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

All right. Looks like we're ready to begin again. It's been a long day. So I'll welcome everyone again for what was maybe the 10th time today so far, but it's been a great conference. So our next speaker is MaxLinear. With us from MaxLinear is Steve Litchfield, CFO of MaxLinear. So Steve, thanks for joining. As I said, the soccer game is over. So now everybody can pay attention again. So that's fantastic. So thanks for being here.

Thank you. Appreciate you having us.

Maybe for those that aren't as familiar with the company, maybe you can give the quick overview of segments you play in and what you do, we can kind of dig in with some Q&A.

Yes. That sounds great. So for those unfamiliar, I mean, MaxLinear went public in 2010, mixed-signal analog company. We have really 4 end markets that we identify. Infrastructure is something we've been investing heavily, captures our wireless infrastructure as well as some of our data center business. Then we have our broadband business, which is probably the largest business that we have, primarily SoCs going into all kinds of broadband applications, our industrial multimarket, which is a lot of power management, interface products that are going into really a plethora of opportunities with probably thousands of customers. And then the last one is our connectivity business. And connectivity really several things, our WiFi business, our Ethernet business, we have some MoCA and G.hn standards as well, all often complementary to broadband, but also there's other stand-alone applications as well. So those are the kind of the 4 end markets that we participate in.

Maybe take a brief overview here, too, about market conditions down, and we'll get into that in some of the conversations. But this has been an interesting cycle for us, and we've seen a lot of them, but never seen a cycle quite like this, where we've seen certain markets soften and other markets that have stayed strong. And in your case, I know in the broadband space, you've seen some degree of weakness but not everywhere. So maybe that's a place to start in terms of kind of why the cycle is a little bit different and how you're seeing it?

Yes. Well, so interesting reflecting on the last year, 1.5 years. I mean the cycle has been pretty unique. We've seen these shortages in a lot of areas, and we've been doing our best to navigate those as best we can. And I think we've done a pretty effective job. We've been able to take some market share in this environment, executing outmaneuvering some of the competitors here. But I mean, I guess as we look out into the future, we still want to navigate that. We don't want to overbuild. I think a lot of our customers right now are kind of assessing where the market is going, what the demand drivers look like. I think for us, I mean, we've got 2 or 3 areas that have been performing extremely well. They are new markets for us like fiber, for example, the fiber broadband market specifically. I mean, last year, we did less than $10 million of revenue. This year, expected to do $30 million to as high as $40 million this year and then expect it to really double that again next year. So fiber is something that we've been very focused on wanting to grow. Connectivity has been a big one. I mean WiFi specifically, 2.5 years ago, we were probably doing $25 million of revenue. We believe next year, we can get north of $200 million of revenue, so great growth opportunities with WiFi 6. Now we're seeing WiFi 6E adoption as well. So that's been a big growth driver for us. And then the third area is probably infrastructure. And infrastructure has been something I mentioned earlier that we're investing in heavily, but it's something that we've executed. We've grown that double digits, expected to do that again next year. Some of that is driven by wireless infrastructure, you talk about supply chain and in shortages. We've still been short on supply of our substrates. That's getting resolved, probably gets resolved this quarter, and we'll start to see that business kind of ramp in the first half of next year. So those are 3 or 4 of the big areas. You asked specifically like some of the puts and takes. I mean, broadband has been strong. It's kind of ebbed and flowed a little bit even this year. I think a lot of the areas of strength there like fiber, cable, it was super strong in Q2, moderated a little bit in Q3. As we look out into next year, I mean, you can see it moderate a little bit. But overall, I mean, we're seeing some very strong long-term multiyear trends where we're seeing upgrades in the home, moving to fiber, but just upgrading broadband internally, you're even seeing the cable guys investing pretty heavily right now in upgrading their own networks to be able to go upstream, improve their upstream capability. So it's another example where we see long-term strength. You're seeing a lot of government subsidies in this area as well. So as I look out over the next couple of years, I feel very good about that business as well as connectivity going forward.

Do you consider some of the areas in broadband, such as the gateways to have been one of those pandemic beneficiaries where there was increased investment. People had upgrade from work from home on that, that maybe pulled forward some of that demand? Is that possibly reasonable also because we've also seen consumer weaken in other places as well, which is why I asked the root cause of some of the slowdown that's happening in that space.

