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

All right. Good morning, everybody. For our next session, we're hosting MaxLinear. I'm here -- on the stage with me, I've got Steve Litchfield, Chief Financial Officer and Chief Strategy Officer. Thanks for being here, Steve.

Thanks for having us.

So before we dive into our Q&A, could you give us a high-level overview of MaxLinear's products and strategy?

Sure. Sure. Yes. So MaxLinear is an analog mixed-signal company. So I mean, we really differentiate ourselves kind of in the mixed-signal space in between analog and digital, which I think is a really exciting space where there's a lot of innovation. The company went public in 2010. We're in a variety of end markets. I mean we break them out, infrastructure is kind of the big one, but we also do products in broadband, connectivity as well as industrial. But I'd say our focus probably over the last 5 years has been in infrastructure. We started kind of an organic development in that area about 6 years ago now, focused on wireless infrastructure as well as data center. Our business is expected to do north of $150 million next year. And it's an exciting space right now with -- especially with what's going on in the data center.

Yes. So you reported earnings a little over a month ago and the commentary on things like quarter rates and expedite requests and things all sounded pretty positive. So where are we in the cycle? And are you kind of confident where you're past the bottom and on the way up now?

Good question. I think we are -- it's been a long cycle. The last -- I think we've been -- we've had about 6 quarters now that have been down, and it has been probably not surprising given the supply chain shortage and the upswing that we saw early on, but it's taken a while to kind of get through the inventory levels. And it is encouraging. I mean we did think that we'd probably see recovery in the first half that's pushed out into the second half. But we're -- the order rates are -- have definitely picked up. Backlog -- starting backlogs are much, much better. The expedites that you mentioned, yes, we've commented on this because customers are coming in, inside of our lead times, which is challenging, especially when you don't have inventory -- and so they're seeing that. And so things feel like they're getting back to a little bit of normalcy. The sell-through continues to be quite a bit higher than the sell-in numbers. That also is encouraging, but I think that will catch up sometime next year.

Yes. So next, I want to take a little time to go segment by segment through those different businesses that you mentioned at the top. So starting with infrastructure. Can you talk about the secular outlook for the infrastructure business? And I think you guys have talked about the SAM growing almost 4x to $4.7 billion by '27. So what are the drivers of that like really considerable growth?

Sure, sure. Look, the big one and talk about data center a little bit. This is our optical DSP product that we've had for a couple of years. We're on a second-generation product right now. That is, I would say, the bigger part of the SAM today. I mean that's a business -- I'm sorry, a market that probably did $800 million, $900 million last year. This year -- well, I'd say, over the next 2 years, they expect to do $1.6 billion, $1.8 billion. So a big uptick really driven by all this data center investment that's going on out there. I think we're really well positioned to take advantage of that. We're a new player. There's a couple of big guys that are looking for alternatives right now. I think we've got a real differentiated solution really based on power. Data center is all about power these days. We're seeing guys buying nuclear power plants and the like to fund these things. So we're really optimistic, and our customers have gotten very excited about the fact that we've got much lower power levels. We're very competitive here and we're seeing good adoption. So that's probably the #1 thing that we're seeing and excited about. I mean the other one is wireless infrastructure. Wireless infrastructure has been down. Telco spending has been poor. We have a couple of different maybe product areas. We've got our -- the access market where we have a modem and a transceiver -- I'm sorry, on the access side, we've got our transceiver as well as our digital front end. And digital front end is brand new. So this is -- it's a way -- I mean, look, telco spending in the wireless infrastructure space is not huge, but we continue to just add more content here. And so we can see almost a 50% increase just in content. So as that telco spend starts to creep back up, which has been down, we do expect to see a recovery this year on the access side. And then we also do backhaul products. So backhaul are these big microwave links that they run instead of fiber. And we do expect to see a recovery in that market this year also.

