MaxLinear, Inc

Greetings and welcome to Max Linear's first 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. If anyone should require operator assistance during a 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. You may begin.

Thank you, Doug, and good afternoon, everyone. And thank you for joining us on today's conference call to discuss Max Lanier's first quarter 2023 financial results. Today's call is being hosted by Dr. Kishore Sindripu, 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 second quarter 2023, including revenue, GAAP and non-GAAP gross margin, GAAP and non-GAAP operating expenses, GAAP and non-GAAP effective tax rate, GAAP and non-GAAP interest and other expenses, and GAAP and non-GAAP diluted share count. In addition, we will 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, connectivity, and industrial markets, timing for the launch of our products, and opportunities for improved revenue and market share across our target markets. Additionally, we will make forward-looking statements relating to the completion of the pending Silicon Motion transaction and its anticipated timing. These forward-looking statements involve substantial risk and uncertainties, including risks arising from our proposed merger with Silicon Motion, including the anticipated timing of the People's Republic of China State Administration for Market Regulation, or SAMR, review, risk related to increased indebtedness, competition, the impacts of global economic downturn, and high inflation, the cyclical nature of the semiconductor industry, our ability to obtain or retain government authorization to export certain of our products or technology, ability to support current level of revenue, including the impacts of excess inventory on our customers' expected demand for certain of our products, and a failure to manage our relationships with or negative impacts from third parties. More information on these and other risks is outlined in our risk factors, the risk factors section of our recent SEC filings. including our Form 10-Q for the quarter ended March 31, 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 first quarter 2023 earnings release is available in the Investor Relations section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including but not limited to gross margin, operating margin, operating expenses, and interest in 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 did not provide a reconciliation of non-GAAP guidance for future periods because of the inherent uncertainty associated with our ability to project certain future charges, including stock-based compensation and its associated tax effects. Non-GAAP financial measures discussed today are not meant to be considered in isolation or as a substitute for the comparable GAAP financial measures. We are providing this information because management believes it is useful for investors as it reflects how management measures our business. Lastly, this call is also being webcast, and a replay will be available on our website for two weeks. And now let me turn the call over to Dr. Kishore Sindhripu, CEO of MaxLinear. Kishore?

Thank you, Leslie, and good afternoon, everyone. Our Q1 revenue of $248.4 million was down 15% sequentially and 6% year-on-year basis. In Q1, non-GAAP gross margin was 60.3%, and non-GAAP operating margin was 27.8%, with cash flow from operating activities of $42.2 million. Wireless infrastructure had a highlight quarter, recording 45% sequential and 41% year-on-year growth, along with strong forward growth momentum. However, our broadband access and connectivity businesses were challenged due to excess inventory in the channel, along with seasonality in Q1. Our industrial multi-market revenues remain stable in what is proving to be a cyclical semiconductor downturn. In 2023, MaxLinux is continuing to lay the critical groundwork for future growth with design-win activity, technology innovation, and customer relationship building spanning fiber broadband, Wi-Fi connectivity, wireless infrastructure, and high-speed data opticals, data center interconnect, and enterprise markets. We believe that these initiatives will drive future market share gains and further expand silicon content in our proven customer platforms. We continue to be encouraged by the strong market adoption of our Wi-Fi 6 and 6C access point solutions and the growing pipeline of new and existing customer design wins in both service provider gateways and third-party standalone routers. More importantly, our Wi-Fi 7 products represent the next phase of growth for our connectivity products. Our Wave 700 product family is the industry's first and only single chip tri-band Wi-Fi 7 solution targeting access points. Due to their highly differentiated performance, power, and cost benefits, we expect our Wave 700 products to both improve average selling price and drive higher attach rates in our broadband and connectivity businesses. Our first Wave 700-enabled customer solutions will launch later this year, and we expect to ramp multiple solutions throughout 2024. Regarding our broadband access market, though demand continues to be soft due to excess channel inventory, we are confident in and excited by the longer-term outlook as the multi-year upgrade cycle of infrastructure modernization by both MSOs and telco carriers firmly takes hold. We have solid market traction with our industry-leading single-chip integrated fiber PON and 10-gigabit processor gateway solution. Our PON access revenue increased fourfold in 2022 and we are well positioned for continued share gains in 2023 due to the breadth of our integrated access and connectivity technologies. As the industry migrates from legacy DSL and older PON technologies to 10 gigabit PON, we expect to grow our revenues by expanding market share and customer platform silicon content. Moving to wireless infrastructure, we see strong growth momentum throughout 2023 as 5G wireless backhaul deployments of multi-band and hybrid millimeter wave and microwave radios double the silicon content per platform of our modem and RF transceiver products. We are very well positioned to benefit from the expanding rollout of E-band millimeter wave technologies across several large geographies, including India, in conjunction with the proliferation of 5G networks. We are currently partnered with Tier 1 equipment suppliers to support ongoing 5G network rollouts that will drive our growth through 2023 and beyond. In high-speed optical data center interconnect, we are in a leading strategic position and have a strong design wind pipeline for a second generation and industry's only 5-nanometer CMOS, 400-gig and 800-gig PAM-4 production-ready silicon pipelines. We are making good progress with the ongoing qualifications for data center deployments that will ramp production shipments late this year and continue to do so over the next two years. In addition, we are working very closely with hyperscale data center, enterprise, and OEM module customers to address the increasing optical interconnect performance requirements driving the industry's transition to 400 gigabit, 800 gigabit, 1.6 terabit, and beyond data speeds. We entered 2023 with a strong product portfolio, significant market traction, and robust designing activity across all our strategic markets. Even as we navigate the ongoing macro demand weakness with extreme fiscal discipline, we are excited by our design with momentum and our strengthening strategic customer and partner relationships, particularly in Wi-Fi, fiber access, and wireless and optical data center infrastructure. We believe that our platform approach, driven by strong technology innovation, is enabling us to not only secure new business opportunities, but also further expand our silicon content in areas where we have proven success. We are also looking forward to our pending acquisition of Silicon Motion, which will further expand the growth opportunities for a combined comprehensive product portfolio. With that, let me now turn the call over to Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer. Steve?

