MaxLinear, Inc. (NASDAQ:MXL) Q3 2023 Earnings Call Transcript

MaxLinear, Inc. (NASDAQ:MXL) Q3 2023 Earnings Call Transcript October 25, 2023

MaxLinear, Inc. misses on earnings expectations. Reported EPS is $-0.49021 EPS, expectations were $0.03.

Operator: Greetings. Welcome to MaxLinear Third 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. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Leslie Green, Investor Relations. Thank you. You may begin.

Leslie Green: Thank you, Sherrie. Good afternoon, everyone, and thank you for joining us today on today’s conference call to discuss MaxLinear’s third 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 fourth quarter 2023, including revenue, GAAP and non-GAAP gross profit margin, GAAP and non-GAAP operating expenses, GAAP and non-GAAP tax rate, GAAP and non-GAAP interest and other expenses, GAAP and non-GAAP diluted share count.

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In addition, we will make forward-looking statements relating to trends, opportunities, execution of our business plan and potential growth and uncertainties in various product and geographic markets, including, without limitation, statements concerning opportunities arising from our broadband, infrastructure, connectivity industrial multi-markets, as well as inventory levels, the timing for the launch of our products and timing of opportunities for improved revenue and market share across our target markets. These forward-looking statements involve substantial risks and uncertainties, including risks outlined in our risk factors section of our recent SEC filings including from our Form 10-Q for the quarter ended September 30, 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 third quarter 2023 earnings release is available in the Investor Relations section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including, but not limited to, gross margin, operating margin, operating expenses, 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 website. 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 related tax effects, as well as potential impairments.

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 to be useful to investors as it reflects how management measures our business. Lastly, this call is also being webcast and a replay will be available on our website for two weeks. And now, let me turn the call over to Dr. Kishore Seendripu, CEO of MaxLinear.

Kishore Seendripu: Thank you, Leslie and good afternoon, everyone. In Q3, our revenues were $135.5 million and non-GAAP gross margin was 60.8%. Infrastructure revenue specifically wireless infrastructure was the main highlight, up 1% sequentially and 40% year-over-year. Our financial results and outlook continue to reflect the channel inventory overhang, especially in our broadband and Wi-Fi markets. We expect the effects of the inventory to persist into 2024 and Steve will talk more about the actions we’re taking to align our financial structure. We continue to make strong progress growing our infrastructure business. Infrastructure represents $50 million in Q3 revenue, and has grown substantially since its inception only a few years ago.

Within infrastructure, in wireless, expanding 5G global rollout of new millimeter wave backhaul technologies and multi-band and hybrid millimeter wave and microwave backhaul radios is allowing us to significantly increase the selection content per platform offer modem and RF transceiver products. In our high speed optical data center interconnect market, the ongoing adoption of AI in the cloud is driving exciting design win activity for our 5-nanometer CMOS, Keystone 800 gigabit, optical PAM4 solution. We have ongoing qualifications in multiple hyperscale enterprise opportunities for which we expect to begin ramping in mid-2024. During Q3, we also announced a new member of our Keystone family, a 5-animator Keystone PAM4 DSP for 400 gigabit and 800-gigabit applications with integrated VCSEL laser drivers.

This product enables best-in-class power consumption for 800-gigabit short-reach optical optical transceivers and active optical cables for datacenters, AI, and machine learning platforms, and high performance computing applications. Earlier this month, at the OCP Global Summit in San Jose, we also demonstrated our Keystone solution supporting active electrical cables or AECs. Keystone is the only 5-nanometer product with DSP available today for the AEC market providing best-in-class power consumption and programmability. We are also making exciting progress with our Panther III series of storage accelerators for the enterprise all flash array and hybrid storage appliance systems. We’ve entered initial mass production ramp with a Tier-1 leading enterprise storage appliance maker and have visibility into additional new design win volume production ramps next year.

