MaxLinear Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 11 speakers on the call.

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. Please note this conference is being recorded.

Operator

I will now turn the conference over to Leslie Green, Relations, thank you. You may begin.

Speaker 1

Thank you, Sherry. Good afternoon, everyone, and thank you for joining us today on today's conference call to discuss MaxLinear's Q3 2023 Financial Results. Today's call is being hosted by Doctor. Kishore Sundripu, CEO and Steve Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer. After our prepared comments, we will take questions.

Speaker 1

Our comments today include forward looking statements within the meaning of applicable securities laws, including statements relating to our guidance for the Q4 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. 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, industrialmultimarket, 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 Q3 2023 earnings release is available in the Investor Relations section of our website at maxlinear.com.

Speaker 1

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 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 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 to be useful to investors as it reflects how management measures our business.

Speaker 1

Lastly, this call is also being webcast and a replay will be available on our website for 2 weeks. And now, let me turn the I'll turn the call over to Doctor. Kishore Seendrupu, CEO of ThanksOneAir. Kishore?

Speaker 2

Thank you, Leslie, and good afternoon, everyone. In Q3, our Revenues were $135,500,000 and non GAAP gross margin was 60.8%. Infrastructure revenues, 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 the broadband and Wi Fi markets. We expect the FX of the inventory to persist into 2024, and Steve will talk more about the actions we are taking to align our financial structure.

Speaker 2

We continue to make strong progress growing our infrastructure business. Infrastructure represents $50,000,000 in Q3 revenue and has grown substantially since its inception only a few years ago. Within infrastructure in wireless, the expanding 5 gs global rollout of new millimeter wave backhaul technologies and multi band and hybrid millimeter wave and microwave backhaul radios He's allowing us to significantly increase the silicon content per platform of our 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 5 nanometer CMOS Keystone 800 Gigabit Optical PAM4 solution. We have ongoing qualifications in multiple hyper scale and enterprise opportunities for which we expect to begin ramping in mid-twenty 24.

Speaker 2

During Q3, we also announced a new member of our Keystone family, A 5 nanometer 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 transceivers and active optical cables for data centers, 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're also making exciting progress with our Panther 3 series of storage accelerators for the enterprise all flash array and hybrid storage appliance systems. We've entered initial mass production ramp with the Tier 1 leading enterprise storage appliance maker and have visibility into additional new design win volume production ramps next year.

Speaker 2

We expect this business to double in 2024 with continued strong growth in 2025 and beyond. Turning to broadband, despite the near term challenging environment, the longer term outlook for the broadband access networks It's solid as the industry migrates from legacy DSL and older PON technologies to 10 gigabit 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 Processing Gateway and Connectivity Solutions, we expect continued strong design win traction leading to a multiyear 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.

Speaker 2

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 twenty twenty four. MiFi 7 has the enhanced ability to efficiently manage the increasing number of connected devices, which have grown tenfold since 2018 and the higher bandwidth requirements in the home. As a result, globally, service providers are embracing the transition to Wi 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 rates in our broadband access platforms versus previous generations.

Speaker 2

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 Octel 2.5 Gigabit Ethernet PHY Switch product. This new product family of switch significantly expands our Addressable market by $300,000,000 through 2027 and addresses both enterprise and SMB switch markets as well as the gateway and router markets. We expect today's more than 2,000,000,000 copper 1 gigabit Ethernet ports In the market, our 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 twenty twenty four.

Speaker 2

As we head into 2024, we are laying the critical 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 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 Steve?

Speaker 3

Thanks, Kishore. Total revenue for the Q3 was $135,500,000 Down 26% versus Q2 and down 53% year over year. Broadband revenue was $34,000,000 down 30 6% versus Q2 and down 71% year over year. Connectivity revenue in the quarter was 15,000,000 2% 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.

Speaker 3

Infrastructure had revenue of $50,000,000 up 1% versus the prior quarter and 40% year over year. Lastly, our industrial and multi market revenue was $36,000,000 in Q3, down 16% sequentially and 24% year over year. GAAP and non GAAP gross margin for the 3rd quarter were approximately 54.6% and 60.8 percent of revenue. The delta between GAAP and non GAAP gross margin in the 3rd quarter was primarily driven by $8,300,000 of 3rd quarter GAAP operating expenses were 91,800,000 including stock based compensation and performance based equity accruals of $8,200,000 combined and acquisition and integration cost of $2,200,000 Non GAAP operating expenses in Q3 were 75,100,000 Down $7,300,000 versus Q2, at the low end of our guidance range. Non GAAP operating margin for Q3 was 5%.

Speaker 3

GAAP interest and other expense during the quarter was $23,700,000 driven by the ticking fee from the debt commitment associated with the terminated Motion transaction. Non GAAP interest and other expense during the quarter was $5,300,000 In Q3, cash flow using Used in operating activities was $12,800,000 We exited Q3 of 2023 with approximately $203,000,000 in cash, cash equivalents Our day sales outstanding for the Q3 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.