Yes. Well, I think I would go back to, as we sit here today, I mean, there's a large, I think, multiyear cycle going on of investment by telcos, by cable operators of upgrading a network. And that's feels like it's just in the beginning stages, just starting this year, some of the even your Biden infrastructure money that's starting that has been approved, that $60-plus billion not expected to really roll out until the second half of next year, which means probably more of a 24 dynamic. A lot of the telcos are getting more aggressive and dedicating more CapEx dollars to rolling out, addressing more homes. If I kind of take a step back and talk about why are they investing? I mean these guys are wanting to monetize more of the services within the home. Historically, there have been this kind of, you got to get the pipe inside the home. But I think today, what our customers really are talking about more is how do we distribute that signal within the home, how do we monetize other applications. There's lots of applications where you need better WiFi within the home not just to get to a further place in your home, but also, I mean, it gets into WiFi sensing. You're doing security applications with just a Wi-Fi access point. You're doing health applications where you're sensing heart beats in the home. And so there's all kinds of new. We did a press release of the company called Cognitive a couple of weeks back, and they're doing some of the sensing applications. So I think you're going to see a plethora of these, I guess, new services roll out, and that's where your telcos and where your cable operators are wanting to monetize some of those services, but they've got to have the infrastructure within the home upgraded, and I think that's really just beginning.

And where does MaxLinear fit within that? And obviously, there's a big guy a couple of miles up to the north that is very large in that space. generally, customers over the years said that it's often not their favorite supplier to deal with for various reasons. And so how much of the opportunity in that is based on the competitive set as opposed to some of the advantages that you have specifically?

Yes. So you're right. From a competitive landscape, look, in the broadband market, Broadcom is the primary player there. I think we've done a very effective job of winning share from them. I think we both benefited to some degree in the market from this build out this multiyear cycle that we're going through right now. I think, look, they have had their own struggles, dealing with the FTC and some of the EU dynamics as well. I think from our perspective, we're investing. We're committing long term to our customers trying to strengthen those relationships. We've got a whole portfolio. If you think of our gateway today, our gateway, if I go back 3 or 4 years, we had closer to USD 12 to USD 15 worth of content. Today, we have $30 of content per gateway. In some cases, it even approaches $40 of content per gateway. And I think that will continue to escalate as the SoC itself needs more processing horsepower, but also you need better WiFi capability. You've got other connectivity such as Ethernet that goes in into that same box as well.

What about fiber gateway, which is new for you? What's the additional content you get in fiber gateway?

Yes. So fiber, so I'll talk about the additional content, but frankly, we really didn't play much and that's the less than $10 million. It just wasn't a focus for the company historically, a couple of years ago, we had always sold into it, but again, it just wasn't a focus. And so we've put that focus, improved the product offering itself more differentiation within the SoC. So the SoC is the primary chip that's in that fiber gateway. You still have the same WiFi dynamics. You still have the same connectivity like an Ethernet solution that you would have there. We do some products outside of the home, like in some of the nodes that are going in, but it's a smaller portion of the revenues. And I'd say the majority of it is coming from those gateways.

Got it. What about the other is on the connectivity side. It's been growing quite a lot. And so what's the reason for that? Obviously, you've got this WiFi 6, 6E. So there's some content there. Obviously, this is another year Wi-Fi has done very good since the pandemic. But it's also an area that seems to have remained stable as well. So maybe you could talk about some of the drivers in that area from content and...

Yes. I mean, look, we were late to market with the WiFi 5 solution. So our Wi-Fi 6 solution really did get a lot of traction. And so a lot of that growth was driven by the attachment alongside of our SoC. Keep in mind that most of these operators, most of these telcos want to have one provider. They've had that in Broadcom over the years. They would like to have a provider that they can go to kind of that whole one throat to choke idea. There's more firmware on these gateways as well. So that's an important part. So we've got to continue to execute, deliver more of that solution. But with the attachment, we've also got it with our fiber, we're getting that attached. And then we're doing stand-alone routers. So stand-alone routers in WiFi is a new area for us. We've not done that. We frankly didn't have enough supply. And so now that we've got more supply, that will start to ramp in Q4, and that will be a nice growth driver for us next year as well. I guess I would also just mention that ASPs are growing, right? So in WiFi 5 ASPs were on the order of $7 per solution or chipset Today, with WiFi 6, we're up around $10. 6E can run USD 11, USD 12, in WiFi 7, we expect to be even higher. And then I guess the other part of that is that a lot of these routers, if it's a dual band solution, it may be lower end, but you're starting to see the trend moving toward these higher-end tri-band solutions. All this is driving a higher ASP. And so it's not just unit volumes ramping, but it's also ASPs or content increasing as well.

