MaxLinear, Inc. (NASDAQ:MXL) Q1 2023 Earnings Call Transcript

MaxLinear, Inc. (NASDAQ:MXL) Q1 2023 Earnings Call Transcript April 26, 2023

MaxLinear, Inc. beats earnings expectations. Reported EPS is $0.74, expectations were $0.7.

Operator: Greetings, and welcome to MaxLinear’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Leslie Green, Investor Relations. Thank you. You may begin.

Leslie Green: Thank you, Doug, and good afternoon, everyone. And thank you for joining us on today’s conference call to discuss MaxLinear’s first quarter 2023 financial results. Today’s call is being hosted by Dr. Kishore Seendripu, CEO; and Steve Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer. After our prepared comments, we will take questions. Our comments today include forward-looking statements within the meaning of applicable securities laws, including statements relating to our guidance for the second quarter 2023, including revenue, GAAP and non-GAAP gross margin, GAAP and non-GAAP operating expenses, GAAP and non-GAAP effective tax rate, GAAP and non-GAAP interest and other expenses and GAAP and non-GAAP diluted share count.

In addition, we will make forward-looking statements relating to trends, opportunities and uncertainties in various product and geographic markets, including, without limitation, statements concerning opportunities arising from our broadband, wireless infrastructure, connectivity and industrial markets, timing for the launch of our products and opportunities for improved revenue and market share across our target markets. Additionally, we will make forward-looking statements relating to the completion of the pending Silicon Motion transaction and anticipated timing These forward-looking statements involve substantial risks and uncertainties, including risks arising our proposed merger with Silicon Motion, including the anticipated timing of the People’s Republic of China State Administration for Market Regulation, or SAMR, review; risk related to increased indebtedness competition, the impact of global economic downturn and high inflation; the cyclical nature of the semiconductor industry, our ability to obtain or retain government authorization to export certain of our products or technology; ability to support current level of revenue, including the impacts of excess inventory on our customers; expected demand for certain of our products and the failure to manage our relationships with or negative impacts from third parties.

More information on these and other risks is outlined in our risk factors, the Risk Factors section of our recent SEC filings, including our Form 10-Q for the quarter ended March 31, 2023, which we filed today. Any forward-looking statements are made as of today, and MaxLinear has no obligation to update or revise any forward-looking statements. The first quarter 2023 earnings release is available in the Investor Relations section of our Web site at maxlinear.com. In addition, we report certain historical financial metrics, including, but not limited to, gross margin, operating margin, operating expenses and interest and other expense on both a GAAP and non-GAAP basis. We encourage investors to review the detailed reconciliation of our GAAP and non-GAAP presentations in the press release available on our Web site.

We did not provide a reconciliation of non-GAAP guidance for future periods because of the inherent uncertainty associated with our ability to project certain future charges, including stock based compensation and its associated tax effects. Non-GAAP financial measures discussed today are not meant to be considered in isolation or as a substitute for the comparable GAAP financial measures. We are providing this information because management believes it is useful for investors as it reflects how management measures our business. Lastly, this call is also being webcast and a replay will be available on our Web site for two weeks. And now let me turn the call over to Dr. Kishore Seendripu, CEO of MaxLinear. Kishore?

Kishore Seendripu: Thank you, Leslie, and good afternoon, everyone. Our Q1 revenue of $248.4 million was down 15% sequentially and 6% year-on-year basis. In Q1, non-GAAP gross margin was 60.3% and non-GAAP operating margin was 27.8% with cash flow from operating activities of $42.2 million. Wireless infrastructure had a highlight quarter recording 45% sequential and 41% year-on-year growth, along with strong forward growth momentum. However, our broadband access and connectivity businesses were challenged due to excess inventory in the channel along with seasonality in Q1. Our industrial multimarket revenues remained stable in what is proving to be a cyclical semiconductor downturn. In 2023, MaxLinear is continuing to lead the critical groundwork for future growth with design win activity, technology innovation and customer relationship building, spanning fiber broadband, Wi-Fi connectivity, wireless infrastructure and high speed data optical data center interconnect and enterprise markets.

