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

MaxLinear, Inc. (NASDAQ:MXL) Q4 2023 Earnings Call Transcript January 31, 2024

MaxLinear, Inc. misses on earnings expectations. Reported EPS is $-0.47135 EPS, expectations were $0.01. MXL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the MaxLinear Fourth Quarter and Fiscal 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Litchfield, CFO and Chief Corporate Strategy Officer. Thank you, Steve. You may begin.

Steven Litchfield: Thank you, Paul. Good afternoon, everyone, and thank you for joining us today in today’s conference call to discuss MaxLinear’s fourth quarter 2023 financial results. With me today is Dr. Kishore Seendripu, CEO. After our prepared comments, we will take questions. Our comments today include forward-looking statements within the meaning of applicable security laws, including statements relating to our guidance for the first quarter of 2024, including revenue, GAAP and non-GAAP gross margin, GAAP and non-GAAP operating expenses, GAAP and non-GAAP interest and other expense, and GAAP and non-GAAP diluted share count. 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 future financial and operating results; opportunities for revenue and market share across our target markets; the effect of seasonality; expected production ramps and timing for the launches of new products, our design-win pipeline; demand for and adoption of certain technologies; our serviceable available market; expected customer inventory rationalization; expected incentive programs; the effects of cost-reduction measures and product announcements.

These forward-looking statements involve substantial risks and uncertainties, including risks outlined in our Risk Factors section of our recent SEC filings, including our Form 10-K for the year ended December 31st, 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 fourth quarter 2023 and fiscal 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 and interest and other expense on both GAAP and non-GAAP basis. We encourage investors to review the detailed reconciliation of our GAAP and non-GAAP presentations and 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 changes, 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 comparable GAAP financial measures. We are providing this information, because management believes it is useful to investors, as it reflects how management measures our business. Lastly, this call is also being webcast and 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, Steve, and good afternoon, everyone. In Q4 our revenues were $125.4 million and non-GAAP gross margin was 61.4%. Our infrastructure end market continues to be the main highlight, growing 30% in fiscal 2023. Entering 2024, we are very optimistic about our infrastructure business and believe that it is firmly poised to grow to an annualized revenue run rate of several hundred million dollars over the next three years or so. Underpinning our optimism and growth convictions for our entire business is the successful launch of several new innovative products across infrastructure and connectivity and a robust and growing customer design win pipeline for them. We expect these new high-value product cycles to drive revenue growth encompassing high-speed optical data center interconnects, wireless access [Technical Difficulty] networks, enterprise storage accelerators, enterprise Ethernet and multi-gigabit PON broadband access and Wi-Fi connectivity.

In the high speed optical data center infrastructure market, we are increasingly bullish and expect to generate tens of millions of dollars in revenue this year for our 5-nanometer CMOS Keystone 800-gigabit PAM4 DSP family. Early stage revenues have already begun and new production ramps later in the second half of the year will drive more meaningful run rate growth in 2025. The ongoing adoption of AI in the cloud is providing a strong catalyst for the transition to 800-gigabit and beyond speeds. In this high barrier to entry market, our investment in innovation over several years, has enabled us to differentiate with the highly competitive and broad portfolio of PAM4 DSPs, which invariably have the best-in-class power consumption and performance across optical transceiver, active optical cables and active electrical cables.

In wireless infrastructure, despite current slowdown in telco 5G wireless access infrastructure spend, there’s an expanding global rollout of new millimeter wave and microwave and hybrid backhaul technologies to upgrade wireless transport links from gigabit speeds to tens of gigabits per second data rates. As the only full system solution provider of modems and RF transceivers, we will greatly benefit from the significantly increased silicon content per platform in these new links. We also expect strong customer demand as part of a multiyear upgrade cycle entering 2025. Additionally, at Mobile World Congress in February end, we’ll have new and unique product announcements addressing 5G access remote radio units for both Massive MIMO and macro base station solutions.

We expect our growing portfolio of wireless backhaul and access infrastructure products to drive significant revenue expansion in the near to long-term. Within our infrastructure revenues, an exciting new growth driver is our Panther III Series hardware storage accelerators, for the enterprise all-flash-array and hybrid storage enterprise appliance systems. With increasing deployments of higher speed low latency NVMe SSD drives, legacy software-based data compression technology using extremely expensive and power-hungry high core count CPUs is no longer viable. The scalability and flexibility of the Panther III DPU architecture allows us to deliver 12:1 data reduction, a full suite of security, low power and CapEx cost reduction, while providing ultra-reliable data protection.

We are in production ramp with the Tier 1 leading enterprise storage appliance maker and expect additional customer product ramps later this year. We expect revenues to double in 2024 with continued strong growth in 2025 and beyond. In Ethernet connectivity, with the recent launch of our new Octal 2.5-gigabit Ethernet PHY and switch products, we have expanded our addressable market by $300 million to include both the enterprise and small and medium business switch markets, in addition to our traditional gateway and router markets. Customers are expected to upgrade today’s more than 2 billion copper 1 gigabit Ethernet ports to 2.5 gigabit Ethernet speeds over time using existing standard CAT5 cabling. We are seeing exciting design win activity for our solution, including a Tier 1 North American enterprise OEM customer that is expected to ramp to production in the mid-2024.

