MaxLinear, Inc

Greetings and welcome to the Max Linear Q2 Earnings Conference 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, Leslie Green, Investor Relations. Thank you, Leslie. You may begin.

Thank you, Paul. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss Max Linear's second quarter 2022 financial results. Today's call is being hosted by Kishore Sindhipu, CEO, and Steve Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer. After our prepared comments, we will take questions. Our comments today include forward-looking statements within the meaning of applicable securities laws including statements relating to our guidance for the third quarter 2022 revenue, revenue growth expectations in our principal target markets, and gap and non-gap gross margin operating expenses, effective tax rate, and interest and other expense. In addition, we will make forward-looking statements relating to trends, opportunities, and uncertainties in various product and geographic markets, including without limitation, statements concerning opportunities arising from our broadband, wireless, infrastructure, and connectivity markets, and opportunities for improved revenues across our target markets. Additionally, we will make forward-looking statements relating to the completion of the pending Silicon Motion transaction and its anticipated timing. These forward-looking statements involve substantial risks and uncertainties, including risks arising from current geopolitical concerns, competition, supply constraints facing the semiconductor industry, global trade and export restrictions, the impact of 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 factor section of our recent SEC filings, including our Form 10-Q for the quarter ended June 30, 2022, which we filed today. Any forward-looking statements are made as of today, and MaxLinear has no obligation to update or revise any forward-looking statements. The second quarter 2022 earnings release is available in the Investor Relations section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including net revenue, gross margins, operating expense, income from operations, interest, and other expense, income taxes, net income, and net income 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 benefits. 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 Dr. Kishore Sindripu, CEO of MaxLinear. Kishore.

Thank you, Leslie, and good afternoon, everyone. Our Q2 revenue was $280 million, up 6% sequentially and 36% year-over-year. Non-GAAP gross margin was 62.3%, and non-GAAP operating margin was 32.7% with strong cash flows from operating activities of slightly more than $123 million. We continue to see robust demand across our expanding product portfolio. In particular, fiber gateway access, Wi-Fi connectivity, and wireless infrastructure are driving exciting growth. They also represent the most significant long-term growth drivers for the company, with strong market share gains and content increase opportunities, which are independent of general end market trends. Our long-term and ongoing investments towards expanding our product portfolio to address high-value adjacent markets are bearing fruit, and we are excited about the meaningful multi-year revenue growth opportunities ahead. Turning to the business highlights, near-term in Wi-Fi, the industry transition to Wi-Fi 6 and Wi-Fi 6E is providing us new design wins along with higher blended ASPs to continue to drive revenues above market growth. With each new growth, we are benefiting from improved differentiation, increased market share, higher attached rates, and higher ASPs. In particular, the new Wi-Fi 7 standard is a major step up in performance and features, which should further accelerate our Wi-Fi revenue growth mid to longer term, along with driving Broadway access gateway platform churn. During Q2, we also began ramping Wi-Fi shipments into third-party standalone routers, with the increased momentum continuing into Q3. This will also beneficially diversify and expand our Wi-Fi revenues beyond service provider gateways. We now expect to not only double our Wi-Fi revenues in 2022 versus 2021, but also maintain strong momentum to achieve $200 million of sales in 2023. Moving to fiber broadband access gateways, multiple customers in North America are currently ramping our product shipments, and a healthy backlog is driving growth in 2022. In 2022, we are not only on target to increase fiber access revenues by more than four times versus 2021, but also expect strong continued growth into 2023. In 2023, we expect continued accelerated ramp at a large tier one customer in North America and to also proliferate our solutions into other regions as well. As you know, fiber broadband market is significantly larger than cable broadband, which is currently the larger portion of our sales today. We are excited and confident in our ability to drive meaningful multi-year growth and market share expansion in the fiber gateway end market, owing to, one, the ongoing and existing CapEx commitments from the carriers and governmental incentives for fiber upgrades, two, our industry-leading integrated PON and 10-gigabit fiber processor gateway SOCs, And three, our significant fiber platform below material content and the breadth of it. Moving to 5G wireless infrastructure, our products continue to grow despite tight back-end supply, driven by continued strength in access and backhaul demand, market share gains, and increasing content per platform. Our backhaul content per platform more than doubles as we ramp our 5G millimeter wave products into multi-band millimeter wave and microwave radios. During Q2, we announced a single-chip solution to enable network OEMs and operators to deliver ultra-high capacity 5G payloads on existing frequency spectrum. We also announced enabling a high-efficiency power amplifier solution that addresses size, weight, and power consumption challenges for massive MIMO 5G radios. In high-speed optical data center interconnect, we have the most advanced 5-nanometer 800-gigabit PAMP4 and 400 gigabit BAM4 solutions, which are being qualified by multiple OEMs targeting hyperscale data centers. With the right technology at the right time, we feel positive about our strategic position in BAM4 and our opportunities to grow in 2023. Before I turn the call over to Steve, a few words about our pending acquisition of Silicon Motion, which remains on track. Since May, our leadership teams have been actively engaged in integration planning, and I'm excited about the opportunities for our combined business. Our discussions further reinforce to me the potential of the strong innovation we can bring to the market as a combined company. Silicon Motion has proven its world-class SSD controller technology with great success in its target markets. We look to continue supporting its ongoing efforts to differentiate its products and expand into rapidly growing markets you know, including consumer and enterprise. We're excited about bringing our two technology-focused cultures together very soon. With that, let me turn the call over to Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer. Steve?