We expect this business to double in 2024 with continued strong growth in ‘25 and beyond. Turning to broadband, despite the near term challenging environment, the longer term outlook for the broadband access networks is solid as the industry migrates from legacy DSL and older PON technologies to 10-gigabits PON fiber access. We continue to ramp with the major North American service provider and are layering additional design wins including another Tier-1 service provider, which will begin to contribute revenue in 2024. With our industry-leading single chip integrated fiber PON and 10-gigabit processor gateway and connectivity solutions, we expect continued strong design win traction leading to a multi-year fiber broadband growth cycle. Recently, we also announced Puma 8, our DOCSIS 4.0 system on chip cable modem and gateway platform, which enables the speed, latency and low power consumption necessary for next generation, 10-gigabit service rates for MSOs. We expect to see initial DOCSIS 4.0 launches in the market as early as the end of 2024.

In connectivity, the design activity for our Wi-Fi 7 is robust and we anticipate early revenues coming in the second half of ’24. Wi-Fi 7 has the enhanced ability to efficiently manage the increasing number of connected devices, which have grown 10 folds since 2018 and the higher bandwidth requirements in the home. As a result, globally, service providers are embracing the transition to Wi-Fi 7 to improve both user experience and performance. For MaxLinear, Wi-Fi 7 has the exciting potential to drive significant ASP growth and higher attach rate in our broadband access platforms versus prior previous generations. Moving to Ethernet connectivity, we continue to build on our core portfolio of 1-gigabit Ethernet and 2.5-gigabit Ethernet PHY technologies.

We not only offer single and quad 1-gigabit Ethernet, and 2.5-gigabit, Ethernet PHYs. But in Q3, we started sampling the industry’s first OCTO 2.5-gigabit Ethernet 5 switch product. This new product family of switch significantly expands our addressable market by 300 million through 2027 and addresses both enterprise and SMB switch markets, as well as the gateway and router markets. We expect today’s more than two billion copper 1-gigabit Ethernet ports in the market or existing CAT-5 cabling to transition to an optimized and enhanced 2.5-gigabit Ethernet offering. With that strong design win activity, we expect to begin revenue ramp in the first half of 2024. As we head into 2024, we are laying the critical groundwork for future growth with robust design win activity and continued technology innovation.

Even as we drive operating efficiencies to navigate near-term headwinds, we are excited that many of our investments over the past several years in infrastructure, broadband access, connectivity, and high performance end of our markets are now poised to contribute meaningful revenue. With that, let me turn the call over to Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer. Steve?

Steven Litchfield: Thanks, Kishore. Total revenue for the third quarter was $135.5 million, down 26% versus Q2 and down 53% year-over-year. Broadband revenue was $34 million, down 36% versus Q2 and down 71% year-over-year. Connectivity revenue in the quarter was $15 million, down 60% sequentially and down 82% year-over-year. Our infrastructure end-market continued to grow in Q3 as a result of solid demand and growing market opportunity. Infrastructure had revenue of $50 million, up 1% versus the prior quarter and 40% year-over-year. Lastly, our industrial and multi-market revenue was $36 million in Q3, down 16% sequentially and 24% year-over-year. GAAP and non-GAAP gross margin for the third quarter were approximately 54.6% and 60.8% of revenue.

The delta between GAAP and non-GAAP gross margin in the third quarter was primarily driven by $8.3 million of acquisition-related intangible asset amortization. Third quarter GAAP operating expenses were $91.8 million including stock-based compensation and performance-based equity accruals of $8.2 million, combined and acquisition and integration cost of $2.2 million. Non-GAAP operating expenses in Q3 were $75.1 million, down $7.3 million versus Q2 at the low end of our guidance range. Non-GAAP operating margin for Q3 was 5%. GAAP interest and other expense during the quarter was $23.7 million, driven by the ticking fee from the debt commitment associated with the terminated Silicon Motion transaction. Non-GAAP interest and other expense during the quarter was $5.3 million.

