mean, that's the 1 way -- I mean, I know there were some concerns about things slowing down. At the end of the day, I mean, the WiFi, we haven't been in the market. And so this is new product opportunities. PON, we're a new player in a market that's twice as big as our existing cable market. I mean, we barely touched the surface on that stuff. And then wireless infrastructure, also a new player. And so these are all upsides in our business, and I think that will help mitigate any risk on some of the other slowdowns that you referred to.

Yes. Maybe coming to margins. And I remember when you did the prior acquisition of Intel, margins took a step down and you guys said, okay, well margins are going to -- they're going to increase and here's how it's going to progress. And actually, you've been -- it went from 57% to 62%, if you look at the guide for the second quarter. So basically, you do what you said you would do and maybe then some. But I think at this stage, there's a lot of products that from the acquisition -- that prior acquisition, more and more of that seems to be more now these days MaxLinear DNA, if you will, so higher margins. But I guess, how should -- coming back to SIMO, like how should we think about how that's going to affect margins? Is that a similar type of playbook where you can kind of ramp that back up.

Yes. No, I think it's a great question, Bill was pointing out that he was right and showing me that our gross margins are going to beat the numbers. Yes. So I think we -- look, at the time when we did the acquisition of Intel, I mean it was definitely taking a step back. Never -- we never like to do that, but we took an opportunity. We saw the ability to raise their gross margins over time. We continue to see that path. I mean we've talked over and over about our ability to get the combined company back up to the mid-60s, and I think we remain confident in that. So now bringing in the Silicon Motion transaction and where does that go? Can we do the same thing? I mean it is interesting how we've kind of -- it's a very similar dynamic going from 62.5%, 63% back to 57%. Now we're talking about 62% back to 58%. And so it is a similar switch. And in some respects, it's a little bit different. But at the same time, I think we see the same opportunities to reduce cost. We've got a lot more leverage in this case as far as the scale that we get, the pricing power that we believe that we'll get with the new asset. So we'll be able to lower that cost structure. So that's going to be super helpful and somewhat similar to what we saw in the Intel transaction. I think you'll also see us be selective. And I think that's very important. I think there's some pricing power here, not suggesting that there's going to be a huge amount of price increases. I just would suggest that we'll be more selective and careful in that approach and prioritize the gross margins, whereas I would suggest that there hasn't been as much prioritization put on it historically.

Well, great, and we look forward to the progress on that. And I think with that, we're getting close to the end of the call. So Steve, thanks a lot for joining the conference.

Great. Thank you, Bill. Thanks, everyone.