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

[Audio Gap] the Day 2 of Citi TMT Conference. My name is Kelsey, one of the analysts here covering U.S. semis. So very pleased to have Steve Litchfield with us from MaxLinear, CFO. Perhaps, Steve, how about we start with giving the audience an overview of the company's heritage, product portfolio and also how MaxLinear is benefiting from the [indiscernible] build out?

Great. Sounds good. Well, thanks for having us Kelsey, and thanks for seeing -- everybody joining us today. A little bit of background on MaxLinear, company is really founded as a mixed signal semiconductor company. Focused -- I mean we started an effort in infrastructure about 5 to 6 years ago, and that's been kind of a labor of love in the beginning, and we really started to get some solid traction here in the market over the last few years. This most recent quarter, it was over 50% of our revenues. That's been the focus of our data center business as well as our storage accelerators and some of our wireless infrastructure. We also have several other end markets, broadband connectivity and industrial markets, but over the last several years as far as R&D dollars and product focus, it's been around the data center and the infrastructure business.

How should we think about that tailwind within the [indiscernible] build out? Is it the 800 gig, 1.6 transition or scale up, scale out? How are you guys positioned within the networking transition?

Sure. So I mean, we're participating in all those scale up and scale out our 400 -- maybe step back a little bit and talk about where kind of revenue comes from today and then where it's going. So this year, mix between 400 and 800 gig primarily DSPs, that business is growing nicely this year. The midpoint of our guidance for the optical piece of it is $220 million. The mix of that business today is probably 70% 800 gig and probably 30% 400 gig, kind of getting to the end of the life on the 400 gig, I think most of the market data says that will slow down next year. But 800 gig, I feel like will grow nicely this year as well as next year. And then some debate on what happens in 2028. Our new product, Rushmore is -- customers are qualifying that product, working with those solutions today, expected to go to market kind of mid-next year. And so we're working with tons of customers right now with that particular ramp. If it starts mid next year, it probably goes into kind of full-scale production in the following year. So -- and I guess one thing I would add there is we also have our Washington TIA that sells alongside of that. So just from a pure ASP standpoint, if you look at 800 gig most of the market data, I'll say ASPs are running, I don't know, $35 to $50 probably versus a 1.6T, which is probably $80 to $100 plus the cost of the TIA, which pushes at above $100. I mean, right now, the market environment is such that pricing is holding very good. I don't expect that to change right now, kind of given the constraints that we're seeing throughout next year. So I don't anticipate pricing coming down much between now and the end of next year anyway.

So on the optical data center piece, I mean, you guys have raised guidance. I think I believe the last 3 quarters. How should we think about that trajectory? Or what changed during this period that resulted in that consistently higher guidance over time?

Right. No, it's a good question. Yes, because going into the year, I think we had said that we would be north of $100 and then each quarter we've raised. So what's changed? I mean I think it's a few things. I mean, the market continues to grow. You guys have all probably seen the growth in transceivers this year versus the beginning of the year. So that's clearly one. But I think our share that we were anticipating has gone up more than probably what we had expected. We've seen new customers come on that were not planned for. And so I just think it's kind of a handful of things. I don't think it's one in particular, but several things. We've also tried to be a little bit conservative entering the year just from the standpoint that with supply constraints being what they are, we don't want to overcommit to investors nor do we want to overcommit to customers. So I think we've tried to be just conservative on those expectations.

How has backlog visibly improved since earnings or even in the last 2 quarters?

Sure. I mean, look, visibility is very good. I mean, again, kind of back to -- I think there's a big gap between supply and demand here. Visibility is strong from the standpoint. Customers are coming in. We quote 26- to 28-week lead times for our optical products. That's fairly consistent, but I will say that customers have come in, placing orders throughout all of next year or at least at a minimum, given us forecast so that we can go out and plan, right? I mean, as all of you know, TSMC and all of the other folks in the supply chain, need forecast, need planning. So in order to secure that capacity for next year, we need to see those orders upfront. And you're in an environment where you're getting those orders right now.

Got it. Could you talk a little bit about MaxLinear differentiation? I mean, in the ESP market, it is dominated by a couple of players. How do you guys been? How do you see that competitive positioning change or evolve as the market transitions to 1.6T?