As we look ahead, we believe our Ethernet business could reach $100 million over the next 18 to 24 months. Turning to broadband. We continue to gain traction in the fiber PON market with new design wins driving our growth. As many of you know, in 2023, we began ramping our single-chip integrated fiber PON and 10 gigabit processor gateway and connectivity solutions with the major Tier 1 North American service provider. In 2024, we expect to begin ramping a new opportunity with the second major Tier 1 North American service provider. This further validates and establishes MaxLinear’s competitive positioning in the fiber PON market. In 2023, our PON revenue was approximately $50 million. We expect to be able to more than double our PON revenues over the next two years.

In connectivity embodies a major milestone, our Wi-Fi 7 solution was both certified and selected by the Wi-Fi Alliance as one of only four certified Test Bed devices for Wi-Fi 7 interoperability and compliance. Our WAV700 single-chip tri-band Wi-Fi 7 device is an industry first and represents a major step forward for power efficiency, performance and reduced latency. Even as Wi-Fi 6 and 6E are reaching peak adoption, Wi-Fi 7 is beginning to launch this year in client site mobile phones and PCs. We expect service providers to follow soon with their initial rollout later this year, with adoption peaking in two to three years. For MaxLinear, Wi-Fi 7 has the exciting potential to drive significant ASP growth and higher attach rates in our broadband access platforms versus previous generations.

Circumspectly speaking 2024 is likely to be the start of an exciting period of new product growth and opportunity for MaxLinear. We also expect market headwinds of the past year in broadband and connectivity to likely become tailwinds when customer inventory rationalization winds down. Most importantly, the investments we’ve made in product innovations across our portfolio are beginning to bear fruit and are opening up new and significant revenue opportunities, that we expect will drive our growth for many years to come. With that, let me now turn the call over to Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer. Steve?

Steven Litchfield: Thank you, Kishore. Total revenue for the fourth quarter was $125.4 million, down 8% versus Q3 and down 57% year-over-year. Broadband revenue for the fourth quarter was $34 million, flat versus Q3 and down 66% year-over-year. Connectivity revenue for the fourth quarter was $19 million, up 26% sequentially and down 82% year-over-year. As expected, infrastructure revenue for the fourth quarter was down substantially. Revenue for the fourth quarter for this end market was $32 million, down 37% versus the prior quarter and flat year-over-year, but grew 30% for fiscal year 2023 as a result of solid demand and growing market opportunity. Lastly, our industrial and multi-market revenue was $41 million in Q4, up 13% sequentially and down 25% year-over-year.

GAAP and non-GAAP gross margin for the fourth quarter were approximately 54.7% and 61.4% of revenue. The delta between GAAP and non-GAAP gross margin in the fourth quarter was primarily driven by $8.3 million of acquisition-related intangible asset amortization. Fourth quarter GAAP operating expenses were $110.3 million, including stock-based compensation and performance-based equity accruals of $19.5 million combined. Restructuring costs of $10.6 million related to our Q4 workforce reduction and acquisition of integration costs of $1.8 million. Non-GAAP operating expenses in Q4 were $75.7 million, up $0.6 million versus Q3. We expect to see the benefit of our cost reductions starting in Q1 and throughout FY’24. Non-GAAP operating margin for Q4 2023 was 1%.

GAAP interest and other expense during the quarter was $0.9 million. Non-GAAP interest and other expense during the quarter was $0.8 million. In Q4, cash flow used in operating activities was $16.6 million. We exited Q4 of 2023 with approximately $188 million in cash, cash equivalents and restricted cash. Our day sales outstanding for the fourth quarter was approximately 124 days, up from the previous quarter due to shipment linearity. Our gross inventory turns were 1.4, slightly up from Q3 levels. This concludes the discussion of our Q4 financial results. With that, let’s turn to our guidance for Q1 of 2024. We currently expect revenue in the first quarter of 2024 to be between $85 million and $105 million. Looking at Q1 by end market, we expect all four end markets to be down quarter-over-quarter.

We expect first quarter GAAP gross margin to be approximately 50.0% to 54.0% and non-GAAP gross 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 a combination of near term product, customer and end market mix. We expect Q1 2024 GAAP operating expenses to be in the range of $115 million to $125 million. We expect Q1 2024 non-GAAP operating expenses to be in the range of $72 million to $78 million. We expect our Q1 GAAP and non-GAAP interest and other expense to be in the range of $1 million to $2 million. We expect our Q1 GAAP and non-GAAP diluted share count to be approximately $82.3 million each. In closing, we are excited about our market position and growth drivers for 2024.