Thanks, Kishore. Total revenue for the first quarter was $280 million, up 6% versus Q1 and up 36% year over year. We have performed well over the last several quarters in the face of severe supply constraints, both on the front and back end of manufacturing process and across majority of our product portfolio. Despite this outperformance, we continue to see supply chain challenges and difficulties across multiple product categories, which are hindering our growth opportunities. With that said, we posted solid growth in Q2 and anticipate additional progress in Q3. Broadband revenue in Q2 was in line with our outlook at $139 million, up 3% versus Q1, and 23% higher year over year. Driven by solid demand across our full portfolio of gateway solutions, including cable, fiber, hybrid DSL, and fixed wireless access, our connectivity end market was down sequentially in Q2 with revenue of $56 million, which was still up 80% year over year. The quarter-over-quarter decline was solely due to Wi-Fi supply constraints, which pushed a material amount of shipments into Q3. As such, we are expecting strong sequential Wi-Fi growth this quarter. Our infrastructure and market had a solid Q2 with revenue of $36 million, up 8% versus the prior quarter and up 22% year-over-year, largely driven by strength in wireless backhaul and high-performance analog. Lastly, our industrial and multi-market revenue increased by 35% to $48.7 million in Q2. Strength within this segment was broad-based as we benefited from new product and design wind ramps and continued to make up ground on supply shortages. Gap and non-gap gross margins for the second quarter were approximately 58.7% and 62.3% of revenues. The delta between GAAP and non-GAAP gross margin in the second quarter was primarily driven by $9.8 million of acquisition-related intangible asset amortization. Second quarter GAAP operating expenses were $125.3 million, with growth being largely driven by Silicon Motion acquisition-related legal costs and timing of certain NRE payments. GAAP operating expenses included stock-based compensation and performance-based equity accruals of $29.2 million combined, acquisition and integration costs of $6.4 million, and amortization of purchased intangible assets of $2.9 million. Non-GAAP operating expenses were $84.3 million, up $7 million versus Q1. Non-GAAP operating margin for Q2 2022 was 32.2%. Gap interest and other income during the quarter was $4.8 million, and non-gap interest and other income was $4.9 million. We had a strong quarter for cash flow. In Q2, cash flow generated from operating activities was $123.4 million. During Q2, we made a $40 million prepayment against our long-term debt position and also repurchased over $5 million worth of stocks. We exited Q2 of 2022 with slightly over $235 million in cash, cash equivalents, restricted cash, and short-term investments. Our day sales outstanding for the second quarter were approximately 45 days, essentially flat with Q1 levels. Our gross inventory turns were 2.6 times, which were also flat from the previous quarter. This concludes the discussion of our Q2 financial results. Before we go to guidance, I want to give you an update on the status of our announced intention to acquire Silicon Motion. We are progressing well through the process and believe we remain on track for close by the middle of 2023. In late June, the Hart-Scott-Rodino waiting period expired, and in early July, we submitted the simplified filing with SAMR. On July 13th, our registration statement on form S4 was declared effective by the SEC. Furthermore, while we have fully committed financing for the transaction, we are actively working to optimize the debt structure to lower our expected cost of capital. As Kishore mentioned, we are excited about the many business opportunities this acquisition will provide over the coming years. While consumer softness is having a near-term effect on Silicon Motion's revenues, its performance has been within the range of our expectations. Based upon their technology position, we see silicon motion as well positioned to post solid top line growth over long over the longterm in the storage space. With that, let me turn to our guidance for Q3 22. We currently expect revenue in the third quarter of 2022 to be approximately 280 million to 290 million up approximately 2% at the midpoint of the range versus the previous quarter. and up approximately 24% versus Q3 of the prior year. While backlog continues to be strong, we continue to experience supply chain tightness and expect that to continue throughout FY22. Looking at Q3 by end market, we expect broadband revenue to be down slightly, quarter over quarter, coming off a record level in Q2. Connectivity is expected to be up significantly versus Q2, driven by a material recovery in Wi-Fi as supply chain dynamics improve. In infrastructure, we are expecting revenue to be down slightly compared with Q2. Demand for our infrastructure solutions continue to be strong, but growth is being constrained in the near term by tightness and substrate availability, specifically for our wireless access and backhaul solutions. Lastly, we expect our industrial multi-markets revenue to be slightly down quarter over quarter. We expect third quarter GAAP gross profit margin to be approximately 57.5% to 60.5%, and non-GAAP gross profit margin to be in the range of 60.5% and 63.5% of revenue. We expect to deliver gross margin within this widened range over the next several quarters, with in-market mix being the primary factor driving sequential fluctuations. We expect Q3 2022 GAAP operating expenses to be down quarter on quarter to a range of $115 to $121 million. We expect Q3 2022 non-GAAP operating expenses to be roughly flat with Q2 levels within a range of $81 to $87 million. We expect our GAAP tax rate to be approximately 27% and non-GAAP tax rate to be roughly 6%. We expect GAAP and non-GAAP interest and other expense to be roughly $3.5 million. In closing, our solid execution and innovative product offerings are enabling us to outperform our market and significantly increase our TAM. We continue to grow our presence in markets where we are today under-penetrated, driving strong pull-through of content in strategic markets, which will continue in FY23. We believe we are well positioned for continued revenue expansion and operating leverage throughout the balance of FY22, which will create meaningful value for our shareholders. With that, I'd like to open up the call for questions. Operator?

