NYSE: MXL Stock | MaxLinear, Inc. Q1 2021 Earnings Call

Greetings and welcome to the MaxLinear Incorporated first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Eugene. Thank you, sir. You may begin.

Thank you, operator. Good afternoon everyone and thank you for joining us on today's conference call to discuss MaxLinear's first quarter 2021 financial results. The call is being hosted by Dr. Kishore Seendripu, CEO, and Steve Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer. After our prepared comments, we will take questions. Our comments today include forward-looking statements within the meaning of applicable securities laws, including statements relating to our guidance for second quarter 2021 revenue, revenue growth expectations in our principal target markets, GAAP and non-GAAP gross margin, GAAP and non-GAAP operating expense, tax expenses and effective tax rates, and interest and other expense. In addition, we will make forward-looking statements relating to trends, opportunities, and uncertainties in various products and geographic markets, including without limitation statements concerning opportunities arising from our acquisitions of Intel's home gateway business and of NanoSemi, growth opportunities for our wireless infrastructure and connectivity markets, and opportunities for improved revenues across our target markets. These forward-looking statements involve substantial risks and uncertainties, including integration and employee retention risks related to the acquisitions, as well as risks arising more generally in our business from competition, global trade and export restrictions, potential supply constraints, the impacts of the COVID-19 pandemic, our dependence on a limited number of customers, average selling price trends, and risks that our markets and growth opportunities may not develop as we currently expect and that our assumptions concerning these opportunities may prove incorrect. More information on these and other risks is outlined in the Risk Factors section of our recent SEC filings, including our Form 10-K for the year ended December 31, 2020, and in our first quarter 2021 Form 10-Q, which was filed today. Any forward-looking statements are made as of today, and MaxLinear has no obligation to update or revise any forward-looking statements. The first quarter 2021 earnings release is available in the Investor Relations section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including net revenues, gross margins, operating expenses, income or loss from operations, interest and other expenses, income taxes, net income or loss, and net income or loss per share 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 do not replace the presentation of MaxLinear's GAAP financial results. We are providing this information to enable investors to perform more meaningful comparisons of our operating results in a manner similar to management's analysis of 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 Kishore, CEO of MaxLinear.

