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?

Steve Litchfield: Look, this is a tough one to call. Definitely, as we reflect back on 2022, that number was approaching $500 million. I mean, this year, it’s well below $300 million. So I don’t have a great answer for you. But I mean I don’t want to guide one segment by quarter, et cetera. But I feel like we’re bottoming out here. We’re kind of getting there, hopefully, at this point. We definitely got a little better visibility with regard to what inventory is out there in the channel. But I don’t have an exact number other than say, it’s somewhere in the middle of those two numbers.

Ross Seymore: And then I guess pivoting over to the OpEx side of things. You guys did a great job in the first quarter. It’s gone up a little bit in the second quarter. Any sort of kind of trajectory, how you think of OpEx like why is it going up in the second quarter and then how should we think about it through the year?

Steve Litchfield: So don’t forget, we do have some NRE dollars that kind of sway this here and there, because in Q1, we always — we typically see things pick up quite a bit, but some of the timing of some of our NRE dollars that are coming in have kind of skewed this a little bit. We’ve actually been very busy in Q1 really dialing back our costs, dialing down our overall operating expenses, I think you’ll see that continue to come down post Q2. I think we will likely exit the year closer to $75 million of OpEx. So I think we’ve made good progress there. Definitely kind of given the revenue headwinds that we see, we’ve jumped in quickly and really dialed back that spending as you’ve seen us do in the past, during past cycles.

Ross Seymore: And then one quick follow-up. Just in general, given the weakness in the market, have you seen any change in the competitive intensity? You talked a little bit earlier about pricing, but any sort of market share shifts, competitive intensity changing, or is this just kind of the typical cyclical downturn where everybody is just trying to figure out where the bottom is and burn inventory until you get there?

Kishore Seendripu: I think I’ll give Steve a break here. So not at all, no changes in competitive positioning or new competitors in the horizon. In every market we are today, we’re one of two or three and that positioning has not changed. And if you really think back about the dynamics of the excess channel and the inventory in the markets we are that are pretty sticky, until those inventory burns burn, you have incumbency advantages in the markets we are. So we don’t see the positive change. But more importantly, the quality of our product offering is improving quite a bit. We’ve got a lot of innovations and new product offerings across all our product areas, whether it’s fiber PON, whether it’s Wi-Fi. Obviously, we’ve got an exciting competitive positioning relative to strengthening optical data center infrastructure, the 5-nanometer product and in the wireless infrastructure as well.

And none of these products will be announced as we go through the middle of this year. So no changes. So we just have to wait out this inventory burn through the channel. I just want to add a little color to what Steve talked about, what is the natural run rate, you asked about the broadband. Here, I don’t want to be giving you any specific number. But just the way I think about it is, if you look at the last two previous years of broadband revenues, maybe it takes us two years to get back there, right? That’s the way I look at it, so — because that’s the — that’s the inertia and the system, right? So therefore, actually, last year’s revenues are, in fact, a positive indicator of what the future could look like. So I wouldn’t look at it as a down statement at all.

All in all, we’ve always done the most exciting work in a tough time, which has been our track record. And actually, we’ve got a profusely rich product portfolio that’s developed and will be — is being announced and continue to be announced as we move forward.

Operator: Our next question comes from the line of Tore Svanberg with Stifel.

Tore Svanberg: If we could just get a little bit more granular on the connectivity side of the business. Obviously, broadband has been correcting for a year already. But it looks like connectivity actually started correcting this quarter, this Q1. Just wondering if that’s going to sort of have a similar trajectory as broadband or other reasons why or why not that wouldn’t necessarily be the case?

Steve Litchfield: As you know, this is a really important product line to us. And we’ve seen tremendous amount of growth. I think, one, we’re seeing a lot more attached. So this is all new business. So a little bit different than the gateway side of the equation. So I would not expect to see the same level of decline. That being said, I mean, they’re both selling into gateways. And so there is some dynamic there where we’re impacted. There’s a big move from Q4 to Q1. There’s a little bit of seasonality in there. We had some large router shipments in Q4 and those were coming down in Q1 kind of as expected to some degree. So I definitely think that Wi-Fi is going to continue to outpace, I mean, there’s more attachment that we can go out and get. And don’t forget, you’ve also got a lot of ASP increases or just a trajectory that’s moving upwards as we get more 6E. And then longer term, once we get WiFi 7, you start to see a move up in ASPs along the way.