Thank you. We will now be conducting a 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 press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Torres von Berg with Stifel. Please proceed with your question.

Yes. Thank you, and congratulations on the record revenue. Um, so it doesn't sound like a whole lot has changed since last quarter with, uh, you know, supply being the biggest focus. Um, macro obviously, you know, has, has changed. So it's just wondering from your perspective and your, and your customers, what are some of the puts and takes that you are seeing, uh, you know, as far as, you know, orders backlog, are you starting to see any cancellations, anything like that?

Hi, Tori. Thank you. Um, you know, uh, Some of the questions on supply that you've raised are unique to us because we are growing with the various product cycles we have with the bill of material content increase in our various platforms, and also our success in infrastructure markets and wireless, which all require very specialty substrates, advanced SOC nodes. So we're getting a little bit of a lag in relief in the supply. So that's creating some volatility across our shipments on the timing of it, which Steve referred to in the talk here. With respect to our backlog, it remains quite strong, as I mentioned in my part of the script here. And so we are managing against the backlog with respect to our supply and trying to make sure that our customers are able to ship their product. At this stage, while there's concern at various quarters about the macroeconomic softening but we feel that given our bomb content increase our penetration to new markets with market share gains that we will be able to maintain our momentum in terms of growth as a company so i hope uh that that that's an answer that sort of uh you know addresses some of the concerns related to our customers that you may have very good thank you for that and that's my follow-up question

It sounds like you're very actively trying to diversify beyond cable gateways, obviously fiber gateways being a great new opportunity. You also talked about getting into, I guess, the third-party router market. Can you just elaborate a little bit on that? What are some of the ambitions there? Because obviously there's some big competitors in that market. So, yeah, if you could just add some color on your ambitions in those types of markets, that'd be great.

So on Wi-Fi, obviously, we are super excited. I mean, if you really put in context of the amount of revenues, we are talking about Wi-Fi as an access point solution. I mean, if you remember, there was a company called Quantana, and that one's revenues were in this vicinity, right? So we have made enormous progress in terms of how much success we are having in Wi-Fi. So on the, you know, while they're formidable competitors to speak for, but on the access point side, I would say we are a pretty formidable player, especially in Wi-Fi 6E. We were the first ones out of the gate with all the bandwidth expansion and the capability that sort of, you know, proves the market for Wi-Fi 7. So, I think we were the leader in that space on the access point, and we're getting traction. So far, we have been constrained in the previous ownership structure for our broadband business, where the focus was purely on the platform. And we're getting very ready traction on the non-operator market. And I think we will be a very significant player on the non-operator gateways in the, what I call, standalone router market. There, the challenge is that we're going to compete purely based on Wi-Fi, but we're also bringing significant BOM on the platform to that market as well, because where there is Wi-Fi, there is also Ethernet, and there's also power management, and we're building a significant power portfolio that we don't normally talk about in this call because it's a part of the full BOM expansion. So I think we're in a very good position to really get a pretty good shade of growth. In fact, when we talk of shortages today, it's really we're balancing between what we can ship to the operators versus what we can ship to the standalone router market. We are actually constrained by supplier versus our backlog.