We believe that these initiatives will drive future market share gains and further expand silicon content in our proven customer platforms. We continue to be encouraged by the strong market adoption of our Wi-Fi 6 and 6E access point solutions and the growing pipeline of new and existing customer design wins in both service provider gateways and third party standalone routers. More importantly, our Wi-Fi 7 products represent the next phase of growth for our connectivity products. Our WAV700 product family is the industry’s first and only single-chip tri-band Wi-Fi 7 solution targeting access points. Due to the highly differentiated performance, power and cost benefits, we expect our WAV700 products to both improve average selling price and drive higher attach rates in our broadband and connectivity businesses.

Our first WAV700 enabled customer solutions will launch later this year and we expect to ramp multiple solutions throughout 2024. Regarding our broadband access market, though demand continues to be soft due to excess channel inventory, we are confident in and excited by the longer term outlook as the multiyear upgrade cycle of infrastructure modernization by both MSOs and telco carriers firmly takes hold. We have solid market traction with our industry leading single-chip integrated fiber PON and 10-gigabit processor gateway solution. Our PON access revenue increased fourfold in 2022 and we are well positioned for continued share gains in 2023 due to the breadth of our integrated access and connectivity technologies. As the industry migrates from legacy DSL and older PON technologies to 10-gigabit PON, we expect to grow our revenues by expanding market share and customer platform silicon content.

Moving to wireless infrastructure. We see strong growth momentum throughout 2023 as 5G wireless backhaul deployments of multiband and hybrid millimeter wave and microwave radios double the silicon content per platform of our modem and RF transceiver products. We are very well positioned to benefit from the expanding rollout of E-Band millimeter wave technologies across several large geographies, including India, in conjunction with the proliferation of 5G networks. We are currently partnered with Tier 1 equipment suppliers to support ongoing 5G network rollouts that will drive our growth through 2023 and beyond. In high speed optical data center interconnect, we are in a leading strategic position and have a strong design win pipeline for our second generation and industry’s only 5 nanometer CMOS 400-gig and 800-gig PAM4 production ready silicon.

We are making good progress with the ongoing qualifications for data center deployments that will ramp production shipments late this year and continue to do so over the next two years. In addition, we are working very closely with hyperscale data center, enterprise and OEM module customers to address the increasing optical interconnect performance requirements driving the industry’s transition to 400 gigabit, 800 gigabit, 1.6 terabit and beyond data speeds. We entered 2023 with a strong product portfolio, significant market traction and robust designing activity across all our strategic markets. Even as we navigate the ongoing macro demand weakness with extreme fiscal discipline, we are excited by our design win momentum and are strengthening strategic customer and partner relationships, vertically in Wi-Fi, fiber access and wireless and optical data center infrastructure.

We believe that our platform approach driven by strong technology innovation is enabling us to not only secure new business opportunities but also further expand our silicon content areas where we have proven success. We’re also looking forward to our pending acquisition in Silicon Motion, which will further expand the growth opportunities for a combined comprehensive product portfolio. With that, let me now turn the call over to Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer. Steve?

Steve Litchfield: Thank you, Kishore. Total revenue for the first quarter was $248.4 million, down 15% versus Q4 and down 6% year-over-year. Broadband revenue was $82 million, down 18% versus Q4 and down 39% year-on-year and was in line with our expectations entering the quarter. Connectivity revenue in the quarter was $66 million, down 37% sequentially but up 10% year-on-year. Our infrastructure end market had strong growth sequentially in Q1 as a result of solid demand and growing market opportunity. Infrastructure had revenue of $46 million, up 46% versus the prior quarter and 40% year-on-year. Lastly, our industrial and multimarket revenue was $54 million in Q1, flat sequentially and up 50% year-on-year. GAAP and non-GAAP gross margin for the first quarter were approximately 56.5% and 60.3% of revenue.