Thank you, Kishore. Total revenue for the first quarter was $248.4 million, down 15% versus Q4 and down 6% year-over-year. Broadband revenue was $82 million, down 18% versus Q4 and down 39% year-on-year and was in line with our expectations entering the quarter. Connectivity revenue in the quarter was 66 million, down 37% sequentially, but up 10% year on year. Our infrastructure and market had strong growth sequentially in Q1 as a result of solid demand and growing market opportunity. Infrastructure had revenue of 46 million, up 46% versus the prior quarter, and 40% year on year. Lastly, our industrial and multi-market revenue was 54 million in Q1, flat sequentially and up 50% year-on-year. GAAP and non-GAAP gross margin for the first quarter were approximately 56.5% and 60.3% of revenue. The delta between GAAP and non-GAAP gross margin in the first quarter was primarily driven by $9.3 million of acquisition-related intangible asset amortization. First quarter GAAP operating expenses were $113 million including stock-based compensation and performance-based equity accruals of $21.6 million combined, acquisition and integration cost of $1.6 million, and amortization of purchased intangible assets of $0.9 million. Non-GAAP operating expenses in Q1 were $80.8 million, up $2.3 million versus Q4, and at the low end of our guidance range. Non-GAAP operating margins for Q1 2023 was 27.8%. GAAP interest and other expense during the quarter was $2.2 million, and non-GAAP interest and other expense was $2.1 million. In Q1, cash flow generated from operating activities was $42.2 million. We exited Q1 of 2023 with approximately $228 million in cash, cash equivalents, and short-term investments. Our day sales outstanding for the first quarter was approximately 69 days, up from the previous quarter due to shipment linearity. Our gross inventory turns were 2.3 times as we continue to tightly monitor our supply levels. This concludes the discussion of our Q1 financial results. Before we go to the guidance, I want to give you an update on the status of our pending acquisition of SiliconMotion. We continue to progress through the SAMR approval process and remain confident of a mid-2023 close. We have fully committed financing for the transaction and are actively working to optimize the debt structure to lower our expected cost of capital. We're excited about the opportunities for our combined business and look forward to bringing our technology-focused cultures together very soon. With that, let's turn to our guidance for Q2 2023. We currently expect revenue for the second quarter of 2023 to be between $175 million and $205 million. Looking at Q2 by end market, we expect broadband and connectivity revenues to be down quarter over quarter. In infrastructure, we are expecting revenue to increase compared with Q1 as demand for our products continues to be strong. Lastly, we expect our industrial multi-market revenue to be down quarter over quarter. We expect second quarter GAAP gross profit margin to be approximately 54.5% to 57.5%, and non-GAAP gross profit margin to be in the range of 59.5% and 62.5% of revenue. Gross margin is being driven by the combination of near-term product, customer, and in-market mix. We expect Q2 GAAP operating expenses to be in the range of $110 million to $116 million. We expect Q2 non-GAAP operating expenses to be in the range of $79 million to $85 million. We expect our Q2 GAAP tax rate to be approximately 25% and non-GAAP tax rate to be roughly 10%. We expect our Q2 GAAP and non-GAAP interest and other expense to be each roughly $4 million. We expect our Q2 GAAP and non-GAAP diluted share count of 81.5 to 82.5 million. In closing, we are navigating a dynamic environment heading into Q2. But solid execution and innovative product offerings are enabling us to maximize strategic business opportunities with continued success. We are continuing to lay important groundwork in Wi-Fi, fiber broadband access gateways, and wireless infrastructure that we expect to drive our growth later this year and throughout 2024. As always, we will continue to focus on operational efficiencies, fiscal discipline, and shareholder value as we optimize for today and plan for an exciting future. With that, we'd like to open up the call for questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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 key. Our first question comes from the line of Quinn Bolton with Needham & Company. Please proceed with your question.