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

Thank you. Our next question is from Quinn Bolton with Needham & Company. Please proceed with your questions.

Hey, guys. I'll offer my congratulations on the strong near-term results. But I wanted to follow up on the Tories' line of questioning. Obviously, the street seems to be very concerned about the macroeconomy and the potential for the industry to go into a downturn next year. And so I guess I'm wondering, have you started to see any sort of cancellations? I don't think you addressed that specifically. Are you seeing greater volatility or variability in your weekly order rates? Was booked a bill? for the quarter above one, just try to get a handle on whether you've seen any change in demand patterns that might temper the outlook as we think about 2023.

So before handing it over to Steve to respond a little bit more on that, I would say that we have not seen cancellations. The backlog is very strong. So on the volatility part, if there is any, let me get Steve to answer that. Steve, why don't you take that?

Yeah, so look, I think the way I think about this is, as Kishore kind of talked about a little bit earlier, we're still very much constrained. We're not keeping up with demand today. So kind of the second half of this year, it's still really just fighting tooth and nail to get enough product for our customers. I think as we look into next year, And thinking through, talking to the customers, I mean, I think that's where, you know, probably like the rest of the world, recognize there's things moving around. There's some uncertainty out there. And so we're trying our best to anticipate that and manage that. Bookings in Q2 were very good. Look, as lead times start to improve, which I fully expect they will, you know, we're going to see that bookings come down a little bit, right? I think that's natural that the whole industry would anticipate that. That being said, I think what we're also excited about is, you know, some of the growth drivers that we have where we're winning share, these multi-year, you know, growth cycles and upgrades that are happening in broadband, some of the things that are happening on the infrastructure side with some of the data center and wireless infrastructure opportunities. So I think long-term feel very good. Short-term, tremendous visibility. And I think it's that next year uncertainty that still kind of looms for everyone. I think we're positioned well to handle it as we gain market share and grow with some of these newer products that we've not had even as late as last year.

And I'll throw a two-parter for my second question. Just could you give us some more sort of detail on the breadth of the fiber gateway wins? I think you said this call that you now have multiple guys in North America. I know there's a lot of activity in Europe, but You know, as you look for that more than 4X increase in fiber gateway revenue this year and further growth next year, you know, any more detail you can provide about the either content per system or the number of operators, just, you know, how broad that growth is. And then just quickly, can you touch on the 400 gig, 800 gig PAM opportunity? Have you started a ship for production yet, or are those parts still going through production? qualification. And if so, when would you expect those production shipments to commence? Thank you.

That was a unique way to get two questions in there.

I think there was like, sorry, I tried.

So on the fiber side, yeah, look, I mean, we've been shipping, you know, fiber solutions for some time. We have talked historically about, I mean, even in 2021, that being like as low as 10, less than $10 million. That's expected to kind of get up in the 30, $40 million range this year, and then probably double again next year. So we're seeing a lot of traction. We've been shipping to tier two guys for quite some time. Uh, we've got a big North American guy that's starting to ship this year. You know, look, we've been constrained on all the products going into the space. And so we're excited about these new opportunities. You mentioned Europe. Yeah, there's definitely European players that are in the mix that will start to roll out. A lot of their upgrades don't happen until 2023 and probably even roll into 2024. And I think that's why we're confident in The the multi-year aspect of this is just because the number of these operators have capex plans that are planned out over the next several years and So we see that so it doesn't feel like it's just a short-term opportunity You're also these upgrades also, you know really force everyone to upgrade To you know for more broadband so it forces, you know kind of puts pressure on the cable guys puts pressure on everyone and as they're all, you know, working on these rollouts. So excited about the fiber opportunity for sure. And, you know, over the next 18, 24 months as those days ramp. So the second part of your question, I mean, the 400 gig side, I don't know, Kishore can probably comment, is the excitement around the five nanometer solution. So you can.