Speaker 3

MaxLinear has a solid track record of managing our business through downturns with strong fiscal 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 Q4 of 2023 to be between $115,000,000 $135,000,000 Looking at Q4 by end market, we expect connectivity in Industrial Multi Market to be up and Broadband and Infrastructure to be down quarter over quarter. We We expect 4th quarter GAAP profit margin to be approximately 52.5 percent to 55.5 percent and non GAAP gross profit margin to be in the range of 59.5 percent 62.5 percent of revenue.

Speaker 3

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 $125,000,000 to $135,000,000 We expect Q4 2023 non GAAP Operating expenses to be in the range of $72,000,000 to $78,000,000 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 $82,500,000 to $83,500,000 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.

Speaker 3

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

Speaker 4

Thank

Operator

before pressing the star keys. Our first question is from Tore Svanberg with Stifel. Please proceed.

Speaker 4

Yes, thank you. My first question is on broadband and connectivity. Obviously, these are both down quite materially year over year It does sound like connectivity may have found the bottom as you're guiding for growth there. First of all, just want to 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 34,000,000 run rate.

Speaker 3

Yes, Torey. 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 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.

Speaker 3

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 improvement. I mean, we talked last quarter about bookings. I think we're starting to see some bookings.

Speaker 3

It's still early days. They're not super robust by any means, but there are some encouraging signs nonetheless.

Speaker 4

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 extent of the decline. And is this basically just sort of like Volatility, because obviously it was up a lot and maybe it's coming back down.

Speaker 4

But yes, any way we should think about infrastructure for the next few quarters would be great.

Speaker 3

Yes. So infrastructure, I mean, I think we've been really pleased with 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 some of those Product ramps, particularly on wireless infrastructure kind of slowdown, they can be lumpy. And so we can see some slowness in Q4 that probably Carries over to the beginning of the year before it starts to pick back up and grow in 2024.

Speaker 2

And there are several contributors Beyond wireless, right? I mean, in fact, optical data center investments, we're very confident the progress we're making. We Like 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 Well, 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.

Speaker 2

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 the next few years. You want to keep in mind the infrastructure last, revenues last a long period of time. That's why they're So like what they have a long lead in time. So on the all in all, our anticipation is over the next 5 years, we should be able to get To double our infrastructure revenue from today's $200,000,000 run rate to maybe in the $500,000,000 vicinity.

Speaker 2

I mean, that's the I mean, the goal we are after, and we feel that we're making very good progress towards it.

Speaker 4

Great. Thank you for that. I'll go back in line. Thanks, Stuart.

Operator

Our next question is from Quinn Bolton with Needham and Company. Please proceed.

Speaker 5

Hey, guys. I guess maybe a follow-up on Tory'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 of your undership in the channel? These businesses are connectivity and broadband down well more than 50% peak to trough.

Speaker 5

Do you have any sense what natural Run rate 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?

Speaker 3

Yes, Quinn. So you're right. I mean, it's definitely been worse than anticipated. I mean, there's been a big Build up, 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.

Speaker 3

Common question that we get is what does it recover to 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 pawn more rural areas deploying more broadband and more broadband upgrades, I think we continue 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 WiFi, WiFi 7, some of our PON business, there are some exciting things going on.

Speaker 3

Some of the bigger money like the bead money and some of that just part of that infrastructure bill 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 U. S. Over the next 2 to 3 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.

Speaker 5

And you guys thought last 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.

Speaker 5

Overhang probably continues through at least Q1 and maybe residually into Q2. Could Q1 be down from the 4th quarter or is it just too early to call? And then I'll have a quick follow-up.

Speaker 3

Yes. 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's correct.

Speaker 3

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 The inventory that's sitting in the channel.

Speaker 5

Got it. And then just quickly, you had mentioned some of the actions you're taking, including reduction in forward site consolidation, prioritization No certain projects yet. Your guidance for OpEx, I think, is flattish sequentially in December, kind of in line with Where we were already looking for OpEx to be in Q4. And so I guess I didn't see much of a change in the OpEx outlook. Are these options sorry, the cost reduction plans you've talked about, Does that kick in really more in the first half of next year?

Speaker 5

Is 75% the right run rate kind of As a baseline or do you think it could move lower next year?

Speaker 3

So I'll comment a little bit on just overall Expense reduction efforts, right? So we did start early in the year. We've made some changes. And then More recently, we've made some additional changes that will start to impact Q4 and beyond. So you don't see so much in the Q4 timeframe just Pretty linearly, sometimes that's masked a little bit by some of the NRE that we take as an offset to OpEx.

Speaker 3

And but I would expect to see the overall OpEx number decline throughout the year. And so I think, I mean, if I was to put a number on it, it's probably $285,000,000 to $290,000,000 next year. So that's the kind of the size of the decline and that also offset some additional NREs that we had taken, which were much larger in 20 23.

