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

Thank you very much for being here with us today. And having MaxLinear, it's a company with so much history. This year is 20 years. Correct. Correct. I guess. Pleasure having you here.

So let's get started with the first question. Maybe you can give us an overview of the markets and the business that MaxLinear participates in. It's a company, but what is?

Sure. Yes, happy to do that. So you're right, we're an analog mixed signal company. I mean I find really focus around the mixed signal portion from a technology standpoint. And then we leverage that technology into multiple end markets. So infrastructure is a big growing market that we've been investing in heavily, wireless infrastructure as well as data centers. And then broadband and connectivity, so connectivity, Ethernet, WiFi are kind of the 2 big ones there and in the industrial multi-market area, a lot of analog, interface, power management chips, we address that market with.

Okay. Okay. Big market with the power management now. It's like everything.

Correct. And power in general is something that we find differentiating in all of our products. I mean, even on the infrastructure side, some of our optical products, I mean, the real differentiator of 5-nanometer is our lower power offering. So yes, so it definitely applies across all the technologies.

Good. Thank you. Thank you very much. So the question is mandatory. How is it going with inventory, inventory rationalization, the cycle we are all talking about this now. How do you see, particularly in broadband and connectivity, how is it going there? And how do you see the end of the cycle if you seen here?

Sure. Yes. No, it's a very common question, quite familiar with the inventory question. So I think we're making good progress on it. It's definitely lasted a little bit longer than I think what we originally anticipated. But we've been undershipping demand for a couple of quarters now. I think we definitely see the amount of inventory in the channel going down, whether that be at the end customer or the ODMs or even in the distribution channel. So we're seeing improvements. It's taken a little bit longer. I think that's some reflection on what the overall demand in the business. I think we've seen a little bit of softening on the demand side. And therefore, not as much product is moving. We're moving into a period where at least our broadband connectivity business has typically see some softer seasonality in Q4 and Q1, and then we would see kind of growing more of our growth quarters during Q2 and Q3. So with the inventory and some of the seasonality, we're still going to be working through that inventory, but do you expect to kind of come out in the first half of next year is kind of where we originally -- or where we think about it today. I would say that more of the inventory has been on the broadband and connectivity side and a little less so on our infrastructure side. In fact, we don't see a ton of inventory in the channel at all there. Industrial multi-market is a place that, I mean, some of the peers have seen more of an inventory build lately. We've seen that over the last 2 quarters. I think we're getting through it. We see some modest improvement in Q4 from a revenue standpoint. But it probably still has a few more quarters to go to get all the way through the inventory correction on the industrial front as well.

Okay. Clear. May I ask what's the role of China demand and China recovery in this process?

Sure. So we don't have a huge amount of exposure to China. The 1 area is the industrial multimarket area. That would be the 1 end market that we have more China exposure, I don't feel like China, from my perspective, it wasn't ever super overheated. I mean, over the last year, it's been pretty soft, and I think the entire industry was expecting it to tick off more. But I think fortunately, there wasn't a huge buildup in inventory. So I don't think there's a lot of inventory to work through in industrial, but the business is still a little bit soft. I'd say export controls, some of the dynamics going on between the U.S. and China continue to be, I wouldn't say a huge headwind. We don't do some of the higher-end shops that most of these export controls are targeting. So I think there's probably less of an impact from that perspective. But it does require us to make sure that we're compliant in every way.

Yes. It was a pretty tough update for some of our -- I mean, like NVIDIA and -- those guys, right?

Yes. So on the processing side, and that seems to be where they're focused right now. While we do some SoCs, we're much less exposed to like the high-end processor market.

Clear. So about the fiber access SoCs, you are a relatively new player here. Can you talk about the progress on that front?

Sure. Sure. Yes. So fiber is a relatively new market. Three years ago, we were doing less than $10 million in this market. I think over the next few years, we can get this business up north of $100 million of revenue. And we've been making good progress thus far. One of the big North America fiber or telcos is deploying our product or has deployed our product this year. We're already working on the next-generation product there. And so I think we are making good progress on that front. There continues to be more upgrades that are happening on those networks. The telcos have been very aggressive in rolling out more fiber around the world for that matter. I mean, we see a lot of this in Europe as well. European is also upgrading a lot of the DSL that's laid out there in order to compete. And so we're seeing opportunities on that front also. And with that fiber, I mean, we're able to capture like a gateway, maybe outside the home or maybe inside the home, but inside the home opportunity, you may see a gateway that's approaching $40 of content maybe 6 to 8 chips. There's definitely the SoC that processes the data there, but there's also Wi-Fi chips, there's Ethernet chips. There's power chips that all go into that same gateway.

And you're just going to Wi-Fi. Wi-Fi 7 is a big story now. So how do you see driving the service providers there and development of that market?