The product innovations that will drive our success in optical Wi-Fi, fiber broadband access gateways, Ethernet and wireless infrastructure are all in market today and gaining customer traction. As always, we will continue our strong focus on operational efficiency, fiscal discipline and shareholder value, as we position ourselves for an exciting future. With that, I’d like to open the call for questions. Paul?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session [Operator Instructions] Thank you. Our first question is from Tore Svanberg with Stifel. Please proceed with your question.

Tore Svanberg: Yes, thank you. My question — my first question is so it looks like some of your businesses, especially broadband connectivity started stabilizing this quarter. It does sound like you’re expecting another step-down. So could you just talk a little bit about the dynamics there because it’s a little bit counterintuitive that they would stabilize, but then take another step down.

Steven Litchfield: Sure Tore, I’ll start and Kishore might add a little bit. But so first of all, yes. So, look, we’ve been talking about this, I think we’ve seen inventory in the channel improve. And so we’re seeing some modest improvements we spoke last quarter about some seasonality. And just the simple fact that there is still inventory in the channel and expect it to be for the first half of this year. So we are getting through it I think the bigger problems is in the broadband and connectivity side. As we’ve talked about a little bit our infrastructure business is going extremely well. We don’t have big inventory overhang in the channel. Industrial is a little bit mixed. In certain areas where things are going well I wouldn’t say there’s a massive amount of inventory, but you’re also hearing rumblings of some things slowing down in industrial multi-market.

Tore Svanberg: Very good. And if we now sort of assume that this is a $400 million business, at least if you take Q1 that’s the run rate of the business and I know that you guys segment by four business units or segments. But if we think about that $400 million, how much of that is going to cyclical versus secular now because you clearly have a lot of secular stuff that’s growing. You would have some great new design-wins and optical and so on and so forth. So just trying to understand, if we look at that baseline of let’s say $100 million a quarter, $400 million run rate. How much of that would be “cyclical” versus more secular? I don’t know if there’s any way you can talk about that.

Steven Litchfield: I don’t know that I can break that out. And I honestly, Tore I think I would go back to reiterate. I mean, we see the problems and where we’ve seen the market declines, the inventory in the channels around the broadband and connectivity. These other markets are doing reasonably well. We’re managing, I mean, there’s a little bit of softness on the industrial side, but I’d — you’re seeing really good performance on the infrastructure side and that’s why we’ve got lots of new products. Kishore spoke quite a bit in his portion about some of the newer products and infrastructure, which are all new product revenues that are in the market, in some cases, already have some revenues. And in other cases, they are design wins that are expected to turn into revenues. And so we certainly expect to come out of this thing stronger, a much better Company, and we’ve got some exciting new products to do that with.

Kishore Seendripu: It’s also true in the broadband and connectivity side, right? We talked about our offerings in the new PON product lines and the Wi-Fi 7 connectivity. So what you’re seeing right now is, really at a place on the broadband connectivity that’s — at the bottom it’s all noise right now in terms of what’s happening on the bookings and inventory and so on. So once we recover, we expect that the new product cycles and the new products that we have announced and we — we have launched will actually pick up the growth even on the broadband and connectivity side. So I wouldn’t discount that there is — it’s a tale of two cities, broadband and connectivity and then the other ones that are growing nicely. I think there are growth vectors even in the broadband and connectivity side as well as all the strong product launches that are happening on the infrastructure side.

Tore Svanberg: Sounds good. I’ll get back in queue. Thank you.

Kishore Seendripu: Yes.

Operator: Thank you. Our next question is from Quinn Bolton with Needham and Company. Please proceed with your question.

Quinn Bolton: Hey, guys, thanks for taking my question. First I wanted to just ask, what are you guys hearing kind of from end customers about the effects of the infrastructure bill and matching funds. Some of the folks in the broadband space like Harmonic and Calix I think have said, they’re expecting a very weak first half of calendar ’24, as a lot of these folks are holding off to try to put as much of their CapEx into the back half of the year, maybe even next year, where they get one-for-one matching dollars. And so it feels like there’s a bit of a shift in CapEx spending to future quarters. Do you guys have any thoughts on that? Are you seeing it and — I assume that activity is probably exacerbating the inventory burn here in the near term if nobody is spending a lot on the CapEx side.

Steven Litchfield: I think the way Quinn I would answer the question. So obviously, we’re aware of some of the commentary out around some of the infrastructure bill and projected subsidies that kind of come along with that. I think we — like at the end of the day, we’re kind of going through this inventory correction. A lot of that’s driven — is impacted by near term or shorter term demand. That’s clearly been I’d say slower than expected, and so it’s kind of dragging as far as getting through this inventory. I think what’s exciting for us is that we continue to see more telcos build out. I mean there — they have been aggressive on the CapEx spending. Some of the second tier, third tier some of those guys are kind of waiting on subsidies and so that — it indeed may push two, three quarters. And I don’t think that’s entirely surprising, but it definitely doesn’t help the recovery.