MaxLinear, Inc. (NASDAQ:MXL) Q4 2022 Earnings Call Transcript

MaxLinear, Inc. (NASDAQ:MXL) Q4 2022 Earnings Call Transcript February 1, 2023

Operator: Greetings and welcome to the MaxLinear fourth 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. Please note that this conference call is being recorded. I would now turn the conference over to our host Leslie Green of Investor Relations. Thank you. You may begin.

Leslie Green: Thank you, Diego and good afternoon everyone and thank you for joining us on today’s conference call to discuss MaxLinear’s fourth quarter 2022 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 including forward-looking statements within the meaning of applicable securities laws including statements relating to our guidance for the first quarter of 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 be making 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 its anticipated timing. These forward-looking statements involve substantial risks and uncertainties including risks arising from our purposed 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 impacts of global economic downturn and high inflation, our ability to obtain government authorization to export certain of our products or technology, and a failure to manage our relationships with or negative impacts from third parties. More information on these and other risks is outlined in the risk factor section of our recent SEC filings, including our Form 10 for the year ended December 31st, 2022, 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 fourth quarter 2022 earnings release is available in the Investor Relations section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including gross margins, 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 website. We do 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 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?

Kishore Seendripu: Thank you, Leslie and good afternoon everyone. Our Q4 revenue was $290.6 million, up 2% sequentially and 17% year-on-year, capping a major milestone in fiscal year 2022 with record revenues breaking the $1 billion mark and operating cash flow of $389 million. Our Q4 non-GAAP gross margin was 59.6% and non-GAAP operating margin was 32.5% with cash flows from operating activities of $69.4 million. As we look forward, we are energized by the near and long-term drivers of our growth trajectory, spanning fiber broadband access gateways, Wi-Fi connectivity, wireless and optical data center and enterprise infrastructure. Entering 2023, we are confident in our ability to outperform our end markets via share gains and expanding silicon content in customer platforms.

Our connectivity business achieved record results with both quarter four quarterly revenue and fiscal 2022 revenue growing nearly 100% year-on-year. Our connectivity growth continues to be fueled by the strong market adoption of our Wi-Fi 6 and 6E access point solutions, increased attach rates in existing customer platforms and a healthy pipeline of new customer design wins. Beyond service provider gateway opportunities are ramping design wins in several third-party standalone routers will further expand and diversify our Wi-Fi revenues. They comprise a new and continuing high volume growth opportunity in 2023. As we look beyond Wi-Fi 6 and 6E, our Wi-Fi 7 standard compliant WAV700 product family is currently sampling and is the industry’s first single chip tri-band dual channel Wi-Fi access point solution in the world.

It’ll drive increased performance and differentiation, higher detach rates, ASP improvements, and a favorable cost structure versus previous generations and competition. We expect to see WAV700 enabled customer products starting late this year. Turning to broadband. Coming off several strong quarters of growth, in Q4, our revenue declined as expected, even as demand moderates to more normalized levels through an adverse period of digesting excess channel inventory, we believe the market is early in a multi-year upgrade cycle of infrastructure modernization by both operators and carriers to enhance customer experience and enable a variety of new revenue generating services. Market growth in PON is a particular area of strength globally with additional government incentives or fiber upgrades just beginning to rollout later this year.

In this context, we are excited about the solid market traction we have with our industry leading integrated PON and 10 gigabyte fiber processor gateway solution. In 2022, our fiber access revenue increased more than four times from 2021, and we are entering 2023 with strong design win momentum. Importantly in the fiber PON market, we have relatively small market share today and expected continue share gains in the coming years with our unique product and technology differentiation. We currently have multiple customers in North America ramping our products, including a large Tier 1 operator. We are winning designs globally beyond North America, along with significant silicon content expansion from our Wi-Fi, Ethernet, power management, and more.