Tore Svanberg: And you mentioned when you were answering one of the questions about the broadband correction that you’re starting to have a better sense for the amount of inventory that’s out there. Can you just add a little bit more on that? Is this based on conversations you’re having with your customers where they are giving you any signs that things are bottoming?

Steve Litchfield: Well, I mean, look, this is — it’s been an interesting semiconductor cycle, right? I mean we’ve not seen 52-week plus lead times in most of our careers anyway. And so it was somewhat unique, and I think that drove your typical bad behavior where we’re seeing a lot of over ordering. And there’s been a lot of cross currency as well, because there’s a lot of markets where you’re still short. And so customers aren’t really giving proper information. And I think now that they do have more inventory, we’re getting a lot more transparency with the customers, because now they’re kind of coming clean to some degree and sharing appropriate information. So we feel better that we’ve got a little bit better visibility at this point.

Tore Svanberg: Just one last question for Kishore. Kishore, the high speed optical business, I know it’s taken much longer than you would have expected. But coming out of OFC, it does seem like there’s finally some strong design win momentum there, especially on 800 gig. So I was just hoping you could elaborate a little bit more on that, especially the confidence level that, that business may actually finally start to contribute more meaningfully to revenues later this year.

Kishore Seendripu: Well, we’re very excited. As you’ve seen in OFC, we had three or four very meaningful demonstrations and announcements of our 5-nanometer, lowest power, most integrated 800-gig PAM4 solution out there, it’s the only 5-nanometer solution. And on the back of it, we had a number of strong design wins with Tier 1 OEMs who’s in turn supplied to the data centers. Obviously, we work with the data center players and the OEMs to line up our design wins. So we have gone through — some of our key OEMs already gone through, their own self interrupts. And now they have sample to the data centers for their qual cycle and they should finish up towards the end of the year. And so we feel very, very good that we will be in a position to gain some significant market share as 800 gig rolls out.

You have to realize that in the 800-gig PAM4 as it is the first deployment that are starting and we are not behind on that, we are leading in that effort. So we feel that the trajectory of this would be we would have shipments that in the second half of this year, which for the qual amounts and beyond that, it ramps pretty strongly next year and the following year and the following year. So feel really, really good. I think we are pretty much Tier 1 OE module maker that you would think is worthy of us to work with. And I feel really good about where we are. It’s actually today, somebody asked what is the most exciting product you have today as you go into the call, and it has to be optical, I said. So that’s how good I feel about it.

Operator: Our next question comes from the line of David Williams with Benchmark Company.

David Williams: Maybe, Steve, on just kind of thinking about the inventory digestion and just those dynamics. It sounds like we’re at least starting to hear some — maybe a slower cadence of spending from some of the service providers and operators there. Can you kind of talk about maybe the dynamics that you’re seeing between inventory and maybe slowing in demand? Is there — do you feel like most of this is really driven by that inventory and not more of a demand cycle?

Steve Litchfield: It’s something that we’re watching closely. I mean we haven’t seen CapEx levels really change that much. To date, we’re naturally watching this closely. I mean, the bigger issue for us right now that we see is just the inventory in the channel. But I guess the way I think about it is, it is something that we’ve got to continue to watch. I think our assumption is that in demand does hold up, that spending does hold up. And that’s really based on there is an upgrade cycle going on and we do expect to see that continue. But if we see a recession, if we see a major pullback in spending, then yes, that could change the demand levels a little bit.

David Williams: And then from the inventory side, is this more MaxLinear product in the channel or is this maybe peripheral products that are out there that are maybe just slowing some of the uptake?

Kishore Seendripu: In the markets we are in, especially the service provider markets and the specific OEMs are assigned to specific chip suppliers as well with specific suppliers. So when you talk of inventory levels, we are associated with certain chip suppliers, right, because we sell our own full platform of solutions. Now on our platforms, there will be minor components from other manufacturers. But we do not think that those are the determinants in the way the inventory is building up in the channel. So all in all, we don’t see a competitive situation where our inventory to be held here because the competitive product is being sold more. And so I think as the sell-through happens, we’ll burn through the inventory and we should be able to resume our shipments.

You also have to keep in mind that as the lead times have shrunk in the manufacturing supply base, our own customers, the OEMs would now go in the other directions where they are in no hurry to place any orders or give us any visibility. So I would say there will be a bit of an overcorrection on the inventory in the other direction and given the interest rates as well. So I think you’re going to see unusually lower inventory levels before it picks up to normal inventory levels, right? So I think we are planning for that right now.

David Williams: And one more quick one for me. Just, Steve, on the gross margin, getting a nice lift into the quarter, even on the downside revenue guidance. Can you talk about what’s driving the margin there, is it simply just mix or is there anything else underlying there that we should be thinking about?