Okay. And then on optical transceivers, I believe you guys are close to like 1 million unit volume run rate. So how is the mix in that 1 million-ish units between the 400 gig, the 800 gig and the 1.6T today? And what sort of growth do you see for that as you look out over the next 2, 3 years?

Right. Yes. So the product is -- it's a 100 gig per lane. And so we've -- it's primarily focused around 800 gig, and that's where we're seeing the most adoption. And that's really what's exciting right now. Most of the bigger hyperscalers or bigger Tier 1 data centers will roll out 800 next year, some early in the year, some late in the year, but that's definitely happening. This year, the mix, to answer your question, is probably 60%, 800 and 40% 400. I think next year, we'll still ship a lot of 400, I expect next year. And -- but maybe it goes to 70%, 800 and 30% 400. And -- so 1.6T is relatively new. This is 200 gig per lane, and we're excited about this product, and we think that we'll be below the competition from a power perspective, another reason to get more adoption. So that -- I think we'll demo this at OFC. I expect that we'll see -- next year will end up being about design wins. So we'll get design wins. We'll work with customers and then production is probably in 2026. That's pretty aligned with where the market expectations are with the exception of NVIDIA. NVIDIA will probably roll out next year. But the bigger hyperscaler guys, the Tier 1 data centers, I expect will happen in 2026.

Okay. One last one on optical. So on your most recent call, there was some discussion of a fairly large opportunity selling into China. Can you talk about how you're positioned for China maybe compared to some of your other peers? And any specific considerations for that market?

Yes. I mean I think of this, there's kind of 3 buckets of people. I mean you've got your hyperscalers, mostly U.S.-based that are driving bigger volumes. You've got Tier 1 data center guys that you're wanting to penetrate. These are big like Ciscos and Oracles of the world that you want to focus on. And then you've got kind of the Chinese guys like the Tencent and Alibaba and the like. So we want to penetrate all of them, frankly, and we're engaged with all of them directly and then also engage with them through the module vendors, right. And so the module vendors, you can imagine us as well as them. I mean, we want to penetrate -- or we want to get these modules qualified. And then once they get qualified at one place, then they want to go and sell them to as many people as they can, right. And so it's a bit of a domino effect. I mean once we get a couple of data centers qualified, these qualifications can be quite long. They can be a couple of 3 months or they can -- I mean, we've got a couple of guys that will run 6 to 9 months on some of these soak tests. So they can be quite lengthy. But once you get them done and kind of the industry knows how tough these qualifications are, and once you get through them, then they're more comfortable adopting you sooner. So it's a bit of a domino effect, and we're excited about, hopefully, we'll see this inflection point happen in 2025 and really start to see some meaningful volumes.

Great. So switching over from infrastructure to broadband. This is another segment where you guys estimate really strong SAM growth, like over 4x, almost 5x to like a $1.9 billion type of number. So what underlies that really strong growth?

Yes. So broadband and connectivity, if I buckle them together, and we can dive into each of them as you like. But both of them -- okay, so first of all, we're a provider, kind of an arms dealer to some degree. We don't really care whether it's fiber or cable or fixed wireless access. So we're selling into all of these guys. And often that comes in the form of a gateway in your home. It's got $40-plus of content in that gateway, 6, 7 chips coming from MaxLinear. That product, if I go back 5 years, did probably $15 of content from MaxLinear. Now we're north of $40, and I think that will continue to go up as we get more chips that penetrate that application. One example of that is like in DOCSIS, the processor that's inside of the gateway itself continues to grow. And so the ASPs continue to go up. Our DOCSIS 4.0 chip upwards of 50% higher content. And so that's one big driver. WiFi also as -- I'll give you an example, Wi-Fi 6 to Wi-Fi 7, ASPs go from, call it, $12 up to maybe $15 with the added feature set and capability. And so those are some of the reasons why that servable market is growing.