Yes. So Wi-Fi, it's a growing market for us. It's a product line that we didn't have much of a presence in Wi-Fi 5 and got a lot of traction with our Wi-Fi 6 product, Wi-Fi 6E, which is that second-generation Wi-Fi 6 product. And now we've been working diligently on the Wi-Fi 7 product. We expect that to move into revenue in the second half of next year. That's about the adoption cycle of the industry. Remember, we're focused on the access points, not the client side of the equation, so the access points are being deployed. They're higher ASPs. So that's 1 of the advantages where we may have seen $10 to $12 worth of content in a Wi-Fi 6 solution, we may be $12 to $15 worth of content in a Wi-Fi 7 applications. Probably important to recognize that many may not know some of the reasons why Wi-Fi 7 is being deployed at all. These are cycles that we've seen over the years. It's typically just more distribution needed in the home. But now a lot of the telcos are talking about having 30-plus devices in a home, all communicated at the same time. And 1 of the challenges that Wi-Fi has is some of the collisions that are happening. And so the number of devices isn't going down anytime soon. If anything, they probably go up. So Wi-Fi 7 actually addresses a lot of those collisions and some of those interceptions that are happening there. Along with the bandwidth naturally, it also gives you 6 gigahertz. So there's different benefits to using Wi-Fi 7, which is why most of your service providers are looking to deploy that product sooner rather than later.

Yes. So a quick question. Who are your competitors in these 2 markets that we spoke about, both the fibers SoC and W-iFi 7?

Right. So on the fiber access side, it's mostly Broadcom. And to some degree, in Asia, you'll see a MediaTek or a Huawei even, but mostly in North America and Europe, we would typically see Broadcom. On the Wi-Fi side, it's also Broadcom and MediaTek to some degree, and Qualcomm. So Qualcomm has a big presence in Wi-Fi. So those are the other 3 competitors.

With large companies?

Yes, yes, absolutely.

So you've talked about the Ethernet business more over the last 2 quarters. Is this a new opportunity for you? And what's the size over the coming years?

Yes. So Ethernet is a new product for us. This is another area that we've really innovated, call it, 3 years ago, we didn't have any presence in Ethernet at all, came to market about 3 years ago now with a 1 gig solution. Now we have a 2.5 gig. So you're seeing the transition happen in the market from 1 gig to 2.5. Now where is this particular Ethernet solution being implemented. It's where we see it today is more on the gateway side. So mostly home gateways that will have an Ethernet port in the gateway itself, so 1 gig move into 2.5 gigs. So we definitely see opportunities there, and that's a big portion of the market. And it's 1 of the reasons that I mentioned earlier about the gateway itself and the content going from $15 of content up to north of $40 of content in a gateway. I mean this is just 1 of the examples of where we're growing that content. That being said, outside of gateways, we're also growing our Ethernet product portfolio. So we're moving into the enterprise space as well. So some of the bigger enterprise storage companies are implementing our enterprise solution. And so that is broadening. It's a new market opportunity that the company didn't have historically and hadn't really focused on, but it opens up new doors, and where you're seeing a lot of switches deployed 4 port, 8 port, type of opportunities moving from 1 gig to 2.5 gig really opens up a whole new market. So we have a whole new set of design wins with new customers that we've not had historically. And then the same thing on the industrial front. We're seeing just similar needs. A lot of the industrial application might be manufacturing some type of operation that have maybe a 4-port switch or an 8-port switch, and they also are seeing those same needs for upgrades there. From an overall size of -- I mean Ethernet is a massive market, as you probably know. But for us, specifically, so last year, say, we did a little north of $50 million of revenue. That number would definitely drop this year, primarily driven by broadband business being in decline and some of the inventory that exists in the channel. I would expect that to be back north of $50 million next year. But then ultimately, I see us quickly getting hopefully up north of $100 million of revenue over the next 2 to 3 years.

What -- because you mentioned the storage companies, I mean, in the data center realm. But what will be the main drivers for growing -- you mentioned a large number. So?

Yes. So well, it's everything and all of these servers, they're using multiple applications using Ethernet. And so -- and all of those need to be upgraded. And so they're a big user of Ethernet switches and PHYs, and so we would expect those to be implemented. I mean there 1 gig is implemented today. And then all of the next-generation solutions are all being -- I shouldn't say all, but a lot of them are being upgraded 2.5 gig solutions. Now we have a 1-gig solution as well. So we're naturally going to build the portfolio out going to 2.5 and then 5,10 gig solutions as well.

Yes, clear. What about infrastructure? Is expected to grow nicely this year? What are the driving engines there?