So, Quinn, obviously, you know, this has taken longer than what we had hoped for in RAMP. In the meanwhile, we decided to be the first ones with the 5 nanometer solution for 400 gig, 80 gig PAM4, with single lane, 100 gig per lambda optics support. And we're getting very, very good traction, and we're hoping that we'll be production ready before the end of the year, and the customers can launch into production by the second half of next year. Everything on track. You know, while we have benefited by being a supplier and incumbent in various markets in these last two years, in new markets, we have had challenges getting a foothold. However, this seems very different now. And, you know, we feel very, very good where we are in the traction. And the market is going to continue to grow. In fact, it will be the first time the entire data center market will converge on a single 800 gig optics. And this will be a huge milestone, even just like 10 gig was for Ethernet and in the data center. So I think we feel very, very well positioned with what's going on right now. So it's a very positive outlook on it. And, you know, if it weren't, I wouldn't be even putting it on that script, let it put it that way. So, yes, we've got a great technology, and there are some trade shows coming along. I think there is, and you should look for us to be there and present very strongly.

Perfect. Thank you for all that color, guys.

Yeah.

Thank you. Our next question comes from Gary Mobley with Wells Fargo. Please proceed with your question.

Hey, guys. Thanks for taking my question. I wanted to double-click on Quinn's second of three questions, and that is about sort of the market transition away from broadband cable, in particular in the U.S., to fiber-based broadband. It seems, though, we've now seen the shift with a lot of the telcos gaining a lot of the net new broadband subs here in the U.S., at least. And so I'm curious about if this transition to broadband fiber can be accretive to your broadband growth based on the idea that you're generating the same or greater bill of material with maybe Wi-Fi attached and Ethernet attached and whatnot, and or given the increased size of fiber broadband and also taking into consideration your relative market share in fiber versus your strong market position in broadband cable.

Hey, Gary, very, very good question. And the emphatic answer is that cable is not going away. I mean, the cost economics of cable being in the various already, you know, deploying more and more gigabits per data reception and also both in the receive side and the, you know, the upstream is unmatched, right, the cost structure. Having said that, the cable guys are not sitting idle. They're upgrading to, you know, DOCSIS 4.0, which is going to be very compelling, and you should start seeing solutions that are deployed for DOCSIS 4.0 within the next two years or so. So we are investing there as well. And so while cable won't be an exciting growth driver in terms of units, but the BOM is steadily increasing for us, and the Wi-Fi is going to keep upgrading in cable. And so that's going to be a growth driver primarily from a BOM expansion direction point of view. With regard to fiber, you're absolutely right. The telcos are very earnest about investing more, and they're driving a lot of capex, which again ties back to Tori's question about how does next year look, right? We feel very good that we have products that will keep driving growth. And you're also right that the BOM increment in fiber is also going to be significant, if not comparable to cable platforms, but maybe even more. And so we should see not just incremental growth on fiber relative to cable on, you know, once you add them up, But we should also see just raw growth that's going to be pretty strong. So I think it's all good for us. But you are right that the cable growth is not going to be exciting in terms of units, but the BOM expansion is going to be real. And they are combating that threat with DOCSIS 4.0.

Appreciate the call there, Kishore. And Steve, I don't know if you're going to go down this path or not, but I'll ask the question anyway. you highlighted some softness in Silicon Motions revenue, and they just reported results revenue a little below expectations, but gross margin to the upside. So when you announced this acquisition, I think the comment was you would expect this deal to be roughly 25% EPS accreted by the gate. And I know there's a long time between now and when this deal closes, and a lot of things from an economic backdrop can change, but Are you still standing by that 25% accretion level, and can you give us any color on sort of the outlook for Silicon Motion's September quarter?

Yeah, Gary. I mean, you're right. I'm going to stay away from guiding Silicon Motion's numbers, but, you know, some commentary. So I think everyone understands the exposure to some of the consumer markets and to S&PCs. But look, I mean, we stand by this. We're very excited about the opportunity. We absolutely are comfortable with our accretion numbers that we shared previously. So we are confident in that and just excited about the outlook. So look, we didn't do this acquisition for next quarter. We did it for the long term and it, you know, continues to expand our product portfolio, gives us much more scale moving forward. And we're very excited about it.

So I think that what Steve said is absolutely correct. And some of the positive dynamics you're seeing while you're looking at the softening on the consumer side, they're all stuff we contemplated to some degree, right? So there's always that calculus on our side, too. I think what I really want to emphasize to you, opportunity, Gary, is that perhaps we have not done a good job of how much technology-wise there is sort of, you know, combined province with our analog signal, digital signal processing capabilities that is going to be even more central as the memory densities increase in flash and the defect densities increase. So we have the IP to bring that to bear. We have very, very strong traction and proven you know, storage accelerator and high-speed interfaces that are already designed into enterprise markets. So I think all in all, this is going to really create a massive expansion in time for both the companies combined as well. So it's very, very exciting, and really looking forward to the acquisition. Now that we have made a commitment to do it, you know, we can't wait for it to happen. Okay? Thanks, guys. Appreciate it. Thanks, Jerry.