Moving to infrastructure. Our wireless infrastructure business grew by over 20% this past year, despite acute shortages of substrates and backend capacity, which resulted in minimal shipments in second half 2022 versus demand. However, as we enter Q1, we are excited to see sustained strong demand for our wireless back haul and access products, along with improvements to our supply chain headwinds. Throughout 2023, we see great market traction and are excited about wireless infrastructure growth as we continue to benefit from the expanding rollout of multi-band millimeter wave and microwave back haul 5G platform solutions across several large geographies. These multi-band platforms not only double our content, but also grow our total addressable units.

In high speed optical data inter interconnect, we have a leading strategic position with our second generation and industries only finite CMOS, 400 gigabit and 800 gigabit PAM4 for production ready silicon. We’re making good progress in ongoing qualifications and feel confident that our data center revenues will grow meaningfully over the next two years. We are working closely with hyperscale data center enterprise and OEM module customers to support the increasing performance requirements of the industry’s transition to 400 gigabit, 800 gigabit and beyond. A strong Q4 performance on our 2022 revenues of $1 billion plus and operating cash flows of $389 million are capstone achievements, which are very — which we are very proud of. In 2022, we also significantly advanced our technology platform and expanded our product portfolio offerings.

We have conviction in a strong long-term growth, even as we navigate the ongoing macro weakness with extreme discipline. Thanks to our developing technology leadership, accelerating design win momentum, and expanding target markets consisting of Wi-Fi, fiber access, wireless and optical infrastructure. Over the last two years, we have delivered transformative growth and strong financials, balancing discipline expense management, and investments in product innovation. Entering 2023 as a result of our core offering, we are once again uniquely poised to grow MaxLinear its significant profitability levels and increased scale. We are also looking forward to our pending acquisition of Silicon Motion and are excited for the future growth opportunities offer comprehensive combined product portfolio.

With that, let me now turn the call over to Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer.

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Steve Litchfield: Thanks Kishore. Total revenue for the fourth quarter was $290.6 million, up 2% versus Q3 and up 17% year-over-year. Broadband revenue was $99 million down 17% versus Q3 and down 23% year-on-year, and was in line with our expectations entering the quarter. Our connectivity end market had strong growth sequentially in Q4 as a result of solid demand in growing market opportunity. Connectivity revenue in the quarter was $105 million up 27% sequentially and up 99% year-on-year. Our infrastructure end market had revenue of $32 million down 11% versus the prior quarter and flat year-on-year. Infrastructure performance was in line with our expectations as a result of ongoing supply constraints in substrates throughout 2022.

Lastly, our industrial and multi-market revenue was $55 million in Q4, a 16% sequential increase and an increase of 62% year-on-year. GAAP and non-GAAP gross margins for the fourth quarter were approximately 56.2% and 59.6% of revenue. The delta between GAAP and non-GAAP gross margins in the fourth quarter were primarily driven by $9.3 million of acquisition related intangible asset amortization. The decline from the previous quarter was primarily driven by a mix shift of end market revenues in the quarter. Fourth quarter GAAP operating expenses were $122.2 million, including stock-based compensation and performance-based equity accruals of $35.3 million combined. Acquisition and integration cost of $1.1 million and amortization of purchase intangible assets of $1.3 million.

Non-GAAP operating expenses were $78.5 million down $1.9 million versus Q3. Non-GAAP operating margins for Q2 2022 was 32.5%. GAAP interest and other expense during the quarter was $0.5 million and non-GAAP interest and other expense was $0.4 million. In Q4 cash flow generated from operating activities was $69.4 million. While cash flow generated for the year increased more than 2x compared with 2021. During Q4, we made a $50 million prepayment against our long-term debt position, which is at approximately $120 million today and continued to make debt prepayment of priority. We exited Q4 of 2022 with $207 million in cash, cash equivalents, restricted cash and short-term investments. Our day sales outstanding for the fourth quarter was approximately 54 days down slightly from 57 days in Q3.