Hey, guys. Obviously a tough guide for the second quarter, you know, down over 20% sequentially. I guess, you know, as you look at the amount of inventory in the channel, is it largely just a broadband effect? Is it affecting connectivity in other end markets? And I guess a follow-up question is, you know, Given the magnitude of the decline in the June quarter, do you think June is the bottom, or do you think you could see even lower revenues in the second half of the year?

Hey, Quinn. Thanks for the question. Yeah, so look, the inventory is across all of our end markets, I would say, but definitely broadband and connectivity are the biggest exposures that we have. I mean, there's bits and pieces here and there in other end markets, but broadband and connectivity are definitely the biggest piece. Look, going into the quarter, I think we had originally thought that, you know, we knew there was inventory in the channel, thought we would be able to get through it in kind of the first half of the year. I think at this point we see that kind of bleeding into the second half of the year as we work through this, but I think we remain confident that the in-demand is reasonably good. And, you know, assuming that continues to hold up, then we kind of burn through this inventory and we kind of move into 2024 with a really great outlook.

Do you think, you know, your June is the peak of the inventory burn, knowing that you might not be back at, you know, consumption levels in Q3? Do you think, you know, kind of that inventory clearance is at its greatest level in Q2, or is that just too hard to call?

Yeah, I mean, look, I don't want to get into guiding out future quarters. I mean, I think we're under shipping demand and, you know, we remain optimistic, but the inventory is definitely at higher levels than I think we had anticipated.

Okay. And then I guess just a follow-up question on the microwave business, which seems like it's driving very strong first half 23 results. You know, I know you had said that that business was constrained from substrate availability and 2022, but as you start to ship against that backlog, are you concerned that this isn't just creating an inventory overhang or an inventory build in that end market? Or do you have pretty good visibility that what you're shipping in Q1 and Q2 actually sells through and you're not just, you know, creating a wireless infrastructure, you know, inventory overhang that you have to deal with later this year or early next?

So, yeah, definitely, you know, We've been behind here, but we've been playing catch up. But I guess I would reiterate there's a big content increase that's happening, so I don't by any means feel like we're creating this big inventory glut in Q1 and Q2. This is demand that has been needed in the market for some time. We're, I guess, cognizant of the overall wireless infrastructure market. Definitely, I'm sure you and many others have seen some of the slowdowns in some of those key customers. So we're watching that closely. But we, you know, had great results in Q1. We do expect to see that pick up again in Q2.

Got it. Thanks for the colors, Steve. Sure.

Our next question comes from the line of Ananda Baru with Loop Capital. Please proceed with your question.