Right. What's your expectation for WiFi 7? Do you expect that as being, WiFi 6, 6E was a pretty big upgrade from 5. What's your expectation for 7 because I think there's been some mixed view of that in the market.

Yes. So look, WiFi 7 is getting a lot of attention. You're hearing more about it. The mobile guys are starting to talk about it more and implement it. And so I think you should expect to hear more. From a revenue standpoint, I don't expect too much revenue next year from access points with WiFi 7. It will be pretty modest. I think it's more of a 24 ramp more than anything. So look, as far as the adoption itself, I think you'll see a big adoption in WiFi 7. I think what we're seeing a little bit is maybe less of an adoption of WiFi 6E. So WiFi 6 is still ramping. We're still seeing tremendous growth and expect to see that throughout next year as well. But then WiFi 7 is starting to come in behind that. You'll see WiFi 6E ramp. I mean we're seeing that right now. But I mean, as far as a size standpoint, you can definitely see some customers starting to look at WiFi 7.

Okay. Just kind of roll in to the product lines on the infrastructure side and particularly the 5G wireless infrastructure. Maybe talk to us where you play there and the content opportunity that you have there?

Sure. So wireless infrastructure as a whole, there's kind of 2 different product lines. One is wireless access, as you mentioned. So these are transceivers going into base stations, relatively new for us, a lot of focus around O-RAN. We've got some DPD technology that is very unique and very differentiated. And that's kind of why we've been winning some of those sockets. And so that started ramping, call it, 12, 18 months ago, doing extremely well. The other side of that wireless infrastructure is backhaul. Backhaul is, there's a couple of products there. One is a modem. We've got the only modem solution in the market. It's the only merchant modem solution in the market. And then the transceiver. The transceiver is relatively new, just started ramping that really this year in earnest, and then we were short on supply due to some of our substrate shortages. That will start to come in, in the first half of next year. But we've seen tremendous growth in backhaul. Some of that is in rural areas, kind of following some of the [ RDO ] money, but then you've also got greenfield applications. Any time that you're familiar with this, I know, Chris, but having these microwave links versus rolling fiber in between base stations is a big opportunity. We've seen it continue to grow. We're engaged with most all of the big players in this space, but they're all familiar names like Ericsson and Nokia and NEC and used to be Huawei, Huawei we can't address any more due to sanctions, but we do have a very good footprint there.

And a lot of the comments you made, the shortages have come up. And maybe you could describe that a bit. And have you been more constrained on the substrate side, is it in the wafer side, maybe some combination of both? And where is that starting to ease?

Yes. So the substrate, I just kind of knock this one out. I know I mentioned it a couple of times, but substrates is an ABF substrate, more higher reliability. We have been short on this most of this year. We've got a lot of backlog that we've not been able to address. We'll start to be able to address it late this quarter and the first half of next year. So that's the big piece of substrates. On the wafer side, we've been short, if I go back to Q2, we were short primarily on our WiFi product line, mostly driven by wafers. We were able to catch up to some degree last quarter, and you saw our connectivity revenues jumped quite a bit in Q3 but expected to grow again in Q4, as I look out, I mean, I do feel like shortages are I don't know if they're 100% behind us, but I definitely think things are much, much better today, and I think we'll be talking about this a lot less going forward.

And do you get a sense as you catch up on some of those shortages that there's still unfulfilled demand out there that will wind up getting addressed as the shortages come out. This is the debate in the industry, right, that we've been short for a while. And then in some segments now, we feel like we have too much. And I guess that's the magic question, right? If there's still unfulfilled demand, then we're going to have that benefit in 2023.