Steve Litchfield: Well, I think — so I think the majority of it is mix and we’re pleased to kind of see — you saw us come up 70 basis points to our midpoint of our guidance gets us up another 70. So making nice progress on that front. Look, I’m optimistic as we look into the rest of this year and even into 2024 as supply tightness eases, I think we’ll have a little bit more pricing power. And so we think that we can continue to lower that cost structure and see better gross margins.

Operator: Our next question comes from the line of Christopher Rolland with SIG.

Christopher Rolland: Perhaps of the segments, the three that are going to be down, I was wondering if you could force rank perhaps even for the next quarter whether we should just have them all down. I know you said connectivity would be stronger for the year than the rest, but for the next quarter in particular.

Steve Litchfield: I don’t know, Chris, that I can stack rank them for you. I mean, we definitely continue to see pressure on the broadband and the connectivity businesses, I mean, our infrastructure business, we think, will be up next quarter and then industrial multimarket is a little more flat to slightly down.

Christopher Rolland: And then on the 5G part of infra in particular, it really kind of feels like an inflection quarter for you guys, which is great to see. I know you guys mentioned India, but I was wondering why this inflection from either like a geographic standpoint, is it India or why this inflection from like a vendor standpoint, and are you guys attached to one vendor in particular? Why this inflection all in one quarter?

Steve Litchfield: Chris, don’t forget. I mean, so we’ve got a big base of our business is backhaul, right? It’s not 5G. I mentioned in the previous remarks that — I mean, 5G is definitely increasing but it’s a smaller part of the numbers. The backhaul business has been driving it, it’s a pretty diverse — it’s a wide set of geographies that we’ve been selling into for a while. I would also emphasize there’s a big content increase as we start to ship more of our transceivers alongside of the modem. So that, of course, helps and that enables us to outpace the overall market growth that I suspect that you are seeing and comparing us to.

Operator: Our next question comes from the line of Karl Ackerman with BNP Paribas.

Karl Ackerman: Two, if I may. In the connectivity business, your cable MSOs are still sweating assets and going through sort of digestion phase. But is there higher intensity discussions of your customers broadening adoption of Wi-Fi 6 and Wi-Fi 6E that would give them differentiation and would also drive your content higher? I mean if you could talk about that as you think about the growth trajectory of connectivity over the next few quarters would be very helpful.

Kishore Seendripu: Well, obviously, our attached business is a significant part of the connectivity business, even as we’re developing traction in the third party router gateways. So Wi-Fi 6E is our current platforms, they’re shipping with the attachments. And we are proliferating our Wi-Fi in other markets where, for example, our cable docs is where we don’t have wearing some Tier 2 markets, we don’t have Wi-Fi attachment. But really the big growth in content comes from Wi-Fi 7 launch, which will be significant content expansion in terms of dollars. And that will be the next big leg of growth for connectivity in the operator segment. So I hope you understand that Wi-Fi 6 and 6E are already part of the operator deployments today and whatever growth we have with the increase in our Wi-Fi is going to come through expanding our Wi-Fi 6 attached in Tier 2 markets.

But the big growth in the Tier 1 markets comes through Wi-Fi 7, our WAV700 family as part of the E solution in the operator platforms.

Karl Ackerman: If I could pivot to your DSP business or opportunity. Kishore, you mentioned that that’s one of your most optimistic areas of your business. And so I guess if I could. I’m curious whether the current digestion occurring in optical transceivers has accelerated your discussions with cloud and module providers on your 800-gig DSP solution. And as you address that question, there has been much debate on the use cases of linear drives versus using a DSP. But you would, of course, be able to address both of them. But do you see linear drive plug roles impeding your design qualifications of your 800 DSP at all?

Kishore Seendripu: Let’s separate those two questions, because the latter one is the flavor of the day and the former is what people bet their money on. So our design traction is really primarily from the former basically, right? We have a solution on the DSP side that is superior to anybody else’s. We are the first 5-nanometer silicon production. We believe we have a significant lead on competition. So that’s where our traction is. With regards to the burning of the inventory in the data center for these DSPs accelerating our momentum. No, not at all. In fact, we have learned that the inventory in that channel also is significantly high. In this particular case, since we didn’t own a much business, we’d not see the impact of that.