Yes. So yes, infrastructure has been a big focus for the company for the last, call it, 5, 6 years, and we've really invested quite a bit in the wireless infrastructure as well as wireline infrastructure such as the data center. Say the majority -- I said to date, probably a little less than half of that revenue has been driven by wireless infrastructure. So it's wireless backhaul and wireless access. So access like 5G applications, transceivers that are being deployed around the world for 5G base stations. But we also do backhaul modems as well as transceivers. So these microwave lengths that exist in between 2 different base stations rather than running fiber between the 2, often they run just microwave lengths instead. And so we're doing modems there and transceivers there. So we've seen tremendous amount of growth in that area over the last few years, organically, I'd say organically through just more unit shipments, but then we've also added to the portfolio, just having the transceiver that came into revenue about 18 months ago. So we've been growing that revenue, and it's really contributed to the overall growth of infrastructure. The other big area, there's probably a couple of other areas, but 1 big focus has been the PAM4 or the optical chips that we're using for the data center. So within the data center, these optical transceivers are being deployed. We do have PAM4 chip, and it's our first kind of entry into this market. We came to market a few years ago with the 400-gig solution. Now we have an 800-gig solution. So we're still addressing the 400 gig as well as the 800 gig market, ultimately 1.6T as well. But this is a big opportunity. It's a big growth trajectory for the company. We've got design wins. We've got early revenues that have just started. We're expecting to move into production in Q2, Q3 of next year with multiple customers. We've got -- 1 of the unique parts of this market is that we have to focus on the hyperscalers first and foremost, I think. But then all of them use multiple module vendors as well. So we're working closely with the module vendors in order to integrate our solution and with the silicon photonics that's needed into that pluggable device and then that will go into a hyperscaler. So we're working with both of them. We've got a unique 5-nanometer solution, which no 1 else in the world has today. Nice advantage over the competitors in this regard. But we got to take advantage of that opportunity and get these designed in quickly and ramp. The whole universe right now, I think, our first generation solution came out a couple of 3 years ago. We got less traction, frankly. We were early to market, but the market itself kind of slid to the right and they move forward with an incumbent solution. I think a little bit different today is the emphasis around 800 gig. 800 gig is really being pushed by some of the underlying AI needs that are in the market today, whether that be at the hyperscalers or NVIDIA, there's numerous opportunities that are really pushing 800-gig adoption? So I think we're really well positioned to take advantage of that. With the 5-nanometer solution, power -- so we've got the lowest power solution on the market. And that's ultimately what these guys are trying to do. They're trying to limit the amount of power that all these data centers are using. So we've got a nice opportunity. We've got to execute. I think we've been doing a great job. We've learned a lot over the last couple of years. It's a new product introduction for us, but we've got production wins. We're expecting to move into production and more in earnest in Q2 or Q3 this year or coming year.

Clear. And just coming back to the competition question, who are your main competitors on this?

Sure. So in this area, it's Marvell and Broadcom, those are the kind of the 2 big guys in this space. Marvell has done a nice job of deploying. And I would say they've got the majority of share where Broadcom would be the second guy.

Clear. Thanks. So on a more strategic level, what are the priorities for the business over the coming 1 to 3 years?

Sure. Yes. So look, I mean, we're very focused on all of these new products that we have. I mean, we've talked about several of them today, our optical products, our Wi-Fi 7 product that's coming to market, our PON product. These are growing in all of our end markets, including Ethernet, right? So the effort is just continue to build out the portfolio. MaxLinear has been successful in growing organically as well as through acquisition, but continuing to broaden out the portfolio so that we can get more traction, grow the top line revenues of the company. And so we've been through somewhat of a challenging inventory cycle, but I feel like we're getting through that, and so it's really back to what we do best, and that's building innovative products and differentiated solutions for our customers. That's what we've been successful with. I mean, we went public in 2010. We've made moving this up into $600 million, $700 million range of revenue. We want to continue to drive that revenue further, and I think we've got great opportunities to do that.

You mentioned M&A activity. Anything you have in mind, it's more in the tuck-in side or [indiscernible] ?

I think right now, let me talk about capital allocation as a whole. I mean, right now, in a somewhat uncertain world, I mean we're kind of building up cash right now. We have -- we will certainly look at smaller tuck-in acquisitions. I think to do something bigger, probably out a little bit further, but we will definitely -- we've done some bigger acquisitions, and then we've done some smaller tuck-in acquisitions where it's supplementing an existing portfolio, and it's kind of accelerated -- it's accelerated some of the product adoption. And we did this in the infrastructure space a couple of times where we just brought in a team of engineers that enabled us to move a little faster. It's all done organically. Ultimately, we weren't buying any revenues, but we were able to bring some expertise in that helped us to move faster to market. So we'll keep looking at that. We've got about $125 million worth of debt. So we'll take that into consideration. And then the stock, we're down at the bottom of the cycle. So naturally, there's some interest in looking at a potential stock buyback as well, but we'll assess all of those in the near future, but right now, really focused on just generating more cash.