Sure. Yes, look, I mean, we've -- there's 2 big players in this market that we've competed against for a long time. I started out talking about our mixed-signal expertise, but that expertise is really what allows us to bring technically unique solutions that are very differentiated. I mean our current 800-gig solution runs about 20% less power than a comparable module from one or the other of those 2 competitors. And so you have to start there, right? I mean we've always had that technical differentiation and we continue to have it. I think a couple of things that have changed or that have allowed us to maybe further gain share, further penetrate the market is, look, over the last couple of years, we've done a lot in broadening the portfolio itself. So now we have our retimers. We have our Washington TIAs. We have drivers. So we're broadening out the portfolio, and that makes a big difference to the customer base because they want to work with less suppliers at the end of the day. So they want to see more capability out of us. I mean, I think the third thing was just simply that we've been in production for now 18 months, mass production. And I think that's -- it's always a bit of a challenge that's ticking in the egg thing. They don't want to design you in, especially big customers, without seeing you in production. We've passed that hurdle, and they're very comfortable with it. I think as we -- and it makes a big difference, especially as I look out into these 1.6T ramps and where we are with the ramp, the knowledge that we have, the visibility that we have, the customer comfort, I guess, if you'll call it that, that we have -- that we didn't have at 400 gig or even 800 to a certain degree. So I think that technical differentiation, I think it always starts with that. We've also bolstered up our systems expertise. I think that's something that's changed a little bit in the environment. When you're dealing with large data center customers or hyperscalers, they're not so much worried about component performance. They're worried about system performance. And so over the last call it, 12 to 18 months, we've hired a number of system engineers located them very close to the big hyperscalers and make sure that we're able to bring systems expertise. And I think that's something else that's important going forward.

Got it. How would you describe your customer [indiscernible] within that?

Sure. So it's fairly broad. I mean I'm sure most of you guys know in the audience, this -- we have to think through all the data center customers as well as the module customers, right? And MaxLinear, we had always focused on the data center customers, and we probably paid a little less attention to the module guys. Now that's flipped over the years. We've put a lot of effort into the module customers recently, just because those are the guys that are working on qualifications, interop trials, firmware changes, things like that, solving customer from. So those folks are really important. As far as concentration, I mean, we've had pretty broad adoption, and we've got engagements across all the major data center guys as well as all of the module players. We don't have any one customer that's dominating that. And as I look out into the -- naturally, we'll see -- if market share is 5% to 7%, I think we have aspirations to get up to 20%, 25% over the next couple or 3 years. And I think we have a great chance to do that. So -- but I don't think it's necessarily dominated by one guy. I think there's 3, 4, 5 guys and many -- I mean, you'll be familiar with all of them, of course. So I don't think it's dominated by one person, but I do expect to see more concentration next year and certainly into 2028.

Got it. What needs to happen to reach that market share aspiration from where we are today?

Well, so first of all, it's happening. And when I say that -- I mean that transition is kind of already happen. We're seeing those share gains. We've got these qualifications done. We've got to continue to support those customers. We've got to continue to ramp. We've got to continue to build out our own portfolio. We got to continue to get supply, right? I think we've got a -- I think we're confident on that. We've got to continue to bring some differentiation, whether it be on the technical side or even innovativeness on the supply chain. I mean, with our 1.6T, as many of you know, we moved to Samsung. So the industry is somewhat constrained by TSMC. And so this move to Samsung has caught a lot of people's attention and they're very interested in the fact that it gives them some diversity. And so most of your module guys selling into the space, they're trying to kind of get some independent supply chains, which is not very easy to do given some of the constraints on all of the components. So I think we've got to continue to do innovative things like that, not just at the chip level, but even in the ecosystem we have to think through.

Could you walk us through like how do you think about the manufacturing strategy? Like I said, and things are getting tighter at advanced nodes, how do you go by securing that capacity? What negotiation you have to work with?

Yes. So I mean, how do we go about it? Maybe I'll follow through on the Samsung. If I -- I mean our strategy is always to have multiple foundries. We've always had multiple foundries over the years. We call it, 4 or 5 years ago, we were alternate between UMC and TSMC. And then UMC kind of stopped investing on advanced nodes. And then we were kind of stuck with TSMC for a period of time. But we had been kind of talking to Samsung and they clearly have advanced node capability, and so we ultimately chose to move forward with that. It really wasn't done just for optical. I mean, it was done for the company and to keep some diversity. So you'll see other products and other product lines or business units that will be done on Samsung as well. So I think overall, it's a long-term strategy that we have as a company. It's not just for optical. As far as securing capacity and what we're doing other than kind of keeping a diverse supplier base, yes, we're negotiating you're putting in orders. We -- a lot of folks are talking about LTAs. I mean we would try to avoid that for the most part. But I mean, from time to time, we've done those. Just to make sure we secure supply. In some cases, we're prepaying or you put letters of credit. There's other ways that you can secure capacity as well. And so we have to use everything in the toolbox right now in order to make sure we get that.

Because you guys are fabless, and it seems like as demand continues to upside much better than our expectation, do you foresee any challenges? Or based on the relationship that you have had with the foundries that is not so much a problem?