So our design win traction is independent of what the channel inventory in that space is. The real four — almost all the data centers are now converging towards 800-gig solutions with 100 gig per lambda for each — 100 gig per lambda on the fiber over eight channels. So the inventory situation has got nothing to do with our traction. On the second part, the linear driver versus — is really a discussion that’s come with the recent OFC conference. And I really, really think that it’s very premature. And the data center people are really not betting their strategies on that. And this is really — if anything is going to happen, it’s going to take a couple of generations for it to really face any maturity, if not infant mortality, it doesn’t happen.

So I would leave it at that.

Operator: Our next question comes from the line of Ashley McCurry with Wells Fargo.

Ashley McCurry: This is Ashley McCurry on for Gary Mobley at Wells Fargo. First question being, it looks like your gross margin guide is a little wider than usual. Is that representative of any uncertainty in product mix for 2Q or if not, what are the drivers of that?

Steve Litchfield: So no, I don’t think so. On the gross margin side, I mean, look, there’s plenty of uncertainty in the world right now. So I won’t go there. But as far as gross margin goes, kind of the midpoint, it is primarily driven by mix. We do continue to see infrastructure holding up very well that the higher gross margin kind of product line. And so we do feel confident that we’ll continue to see an improvement similar to what we saw last quarter.

Ashley McCurry: And then just as a follow-up in terms of the SIMO acquisition. Do you guys have any visibility into SAMR’s approval process? And is there any qualitative comments you guys can give that gives you comfort in that mid-calendar year ’23 close?

Kishore Seendripu: So I kind of reviewed this in our prepared remarks. I don’t have a whole lot to add, kind of we remain confident on track. I think things are moving as expected on the SAMR front. And hopefully, we can update you soon on that.

Operator: Our next question comes from the line of Suji Desilva with ROTH Capital.

Suji Desilva: I’m curious if the unit attaches of 6E have cut over from 6 already or if not, what the timing would be? And if it has, when would you expect the Wi-Fi 7 unit attaches to cut over in terms of units versus 6E?

Kishore Seendripu: So firstly, the cutover from 6 to 6E has really not happened. 6E is an interim standard between what the market really wants on the Wi-Fi 7 versus Wi-Fi 6. And the difference beating 6E is going to enhance throughput. And so I don’t think there’s going to be a cutover from 6 to 6E, whatever 6E has been designed in, it stays in place and 6 will continue until Wi-Fi 7 takes over. I think Wi-Fi 7 is one of the biggest, broadest adoption and most rapid adoption of any Wi-Fi standard in recent history. So if I were to go by the rate at which the Wi-Fi Alliance, for example, is going through to their interop test and the rapidity at which they will pick the Wi-Fi Alliance interoperability test bed platforms, they’ll pick four or five of those.

And based on the speed at which is going on, Wi-Fi 7 will be really ready to go by the end of the year. But the adoption itself in the nonconsumer markets, I expect to happen in 2024. So really, it’s a latter half of 2024 cutover process starting from 6 and 6E to Wi-Fi 7. I hope that answers your question.

Suji Desilva: And then just more broadly, I mean, you talked about inventory a lot. I’m just wondering if it’s happening, the platforms that were going to be upgrades that we’re planning to be rolled out, are being pushed out just so older platforms can digest this inventory, is that happening as well as the inventory deduction or is it just that your parts are being ordered because they’re trying to work down what they have?

Kishore Seendripu: In the markets we are in these platform changes don’t happen frequently or the cycle is pretty long. So the inventory digestion or burn is well within the timing dose of these planning cycles. So I don’t think there’s any changes happening on new platform development plans by service providers and carriers. Having said that, I do believe in some form even our customers are going through their OpEx discipline process. So I will not be surprised if it’s a slower rollout than originally anticipated. But at this moment, I think operators is more invested in not backing off on the CapEx for the infrastructure investments, for example, on the DOCSIS side, preparation on the network itself to upgrade the network to be able to support DOCSIS 4.0. And also you’re seeing fiber networks upgrading from older PON to newer 2.5 gigabit and 10-gigabit PON networks.

So I think that the focus of the operators and the carriers is right now upgrading the network infrastructure and that’s going on quite robustly. So in short, we do not see any impact of this inventory accumulation in the channel pushing out launches of new product platforms.

Operator: There are no more questions in the queue. I’d like to hand the call back to Kishore Seendripu for closing remarks.

Kishore Seendripu: Well, thank you, operator. This quarter, we will be participating at the Stifel Cross Sector Insight Conference in Boston on June 6th, that’s the next conference will be participating in. So with that said, I want to thank you all for joining us today and we look forward to reporting on our progress to you next quarter. Thank you very much.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.