In Q3, cash flow used in operating activities was $12.8 million. We exited Q3 of ‘23 with approximately $203 million in cash, cash equivalents and short-term investments. Our days sales outstanding for the third quarter was approximately 106 days, up from the previous quarter due to shipment linearity. Our gross inventory turns were 1.4, down from Q2 levels. As Kishore mentioned, we’ve taken meaningful actions to align our cost structure with the current environment and we expect to begin to see the benefit in Q4. These actions include a headcount reduction, site consolidation to drive efficiency and scale at our primary sites. And more prioritization around the projects that we believe will drive growth over the coming years. MaxLinear has a solid track record of managing our business through downturns with strong physical discipline, and focused spending.

This concludes the discussion of our Q3 financial results. With that, let me turn to the guidance for Q4 of 2023. We currently expect revenue in the fourth quarter of 2023 to be between $115 million and $135 million. Looking at Q4 by end-market, we expect connectivity and industrial multi-market to be up and broadband and infrastructure to be down quarter-over-quarter. We expect fourth quarter GAAP profit margin to be approximately 52.5% to 55.5% and non-GAAP gross profit margin to be in the range of 59.5% and 62.5% of revenue. Gross margin continues to be stable despite lower unit volumes with the range being driven by the combination of near-term product, customer and end-market mix. We expect Q4 2023 GAAP operating expenses to be in the range of $125 million to $135 million.

We expect Q4 2023 non-GAAP operating expenses to be in the range of $72 million to $78 million. We expect our Q4 GAAP and non-GAAP interest and other expense to be negligible. We expect our Q4 GAAP and non- GAAP diluted share count to be between 82.5 million to 83.5 million. In closing, we continue to navigate a dynamic environment in Q4. But are laying important groundwork and strategic applications that will drive our future growth. Our solid product innovation and execution in Wi-Fi, fiber broadband, access gateways, Ethernet and wireless infrastructure is positioning us well across a number of exciting emerging markets. As always, we will continue our strong focus on operational efficiency, fiscal discipline, and shareholder value as we optimize for today and plan for an exciting future.

With that, I’d like to open up the call for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Thank you. Our first question is from Tore Svanberg with Stifel. Please proceed.

Tore Svanberg : Yes, thank you. My first question is on broadband and connectivity. Obviously, these are both down quite materially year-over-year from this inventory digestion. It does sound like connectivity may have found the bottom as you’re guiding for growth there. First of all, sort of make sure you confirm that and then second of all on broadband, are you seeing any sort of bottoming at all in that business, given its $34 million run rate?

Kishore Seendripu : Yes, Tori. So, you’re right. And I think you’re also rightly looking at broadband and connectivity. Somewhat together they have been influenced by some of the similar dynamics of just the massive amount of inventory that we’ve seen in the channel. It’s definitely persisted, more than I think what we had anticipated. But you’re correct in we did say that we would see connectivity start to move up a little bit in Q4. I think for both broadband and connectivity, well, connectivity has some growth drivers as we’ve talked about over time that are a little bit better. I mean both are still being influenced by inventory in the channel and I would expect to see that last through kind of Q1, maybe even some residuals in Q2.

But we are seeing an improvements. I mean, we talked last quarter about bookings, I think we’re starting to see some bookings. It’s still early days. They’re not super robust by any means, but there are some encouraging signs nonetheless.

Tore Svanberg : Great. And on infrastructure, obviously, that was the highlight this quarter. You’re expecting that to come down in Q4. I’m just hoping you could talk a little bit about the expense of the decline and is this basically just sort of like the volatility because obviously it was up a lot and maybe it’s coming back. But yeah, any and any, anyway, we should think about infrastructure for the next few quarters would be great.

Steven Litchfield: Yeah, so infrastructure, I mean, I think we’ve been really pleased with the infrastructure. I think we’re making tremendous amount of progress in a business that we’ve been investing in heavily for a long time. I think, as we spoke over the last couple of quarters, the first half of the year was extremely strong that carried through into Q3. But, we still see as some of those product ramps, particularly on wireless infrastructure, kind of slow down. They can be lumpy and so we can see some slowness in Q4, and that probably carries over to the beginning of the year. Before it starts to pick back up and grow in 2024.