Speaker 5

Got it. Thanks for the additional color,

Speaker 6

Steve. Sure.

Operator

Our next Question is from Gary Mobley with Wells Fargo. Please proceed.

Speaker 6

Hey, guys. Thanks for taking my question. Looking at your largest customer, it looks like they purchased about $90,000,000 of product from you in the Q3 of last year. That's Probably down to something less than $10,000,000 in this most recent quarter. So my question is, what's the right level for Purchases with this customer, which I presume is representative of your broadband cable and Wi Fi business.

Speaker 6

And does your current Q4 guidance and maybe your longer term view contemplate the transition of this business away from that

Speaker 3

So Gary, I mean, with regard to the some of the disclosures And the top customers, we've had a very large customer for a while. I think you've heard us talk about our Top customers are often kind of more I'm going to refer to them more as kind of box vendors that Kind of sit in between us and the operator. And I think you're well aware of most of these service providers are looking to kind of keep Multiple silicon vendors in the mix, so that they've got some leverage. We don't see that changing much. And so we don't necessarily You don't put too much weight on these customers.

Speaker 3

They ebb and flow from time to time. And even this year, we've actually seen some of our top customers switch As different service providers start to ramp, we've actually seen that through this year and we've seen some nice improvements on some of these newer customers.

Speaker 6

Okay. A question for Kishore is my follow-up. Kishore, you mentioned in your prepared remarks some Design win traction, I think is how you phrased it for Keystone in the data center market. So I think you also mentioned a revenue ramp into the second half of the year. How much visibility do you have at this time in that revenue ramp?

Speaker 6

And how influential

Speaker 2

So I think there are 2 parts to this question. I mean, the visibility is very, very clear, Right. In the sense that you work directly with the OEMs or module makers, whether it's transceivers Our cable manufacturers, optical cable manufacturers, you directly work with them. And you work with them because they are being aligned up to utilize our silicon at the endpoints, which is usually the data center folks. And so you have direct visibility.

Speaker 2

Now The timing of when each one ramps and select and how the distribution portioning of the revenue goes He is the one that you have a little bit of what I call uncertainty of. However, the fact that we are in the mix, the fact Certain calls are going well and the interactions, the commitment to take us through all the qualification process, the direct visibility you have. So having said that, like I said in my prepared remarks, the interrupts and calls are going on still. And We feel very good that our silicon is sound and strong and the interrupts will go favorably. At this Steve, that's our conviction and that's our what I call reading the tea leaves, if you will.

Speaker 2

Regarding how much influence they will have on our revenues, absolutely, right. Even if you were to you don't do a top down game plan, you always have to do a bottom up game plan for revenues. And but if I were to map all of that, we hope to expect about 20% share sometime in the 3 to 5 year window of each of our customers. That's our base plan. And if you exceed that, you'll do much better.

Speaker 2

So how big can the business be in 5 years? Obviously, it can be some Maybe $100,000,000 to a few $100,000,000 right? That's a wild card here. So yes, and that's The basis on which including wireless, optical, their accelerator business is where the confidence comes That in a 5 year window, our infrastructure business should be in the ballpark of the $500,000,000 range, right. And that's the goal and all of which I would say optical and storage actually is the greatest growth curve ahead of them.

Speaker 6

That's a good detail. Thanks, Tishore.

Speaker 5

Yes.

Operator

Our next Question is from Christopher Rolland with Susquehanna. Please proceed.

Speaker 7

Hey, guys. Thanks for the question. I guess the first one is just kind of the swings that we've seen here from peak to now trough Going from $105,000,000 in connectivity to $15,000,000 for example, have just kind of been incredible. So I guess, first of all, do you guys really view this as all inventory digestion? Like are we done in connectivity?

Speaker 7

I don't See how it can get too much kind of lower than this. But do you have any idea of how much Extra inventory is out there in the channel. And then moving forward, are you guys rethinking kind of systems To judge this inventory level that's out there, are there new kind of processes that can be put in place to have a better view?

Speaker 2

So if you were not analyzing the channel and the inventory, We shouldn't be in this job, right, in the 1st place. So obviously, we are Analyzing these two tests and sometimes it's very difficult because there is a certain level of Regarding disposition from your customer to their customer, so The closer they are to you, the more information you get a little bit more accurate. But I just want to hark back a little bit more. One of the most important things we need to start Guessing or being educated guesses is about when did the ore bill start. It started, Let's assume the old shipments happened in the pandemic period over the last 2 to 3 years.

Speaker 2

And if you think There was a, let's assume, a 30% over shipment, then you're looking at probably 3 quarters worth of at least actual end And that is sufficiently provisioned. And how far are we into it? Maybe we are into a quarter of it, Right. If that is the logic you go run through as all logical people should, then you should start expecting a recovery somewhere in the second half of next year. Can you dial it in within a quarter?