Yes, clear. So maybe connecting to that, what is the kind of investment opportunity for an investor in MaxLinear? How do you -- what do you want the investors to know?

Yes. Look, what we want them to know is that we're an innovative company that is really bringing differentiated products to market, competing, as you mentioned, against some of the bigger guys. But the reason the bigger guys are there is because they're big markets and they're big growth opportunities for the company. And I think we've come to market, we've proven ourselves. We've got a great track record of bringing new products to market and winning business. And so that's what we continue to stay focused on.

Great. Just a reminder, if somebody has a question, you can post it. This is an open forum. So another question you have, how do you see competition from China? It's every -- you are more in the [ tablet ] side. So that's maybe different from what other peers are talking about this immense amount of capital input in new [ tabs ], which obviously is a different story, but do you see any new players coming up in China? How do you see that?

Yes. So we do see competition from China and some of the kind of export compliance situations that we've had to navigate as well some of the licensing and the like. I think we're well positioned to take advantage of that. Chinese competition has been there for a long time. I wouldn't say it's changed a whole lot. I mean it's still very relevant, especially in some of our analog products is where we probably see it more. So I think we've done a good job over the years of navigating and winning incremental business. So I don't see that changing much in the short term. We've got to just continue to stay competitive, continue to stay ahead of them with the innovation that we ultimately bring.

Yes. Makes sense. And maybe last question on the topic, but every CEO has been asked and every CFO has been asked here about how do you see the geopolitical situation with Taiwan, a potential is an election coming up next year? -- with potential ramifications with the mainland government and impact on -- you are 1 of the clients of TSMC and you rely on them pretty heavily. How do you -- do you see a risk, you don't think [indiscernible]?.

I mean, look, we do see challenges with the geopolitical landscape in general. I think that's a multifaceted question. I think from our standpoint, we've got to continue to be nimble. We got a -- I think we've done a good job over the years of diversifying our supply base. And so while -- I mean, look, the majority of semiconductor foundries exist today in Taiwan, but they're starting to diversify outside of that. We've looked outside of Taiwan as well, and we will continue. We get supplied today outside of Taiwan, and we have continued to increase our exposure to mitigate that exact risk from a supply standpoint. I think the other dynamic is the market itself. I mean you also -- there's a risk of losing some of the opportunities in China and some of the export controls, for example, I think of MaxLinear as we play somewhat in the middle. We're not planning at the super advanced nodes where there may be more risk like in some of the processing capabilities that you're hearing a lot about. So not as exposed there. And so I feel like we can continue to participate in that market, compete in that market and be able to take market share. But clearly, it's the barriers to -- if they continue to go up, it may get harder. But right now, we play in an area of what I kind of term benign trade where you do see a lot of trade going between U.S. and China. And I believe that we'll be able to continue to do that.

Okay. Sounds good. Anything else that are leaving on the table. Any other questions that investors are asking you?

No. I mean, I guess maybe I'll -- since we got a couple of minutes, I'll mention the P&L in general and finances, I mean going through -- this kind of inventory downturn, we definitely dialed back on the expenditures on the OpEx standpoint. As revenues have come down, we dialed back the spending. But I think we've also done a really nice job on the gross margin front. Our gross margins run typically 60% to 61% gross margins, and we've held that despite revenues coming down. There's been a couple of reasons. I mean, one, I think we do a good job on the supply side of really negotiating better prices. I think even going forward, I think we'll be able to continue to do that now that the supply constraints have eased a little bit, I think we'll see a little bit more of an opportunity to see some cost reductions. So that should be good. The mix has worked in our favor as well. I mentioned our infrastructure business. Our infrastructure business is on track to grow 30-ish percent this year. And so we want to continue to grow that business, but that also has slightly higher gross margins attached to it, while some of our other products like connectivity, like some of our lower-end Wi-Fi products that sold into Asia may have lower margins. So the mix shift has actually worked in our favor. We want to continue to do that, where we're investing, where we're investing those research dollars is in places that we can drive higher gross margins. I think in the short term, as you get through this correction, I won't be surprised to see some pricing pressure, but most of our businesses don't have -- it's not like a consumer market where you see a huge amount of pricing pressure. We will see some. I would expect us to see a little bit more of that in 2024 and then hopefully, we can start to work back up to our long-term goal of being in the mid-60s on the gross margin side.

Cool. Okay. Sounds good. All right. So Steve, that will see it. Thank you very much again. It was a great conversation, and yes.

Great. Thank you very much, [ Carla ]. Thanks, everyone.