Kishore Seendripu: And there are several contributors beyond wireless, right? I mean in fact optical data center investments, they’re very confident with the progress we are making. We expect to see ramps in the middle of next year. We’re going through interop cycles right now, and a lot of design win activity going on. Whether it is in transceiver products or in active optical cables or even active electrical cables, right? And then, over on top of that, there is our storage accelerators, which we have not spent time much. A lot of great design win traction, a very, very strong design win pipeline. It’s going to double next year into high teens, if you will and then beyond that, it’s going to keep growing very robustly in the next few years.

You want to keep in mind, the infrastructure lasts – revenues last a long period of time. That’s why they have a long leading time. So, on the – all in all, our anticipation is over the next five years, we should be able to get to double our infrastructure revenue from today’s $200 million runrate to maybe in the $0.5 billion vicinity. And that’s the ultimate goal we are after and we feel that we’re making very good progress towards it.

Tore Svanberg : Great. Thank for that. I’ll go back in line.

Kishore Seendripu : Thanks, Tore.

Operator: Our next question is from Quinn Bolton with Needham & Company. Please proceed.

Quinn Bolton: Hey guys. I guess maybe a follow up on Tore’s question. Obviously this inventory corrections lasted longer and causing a deeper revenue trough. But, as you look to next year, can you give us any sense how much you under shipped in the channel. These businesses are connectivity and broadband done well more than 50% peak to trough. Do you have any sense for what natural runrate demand is? What kind of snapback might you see, once we’ve flushed this current inventory? And then, just any thoughts on all of the government spending or government funds that are available for broadband infrastructure? When does that start to benefit this business?

Steven Litchfield: Yeah, Quinn. So, you’re right. I mean, it’s definitely been worse than anticipated. I mean, there’s been a big buildup. We’ve seen some kind of bad practices, some overbuilding definitely over the last couple of years. That’s kind of playing out right now. The common question that we get is what is it recovered too and when? I guess I would just say that we’re confident that we’re kind of seeing the bottoming here. I, – you raised a couple of good points about the government spending that we’ve highlighted. We have seen CapEx commitments. You’ve seen a great transition to PON more rural areas deploying more broadband and more broadband upgrades. I think we continue to see that. The outlook that our customers and the service providers in general have is the outlook does remain very good.

So thus our excitement in some of Kishore’s remarks around Wi-Fi, Wi-Fi, 7 some of our PON business. So there are some exciting things going on. Some of the bigger money like the bead money, and some of that, just part of that infrastructure build starts to be deployed. I should say, it gets allocated at the end of next year. So it’s still a little ways off. But we’re seeing ramps upgrades in Europe, in the US over the next two to three years. So, we still have good visibility on this. And do expect to see these upgrades. But in the meantime, unfortunately, we’re having to work through this inventory.

Quinn Bolton: And you guys thought quarter that September would be the bottom. Obviously, you’ve updated that guidance today, with December being down. Are you willing at all to make a comment do you think December is the bottom? Steve, you mentioned inventory overhang probably continues through at least Q1 and maybe residually into Q2? Could Q1 be down from the fourth quarter? Is it just too early to call? And then I’ll have a quick follow-up.

Steven Litchfield: Yeah. So if I recall correctly, so last quarter, we talked about Q4 expecting somewhat of a modest improvement, but we didn’t say we would be out of the woods on the inventory side. We expected inventory to last into next year. But that being said, we thought we would see more of a recovery and we didn’t see that. So that that’s correct. As we look out into next year what’s the shape of that look like, it feels like we get back to the normal seasonality in our business. I wouldn’t be surprised to see softness in Q1. But then you start to build off of that. As we normally would our Q2 and Q3 as you know, have been historically much stronger than say Q1 and Q4. And so I think there are some dynamics of seasonality that are starting to play a role again. But I think more than anything right now it’s just getting through the rest of the inventory that’s sitting in the channel.