The delta between GAAP and non-GAAP gross margin in the first quarter was primarily driven by $9.3 million of acquisition related intangible asset amortization. First quarter GAAP operating expenses were $113 million, including stock based compensation and performance based equity accruals of $21.6 million combined, acquisition and integration cost of $1.6 million and amortization of purchased intangible assets of $0.9 million. Non-GAAP operating expenses in Q1 were $80.8 million, up $2.3 million versus Q4 and at the low end of our guidance range. Non-GAAP operating margins for Q1 2023 was 27.8%. GAAP interest and other expense during the quarter was $2.2 million and non-GAAP interest and other expense was $2.1 million. In Q1, cash flow generated from operating activities was $42.2 million.

We exited Q1 of 2023 with approximately $228 million in cash, cash equivalents and short term investments. Our days sales outstanding for the first quarter was approximately 69 days, up from the previous quarter due to shipment linearity. Our gross inventory turns were 2.3 times as we continue to tightly monitor our supply levels. This concludes the discussion of our Q1 financial results. Before we go to the guidance, I want to give you an update on the status of our pending acquisition of Silicon Motion. We continue to progress through the SAMR approval process and remain confident of a mid-2023 close. We have fully committed financing for the transaction and are actively working to optimize the debt structure to lower our expected cost of capital.

We’re excited about the opportunities for our combined business and look forward to bringing our technology focused cultures together very soon. With that, let’s turn to our guidance for Q2 2023. We currently expect revenue for the second quarter of 2023 to be between $175 million and $205 million. Looking at Q2 by end market, we expect broadband and connectivity revenues to be down quarter-over-quarter. In infrastructure, we are expecting revenue to increase compared with Q1 as demand for our products continues to be strong. Lastly, we expect our industrial multimarket revenue to be down quarter-over-quarter. We expect second quarter GAAP gross profit margin to be approximately 54.5% to 57.5% and non-GAAP gross profit margin to be in the range of 59.5% and 62.5% of revenue.

Gross margin is being driven by the combination of near term product, customer and end market mix. We expect Q2 GAAP operating expenses to be in the range of $110 million to $116 million. We expect Q2 non-GAAP operating expenses to be in the range of $79 million to $85 million. We expect our Q2 GAAP tax rate to be approximately 25% and non-GAAP tax rate to be roughly 10%. We expect our Q2 GAAP and non-GAAP interest and other expense to be each roughly $4 million. We expect our Q2 GAAP and non-GAAP diluted share count of $81.5 million to $82.5 million. In closing, we are navigating in a dynamic environment heading into Q2. But solid execution and innovative product offerings are enabling us to maximize strategic business opportunities with continued success.

We are continuing to lay important groundwork in Wi-Fi, fiber broadband access gateways and wireless infrastructure that we expect to drive our growth later this year and throughout 2024. As always, we will continue to focus on operational efficiencies, fiscal discipline and shareholder value as we optimize for today and plan for an exciting future. With that, we’d like to open up the call for questions. Operator?

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Q&A Session

Operator: Our first question comes from the line of Quinn Bolton with Needham & Company.

Quinn Bolton: Obviously, a tough guide for the second quarter, down over 20% sequentially. I guess as you look at the amount of inventory in the channel, is it largely just a broadband effect, is it affecting connectivity in other end markets? And I guess a follow-up question is given the magnitude of the decline in the June quarter, do you think June is the bottom or do you think you could see even lower revenues in the second half of the year?

Steve Litchfield: So look, the inventory is across all of our end markets, I would say, but definitely broadband and connectivity are the biggest exposures that we have. I mean, there’s bits and pieces here and there in other end markets but broadband connectivity are definitely the biggest piece. Look, going into the quarter, I think we had originally thought that we would — we knew there was inventory in the channel, I thought we would be able to get through it in kind of the first half of the year. I think at this point, we see that kind of bleeding into the second half of the year as we work through this but I think we remain confident that the end demand is reasonably good. And assuming that continues to hold up then we kind of burn through this inventory and we kind of move into 2024 with a really great outlook.