Our gross inventory turns were 2.6 times essentially flat with the previous quarter. This concludes the discussion of our Q4 financial results. Before we go to guidance, I want to give you an update on the status of our pending acquisition of Silicon Motion. We continue to progress with the SAMR approval process and remain optimistic for a mid 2023 close. We have fully committed financing for the transaction and have actively working to optimize the debt structure to lower our expected cost to capital. We are excited about the opportunities for our combined business and looking forward to bringing our two technology focused cultures together soon. With that, let’s turn to our guidance for Q1, 2023. We currently expect revenue in the first quarter of 2023 to be between $240 million and $260 million.

Looking at Q1 by end market, we expect broadband revenue to be down quarter-over-quarter. Connectivity is expected to be down versus Q4, primarily driven by the timing of Wi-Fi shipments between Q4 and Q1. In infrastructure, we are expecting revenue to increase compared with Q4 as substrate supply constraints continue to ease. Lastly, we expect our industrial multi markets revenue to be down quarter-over-quarter. We expect first quarter GAAP gross profit margin to be approximately 55% to 58% and non-GAAP gross profit margin to be in the range of 59% and 62% of revenue. Gross margins being driven by a combination of near-term product, customer and end market mix. We expect Q1, 2023 GAAP operating expenses to be in the range of $114 million to $120 million.

We expect Q1, 2023 non-GAAP operating expenses to be in the range of $80 million to $86 million. We expect our Q1 GAAP tax rate to be approximately 25% and non-GAAP tax rate to be roughly 10%. We expect our Q1 GAAP and non-GAAP interest and other expense to be roughly $4 million, and we expect our Q1 GAAP and non-GAAP diluted share count of $81 million to $83 million. In closing, we are navigating a dynamic environment in Q1, but solid execution and innovative product offerings are enabling us to maximize strategic business opportunities with continued success. As we enter 2023, we’re energized by our traction and Wi-Fi, fiber broadband access gateways, and wireless infrastructure where our growth drivers are less dependent on macro conditions.

As always, we will continue to focus on operational efficiencies, physical 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: Thank you. And at this time we’ll conduct our question-and-answer session. Our first question comes from Alessandra Vecchi of William Blair. Please state your question.

Alessandra Vecchi: Hi. Thanks for taking my question and congratulations on executing and what’s probably been a very tough environment. I think in the past you’ve commented on strong backlog that’s maybe exceeded a year. Is there an update you can give us on backlog trends and how you’ve been seeing movement within backlog on terms of cancellations, push outs, increases, et cetera?

Steve Litchfield: Sure, Alex. Yeah. So just briefly on backlog. So, somewhat consistent with what we’ve been saying over the last couple of quarters. We have had strong backlog. Lead times had been long. They are definitely getting shorter now and — but that being said, we still have a significant amount of amount of backlog. Consistent with the last two quarters on this call I mean, I’ve highlighted that customers have been kind of moving around shipment dates and asking for either push outs or cancellations. So, we continue to navigate that today as we have been over the last three to six months.

Alessandra Vecchi: Okay. That’s helpful. And then on the Wi-Fi constraints, any more color you can give us there in terms of how to think about the year? There as well I think in the past you’ve talked about over $200 million in revenue. Do you still see that as possible? And do those — does the impact in Q1 come back fully in Q2?

Steve Litchfield: Yeah. So, on the Wi-Fi side, I mean we had an incredible year. I think in 2022 we made lots of progress. We were able to increase a lot of our shipments. You saw a big pickup in our results in Q4. A lot of that was driven as we got more supply online and customers have definitely taken that. So, very excited. You talk about that $200 million that, that we’ve highlighted as a goal for next year or for 2023. That remains the goal and we’re pushing hard towards it. That being said, I mean, we are in a pretty difficult environment where there’s a lot of inventory in the channel, but we are continuing to gain good traction. We’re continuing to see ASP increases, and so we’re working very hard to get there.

Alessandra Vecchi: Thank you. With that, I’ll go back in queue.