Hey, thanks a lot, guys. Good afternoon. Thanks for taking the question. Yeah, two if I could, just real quick. Steve, just piggybacking off of those questions, what are you seeing pricing-wise right now? And do you expect anything can take place with pricing going forward from what you're seeing now? And I have a quick follow-up. Thanks.

Yeah, sure, Ananda. I don't think we've seen too much. I mean, there's definitely certain markets that are more sensitive to prices, but I think in general, we feel like that prices will hold up here. I don't think there's any doubt. I mean, there's some segments of our market that are more call it Asia-based, some of our Wi-Fi products, for example, we see pricing pressure from time to time there. But as a general rule, as you know, most of our markets don't have that, the pricing dynamic there. Awesome.

And just the quick follow-up is on the infrastructure market. Can you just, you know, unpack that in a little more detail, the dynamics that you're seeing there drive the growth? And Is it across the business or is it in particular parts of the business, particular parts of the product line? Is it across the product line?

Yeah, sure. I mean, I think Kishore kind of talked through some of this. So, I mean, I'd say the biggest piece has been backhaul. I mean, I mentioned the content increase, but we're, you know, shipping a lot of the transceiver product now alongside the modems. That's really driving a lot of the big uptick there, and it's in various regions. It's not just one geography. It's in various geographies. Our 5G platform is also shipping. It's lower dollar contribution, but it's definitely continued to improve as well. Optical, as you know, I mean, falls into the infrastructure category, but still early days on that. We would expect to see more contribution in 2024.

And is it too early to have a sense with what's going on in hyperscale, you know, if there's going to be a positive impact there? You know, Microsoft and Google had positive remarks last night. You know, Meta may have positive remarks right now. They had a good quarter. Is it too early, or is this part of what you're seeing there as well? And that's it for me. Thanks.

Sure. Thanks, Ananda. Well, I don't think this is all new incremental business for us. We're excited. I mean, clearly, the data center demand is what's driving these optical product ramps. And so still early days. I mean, I think we'll see some early revenues in the second half of this year, but it's really much more about 2024. Awesome.

Thanks a lot, guys. Thanks, Steve.

Thanks, Ananda.

Our next question comes from the line of Ross Seymour with Deutsche Bank. Please proceed with your question.

Hi, guys. Thanks for having me ask a question. Just going back to the broadband segment, since it's your biggest segment, it looks like that could be down, I don't know, 60%, 70% year over year. Any idea of how we should judge what true end demand is. If you were shipping to that, you know, if you're kind of, I don't know, 50, 55 million, something like that in the quarter versus a year ago being closer to 140, just trying to judge whenever the inventory is out of the equation, what's a realistic landing spot when you get back to normal?

Yeah, Ross, good to hear from you. Look, this is a tough one to call. I Definitely, as we reflect back on 2022, you know, that number was approaching $500 million. I mean, this year it's, you know, well below $300 million. So I don't have a great answer for you, but I mean, I don't want to guide one segment by quarter, et cetera, but I feel like we're bottoming out here. You know, we're kind of getting there, hopefully, at this point. We've definitely got a little better visibility with regard to what inventory is out there in the channel. But I don't have an exact number other than say, you know, it's somewhere in the middle of those two numbers.

Got it. Then I guess pivoting over to the OPEX side of things, you guys did a great job in the first quarter. It's going up a little bit in the second quarter. Any sort of kind of trajectory, how you think of OPEX? Like, why is it going up in the second quarter? And then how should we think about it through the year?

Sure, sure. Yeah, so don't forget, we do have some NRE dollars that kind of sway this here and there, because in Q1, we typically see things pick up quite a bit, but some of the timing of some of our NRE dollars that are coming in have kind of skewed this a little bit. We've actually been very busy in Q1, really dialing back our costs, dialing down our overall operating expenses. I think you'll see that continue to come down post-Q2. I think we will likely exit the year closer to $75 million of OPEX. So I think we've made good progress there. Definitely kind of given the revenue headwinds that we see, we've jumped in quickly and really dialed back that spending as you've seen us do in the past or in past cycles.

Gotcha. Then one quick follow-up just in general. Given the weakness in the market, have you seen any change in the competitive intensity? You talked a little bit earlier about pricing, but any sort of market share shifts, competitive intensity changing, or is this just kind of the typical cyclical downturn where everybody's just trying to figure out where the bottom is and burn inventory until you get there?