Yes. Got it. So lots of content growth there. Going back to the wireless CapEx that we were talking about a little bit and telecom company CapEx generally, I think you guys are expecting things will start to improve in 2025 after like a pretty flattish couple of years. So are you already seeing concrete evidence of that in like orders, for example? Or is that still a little too soon a little bit down the road?

Yes. I think we're cautiously optimistic here. I mean I do expect a recovery. I think it's -- maybe the questions are more about how much of a recovery. I think we're just trying to be cautious because it has been a couple of pretty tough years. But the order rates, the visibility that we have right now is definitely getting better. So I don't think we're here pounding the table, but we're definitely seeing those signs. We're seeing more expedites come in, which is a good indicator. I mean, bookings, obviously, we always look at bookings, and that is very different. We've had 6 quarters now of improved bookings off of a very low number. But those are the signs that we're starting to see.

Got you. And lastly, touching on connectivity. We talked about it a little bit already. But again, this is a segment where you guys have a really strong growth forecast for your SAM up to like a $3 billion level. So what are the kind of pieces of that recipe?

Sure, sure. There's really 2, Wi-Fi and Ethernet. Those would be the 2 bigger drivers. Our connectivity business, I think, will probably grow this coming year north of 50%. I think most of the analysts have it in that ballpark. It's a recovery off of a kind of a lower number, but there's also a lot of new product development and new product adoption that's happening. So Wi-Fi 7 that I mentioned a little bit earlier is one of those. And that's definitely driving the SAM. It's also driving the recovery in 2025 as well. The other one is Ethernet. Ethernet is a product line that we really developed to go into a gateway application. There's a lot of upgrades that are going on in Ethernet today from 1 gig to 2.5 gig. There's probably 1 billion-plus ports out there doing 1 gig devices today that will be upgraded over the next, call it, 18 months. So that's a big opportunity. It happens in the gateway. But we've actually leveraged our team and gone out to our industrial customer base where they're deploying more and more of this Ethernet into factory automation. I mean, just tons and tons of different applications. And so we're seeing good adoption there which opens up a brand-new market. Same thing on the enterprise side. We've won the big North America switch company. That will start to ramp in Q2, Q3 of next year. So we're seeing good broad-based adoption in the enterprise market, which is entirely new. And again, that's driving the SAM numbers. This business, Ethernet, I mean, just as -- maybe I'll highlight it business was probably doing $40 million to $50 million in mostly gateway applications. And now that's dropped down to, call it, mid-30s. I expect that to recover back up to the $50 million. But ultimately, I think we can get that number to closer to $75 million, maybe $100 million over the next couple of 3 years. So that's a big uptick for us on a product. I mean this is kind of what we do. We go out and we kind of keep grabbing additional share, additional content, these upgrades in spaces that I think are sizable. But yet the competitive landscape is such that I think we can really capitalize.

Yes. Have you guys sized for gateways like the size of the content uplift when you go from 1 gig to 2.5?

I mean there's probably, I don't know, call it, 15% increase, not as high as like something like Wi-Fi or even what we're doing on the wireless infrastructure. But it's a good uptick, yes.

Right. So then more of the growth is volumes recovering in industrial and these kind of other adjacency areas and not just more for more?

That's correct.

Got it. What about -- how do you guys feel about the pace of adoption of Wi-Fi 7? Is that going as fast as expected or slower? And yes, I guess, how is that going?

Yes. I think the Wi-Fi 7 adoption is going for the most part, as planned. I would say -- I think maybe what is slower -- so the recovery is a little slower. I mean that would be one. So that's really driven by CapEx spending. And if I look at service providers probably make up 50%, 60% of the WiFi deployments that happen. And so if service providers hold back on CapEx, so some of these cable guys have been spending a lot of money on infrastructure upgrades, that will transition over to CPE, the consumer premise side in '25 and '26. And so as that transition, we'll start to see more uptake. So I don't think it's necessarily behind. I think the other dynamic that we've seen with the cycle is kind of -- you've seen some higher-end devices kind of move to more mid-tier devices, whereas in the boom times, the highest feature set always wins. I'm not saying that we're at the bottom of some economic slump here, but I think it's definitely moved down to mid-tier offerings and -- which is just driving a different volume for us.