Thanks, Kishore. I will first review our Q1 2021 results and then further discuss our outlook for Q2 2021. Total revenue for the quarter was $209.4 million, up 8% versus Q4. Infrastructure revenue was increased by 61% compared with Q4, above our expectations, and driven by a strong recovery in both our wireless backhaul and high performance analog end markets, along with growing 5G access market contribution. Our broadband business demonstrated strong growth during the quarter, up 10% sequentially and slightly better than our expectations, driven by upside in gateway SoC shipments. Solid demand for our broadband products is being driven by a combination of in-market strength and company-specific drivers, including silicon content increases and share gains. Our connectivity business was down 20% sequentially, as supply constraints in Wi-Fi and Ethernet were only partially offset by growth in G.hn and MoCA. Lastly, our industrial and multi-market business was down 1% sequentially and in line with expectations, as softness in components was largely offset by strength in the HPA demand. GAAP and non-GAAP gross margin for the first quarter was approximately 53.4% and 58.6% of revenue, up 10.7 percentage points and 80 basis points over last quarter, respectively. The delta between GAAP and non-GAAP gross margin in the first quarter is primarily driven by $10.7 million of acquisition-related intangible assets amortization, in addition to $0.3 million of stock-based compensation and performance-based equity. First quarter GAAP operating expenses were $101.8 million, down sequentially and slightly below the low end of our $103 million to $107 million guidance range. The GAAP operating expenses included stock-based compensation and stock-based bonus accruals of $19.3 million, combined amortization of purchased intangible assets of $6.1 million, restructuring charges of $2.2 million, and acquisition integration costs of $1.7 million. Non-GAAP operating expenses were $72.6 million, down $3.2 million versus Q4 and at the low end of our guidance range of $72 million to $76 million. Non-GAAP operating margin for Q1 2021 of 24% was the highest level in the past six quarters. Moving to the balance sheet and cash flow statement, our cash flow generated from operating activities in the first quarter 2021 was $40.3 million, and we ended the period with $149.2 million in cash, cash equivalents, and restricted cash. Our loan balance stood at $350 million exiting Q1, as we made principal payments of $20 million during the quarter, and we have subsequently paid down another $15 million. We remain consistent in our intentions around uses of cash, with priorities on debt pay down and strategic acquisition. We also purchased $2.7 million of stock late in the quarter after the board approved the $100 million buyback program. Our days sales outstanding for the first quarter was approximately 38 days, slightly up from 32 days in the prior quarter due to shipment linearity. Our inventory turns were 4.1 compared to 4.4 in Q4. That leads me to our guidance. We currently expect revenue in the second quarter of 2021 to be approximately $200 million to $210 million, down 2% sequentially at the midpoint of the guidance range. We expect broadband revenue to be down quarter over quarter. Semiconductor manufacturing supply chain tightness is expected to constrain shipments below actual end market demand. We expect infrastructure revenue to be up slightly versus Q1 due to modest growth in wireless backhaul and wireless access. We expect our industrial multi-market revenue to be flat to down on a sequential basis. Lastly, we expect our connectivity to grow double digits quarter over quarter, with the rebound being driven by a combination of solid demand and supply improvement. While the theme of broader supply constraint continues to be prevalent across the entire industry, we continue to aggressively manage these issues in order to support our customers. With that said, we have seen limitations dating back to the fourth quarter and believe supply will continue to be an issue through the balance of the calendar year and into the first half of 2022. This uncertainty does impact our visibility with respect to product mix. We expect second quarter GAAP gross profit margin to be approximately 52.5% to 54.5% and non-GAAP gross profit margin to be between 58% to 60% of revenue, with a midpoint up 40 basis points from Q1. As a reminder, our gross profit margin percentage forecast could vary plus or minus 2% depending on the product mix and other factors. We continue to fund strategic development programs targeted at delivering strong top-line growth in 2021 and beyond, with particular focus on infrastructure and connectivity initiatives and our stated goal of increasing the operating leverage in the business. We expect Q2 2021 GAAP operating expenses to increase approximately $2.7 million quarter on quarter to a range of $102.5 million to $106.5 million, primarily driven by increased prototyping expenses and payroll related expenses. We expect Q2 2021 non-GAAP operating expenses to be up approximately $2.4 million versus Q1 to a range of $73 million to $77 million. We expect GAAP tax expense to be approximately zero and a non-GAAP tax rate of 6%. We expect GAAP interest and other expense to be $3.9 million to $4.1 million and non-GAAP interest and other expense to be $3.8 million to $4 million. In closing, we continue to see sustainable fundamental expansion across all of our addressable markets. This is largely being driven by a combination of company-specific catalysts, including new product introductions, market share gains, and content per platform increases. We believe our end markets are also demonstrating favorable growth profiles due to the proliferation of global networking, in addition to the recent trend towards the incremental dependency on reliable and robust connectivity. Our infrastructure efforts in PAM4 and 5G continue to foreshadow meaningful growth coming in 2021 and beyond as production platform ramps commence. We're also pleased with both the near-term customer traction and development milestones in our Wi-Fi business. We remain steadfast in supporting customers through a dynamic market environment which pairs accelerating demand with tight supply constraints. We remain focused on expanding upon our recent profitability advancements and strong cash flow generation, while continuing to execute on the integration efforts as well as our organic infrastructure developments. With these profitable growth initiatives, we continue to believe we are uniquely positioned to deliver strong leverage in our business in 2021. With that, I'd like to open up the call for questions.

Thank you. We'll now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may also press star 2 if you would like to remove your question from the queue. One moment please while we now poll for questions.

Yeah, thank you and congratulations on the record results. First question is on capacity. Can you just add a little bit of color on what's going on there, what some of the puts and takes are, especially when I think about your connectivity business being hampered a bit this quarter but relief is coming next quarter while broadband is the other way around? If you could just add a little bit of color there, that'd be great.

Very good. And on your infrastructure business, obviously it had a tremendous quarter, and I was hoping you could just talk a little bit about the geographical contribution to that growth. I mean, is this kind of the new run rate, and can it grow from here on, because obviously it grew significantly better than what you had expected?

Just one last question. Could you just give us a sense for where you expect the inventory days to be longer term for the new business model? You're obviously slightly below 100 days right now, but where are you trying to get the inventory days level to?