Hey, Ross. This is Kishore. I think I'll give Steve a break here. So, not at all. No changes in competitive positioning or new competitors in the horizon. In every market we are, today we are one of two or three, and that positioning has not changed. And if you really think back about the dynamics of the excess channel in the inventory in the markets we are, they are pretty sticky. Until those inventory burns burn, you have incumbency advantages in the markets we are. We don't see the positive change. More importantly, the quality of our product offerings is improving quite a bit. We got a lot of innovations and new product offerings. across all our product areas, whether it's fiber pond, whether it's Wi-Fi. Obviously, we've got an exciting competitive positioning, relative business strength in optical data center infrastructure with the 5 nanometer product, and in the wireless infrastructure as well. And some of these products will be announced as we go to the middle of this year. So no changes, so we just have to wait on this inventory burning from the channel. I just want to add a little color to what Steve talked about, what is the natural run rate you asked about the broadband. Here, I don't want to give you any specific number, but just the way I think about it is, if you look at the last two previous years of broadband revenues, you know, maybe it takes us two years to get back there, right? That's the way I look at it. So, because, you know, that's the inertia in the system, right? So, therefore, actually, last year's revenues are, in fact, a positive indicator of what the future could look like. So, I wouldn't look at it as a down statement at all. All in all, we've always done the most exciting work in a tough time, which has been our track record, and Actually, we've got a profusely rich product portfolio that's developed and is being announced and will continue to be announced as we move forward. Thank you. Thanks, Ross.

Our next question comes from the line of Tori Savberg with Stifel. Please proceed with your question.

Yes, thank you. If we could just get a little bit more granular on the connectivity side of the business. Obviously, broadband's been correcting for a year already, but it looks like connectivity actually started correcting this quarter, this Q1. Just wondering, you know, if that's going to sort of have a similar trajectory as broadband or other reasons why or why not that wouldn't necessarily be the case.

Yeah, Tori, good question. As you know, this is a really important product line to us, and we've seen a tremendous amount of growth. I think, you know, one, we're seeing a lot more attached. So this is all new business, so a little bit different than the gateway side of the equation. So I would not expect to see, you know, the same level of decline. That being said, I mean, they're both selling into gateways, and so there is some dynamic there where we're impacted. It was a big move from Q4 to Q1. You know, there's a little bit of seasonality in there. We had some large router shipments in Q4, and those were coming down in Q1 kind of as expected to some degree. So I definitely think that Wi-Fi is going to continue to outpace. I mean, there's more attachment that we can go out and get. And don't forget, you've also got a lot of you know, AST increases or just a trajectory that's moving, you know, upwards as we get more 6E. And then, you know, longer term, once we get Wi-Fi 7, you start to see a move up in ASPs along the way.

Very good. And you mentioned when you were answering one of the questions about the broadband correction that you're starting to have a better sense for, you know, the amount of inventory that's out there. Can you just add a little bit more on that? Is this based on conversations you're having with your customers where they are giving you any signs that things are bottoming?

Yeah, well, I mean, look, it's been an interesting semiconductor cycle, right? I mean, we've not seen 52-week-plus lead times in most of our careers anyway, and so it was somewhat unique, and I think that drove your typical bad behavior where we're seeing – you know, a lot of over ordering and, you know, there's been a lot of cross currents as well because there's a lot of markets where you're still short and so customers aren't really, you know, giving proper information and I think now that they do have more inventory, we're getting a lot more transparency with the customers because now they're kind of coming clean to some degree and sharing appropriate information. So we feel better that we've got a little bit better visibility at this point.

Very good. Just one last question for Kishore. Kishore, the high-speed optical business, you know, I know it's taken, you know, much longer than you would have expected. But, you know, coming out of OFC, it does seem like there's finally some strong design momentum there, especially on on 800 gigs, so I was just hoping you could elaborate a little bit more on that, you know, especially the confidence level that that business may actually finally start to contribute more meaningful to revenues later this year.