Quinn Bolton: Do you think your June is the peak of the inventory burn knowing that you might not be back at consumption levels in Q3, do you think kind of that inventory clearance is at its greatest level in Q2 or is that just too hard to call?

Steve Litchfield: I mean, look, I don’t want to get into guiding out future quarters. I mean I think we’re under-shipping demand and we remain optimistic. But the inventory is definitely at higher levels than I think we had anticipated.

Quinn Bolton: And then I guess just a follow-up question on the microwave business, which seems like it’s driving very strong first half ’23 results. I know you had said that, that business was constrained from substrate availability in 2022. But as you start to ship against that backlog, are you concerned that this isn’t just creating an inventory overhang or an inventory build in that end market, or do you have pretty good visibility that what you’re shipping in Q1 and Q2 actually sells through and you’re not just creating a wireless infrastructure inventory overhang that you have to deal with later this year, early next?

Steve Litchfield: So yes, definitely, we’ve been behind here but we’ve been playing catch-up. But I guess I would reiterate, there’s a big content increase that’s happening. So I don’t, by any means, feel like we’re creating this big inventory glut in Q1 and Q2. This is demand that has been needed in the market for some time. We’re, I guess, cognizant of the overall wireless infrastructure market. Definitely, I’m sure you and many others have seen some of the slowdowns in some of those key customers. So we’re watching that closely. But we had great results in Q1, we do expect to see that pick up again in Q2.

Operator: Our next question comes from the line of Ananda Baruah with Loop Capital.

Ananda Baruah: Two if I could, just real quick. Steve, just piggybacking off of those questions. What are you seeing pricing wise right now and do you expect anything can take place as pricing going forward from what you’re seeing now? And then I have a quick follow-up.

Steve Litchfield: I don’t think we’ve seen too much. I mean there’s definitely certain markets that are more sensitive to prices. But I think, in general, we feel like that prices will hold up here. I don’t think there’s any doubt. I mean there’s some segments of our market that are more, call it, Asia based. Some of our Wi-Fi products, for example, we see pricing pressure from time to time there. But as a general rule, as you know, most of our markets don’t have the pricing dynamic there.

Ananda Baruah: And just the quick follow-up is on the infrastructure market. Can you just unpack that in a little more detail, the dynamics that you’re seeing there to drive the growth? And is it across the business or is in particular parts of the business, particular parts of the product line, is it across the product line?

Steve Litchfield: I mean I think Kishore kind of talked through some of this. So I mean, I’d say the biggest piece has been backhaul. I mean I mentioned the content increase but we’re shipping a lot of the transceiver product now alongside the modems, that’s really driving a lot of the big uptick there and it’s in various regions. It’s not in just one geography, it’s in various geographies. Our 5G platform is also shipping. It’s lower dollar contribution but its definitely continued to improve as well. Optical, as you know, I mean, falls into the infrastructure category but still early days on that. We would expect to see more contribution in 2024.

Ananda Baruah: And is it too early to have a sense with what’s going on in hyperscale, if there’s going to be a positive impact there. Microsoft and Google had positive remarks last night. Meta may have positive remarks right now, they had a good quarter. Is it too early or is this part of what you’re seeing there as well? And that’s it for me.

Steve Litchfield: Well, I don’t think — this is all new incremental business for us. We’re excited. I mean, clearly, there the data center demand is what’s driving these optical product ramps. And so still early days. I mean, I think we’ll see some early revenues in the second half of the year but it’s really much more about 2024.

Operator: Our next question comes from the line of Ross Seymore with Deutsche Bank.

Ross Seymore: Just going back to the broadband segment since it’s your biggest segment. It looks like that could be down, I don’t know, 60%, 70% year-over-year. Any idea of how we should judge what true end demand is, if you were shipping to that, if you’re kind of, I don’t know, $50 million, $55 million, something like that in the quarter versus a year ago being closer to $140 million? Just trying to judge whenever the inventory is out of the equation, what’s a realistic landing spot when you get back to normal?