Yeah, that's a tough question to answer right now, Tore. I mean, especially given the environment that we're in with the increased business that we have, along with the supply constraints and just kind of uncertainty in the global world right now. We're trying to anticipate that. We're more than likely going to have to, we want to build up some more inventory, but we're not quite to that stage, so I can't really answer your question quite yet.

Sounds good. And congrats again. Thanks.

Our next question comes from Ananda Barua with Loop Capital Markets. Please proceed with your question.

All right, good afternoon guys. Thanks for taking the question and congrats on the strong execution. I guess a couple, if I could. You mentioned when you were talking about, let me see if this is actually you, I think you gave the broadband guidance, but one of the remarks was supply constraints around broadband, demand remained stronger than supply. But just a moment ago, I think you also said that that's generally across the business. So really, can you just clarify, is it across the business that demand is stronger than supply? You said you're supply constrained across the business. Is it also the case that demand is meaningfully stronger than supply across the business? And then with regards to broadband specifically, is there any sense of how much revenue you're not able to meet right now? And then I have a quick follow-up. Thanks.

That's fantastic context, I appreciate it. And the quick follow-up to that is, you mentioned in the press release, I think this is your comment, we feel increasingly confident in the company's outlook for the remainder of this year. So would you mind, I mean, would you be able to sort of give us some sense of what that outlook is, since you mentioned it in the press release that you feel confident in it? And that's it for me. Thanks.

Yeah, thanks for that. So I'm not sure, we only guide one quarter out, so we're not going to give any guidance beyond that. We do see supply constraints continuing as I mentioned in the prepared remarks in the second half and into the first half of 2022. I'll reiterate what Kishore said, the demand is extremely strong across all of our end markets. I would say that we've seen a real fundamental shift in the broadband markets in general. Connectivity has been a big play because these are new products for us, content increases which is very meaningful. But I think you're also seeing that the operators, telecom and cable, really starting to invest. I think as we look out over the next three to five years, you're going to see a substantial increase in the markets there and the amount of spend that these guys intend to make.

That's great context, Steve. Thanks guys. Great. Thank you.

Thank you. Our next question comes from Quinn Bolton with Needham. Thanks for sending your question.

Hi guys, it's Michelle Alan for Quinn. Thanks for taking the question. Congrats on the solid results. So just two quick ones for me. Can you guys give me an update on the next generation 5G cellular transceiver, the 8x8 massive MIMO cellular transceiver? And then on the second question, just between the supply constraints, the elevated shipping costs due to COVID and so on, we're just wondering how you guys feel about the target for the 60% gross margins at the exit of this calendar year. Do you guys feel comfortable with that? I know you don't guide more than a quarter out, but I believe that was a target you guys had mentioned after closing the Intel acquisition.

Yeah, Michelle, on your supply constraint question, I think tying back to gross margins, I don't think anything's changed as far as our expectation that we hit that 60% exiting the year. We definitely are seeing price increases in a number of places, as many of our peers are seeing across the industry. So we're working very hard. Our real priority right now is just to get supply. Demand has been extremely strong, and we're doing our best to get supplies as quick as we can. And I want to add that mix will have an important contribution to gross margin, and so it's going to be a balance between infrastructure products and non-infrastructure products. So we'll wait to see how that mix plays out, but for now, we only are guiding the next quarter out.

Okay, thanks guys. Appreciate it.

Thank you. Our next question comes from Suji Dasilva with ROTH Capital. Please proceed with your question.

Hi, Kishore, hi Steve. Congratulations on the strong quarter. Perhaps first on the infrastructure optical ramp. I want to clarify, you said 400G you expect the second half of this year you'll start to see contributions there, and I just want to get a real sense of what kind of linearity, initial shipping levels we can expect out of the gate, or whether it takes several quarters to ramp up.

Yeah, I can also imagine how being in a tricky supply chain as well, so I understand that. And then moving over to the broadband business, the Wi-Fi, can you help us understand if the upgrades to Wi-Fi 6E tri-band sweeps in MaxLinear where you weren't before, or is it an upgrade of your prior content? If so, what's the content increase? Give a sense of how those upgrades will help you guys.