Speaker 2

No. The second part of it is like, have the dynamics in the business change? No, I mean, Always, we get excited about the latest and the greatest new offering technology, blah, blah, blah. And our customers talk a bit and our customers' customer talk about it, Because I hate to say that's what the investors want to hear. Okay.

Speaker 2

But the real revenues are generated by all the products, products that are Actually, long term, they're sticky because of software or performance or whatsoever. And they're also costed down for the customers, so they can ship more of it. In that sense, the dynamic hasn't changed the marketplace in terms of we have a robust Wi Fi 6 portfolio, we have a robust Wi Fi 7 offering, We have the SOCs to complement our broadband Wi Fi offering, right. I know that the broadband It's funny when it does well, it gets discounted, when it goes down, well, that's the problem. So honestly, if you step back, we're trying to build a broad based portfolio company With potential to generate large profits and earnings per share for shareholders and at the same time build scale and while investing In what I call more resilient businesses like our infrastructure and so on and so forth, so that we can build a comprehensively large company.

Speaker 2

I mean, that's the ultimate goal. And no matter what happens now, we remain focused on the long term goal and that we're very committed to.

Speaker 7

Thanks for that, Kishore. And then secondly, about your infrastructure business, the upside there, you guys kind of Highlighted millimeter wave and 5 gs backhaul. I would say, 1st of all, on the millimeter wave I think it's been very slow adoption. So, it's interesting to see you guys picking up why now. And then secondly, on the 5 gs side, we've seen builds really start to slow even in India now.

Speaker 7

What are the specific programs that you guys are linked to that are kind of swimming upstream here?

Speaker 3

Yes. Just real quick, maybe a clarification, Chris. I think you're aware, most of our business has been backhaul. So these backhaul Transceivers that we've been shipping this year has been a big driver, right? So very different than the markets the 5 gs access markets that you're describing.

Speaker 3

And so these are microwave backhaul that's replacing fiber kind of in between base stations. So very again, just want to emphasize a very different market than the decline that you're referencing, which we also see. We sell into the wireless And in some of these other markets, they're a little nicheier markets. They're a little bit smaller, but they've been great growth drivers for MaxLinear. There

Speaker 2

is a trend in the microwave millimeter wave backhaul deployments as well, right? People are Deploying more and more multi band deployments and multi band, I mean, like millimeter waveband, microwave kind of combined radios or hybrid radios. So that increases the content as well. Yes, India has been a driver as India was rolling out strongly on 5 gs. And now we see a slowdown.

Speaker 2

So we The slowdown as of guidance guided accordingly. And you also have to keep in mind that we did not have excess inventory in the infrastructure channel. We basically we're running short on supply and we supply to the market. So the growth you're seeing, what you call The ability to pull us out and go upstream is really based on the fact that the channel was not overstocked. So we are shipping to natural demand.

Speaker 2

Now with the slowdown, we will be caught up with the slowdown as well. So really, the growth is coming in the back Call to these multi band hybrid deployments, which millimeter wave is a part of. And you also want to think about the fact that as the access bandwidths increase, the front haul and back Call DataPipe is no longer going to be provisioned sufficiently by microwave, and they have to use millimeter wave, where it is cost Effective to in combined with microwave and they're making trade off versus fiber. So you can imagine countries like India And even in the U. S, in metropolitan zones and things like that, people are trying to do a lot of hybrid deployments.

Speaker 2

Now does it Slow down? Yes, absolutely. We have guided so accordingly and it's going to be a little what I call the telecom CapEx being dramatically slowed down as a lot of Telecom OEMs have talked about, in fact, some are pre announced, right. We should see some impact of it, but this is where our infrastructure is going to really be Driven by our growth in our storage accelerators and our optical data center investments. So I think it's turning out to be a pretty nice portfolio, which I'm quite pleased actually.

Speaker 2

Those have been taken a while.

Speaker 8

Excellent. Thank you, guys. Yes.

Operator

Our next question is from Ross Seymore with Deutsche Bank. Please proceed.

Speaker 5

Hi, guys. Just wanted to ask a couple Questions. For the Q4 not going up sequentially, was that demand changed, more inventory was out there than you And I know those two things are interlinked, but what changed from 3 months ago to today that leads the Q4 to be down sequentially?

Speaker 3

Yes. I mean, I think it's exactly as you stated. I think it's both, right? I mean, there's definitely more inventory. We saw more push outs.

Speaker 3

I We saw bookings in the quarter, so we saw some improvements, but it wasn't as much as what we had originally expected 3 months ago.