Well, you know, we're very excited. We, as you've seen in OFC, we had three or four very meaningful demonstrations and announcements of our 5 nanometer lowest power, you know, most integrated 800 gig BAMFOR solution out there. It's the only 5 nanometer solution. And on the back of it, we had a number of strong design wins with Tier 1 OEMs, whose in turn supplied to the data centers. Obviously, we work with the data center players and the OEMs to line up our design wins. So we've gone through some of our key OEMs already gone through their own self-interops, and now they have sampled to the data centers for their call cycle, and these should finish up towards the end of the year. And so we feel very, very good that we will be in a position to gain some significant market share as the 800-gig rolls out. You have to realize that the 800-gig PAM-4 is the first deployment that is starting, and we are not behind on that. We are leading in that effort. So we feel that the trajectory of this would be we would have shipments in the second half of this year, which for the qual amounts and beyond that it ramps pretty strongly next year and the following year and the following year. So feel really, really good. I think we are pretty much a tier one OEM module maker that you would think is worthy of us to work with and I feel really good about where we are. It's actually today, somebody asked me, what is the most exciting product today as you go into the call? And it has to be optical, I said. So that's how good I feel about it. Very good. Thank you so much.

Yep. Thanks, Troy.

Our next question comes from the line of David Williams with Benchmark Company. Please proceed with your question.

Hey, good afternoon. Thanks for letting me ask the question. Maybe Steve, just kind of thinking about the inventory digestion and just those dynamics, it sounds like we're at least starting to hear maybe a slower cadence of spending from some of the service providers and operators there. Can you kind of talk about maybe the dynamics that you're seeing between inventory and maybe slowing in demand? Do you feel like most of this is really driven by that inventory and not more of a demand cycle?

Hey, David. It's a good question. It's something that we're watching closely. I mean, we haven't seen CapEx levels really change that much to date. We're naturally watching this closely. I mean, the bigger issue for us right now that we see is just the inventory in the channel. But I guess the way I think about it is it is something that we've got to continue to watch. I think our assumption is that in-demand does hold up, that spending does hold up. And that's really based on You know, there is an upgrade cycle going on, and we do expect to see that continue. But, you know, if we see a recession, if we see a major pullback in spending, then, yeah, that could change the demand levels a little bit.

Okay, that's fair. Thank you. And then from the inventory side, is this more max linear products in the channel, or is this maybe peripheral products that are out there that are maybe just slowing some of the uptake?

You know, in the markets we are in, especially the service provider markets, and, you know, specific OEMs are assigned to specific chip suppliers, associated with specific suppliers. So when you talk of inventory levels, they're associated with certain chip suppliers, right? Because we sell our own full platform of solutions. Now, on our platform, there will be minor components from other manufacturers, but we do not think that those are the determinants in the way the inventory is building up in the channel. So all in all, we don't see a competitive situation where our inventory is being held up because the competitive product is being sold more. And so I think as the sell-through happens, we'll burn through the inventory and we should be able to resume our shipments. You also have to keep in mind that as the lead times have shrunk in the manufacturing supply base, our own customers, the OEMs, would now go in the other directions where they are in no hurry to place any orders or give us any visibility. So I would say there will be a bit of an overcorrection on the inventory in the other direction, and given the interest rates as well. So I think you're going to see an unusually lower inventory levels before it picks up to normal inventory levels, right? So I think we're planning for that right now.

Fantastic. One more quick one for me. Just Steve on the gross margin. Getting a nice lift into the quarter, even on the downside of revenue guidance. Can you talk about what's driving the margin there? Is it simply just mix, or is there anything else underlying there that we should be thinking about?

Well, I think the majority of it is mix, and we're pleased to kind of see. You saw us come up 70 basis points. Our midpoint of our guidance gets us up another 70, so making nice progress on that front. Look, I'm optimistic as we look into this. the rest of this year and even into 2024 as supply tightness eases. I think we'll have a little bit more pricing power. And so we think that we can continue to lower that cost structure and see better gross margins.

Our next question comes from the line of Christopher Rowland with SIG. Please proceed with your question.

Hey guys, thanks for the question. Perhaps of the segments, the three that are going to be down, I was wondering if you could force rank perhaps even for the next quarter, whether we should just have them all down. I know you said connectivity would be stronger for the year than the rest, but for the next quarter in particular.