Right. Yes. And there's definitely some of that, right, where we're literally in the process. It's kind of happening real time, call it, in Q4, where you're catching up, you're getting additional wafer supply, able to address opportunities that you weren't able to address. I mean we have that to some degree in our WiFi business that was demand that we won probably 9 months ago could have shipped 9 months ago and didn't have the supply. But I think as an industry, now you're getting those products, you're able to address it. And I think you're approaching the point where customers are now going, okay, well, what's my demand look like next year, right, as they've got, in some cases, you're not, some of these markets where they've overordered, you're going to see pullbacks, right? I mean, like on the consumer side, you've already gone through that. You've been going through that for 6 to 9 months. I mean we don't do as much consumer business. But clearly, there was overordering and you've seen the industry kind of burn that off over the last couple of quarters. And so I think that's the big question that kind of looms out there for the industry in '23 is do we see a slowdown? Or is it pretty modest, and we just kind of roll right through it.

I understand. To move on to the acquisition, Silicon Motion acquisition. And I got the perception, and I don't cover MaxLinear, but I do get the perception that that's been a little controversial. And maybe you could start with kind of the rationale behind it, why it's a strategic fit and why you elected to do that acquisition?

Sure, sure. Level of controversy. Okay. No. Look, it was a very exciting opportunity for us. We announced the acquisition in May of this year. So exciting the rationale itself, I mean, so for those of you unfamiliar, Silicon Motion is a storage controller company, been around for a number of years. There's a lot of similarities, frankly, between them and MaxLinear. founder-led company, grown it over the last 20 years, a very impressive product offering. We announced it in May, some of the, well, let me tell you the rationale first. So first of all, the storage market is a big market. It's growing double digits every year, expect to see that continue. And that's across all of the storage controller markets, right? And so that addresses the client side like consumer enhancements, but it also gets into industrial, automotive. It gets into data center, enterprise storage, these are big, big markets that are growing quite a bit. That was the attraction from us. We don't have a huge storage exposure. We sell into the enterprise storage markets today with several of those players. Clearly, we're talking about optical. I mean, optical, we sell into the data centers. So there's a couple of overlaps. Now neither of us, us or Silicon Motion have huge exposure just as a percentage of our revenues to the enterprise market, but it's a place that we both see as a big growth potential for the company, and we think we can benefit from that. I guess the second thing I would mention is scale. I mean this was a big rationale behind the deal itself. I mean all of you know the consolidation that's happened in semiconductors over the last several years. We're competing every day against companies like Broadcom, like Marvell that are 4, 5, 6x bigger than us. We need to have the scale. It's always been important in semiconductors. The acquisition that we made, Silicon Motion was doing 2 to 3x more wafer volume than we are doing at TSMC. That will give us a tremendous amount of leverage from a cost standpoint on wafers, on back end, assembling tests. But also on the front end, as I think about like R&D dollars, we're both investing heavily in IPs for next-generation products. We have a 5-nanometer solution for our optical products. Naturally, some of those IPs will be needed when Silicon Motion develops their next-generation 5-, 7-nanometer product as well. So now we can leverage that across a much bigger business, taking a $1 billion business, moving it to $2 billion. Just the scale alone gives us a lot more capabilities to pursue other things. Long term, naturally, we want to continue to grow organically, but we'll also want to do more acquisitions down the road and continue to roll out more semiconductor companies. Financially, it's a very accretive transaction. I mean the structure of the deal was a little over 80% cash, a little less than 20% stock. It will be funded with the term loan. It will be done in Term Loan B, Term Loan A debt facilities, and that will be syndicated out closer to the time of close, maybe to hit some mechanics of the transaction. The only thing we're waiting on is SAMR approval through China, so antitrust approvals in China are taking close to 12 months right now, in some cases, more, some cases less. But that, as a general rule, that's about the time, and that's what's kind of dictated our view of us closing kind of mid next year.

Right. And what's your accretion targets for that acquisition?