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

Hey, good afternoon. Thanks for taking the question, and congrats on the quarter. Just wanted to see maybe if you could talk a little bit about the customer feedback that you received on the time of transaction, and just maybe any commentary around that, how your customers are seeing it, and what your opportunities you think for synergies between the two companies will be.

So, you know, I'm afraid we cannot comment on the customer side of things, right? But we definitely can comment about our customers, standalone, max, linear, and their reaction. They're super excited, right? You know, if you look at a broadband platform, there's always, you know, a storage controller device that we can put in our reference design, and that creates real growth opportunities in markets. Second, we have a pretty wide channel distribution sales. You know, you now will have noted that industrial multi-markets is about running at what this quarter was $50 million. And so that's a significant channel we can sell storage onto. And the general operational scale it provides in terms of advanced technology nodes, we're talking with suppliers, right? And what that could potentially mean when we have the abnormality of the last two years behind us, I think our customers are super excited. So I can speak for our customers, but I cannot speak for their customers right now.

That's fair, and I appreciate the color there. So maybe one for you, Steve. Can you talk maybe a little bit about the gross margin and the leverage there? You're running in this kind of 62% range. You expect it to kind of stay there. How do you think about this longer term as you kind of think about pricing dynamics and supply chain issues and everything as we get into 2023?

Yeah, David. So, look, I think the team's been working very hard on the gross margin side. And, you know, mix plays a big role here, right? And so as much as we're fighting every day on the cost side of the equation, we're also kind of fighting against this mix. I mean, you've seen us grow tremendously on the Wi-Fi side. And so we'll continue to, you know, I mean, we're winning. Kishore talked about the growth that we're seeing, you know, expecting to see north of $200 million today. next year. I mean, with the supply chain dynamics, I mean, it can ebb and flow a little bit. We've got cost increases coming. Some of these newer regions are lower cost regions. So we may see some challenges on that front that may impact gross margins. But overall, I don't think our long-term view is that that's changed. But in the short term, we'll continue to fight all the cost increases and some of the new mixed dynamics that we'll have before us.

I mean, it's fairly public right now, right? The foundries have gone ahead and declared that they're going to increase prices, right? And they have increased prices. And our guidance contemplates those increases that we'll have to deal with. So when we give you gross margin guidance, we are steadfast on our goals here. Fantastic. Thanks so much.

Thank you. Our next question is from Suji De Silva with Roth Capital. Please proceed with your questions.

Hi, Kishore. Hi, Steve. Steve, just a question on the OpEx guiding flat. Can you talk about the puts and takes there? Are there moving parts in there, or are you just able to kind of get leverage at this level as you grow through the next several quarters?

Yeah, Suzy, no problem. So when you talk gross market, I'm sorry, OpEx move up quarter to quarter. A lot of that was driven by, you know, we're seeing more and more NRE in our business, which I think is overall a great thing because it really shows support from the customer base. But These are also projects that we have to navigate and manage and contracts that come in and have a lot of lumpiness to them. But we've done a pretty good job. That influenced Q1, so OpEx came up a little bit in Q2, comfortable that that kind of moves sideways. But then, you know, it's likely to kind of come back down in Q4, OpEx overall. A lot of that's driven by more NREs coming in. So I think overall, our expectation for OPEX for the year is in line with what we've thought going into the year.

And the reality is that we're also fighting to hire talented employees and all of the industries facing those dynamics and skilled laborers. I still feel shortages of that in terms of where we need and what we need to execute on the projects. So I think there's going to be a healthy tension in terms of volatility on the OPEX relative to that. So Steve and me will have to figure this out together.

Okay, that's helpful, Kalar. And then on the fiber side, the North America Tier 1 you're ramping, has that ramp, did that have the initial inflection? Is it going to have an inflection? Or is the supply constraints really forcing this customer to come out? have a steady kind of start out of the gate for you guys?

Yeah, yeah. So still early days on that. I mean, we said it would originally kind of start in the second half of this year. I mean, supply has been challenging for us, but we're making some good progress. So it'll ramp kind of as expected in the second half of this year and, you know, into the first half of next year.

Okay, thanks. Congrats, guys.

Thanks.

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

Hey, yeah. Good afternoon guys. Thanks for taking the, uh, thanks for taking the questions and, uh, yeah, good to see things, uh, are remaining robust. And I guess to that point, I'd love to just get a little more context from, with regards to some of the comments that each of you made, uh, each of you made comments first to shore and then Steve, uh, and I guess it's really the context around the comments I'm interested in, uh, you know, sort of should things soften, in 23 or going into 23, confidence that you can support the growth. Any context around, you know, to what degree the growth could be supported, you know, and not looking for a guide, you know. But, you know, so I guess with regards to current levels, you know, anything you can give us there I think would be useful. And then I have a quick follow-up also. Thanks.