Got you. So I've got a few more, but I should mention, I forgot to at the start, that there's a QR table, a QR code on the table for those of you in the room. So if anybody in the audience has any questions for Steve, those will come up here to me. But moving on to my questions over to the industrial and multi-market business. So where do you compete in this market? And is it just kind of taking natural adjacencies from what you're doing for your others or more to it than that?

So these are -- in a lot of cases, they are adjacencies. But I would say a lot of the products are more analog-type products, broad-based, tons and tons of applications, thousands of customers, hundreds of products and product families. We've been in this business for a long time. It's primarily a distribution business. So a lot of partners. I guess maybe one differentiator, we do a lot of business in China here, which has hurt. I mean, China has been soft over the last, call it, 1 year, 1.5 years. And so that's definitely depressed the market. And you're seeing this from a lot of our peers in the industrial space. They were kind of the last one in the cyclical slowdown. And so I think you probably got another couple of quarters. I do think we get back to growth next year. I think we get back to -- we typically see this growing on or about GDP levels. And so I think we see kind of low single-digits next year of growth from the industrial market. One thing I'd add here, we did -- we've had an export control. Export dynamics are challenging right now with China. This is one business that got affected by that earlier in the year. I think that's behind us now. So that's another reason that I'm confident that we can continue to grow. I don't expect any more. Now who knows with tariffs and more restrictions potentially coming. But I think most of that's behind us. We actually saw in 2019, a fair amount of tariffs put in place. It did have an impact on our business, but we no longer ship a lot of that business under licenses. So there's less risk there. So I think we can get back to some normal shipment levels.

Got it. So if we -- we talked about broadband, connectivity, infrastructure and then the multi-market kind of stuff. So if you add it all up, it seems like you guys are targeting revenue growth of about twice as strong as you would just get from the underlying markets themselves. So how much of that is you guys choosing really favorable spots within those markets? And how much of it is share gains at the expense of competitors or any other like pieces of the growth formula you would call out?

I think the overarching principle is to drive more content with existing customers. So I think that's the play. Now that also means that you end up gaining share. So that's certainly -- they're really tied together in my mind. And as far as picking spots, I mean, clearly, we target -- we try to leverage the capability, the technologies that we have into a real differentiating position. I mean we differentiate on technology. That's how we win. I mean I talked earlier about the power differentiator that we have in the data center. With that, we go head-to-head against some big guys every day, and we have since the formation of the company. And -- but we're winning on technology, right. We're winning on that differentiation. I think, fortunately, as some of these markets get much, much bigger and our peers even get bigger, they have to focus on bigger things, which leaves a big opportunity for us to go off and capitalize on. If you think of some of these data centers, I mean, there's tons of opportunities out there that a Broadcom just basically doesn't want to pursue because it's just too small for them. But it's a pain point for an Amazon, a Google, Microsoft, right. And so -- and they rely on us. They've seen our capabilities. They see our customer support. So the door is open for us to kind of come through and really leverage that and turn into -- I mean you've seen this with some of the peers even in the data center space. They can take some really simple technology and turn it into some bigger dollars, all because some of the bigger guys just simply can't chase it.

Right. Can we dig into operating leverage a little bit? So you guys are a fabless company, but you've talked about a little bit of gross margin accretion from kind of the low 60s range now to more like a 65% long-term target. So what are the pieces there?