So we announced at the timing of the deal accretion of about 25%. And I think for most of you that we're familiar, I think if you plug the models together, there was $100 million of synergies and the accretion levels were much higher than the 25% that were announced. That was just kind of baking in some cushion. Clearly, when we announced the deal in May, part of the controversy that you mentioned was why this deal? Why now? I talked through the rationale itself, but I think part of the concern at the time was why the consumer market. Consumers were slowing down in April of last year, April and May, right? And then we're putting some additional leverage. So first of all, I mean, look, we weren't necessarily buying the company to be in the consumer market per se. But that being said, it drives tremendous amount of volume, tremendous amount of scale. And so we'll be able to benefit from that. With regard to the leverage, I mean, look, you've seen us do deals historically that we put leverage on the company. We were very quick to pay down that debt. We would intend to do that here as well. The leverage we announced that we estimated to be at close would be a little less than 4x levered at close. And then 18 months beyond that, we'd be below 3x levered. So that's still the focus today. Maybe one other point to note, as many of you know, interest rates have moved up. When we announced the deal, the interest rate was on or about 4.5%. Today, that's probably running closer to 7.5%, maybe as high as 8% if we were to close today, which we're not. So as we syndicate that deal out, call it next spring, we'll see where that interest rate lands. But the deal is still very accretive and very exciting long term for MaxLinear and growing the company.

And so it sounds like that there was enough cushion in the accretion targets when you announced the deal, that even though we've got higher rates, softer consumer markets still feel you can hit those targets...

We do feel very good about that. And in fact, I'm often mentioning I think in a downturn, you can get in there and you can make some corrections. We can realize more synergies during tough times, tough markets versus when times are good, it's a little more difficult to realize some of these synergies. And maybe I'll just hit on the synergies briefly. There was $100 million of synergies, $30 million were expected to come from COGS and $70 million from OpEx. And that $30 million, you can imagine at, what, $2 billion of revenue, a little less than $1 billion of COGS getting $30 million of synergies. I think that's a pretty conservative number, hopefully, especially as we look out going forward, and you're seeing suppliers utilization go down. I think we'll see some more pricing leverage on that front. So very confident that we can realize the 30. On the 70 side, it's a little less than what we would normally target. Now we don't have as much overlap in the business. But that being said, I think we're more than confident that we can hit the 70 and potentially even higher than that.

Great. Just again, are there any questions in the audience? I'll look out if there's anyone there? Generally, they have been done. Maybe you spoke about some of the margins in that. Let's speak about the pricing environment, too. Certainly, this has been something different in the semiconductor industry. We've been seeing pricing moving higher, and that's been largely a function of tight foundry supply, tight substrate supply. What's your outlook in at into 2023? And I've heard some mixed things that certainly in industrial markets such that, that still sounds like pricing is going higher into next year. How do you look for your business? Because certainly, it seems that TSMC pricing is going higher next year. And what's your ability to pass that along to your customers?

So I think you're hearing mixed views because I think there's a lot of mixed things going on out there. I think everyone is kind of in this negotiating phase right now. I think you're hearing from suppliers. Everyone wants to pass along more price increases. Clearly, there is some inflation out there, energy prices, et cetera, are still going up and they'd like to pass that along. We'll see if they'll be able to. I think there's a lot of suppliers that would like to but yet demand is going down, and they're going to have to deal with that, right I think the same thing applies to our customers as well. I mean to the extent that we can pass that along, we will pass that along, where applicable, right A lot of negotiation. I think there are parts of the market where you will still see price increases next year, and I think you'll see other places in the market that I think you'll see prices come down. I think you've kind of seen this reset in the market. I don't know that we're going to go back to prices 2 years ago. I don't expect that at all. But I also think there are certain markets that you're going to see kind of what I'll call typical ASP erosion, just like we've seen in historical cycles.

Right. And what about from a foundry standpoint? Where is your sweet spot in terms of what process nodes you're using and the supply-demand dynamics in those nodes?

Yes. So the majority of our wafers today are 28, soon to be 16-nanometer, I'd say that's where the majority of volumes are. We have a broad supply base. We're buying some products from Intel via the previous acquisition that we did, TSMC, UMC as well as a little bit from GlobalFoundries. So all of those are suppliers, as I mentioned earlier, not seeing any tightness. I think different places, we may be able to see some price reductions as well going into the...

And I think that those nodes are a little bit looser than what we've seen, both leading edge and the trailing edge. Looks like we're just about out of time. Anything you want to leave us with in the last few minutes?

No. No, it should be an exciting year, and thanks again for having us.

Absolutely. And thanks for coming. Thanks, everyone.