Yeah, I mean, tough question. I mean, obviously, we're all kind of trying to navigate what customers are going to do in 2023, right? So I'm not going to stick my neck out here and give you a guidance on 2023. But, you know, all in all, I mean, I think we just have to continue to execute. Infrastructure is, you know, performing extremely well. I absolutely expect that to continue. Broadband and connectivity both, you know, short of supply right now, we continue to work hard to get more products for our customers right now. And so we'll, we'll continue to try and navigate that industrial multi-market had tremendous, uh, growth last quarter and, you know, we're getting good traction on, on, you know, in those markets. And, uh, so, so we'll, I mean, there was some catch up there from the previous quarter, but as we look into 2023, You know, we've got to continue to execute and get more products out the door and into our customers' hands.

And, Steve, did you guys, in the comments that you and Kishore made, did you suggest that there are some customers that are starting to get, you know, sort of a little antsy with regards to the macro? Was that an accurate interpretation? And if it was, you know, can you give us any sense of, You know, what areas of the business or at least what markets?

Yeah, Ananda, I mean, look, I mean, you've heard all this from plenty of our competitors, our customers. I mean, there's definitely some concern out there about next year. So make no mistake. I mean, we've had guys moving around orders. We've had moving around orders this year as well as in 2023. So there's no doubt that there's concerns out there, right? And some of that's based on getting enough product today. and some of it's based on shipment dates for next year and how they ramp. So, yeah, things are gonna continue to move around in this world.

Is that fairly broad-based?

Yes, yeah, yeah, across all of the end markets, sure. Cool, cool, thanks, appreciate it.

Thank you. Our next question is from Chris Roland with SFG. Please proceed with your question.

Thanks, guys. I just wanted to understand supply versus demand here. So three of the four segments were guided down. Is that because supply quarter over quarter is tightening, and then does that loosen in 4Q, or does demand come into this picture as well?

Yeah, so, Chris, I think, I mean, we've talked about this. It was going on even last quarter that we talked about this. Infrastructure... Clearly, we definitely have substrate challenges that are continuing to persist, and we expected to see that before we start to see things ease in Q4. So that was kind of as expected. The Wi-Fi business definitely was light last quarter, so that impacted connectivity a little bit. That will recover very strongly this quarter, so supply chain got us in Q2 for sure. With regard to broadband, we had a really strong Q2, not as many supply challenges, but there's kidding challenges there, right? Because these guys, they don't want one, they want both products. So there's challenges there. Big quarter last quarter, you'll see some of that moderate this quarter. Same thing on the industrial multi-market side, definitely continue to see challenges there. We saw some volatility over the first half of the year. We were short in Q1, definitely made up for some of that in Q2. and so that'll moderate a little bit in Q3.

Okay, thanks for that clarification. My second one's a bigger picture question, and that is where do you guys estimate right now your Wi-Fi market share? And then looking out perhaps a few years later, Do you think that will be consistent with the fiber gateway as well? And finally, any thoughts on what your Wi-Fi attach would be there or even your Ethernet attach? Thanks.

Yeah, so, I mean, look, this is exciting, right? I mean, Wi-Fi, a lot of our early growth has been getting attached with our cable SOC, right? And so we saw a lot of the growth that's been driven by that. We're not at 100% yet. But, you know, we're getting up in the 70%, 80% range, so we've made really good progress amidst some of the supply constraints and the like, right, trying to keep a balance there. So that's going extremely well. Fiber, relatively low, you know, revenue for us over the years. I shared earlier about some of the progress that we're making and how much growth we're seeing. Look, that market, the fiber market, is probably two to three times larger than the cable market. So naturally with that comes a lot of Wi-Fi product. And so we will capture that. I mean, Kishore talked earlier about some of the gateway products and the content that we have in those gateways. In a lot of cases, I mean, it's around, you know, we've talked a lot about this $30 of content in a gateway. Some cases now it's even higher than that in some of the fiber opportunities that we have. So there continues to be more Wi-Fi there. And then the third-party router opportunity is a huge opportunity for us. It will start to ramp in the second half of the year, and it will be a big growth driver for us next year. So I don't have an exact – I'm not going to share an exact Wi-Fi market share number, but we're still relatively underpenetrated against the two or three other guys that are in the space.

Awesome. Thanks, Steve.

Thank you. Our next question comes from Richard Shannon with Craig Hallam. Please proceed with your question.