Speaker 2

Honestly, we ourselves are sort of Paffled, if you will, as to how much inventory is out there and with the slowdown and how to reconcile that, Right. So it's getting clear as the slowing economy sort of is all the catching up with us. I think there are 2 Parallel economies out there right now, a tech economy and there is a chip economy and maybe there is a consumer economy. I don't know, maybe there are 3 of them and we are definitely in the chip economy And we're seeing some of the downsides of that.

Speaker 5

And I guess second question, I have 2 quick follow ups. The first one, for next As a whole, I know you're not going to guide the total revenues. You talked a little bit about the linearity of it with the seasonal comment earlier. But from a high level, What do you think are the idiosyncratic tailwinds or headwinds that you guys as a company have as you look at 2024?

Speaker 3

I think pretty straightforward. I mean, I don't not going to guide, of course, next year, but I mean, I think the shape of It's probably the opposite of this year, right? I mean, we started the year out really strong and we saw that kind of deteriorate to some degree. We're working through this inventory and I think you're likely to see us Continue to improve and a lot of that's coming from just naturally inventory burning off, but it's also coming from new programs, New products that are going to ramp in that kind of the second half of next year. I mean, you got a lot of new wins coming from optical that Wi Fi 7 starts to ramp next year.

Speaker 3

So you've got several new programs that are going to ramp on top of the inventory just Naturally burning off. So both of those will help. I mean, I guess the only other thing that I just mentioned on another question was seasonality. I think you probably see a little bit Softness and seasonality, but I think it's more influenced at least in the short term by the inventory that sits in the channel.

Speaker 5

Got it. And then my last one and forgive me for sneaking in 3. I know it's a confidential process in the arbitration with Silicon Motion, but any sort of update on either the timing, a reiteration of what you said before, but the timing of it Or the potential magnitude, any sort of color on that is that tends to be the most frequent question I get. And again, I Appreciate your somewhat, if not significantly limited in what you can say.

Speaker 3

Yes, I don't think anything's changed, just as we had updated before. I mean, The only change is that Silicon Motion filed for arbitration, confidential process. So you're correct in that we can't add any more color there. Still expect that arbitration process to take 12 to 18 months.

Speaker 5

Thank you.

Operator

Our next question is from David Williams with The Benchmark Company. Please proceed.

Speaker 9

Hey, good afternoon. Thanks for taking the question. Kishore, maybe you could talk a little bit more about the traction you're seeing in the Keystone platform. And what's the magnitude of that ramp do you I think for next year, is there any maybe just a little more color that you've brought around that to help us understand that traction in growth? We

Speaker 2

don't guide to the future in that sort of short timelines. But I think from where we are today, we are pilot builds right now as the interop cycles continue. And hopefully, next year, we are somewhere in the teens or beyond that. And hopefully, beyond that, because that would be disappointing if it was in the teens. And then, but I can talk to you in terms of 3 year window, could we cross $100,000,000 Yes.

Speaker 2

I mean, that would be a natural expectation, right? So can we do better than that? Absolutely, that's based on share shifts. I think one wild card is the timing of the deployments of multiple data centers in the transition to to 100 gigabit per Lambda, whether it's 400 gig or 800 gig or 1.6 terabit on the 100 gig platform, if you will. And so you're counting on multiple players coming on.

Speaker 2

Right now, we have confirmed transitions from big one big data center guy. I know that in the NVIDIA AI clusters, they are deploying 100 gigabit. But you know what, It's like we have to land into it rather than win into it right now. So we are trying to win into it. And as we increase their supplier base, Hopefully, we are one of the selected ones, but I'm not saying that we are selected or we are in it.

Speaker 2

So please don't mistake that. I'm just trying to say our focus is right now winning And good luck on the share basically, okay?

Speaker 9

Okay. Can you say is that progressing as you would have

Speaker 2

It always be slower to me honestly. It's been a few several years since we've been investing in the optical Data center and I can't every time it seems slower slow for me because I'm dying with anticipation, Right. So but so far, we feel very good about where we are. And like I said, if you read the tea leaves, I Actually be more positively disposed than my forecasting will indicate to you.

Speaker 3

I think, David, another positive, I mean, you're starting to see Our IP that we've developed in optical is starting to broaden out. We can go after AEC opportunities, AOC And that really helps us to leverage the development that we've done thus far. Those are also types of programs that can ramp quicker Versus some of the other transceiver platforms, yes.

Speaker 9

Great color. Thanks so much. And then maybe lastly, just on the carrier or maybe the operator side, If you look out, are you hearing anything in terms of the beginning of the year of CapEx planning? Or is there any sense of optimism that you're Beginning to hear maybe for 2024 deployments and maybe CapEx spend?

Speaker 2

It's always the hardest thing in all these years in broadband. I can tell you very clearly that They start the process sometime in Q3 and then Q3 don't know anything in Q1. By the time we end up Q1, then sometimes they just go super aggressive as well. So but these are unique times Because there's a lot of inventory sitting out there, even if they're going through that process, us feeling the impact of their OpEx decisions is going to be delayed for sure, Right, because they're going to be depleting every inventory. So you won't feel the urgency.