Steve Litchfield: Thanks Alex.

Operator: Thank you. And our next question comes from Gary Mobley of Wells Fargo Securities. Please state your question.

Gary Mobley: Hey, guys. Thanks for taking my question. I wanted to basically ask about the general tone in the market environment and maybe more specifically about the 14% sequential revenue decline you’re expecting for Q1. I appreciate you commenting that broadband and connectivity will both be down sequentially, but between the two, what would you say is creating the most amount of headwind? Or is it sort of equally balanced, sort of channel reset?

Steve Litchfield: Yeah. Gary, I mean, I’ll jump in here. I mean kind of consistent with my previous comments about, just the order rates and visibility. I mean, it’s definitely cloudy out there and so, we’re trying to navigate it best we can. I think we kind of came into this much later than others. We continue to see really good demand. And I think overall, from a long-term perspective, this kind of multiyear broadband cycle continues to be very exciting with the attraction that we’re seeing on our fiber product offering as well as Wi-Fi is really encouraging. I think there’s clearly some inventory in the channel that the industry is going to have to work through. And we’re doing our best to kind of navigate that with our own business as well. I mean — long term, I mean, I feel very good about the progress that we’re making in each of our end markets with all of our product offerings.

Kishore Seendripu: So, you want to look at broadband in two categories, right? There is the cable side and the fiber side. Fiber side is a continuing growth storey with share gains and content expansion. Cable has been a content expansion story and the real next big growth Philip comes when DOCSIS 4.0 launches. So, I think the secular growth vectors in place, we have the right product offerings. And it’s very hard to predict what is the channel inventory levels right now. On a longer term basis, as we have stated in the script portion of our call here that we’re really excited where MaxLinear is positioned today.

Gary Mobley: Got it. Appreciate the color. And as my follow-up, I want to ask about the China SAMR approval process. What is the communication like with China SAMR? Are they asking for supportive materials for consideration? And have they communicated with you that gives you any — if they communicated with you anything that gives you comfort in the mid-2023 close?

Steve Litchfield: Yeah. Gary, with regard to SAMR, I mean, we’re not going to comment on the dialogue that we have with SAMR. But we do remain optimistic as we’ve consistently said about closing this mid this year.

Gary Mobley: Got it. Thank you.

Operator: Thank you. And our next question comes from Quinn Bolton of Needham & Company. Please state your question.

Quinn Bolton: Hi, guys. Congratulations on a nice close 2022. Obviously, the environment entering 2023 is, as you said, low visibility. But I guess, Steve and Kishore, you’ve talked about inventory in the channel. I think, in broadband, it sounds like there’s some in Wi-Fi. I assume there’s probably some in industrial and multi-market. And so I guess, my question is typically inventory corrections last longer than a quarter. Do you expect that to be the case this time around? And can you give us any sense do you think the second half of the year you start to come back to consumption levels or could the inventory burn potentially last into the second half of 2023?

Kishore Seendripu: Hey, Quinn, it’s — this is — it’s a very difficult question you’re asking. We are talking to our OEMs and the OEMs are talking to the operators, and everybody is trying to get hold of what the total inventory in the channel is. So, while I do not expect the correction to complete in the first half of 2023, we’re projecting far out into the second half of that is very difficult. Having said that too we are really depending on growth coming in our fiber side, the content expansion and wins that ship in outside of the operator gateways in our Wi-Fi products as well. So, Wi-Fi, while it is attached substantially to the operator platforms as we speak today, there are growth opportunities in the non-operator markets, retail router gateways that are more in the operator class.

So, I would say that I cannot answer your question. It’s very cloudy, but I’m optimistic as everybody else that things will revert back in time by the time we close out 2023, right? But for us, the growth cycles really depend on the — on Wi-Fi infrastructure going strongly, fiber going strongly. And then beginning of a ramp on our optical high speed data center interconnect products. So, those are the things that really we are looking forward to because they set the stage for very strong growth in many years to come.