Yeah, I don't know that, Chris, that I can stack rank them for you. I mean, we definitely continue to see pressure on the broadband and the connectivity businesses. I mean, our infrastructure business we think will be up next quarter. And then, you know, industrial, multi-market, a little more flat to slightly down.

Okay, great. Thanks. And then on the 5G part of infra in particular, It really kind of feels like an inflection quarter for you guys, which is great to see. I know you guys mentioned India, but I was wondering, you know, why this inflection from either like a geographic standpoint? Is it India? Or why this inflection from like a vendor standpoint? Are you guys attached to one vendor in particular? Why this inflection all in one quarter?

Yeah, Chris, don't forget. I mean, so we've got a big base of our businesses is backhaul, right? It's not 5G. I mentioned in the previous remarks that, I mean, 5G is definitely increasing, but it's a smaller part of the numbers. The backhaul business has been driving it. It's a pretty diverse, it's a wide set of geographies that we've been selling into for a while. Would also emphasize, you know, there's a big content increase as we start to ship more of our transceivers alongside of the modems. So that, of course, helps. And that enables us to outpace the overall market growth that I suspect that you're seeing and comparing us to.

Excellent. Thanks, guys.

Thanks, Chris.

Our next question comes from the line of Carl Eckerman with BNP Perseverance. Please proceed with your question.

Yes, thank you gentlemen for the questions. Two, if I may. In the connectivity business, your cable MSOs are still sweating assets and going through this immature digestion phase, but is there higher intensity discussions of your customers' broadening adoption of Wi-Fi 6 and Wi-Fi 6E that would give them differentiation and would also drive their content higher? I mean, if you could talk about that as you think about the growth trajectory of connectivity over the next few quarters would be very helpful.

Well, obviously, you know, our attached business is a significant part of a connectivity business, even as we're developing traction on, you know, in the third-party router gateways. So Wi-Fi 6C, the current platforms, they're shipping with the attachments, and we are proliferating our Wi-Fi 6 in other markets where, for example, our cable docks is where we don't have, where in some tier two markets we don't have Wi-Fi attachment. But really the big growth in content comes from Wi-Fi 7 launch, which will be significant content expansion in terms of dollars, and that will be the next big leg of growth for connectivity in the operator segment. So I hope you understand that Wi-Fi 6 and 6E are already part of the operator deployments today, and whatever growth we have, the increase in our Wi-Fi is going to come through expanding our Wi-Fi 6 attached in Tier 2 markets. but the big growth in the tier one markets comes through wifi seven or wave 700 family as part of the solution in the operator platforms.

Understood. Thank you for that. Um, if I could pivot to your DSP business or opportunity, uh, Kishore, you mentioned that that's one of your, uh, most optimistic areas of your business. And so I guess, uh, If I could, you know, I'm curious whether the current digestion occurring in optical transceivers has accelerated your discussions with cloud and module providers on your 800-gig DSP solution. And as you address that question, you know, there has been much debate on the use cases of linear drives versus using a DSP, but you would, of course, be able to address both of them. But do you see linear drive pluggables impeding your design qualifications of your 800-gig DSP at all?

Thank you very much. Let's separate those two questions, because the latter is the flavor of the day, and the former is what people bet their money on. So our design traction really primarily is from the former, basically, right? We have a solution on the DSP side that is superior to anybody else's. We're the first fine animated silicon production. We believe we have a significant lead on competition. So that's where our traction is. With regards to the burning of the inventory in the data center for these DSPs, accelerating our momentum, no, not at all. In fact, we have learned that the inventory in that channel also is significantly high. In this particular case, since we didn't have much business, we did not see the impact of that. So our design interaction is independent of what the channel inventory in that space is. The real fork here is almost all the data centers are now converging towards 800 gig solutions with 100 gig per lambda, you know, for each, you know, 100 gig per lambda on the fiber over eight channels. So the inventory situation has got nothing to do with our traction. On the second part, the linear drive versus, you know, is really a discussion that's come at the recent OFC conference. And I really, really think that's very premature, and the data center people are really not betting their strategies on that. And this is really, if anything is going to happen, it's going to take a couple of generations for it to really face any maturity, if not infant mortality. You know, it doesn't happen. So I would leave it at that. Okay?

Very helpful. Thank you.