Speaker 2

They would come rushing towards the end of Q4 or in the middle of Q1 in the Past pre pandemic period, right? But now there's still enough inventory in the channel that it's going to be dampened. So we wouldn't be picking that signals much. But I think we should all expect that everybody is going to be tightening their bells, right. And so, it will be subdued whatever they are going to be up to.

Operator

Our next question is from Karl Ackerman with BNP Paribas. Please proceed.

Speaker 8

Yes, thank you. Hi, it's Ashore and Steve. Two questions if I may. Thank you. Hi.

Speaker 7

I guess, I first want

Speaker 8

to ask, there have been many questions on this call sort of asking whether there are structural impairments To some of the broadband and connectivity portions of your business, so I'd like to ask specifically about your connectivity business. How much Of that business today is on a rough and tough basis split between wireless and wired. I think that would be certainly helpful as we contemplate some of the content drivers that you talked about earlier on this call as it relates to Wi Fi 7 Next year as well as some of the growth opportunities today for WiFi 6.

Speaker 2

Okay. I would say we have little or no Exposure to wireless access from a connectivity side. To the extent that we have exposure to the wireless On the broadband connectivity side for our Wi Fi's offering, it's really the telco platforms where they tend to be The gateway box where, for example, they have our FiberPond chip with our gateway processor and a Wi Fi And they will be what I call an input to that box that comes from a 5 gs So very little or no exposure to wireless broadband access, gate access, okay? So if you take out that on the wireline, we are pretty much 100% of our exposure to wireline access. However, it may be, let's say, 90% of it and 10% of it is what I call Standalone router gateways that we are we started making progress toward at the beginning of the year to get revenues That are outside of the operator gateways, right?

Speaker 2

That would be the landscape. So you should on the practical terms, you should associate 90% of our Wi Fi connectivity they will use with our wireline broadband access gateways. Okay? And maybe Carl, just to add on a little bit. So don't forget on connectivity side,

Speaker 3

we also have Ethernet. So while a lot of our declines In the gateway, I mean, it's been driven by both Wi Fi and Ethernet. One of the big things going on is we're seeing more exposure. Kishore shared To see more growth in 2024 and 2025 from Ethernet as well as of course the Wi Fi opportunities.

Speaker 8

That's very helpful. I appreciate that color. For my follow-up question, I guess, are lead times and backlog Back to normal, I guess, pre COVID levels. Is that a fair way to think about it today? And then second, It's nice to see the decline in inventory, but any thoughts in terms of a target level of inventory as you look to manage Expenses over the next couple of quarters.

Speaker 8

Thank you.

Speaker 3

Yes, it's a good question. So I think we've been doing a really good job on inventory as far Bringing it down, but we got to do better and we will continue to do better. We jumped on this pretty quick, going all the way back to the tail end of last year. But unfortunately, the revenue decline has just been such that we've not been able to get the inventory out as fast as we'd like to. With regard to lead times, With regard to lead times, I would say we're kind of back to normal.

Speaker 3

I mean, we're kind of quoting 16, 18 week lead times, which is pretty typical in our business. I mean, there's Couple of businesses that are probably a little faster than that, but that's kind of our normal. So I wouldn't say that that is problematic whatsoever at this point. The backlog also backlog and bookings, so bookings as I've talked about, I mean have been very low because you had Super good backlog for well over a I don't know, almost 2 years now. And so now I feel like we're getting through that adjustment phase Where you're going into a quarter with whatever 50%, 60% backlog, whereas you historically, you've been running for The last 2 years you've been running at 100% backlog and that's changing and that getting back into that normal rhythm, that's What we're used to, that's what we know.

Speaker 3

And so actually looking forward to kind of getting back. Some of the uncertainty has been around Pushing out of a quarter, that's really where the problem has been. And so we're starting to see that improve. But to

Speaker 2

be honest, Steve, To the extent, I can say we want 0 inventory in our books, so that we get the PO bookings going on our customer side, I bet you I will support you on that.

Speaker 4

Of course.

Speaker 8

Thank you.

Speaker 3

Thanks, Rob.

Operator

Our next question is from Ananda Brouwer with Loop Capital Markets. Please proceed.

Speaker 10

Hey, yes. Good afternoon, guys. Thanks for taking the question. Maybe just kind of dovetailing right off of that last topic with Carl. It seems like everything you guys just talked about would suggest that new normalized inventory levels at customers Exiting this would be the same as they previously were going in.

Speaker 10

You think that that's Based on what you can see as fair assumption?

Speaker 3

I'm not sure that I follow you, Ananda. I'm sorry.