Okay, helpful. Thanks guys.

Thank you. Our next question comes from Alessandro Vecchi with William Blair. Please proceed with your question.

Hey guys, congrats on the quarter. Just a quick question on the operating expenses. I feel like I ask you guys this every quarter, but you've done such a tremendous job holding those costs down. I think I remember discussion last quarter about some mask costs coming in Q2 or Q3. Is the streamlined OpEx and the Q2 guidance a function of the mask costs hitting in Q3, or is there something else going on there?

Hey Alex, good to get a chance to talk with you today. So from an OpEx standpoint, as kind of expected, we did anticipate this going up. There were some payroll increases as well as some mask additions in Q2, so we do see it going up, not quite as much as I think what we'd originally expected. But some of those costs I suspect will push into the second half of the year. So net, I think it's a little bit better than what we went into the year with, but there were some of those costs that will push out into Q3. But to answer your question, mask costs related with the 5 nanometer product which we just talked about in the call, the Keystone product, is part of those increased expenses, and some of it may push out into Q3.

Okay, that helped. And then just on the broadband side, heading into the quarter there was some investor concern that at some point because of the work from home trends, the broadband revenue would sort of trend down or moderate in the back half of the year. Obviously, we're seeing a little moderation in Q2 because of the constraints, but I guess what I'm trying to get at is if the supply is below the demand and you have all these drivers in terms of increased content and the operators finally starting to spend a little bit more and open up the purse strings, does that sort of alleviate the original worries in Q1 of maybe a back half tail off or a 2022 tail off?

So I think the best way to answer that is, first of all, what's happened post-COVID, I think you've actually seen this acceleration of the cycle that we've been through where operators don't spend, and we were starting to see the beginning of the cycle where they would start to spend. We saw a lot of that increased demand start because of work from home. But I think what you've seen more recently and what you've heard from a lot of our peers, our customers, operators, is that you're probably going to see a multi-year cycle. Going into this, even the acquisition of Intel, we had highlighted numerous times that this broadband business would probably grow in the low single digits. I think at this point, based on visibility that we have, feedback from operators and customers, that could be mid to high single digits going forward. And then hopefully we'll see some additional content increases and share gains on top of that. So yeah, I think the world has changed. I think you've heard a lot of this commentary about the importance that the operators are placing on the home and wanting to really control and derive services and things like that. They're going to continue to invest further, and I think that started to really shift in our own business, and that's really driving that outlook. So yes, we would agree that things have changed a little bit. Demand has definitely picked up quite a bit, and really on top of that, I think as you look out over multiple years, you're going to see more of that spending going forward.

Perfect, that was incredibly helpful. Thank you.

Sure, thank you.

Thank you. Our next question comes from Christopher Roland with Susquehanna. Please proceed with your question.

Hey guys, thanks for the question. I want to dig into the supply situation a little bit more here. You mentioned it was more back end. Is this the substrate issue that most people are having, or is it something else like test or packaging? And what is the path towards kind of equilibrium look like there? And is there any way that us analysts can get a sense of the size of these constraints or how kind of the various pieces are moving? Are we having revenue push from Q1 to Q2 or Q2 to Q3? How should we be thinking about this? Thanks.

Yeah, Chris, I wish I could tell you. So we are working very hard. It's all of the above. Everything: substrate, lead frames, wire bonders that you've heard from numerous people. We're seeing a lot of those challenges. We do expect to see them through the rest of this year. Hopefully they ease in each subsequent quarter, but there's no guarantee of that. And the lead times have stretched tremendously, especially on the substrate side. So yeah, we've got some challenges that we got to work through. Fortunately, we've got a lot of demand, we've got a creative team, and we've been working closely with our suppliers, and we're also coordinating with our customers as well, trying to do what we can and cooperate with them to kind of maximize this output.

Okay, thanks. And then maybe we can, you just mentioned lead times, so maybe dig in there a little bit more. Talk about where they were six months or a year ago, where they are now, and talk about this in the context of bookings and backlog here. Have you guys seen considerably more bookings than you're able to build right now? Is that backlog building right now? And can you give us any sort of visibility into that backlog, what it might look like now, and what this means for billings for you guys in future quarters?