Yes. So we've had a goal to be in the mid-60s. We've been running in the low 60s. Now with this revenue decline, we tipped right below 60%, but I do see that recovering. Optimistic that we can exit next year at that 60% level. Some of it's revenue. You're right, we're fabless, and so it doesn't have as big of an impact on us. But that being said, at some point, those fixed costs start to weigh in. Now you're right on the mix. I mean the mix is a big driver for us, and it's something that we're very focused on. The infrastructure business does run slightly above the corporate average, and it's something that -- I mean that's an area we've been investing heavily in because of the growth, but it's also got better gross margins for us, whether it be wireless infrastructure or the data center side. Both of them have higher gross margins. We -- if I think of our other businesses, we don't have anything that's super low gross margin. I mean it comes in slightly below, but I'm confident that we can move back into the low 60s. And then as revenue improves and -- infrastructure will certainly grow faster than these other end markets. And so that's the reason we feel confident that we can get back up to the midpoint.

That will be a tailwind for you. I think there's a lot of kind of green shoots there or cautious optimism or outright optimism for next year in general on the revenue side. But then I think you've also targeted some pretty substantial 20%, 25% OpEx reductions for next year. So can you talk about what specifically you're targeting and how you plan to do that and still make sure you're protecting the potential growth to the upside and not taking out costs that you would need, right?

Right, right. Yes. No, look, I think we're excited about next year. I think there are some conservative estimates out there. We want to outpace the overall top line revenue growth of the market. But your question on OpEx -- so yes, in Q3, we did announce a cut of 20% to 25%. We feel -- I mean that is a big cut, but it's -- if I reflect back on the last 2 years, we've had a number of different cycles that we've gone through. We've built this 1.6 gig -- 1.6T solution for the data center market. We've had Wi-Fi 7. We've had our PON upgrade. We've had our DOCSIS upgrade. We've had a lot of developments that are kind of rolling off right now, frankly, and now it moves more to a customer support mode. And so I think I'm very comfortable that we -- our long-term growth won't be hurt at all by these reductions. These reductions are never easy. They're not much fun. But I think we do need to get the cost structure rightsized. Long term, our goal has been to be north of 30% operating margins. So -- and we've done 30% operating margins above $1 billion, but we've done 30% operating margins at $300 million to $400 million of revenue as well. And so I certainly think that we can get to that 30-plus percent operating margin in the markets that we target, right. I mean there's -- infrastructure can -- like data center can have a bit of a treadmill, Wi-Fi can have a bit of a treadmill. But most of the other markets kind of have a 6- to 7-year life. And so you're not doing a chip but every 6 or 7 years. And so we can manage that relatively well. It's a consolidated market. You're not on this hamster wheel. So I'm confident that we can do that. I get the question a lot is like, well, now that you've reduced the 20%, 25%, should I see a big increase when revenues start to recover? I don't think so. I don't think you -- we're going to have to put that level of investment back in, not immediately. I mean, will it go up? It will go up a little bit in 2026. Typically, we expect that number to go up maybe half the rate of the top line. So that would be our expectation. But I think right now, we're really focused on getting back to that 30% operating margin target.

Great. And then lastly, can we talk through capital deployment policy and how you allocate the capital that you have? And then if it comes to M&A, if that's one of the options, like how you think about and evaluate either like a big strategic transaction or a smaller tuck-in or acqui-hire type of thing?

Sure. Yes. So I mean, acquisitions have been a part of the strategy and will continue to be part of the strategy. I think where we're at right now at the lower revenue levels last quarter, based on those cuts and where the revenue was, we did burn cash in Q3. And we had some onetime costs related to severance. We'll have some more of that in Q4. But right now, I would say that we have just heads down, focused on generating more cash. And I think that's where our focus will be over the next, call it, 12 months. And then hopefully, we can get back to acquisitions down the road a little bit. So from a capital allocation, I mean my focus is generating more cash.

Yes. Yes. Great. Well, that's all I have. So I'll leave it there. Thanks very much for the time today, and I hope that we can catch up on some of these same questions a year from now and see how everything has gone in '25.

I look forward to it. I look forward to it. Thanks again. I appreciate it.

Thanks.