Speaker 10

Well, your customers hold I mean, they probably view their inventory level to them, they have What they would interpret as normalized inventory levels, I would imagine. And that was that looked a particular way going into 2020, they can change what that looks like, Steve, but it sounds like, I mean, if they could change it higher, they could change it lower, they could leave it the same coming out of this. But it sounds like based on what you're saying well, here's my thought. So does that make sense though, what I'm saying? Like they probably say, We want to hold some number of weeks of maxlinear inventory.

Speaker 2

Sure. Yes.

Speaker 10

Yes, yes. So It sounds like what you're saying is the lead times are back to pretty typical and you're at 50%, 60% backlog. It sounds like ship out is meaningfully higher than ship in because you have typical lead times. So it sounds like they're operating you guys in typical lead times, just working down the inventory to the 50%, 60% backlog. So I would sort of suggest to I guess really kind of the crux of the question.

Speaker 10

It sounds to me like they're already working you guys as if getting you back to pre COVID inventory levels, I was just wondering if you have an opinion on where that might settle in. Does that also inform when you guys inflect?

Speaker 3

Yes. Look, if I understand your question correctly, I agree that they I mean, I think the whole industry sees that lead times have come down and so they're waiting, they're taking more risk. They actually kind of Not sure if we're seeing eye to eye on this, but I think customers do have still have, if you look across the industry, there's still a lot of inventory either in the channel or even sitting at end customers. And so while that is still high, I mean, they are still burning that down and but we're getting back To those normal times, as I stated, I mean, I think it's another couple of 3 quarters, but we are seeing improvements.

Speaker 10

Yes. And I guess the question really was, do you think that they settle you in at lower levels than previously? When things get back to normal, do you think

Speaker 2

you should be in a listen only mode?

Speaker 3

I think yes, I mean, absolutely. That's what we see in every cycle. It swings the other way, right? They will take more risk. They will wait too long.

Speaker 3

That's exactly what's going on right now. And my opinion across the entire is that they are waiting, because they either they know or they think they know that there's enough inventory out there. And so they're going to wait as long as they can and nobody's every one of these customers, their operations guys getting pounded on for having too much inventory. So they're going to not order and they're going to risk being late. And in this environment where demand is kind of so so, that's probably okay.

Speaker 10

And then just a quick follow-up. Kishore, you mentioned a couple of times about the storage accelerators And potentially picking up in 'twenty four and then potentially it will be robust for a few years. Do you any context around how impactful those could be?

Speaker 2

It's very impactful, right? I mean, generally, by and large, whenever we invest Any new product areas, we hope to build at its peak run cycle somewhere in the $50,000,000 to $100,000,000 per year product, Infrastructure product, otherwise the economics don't make sense. And there's a reason to it, what is the next product going to be built and that sort of thing, there's Sustaining revenue and growth, right, self sustaining growth and revenue. So that The expectation for this product that it's going to be somewhere in the $50,000,000 to $100,000,000 per year revenue when it hits its peak revenue. So initially, you have really rapid growth, like you said, double next year and maybe grow 50%, 60% the following year from there and maybe it hits the peak point Seeing some of the 3rd and the 5th year from now, right?

Speaker 2

Hopefully, the 3rd year, not the 5th year, and then it holds there for a long time and we launch new products. And the more important thing, and this is where this is the key point here, and maybe we never ever connected the dots very well here is that There is a place and need for these accelerators in the cloud market as well. And as the AI in the cloud and the edge increase, accelerators will become Essential to it, so right now, we're investigating partnerships with AI vendors, if you will, where there could be a joint And we're seeing a lot of what I call open nets for that joint collaboration of a joint listing. And that's really the key to the storage business is the enterprise is going to be a massive consumer of storage And latency is an access speeds and all of this is going to be incredibly important at the edge and even inside the cloud moving forward, even with AI is going to get even worse. And really, this is a play that goes together with all the offerings on the AI processors as well.

Speaker 2

So That's the next step in the evolution of our storage accelerator business. And maybe this is the first time I really connected the dots in that sense for you.

Speaker 10

That's really helpful context. All right, great. Thanks guys.

Speaker 3

Thanks Ananda.

Operator

Our next question is from Suji D'Silva with ROTH MKM. Please proceed.

Speaker 8

Hi, Kishore. Hi, Steve. A question about the Carrier PON program. I'm curious If that is the rollout is happening as you'd expected or whether that carrier is pushing out or delaying that rollout because of the macro environment?

Speaker 2

The roll is already happening. We've been shipping for this whole year actually. The only difference is that the Earlier part of the year, the rollout was slower than we expected. So they were sitting in a bunch of inventory. And then they started shipping.

Speaker 2

Now they're shipping on a natural cadence. And we are already working on the next generation platform, but my expectation is the next generation is going to be delayed and the existing generation platform With 10 gigabit PON, XGS PON and Wi Fi 6 R2, Which is enhanced throughput 1 is going to have a long life. Having said that, we got the next generation offering as well. So I don't think there's any change in plans yet. There'll be natural slowdowns and seasonalities and that sort of a thing, but Nothing out of the ordinary, because to start with, it is not as much inventory on our side as was in the beginning of the year.