Hi, guys. Thanks for taking my questions as well. I'll follow up on the topic of Wi-Fi here. Thinking about kind of bridging this year's revenue number into the $200 million plus number for next year, wondering how you think about the various contributions from a dollar point of view between kind of three major areas, the cable, the fiber, and the third-party routers. Is there any one that's going to be dominant or easily bigger than the other kind of credit contributing to that growth. Any way you can characterize that?

Well, I mean, cable is definitely the bigger contributor, right? I mean, we, we, as I just mentioned in the previous question, the, the third party router stuff is just beginning in the second half of the year. We've just not had sufficient supply and, uh, that'll start to ease in Q3 and more in Q4. but we're really just beginning that ramp, if you will, and that will continue. So you'll see a big part of our ramp next year will be from third-party routers.

Okay, fair enough. Then a follow-up question in broadband, especially fiber. Maybe you can talk to kind of the competitive dynamics here of the wins that you've talked about, alluded to, as well as ones you hope to get over the next six to 12 months here. Are you winning, like, flagships at some of these large customers or, you know, high-end SKUs, or maybe you can characterize how the competitive dynamics play into where you're winning and how you expect that to change and evolve over the next year?

Look, I mean, you know, yes, we're excited about our growth this year, but, you know, at the really larger fiber scheme of things, you know, we're miniscule, right? I mean, we're, like, single-digit percentage at best, right? And that, too, pure... fiber piece. What I mean is not the processor and not the, you know, some low-end processor, and then, you know, not with the Wi-Fi and a high-end processor, right? So the big growth Really, next year, we go to chart with the flagship players, right? And then there's going to be derivative products with the mid-end, which is really the meat of the market, right? So clearly, you always want to come from high-end to the low-end. That's always been a strategy. Otherwise, you're not differentiated enough. And now with the big flagship in North America, we have the most premier platform in any gateway in the world, right? And that is setting the stage as a sort of a pull, if you will, from the operators and the customers to our derivative mid-end platforms or to the high-end platforms. So we are in a position to win both the high-end SKUs and the mid-end SKUs. So I hope that answers your question.

That's very helpful, Kishore. Thanks, and that's all for me.

And you really want to think of the mid-end as, not small at all. It is actually the meat of it. And this excludes China, right? If you just look at North America and Europe, the dollars-wise, the high end may be equal in size to mid-end, but the mid-end is significant, right? And so that's pretty exciting.

Thank you. Our next question is from Tori Svanberg with CIFL. Please proceed with your question.

Yes, thank you. I just had a follow-up on the industrial and multi-market business. And I understand your comments about timing and catch-up and things like that. But it's approaching the size of your connectivity revenue. It looks like it's going to be the second strongest growth driver this year. So what else is going on there? I know you have some power products for the supermarkets. Just wondering where we stand there. You know, are you also seeing some high ASPs from the interface products? So, any more color, because obviously this has become your second largest growth engine this year beyond connectivity.

Oh, sorry, with that question, you got me so excited, but I don't know how to even break it down, right? Lots of exciting things happening in the industrial multi-market. strong interface ASP growth, right? And because we have added a lot of new products, we're taking market share gain from our rivals in the industrial space, actually, which we don't talk too much about. And then there's power management growth. Yes, you talked about servers, but there's growth happening in non-server markets. which is like a major platform and which hopefully we'll get the permission to talk about. We're waiting for that to happen. And we're also looking at power management growth in various other platforms that are not ours, which we will put in this category. And because we have Ethernet, for example, which goes every other market, then suddenly there's discussion about our power. There's discussion about our other interface, other things we can sell them. So there seems to be this scale is giving us a lot of traction, which otherwise, standalone, three, four years ago, we didn't have the same level of traction. We also had a significant number of SKUs and products that have been silently growing, and so we never had a thematic description about how that growth is coming. So we have agreed internally that we will do an analyst day. so that each of our general managers can talk about their businesses. And, you know, hopefully it will happen in the next six months, and we'll get to share more details there.

Sounds good. Looking forward to it. Thank you, Kishore.

Thank you, Tori. With that, I just want to let you know that we've got a big calendar coming here on investor conferences. We will be participating at the following conferences in Q3. We have the Oppenheimer 25th Annual Technology, Internet, and Communications Conference on August 9th, the third annual Needham Virtual Semiconductor and Semicap Conference on August 24th, the Deutsche Bank Technology Conference on August 31st, and the Wells Fargo Leverage Finance Conference on September 8th. So we look forward to talking to you guys again. Until then, have a great summer, and thank you, operator. Bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.