Thanks, Raul.

Our next question comes from the line of Ashley McCurry with Wells Fargo. Please proceed with your question.

Hi, this is Ashley McCurry on for Gary Mobley at Wells Fargo. First question being, it looks like your gross margin guide is a little wider than usual. Is that representative of any uncertainty in product mix for 2Q, or if not, what are the drivers of that?

Sure. So, no, I don't think so. On the gross margin side, I mean, look, there's plenty of uncertainty in the world right now, so I won't go there. But as far as gross margin goes, kind of the midpoint, it is primarily driven by mix. We do continue to see infrastructure holding up very well. That's a higher gross margin kind of product line. And so we do feel confident that we'll continue to see an improvement similar to what we saw last quarter.

Thank you. And then just as a follow-up in terms of the SIMO acquisition, do you guys have any visibility into China's SAMRs approval process? And is there any, you know, qualitative comments you guys can give that gives you comfort in that mid-calendar year, 23 closed?

Yeah, so kind of reviewed this in our prepared remarks. Don't have a whole lot to add. Kind of we remain, you know, confident, on track. I think things are moving as expected on the SAMR front. And, you know, hopefully we can update you soon on that.

Thank you.

Thanks.

Our next question comes from the line of Suji DeSilvia with, Roth Capital, please proceed with your question.

Hi, Kishore. Hi, Steve. I'm curious if the unit attaches of 6E have cut over from 6 already, or if not, what the timing would be? And if it has, when would you expect Wi-Fi 7 unit attaches to cut over in terms of units versus 6E?

So, firstly, the cutover from 6 to 6E has really not happened yet. 6E is an interim standard between what the market really wants on the Wi-Fi 7 versus Wi-Fi 6 and the difference between 6E is going to enhance throughput and so I don't think there's going to be a cut over from 6 to 6E. Whatever 6E has been designed in, it stays in place and 6 will continue until Wi-Fi 7 takes over. I think Wi-Fi 7 is one of the biggest, broadest adoption and most rapid adoption of any Wi-Fi standard in recent history. So if I were to go by the rate at which the Wi-Fi Alliance, for example, is going through their interop tests and the rate and the rapidity at which they will pick the Wi-Fi Alliance interoperability testbed platforms, they'll pick four or five of those And based on the speed at which is going on, Wi-Fi 7 will be really ready to go by the end of the year. But the adoption itself in a non-consumer market, I expect to happen in 2024. So really it's a latter half of 2024 cutover process starting from 6 and 6C to Wi-Fi 7. I hope that answers your question.

No, it's a very helpful case for you. And then just more broadly, I mean, you talk about inventory a lot. I'm just wondering if it's happening that platforms that were going to be upgrades that were planning to be rolled out are being pushed out just so older platforms can digest this inventory. Is that happening as well as the inventory digestion, or is it just that your parts aren't being ordered because they're trying to work down what they have?

That's a very, very good question. You know, in the markets we are in, those platform changes don't happen frequently or the cycle is pretty long. So the inventory digestion or burn is well within the time windows of those planning cycles. So I don't think there's any changes happening on new platform development plans by service providers and carriers. Having said that, I do believe in some form even our customers are going through their OPEX discipline process, so I will not be surprised if it's a slower rollout than originally anticipated. But at this moment, I think the operator is more invested in not backing off on the CAPEX For the infrastructure investments, for example, on the DOCSIS side, preparation on the network itself to upgrade the network to be able to support DOCSIS 4.0. And also you're seeing fiber networks upgrading from older PON to newer 2.5 gigabit and 10 gigabit PON networks. So I think that the focus of the operators and the carriers is right now upgrading the network infrastructure And that's going on quite robustly. So, in short, we do not see any impact of this inventory accumulation of the channel pushing out launches of new product platforms.

Okay. That's a call I was looking for, Kishore. Thanks. Yeah.

There are no more questions in the queue. I'd like to hand the call back to Kishore Sindhripu for closing remarks.

Well, thank you, operator. You know, this quarter we will be participating at the Staple Cross-Sector Insight Conference in Boston on June 6th. That's the next conference we'll be participating in. So with that said, I want to thank you all for joining us today, and we look forward to reporting on our progress to you next quarter. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.