Speaker 8

Okay. That's helpful. Kishore. And then lastly on the AEC market within optical, that's kind of coming online here. Can you help us just think about the relative size do you think that market will be a year or 2 out versus the AOCs and the passive cables?

Speaker 8

Just to understand how big you think that market

Speaker 2

That's a very, very interesting question. I know there's a lot of excitement at AEC, but AEC has been a very, Tiny market looking backwards, right. The whole rationale for AEC comes in As the speeds have increased dramatically, where passive copper cannot meet the performance and you need Active Electrical Cables. There's a place for AOCs as well. If I'm in an AI cluster, I don't want to do anything with AECs, Right.

Speaker 2

I want to go optical. So it's really the mix and match. So this market can be huge, gigantic. And I think any forecast will underestimate The volume it can be over the long term, it's just like USB 3.0, right? It can just keep growing.

Speaker 2

However, the prices are going to be A lot more optimistic than they really will play out to be, right. All in all, I expect the market, I don't know anywhere between $200,000,000 size for a chip guy to as big as $1,000,000,000 for transceivers, Active optical cable and active electrical cable combined. But there is These cars in the last 20 years of existing is MaxLinear for me. I've never seen a single chip supply In the communications segment, more than $300,000,000 of product. So the $1,000,000,000 TAM $300,000,000 TAM is my point.

Speaker 2

So put it differently, it's going to take many generations of products to really access the $1,000,000,000 TAM and that's going to take a few years to get there. But I think we are very well positioned with our technology evolution.

Speaker 4

Okay. Thanks, Kishore.

Operator

Our final question is a follow-up from Tore Svanberg with Stifel. Please proceed.

Speaker 4

Yes, thank you. I just had a 2 part question on the recent CommScope, Vantiva deal. First of all, did that also have an impact on sort of purchasing behavior? Obviously, when you have an event like this, Perhaps customers are a bit more careful about buying inventory. And then the second part of the question, Does this change anything at all for MaxLin?

Speaker 4

And the reason I'm asking that question is because now that it's going to sort of like 2 customers in 1, I would think that the qual for DOCSIS 4.0 is going to be a bit more simpler. So if you could answer those two questions, that'd be great. Thanks.

Speaker 2

So, Tore, first part of the question is very, very easy. I don't think anybody knows which deal happens when. It's a very non linear process, the M and A activity. Having said that, there's so much inventory in the channel. I don't think this the deal itself had any impact on that.

Speaker 2

It's really driven by the end market throughput and the end market itself Got a lot of inventory sitting on it, right. So I think our customers are in the same bad place we are in, number 1. Number 2, regarding The DOCSIS 4.0 cycle, yes, we got a great chip, the lowest power, the most beautiful thing in the world, that sort of a chip we have compared to any competition out there. However, we have seen the way the DOCSIS cable market plays out. It really takes 3 to 4 years to get to the ramp point where it hit 50% of the volume, at At least 4 years to get a 50% of the market and then a 7 year life to it, right.

Speaker 2

Having said that, Doctors 4.0 is not the same for everybody. There's already a system in the marketplace. There are 2 flavors of it And it's a very, very costly network rollout. And I think operator is going to be very, very selective about DOCSIS 4.0. It's going to be a very small share of the market.

Speaker 2

However, DOCSIS 3.1 has got many flavors. There's something called the Ultra DOCSIS 3.1, which is going to meet all the category of services that the market needs with 10 gigabit received bandwidth and upstream multi gigabit, it's going to meet all those things, it's called the higher split ultra DOCSIS 3.1 And that can roll out today based on all the network out there. And I think that's what the operators are going to lean towards and that's going to be 80% of the market. And so DOCSIS 4.0 is great, but 3.1 is even more beautiful. Ultra DOCSIS 3.1 is what I put my bet on.

Speaker 4

Great perspective. Thank you.

Speaker 2

Thank you.

Operator

We have reached the

Speaker 10

end of our

Speaker 2

Sorry, go ahead.

Operator

I was just going to hand it back over to Doctor. Kishore Senderpoo for closing comments.

Speaker 2

Well, thank you. Thank you, operator. So I just want to thank you all for attending this call. I would like to tell you that we'll be participating in a number of conferences in November through January, The Stifel Midwest Growth Conference Chicago on November 9th, the ROTH Capital Technology Event in New York at number 15th, the UBS Technology Conference in Scottsdale Deal on November 28, the Wells Fargo TMT Summit in Rancho Palos Verdes, California on November 29 and the Needham Growth Conference in New York on January 18. With that, I want to thank you all once again for joining us, and we look forward to speaking with you again soon.

Speaker 2

Thank you.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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Earnings Conference Call
MaxLinear Q3 2023
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