Yeah, I mean, look, I think it's pretty consistent with what we've seen from others. You're seeing lead times quoting lead times up to a year in advance, and so 52 weeks is a long time to get product. And so we definitely have seen bookings quite dramatically, and so our backlogs have increased. We've heard other peers talk about booking out an entire year. I mean, we're definitely seeing that. And so we're very confident. We've got great visibility. It's important that customers are kind of getting in line, and I think they've been reacting to make sure that they're scheduling out their own needs. And so we do have incredible visibility at this point, and that really helps our own planning perspective and gives us a lot more confidence as we're forecasting the year, albeit somewhat tough in the short term with some of the tighter supply constraints.

Thank you.

Thank you. Our next question comes from Bill Peterson with J.P. Morgan. Please proceed with your question.

Oh yeah, good afternoon and congrats on the results. Trying to ask the supply-demand questions a little bit differently. I know you only guide one quarter at a time, but in that spirit, I guess we see here how the impact on broadband is with the sequential decline even amid strong demand, while connectivity obviously is up. But is the demand such that you can drive sequential growth into the third and fourth quarter across your businesses? Is demand supportive of that, and do you expect the stage of supply could be supportive of growth in the back half across your various segments?

Yeah, Bill, these are all great questions. They're also hard to answer when you don't have that visibility. But I guess the best thing that I can say is that I think we absolutely continue to see very tight constraints in Q2 and Q3. I think we're optimistic things start to improve in Q4 and into next year, but there's no guarantees on these things. So that's my take on the overall supply chain. I guess I'd add, and I don't know if this is part of your question or not, but on the broadband and connectivity side, just to maybe echo what you've heard in our prepared remarks and what Kishore shared already, I do feel confident that you're going to continue to see growth there. As I look into next year, we're continuing to see really nice growth in that business from a year over year perspective. And so the supply chain constraints are going to push some of that to the back of the year and into 2022, but we're seeing a very solid demand in 2022 already.

That's really good color. Maybe more specifically, coming to infrastructure and in particular access, we're hearing more about O-RAN coming. You kind of mentioned the Facebook opportunity. On one hand, it feels like it's still a few years away, but when do you really expect some of these O-RAN developments to start, and how is MaxLinear positioned? You talked about the 8x8, but obviously we've seen some announcements from some of your peers that they're working closely with some of the compute companies or other companies that have already sort of started some initial O-RAN deployments.

It's good to hear that you're competitive in this case, and look forward to seeing the progress. Thank you.

Thank you. Our next question comes from Sam Peterman with Craig-Hallum Capital Group. Please proceed with your question.

Hi guys, Sam on for Richard here. Thanks for taking my question. I want to ask about MIMO. I'm curious what kind of share you guys think you can get with your SoCs for MIMO, particularly the 8x8 that you're coming to market towards the leading edge with. You've named Texas Instruments and ADI as your biggest competitors. Curious how you expect share to shake out, and does Nokia ramping their ReefShark season in 2021 affect that at all? Thanks.

Okay, great. That's helpful. And then just a quick follow-up on broadband, especially in Wi-Fi. You've noted that both content and share have been increasing in recent quarters. So I'm curious how you characterize the split between content and share in driving broadband growth this quarter, and if you expect one or the other to be a bigger driver of performance next quarter. I'd also be curious if that answer would be different absent the supply constraints you've talked about.

Okay, great. Thanks guys.

Thank you. Our next question comes from Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Hi, good afternoon and congrats on the results. I hopped in a little earlier because I think you addressed a little bit of this, but maybe we can go into it. That really concerns growth in the broadband connected home area, and you've already said you can see the prospects for mid to high single digit growth instead of low single digit growth. I guess I would try and juxtapose that against your biggest competitor having an event recently and talking about double digit growth potential for that $3 billion piece of their broadband IC business. Now I think there are areas in which you do and don't overlap, particularly on the broadband infrastructure side, but a lot of overlapping in CPE and connectivity. So I'd be interested in your thoughts on the potential for double-digit growth in that group, although I know I'm getting ahead of myself because you just raised it from low to high singles.

Great, thanks very much and congratulations again.

There are no further questions at this time. I'd like to turn the call back to management for any closing remarks.

Ladies and gentlemen, this concludes today's web conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.