So look, I think we've got a great relationship. I mean it's been forged over many, many years. I think we've seen great response from them in tough times like this. So I'm confident that we will continue to get more supply. I mean, I think your question alludes to more, how much more can you get? I think we can get a lot more. And -- but we do have to continue to keep a really close relationship. We have to give them visibility and help them. And we do that in a number of ways. I mean, not just given the POs or -- but we also think through from a technical standpoint on how we can improve that throughput as well. I mean, whether it's IP or chip size, I mean there's all kinds of ways that we can do this in order to increase output. They're not easy and sometimes they take months and some R&D dollars, but often that will make sense for the long term. So we have a close partnership and we'll keep that up for sure.

Got it. I'll open it up to the floor for any questions. Go ahead. One second.

Thanks, [indiscernible]. I have a quick question regarding your products market share. So as the technology evolves, do you think, for example, like DSP, like your per share or like a dollar value as the technology events, would it be higher or lower? And how do you think about the product mix going forward?

Yes, good question. So certainly, as we go, just like we've seen from 400 to 800 ASPs have gone up, same thing at 1.6, I mentioned there's a big jump at 1.6. I think as you go to 3.2, you're going to see another big jump and 6.4 naturally. I mean these performance levels keep increasing. Talk about the component, like what exactly increases? I mean, I think of some of the simple pieces like a TIA, the driver, the DSP, which includes the SerDes, I mean those are kind of the 3 big pieces, right? As you advance and especially as you go to 3.2, architectures are changing quite a bit, and you're seeing the -- some of those parts become a little disaggregated. So now you've got a -- more than likely you're going to see a stand-alone TIA, you're going to see a stand-alone driver and then you're going to see the SerDes itself, which really is going to be incorporated differently. Maybe it's not in a DSP, but it certainly exists and will very much be needed. There's only a handful of guys out there that have their own SerDes at these performance levels. And so that's something that is very unique to us, and I think we can continue to increase our value proposition to the customer. So I absolutely think ASPs go up at each transition for MaxLinear. I can't give you an exact number of what that ASP is because we don't know what 3.2T or 6.4 is going to look like. But each of the pieces may look a little different, right? I mean your TIAs and drivers at 1.6T are -- the ASPs are quite a bit higher than they were on 800 gig, quite a bit higher than they were on 400 gig because those pieces end up becoming more valuable as does the SerDes.

What is the metric that drives that content increase? Like what do customers sort of look at before they're willing to pay a higher dollar for that?

Well, that's a tough question because I think -- if you think it from a customer's eyes, I mean, they're building entire systems, right, and they're trying to be more efficient and effective. I mean there's -- I started out talking about our differentiation being on power. I mean, their power cost are tremendous, right? And so to the extent they can lower that, they lower the overall system cost. You can simply put -- I mean even we're talking -- like the DSP portion, if you end up doing half realtime solution, if the signal integrity is such that you can reduce one side, then you have to increase the other so I could reduce some content here, but I've got to increase -- so like, for example, I could decrease the DSP over here, but increase the TIA and the driver on the other side, right? So I don't know that there's one perfect metric. I mean, because every one of these guys is -- their architecture is a little bit different. And I think what's important to us, and actually, I think it's a very unique value proposition that we have, as you mentioned, the 2 other competitors in the space, there's not many people that have these IP blocks that are able to address the problem statement here, if you will, right? I mean, you can't just come in and develop SerDes at these performance levels. It's just -- I mean, right now, the entire market is short on these resources today. And so I think that's something that really stands out, and it's why customers come to us.

Okay. Got it. Anyone else?

Just as you move to 1.6T and utilize Samsung more, just curious what kind of market share opportunities I think that opens up whether or not there's significant slack capacity there?

Yes. So well, I guess I don't think of it -- I think if your question is about market share as a whole at 1.6T, I mean, I think it's -- whether we are on TSMC or Samsung, I mean I think we have equal opportunity. That being said, with Samsung, given the constrained environment, I think, we're seeing a lot of people kind of show up going, yes, we would love this. It's something else that differentiates us. So I mean, we've long held getting to that 20%, 25%. I mean, I think we stand by that today. It's not going to happen overnight. Naturally, you do see bigger jumps at the different transitions. So I do think that we can take a sizable jump at 1.6T. I think that's what we're counting on and looking towards. With regard to getting wafers, we don't anticipate that being a problem. And I don't mean that they have infinite supply, but naturally, we've worked with them on the forecast and potential ramps, and we feel very comfortable that we can meet the demand of the customers.

So I asked about your product mix going forward as a technology advance so eventually we're going to have NPO and then CPO, right? So you would have your products to offset those potentially like DSP less risk, right? Can you talk about that area?

I'm sorry, offset what risk?