MaxLinear, Inc

Hello, and welcome to the MaxLinear second quarter 2023 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may press star one at any time to be placed into question queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Leslie Green, Investor Relations. Please go ahead, Leslie.

Thank you, Kevin. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss Max Linear's second quarter 2023 financial results. Today's call is being hosted by Dr. Kishore Sindhiput, 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 meeting of applicable securities laws, including statements relating to our guidance for the third quarter 2023, including revenue, GAAP and non-GAAP gross profit margin, GAAP and non-GAAP operating expenses, GAAP and non-GAAP tax rate, GAAP and non-GAAP interest and other expenses, 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. These forward-looking statements involve substantial risks and uncertainties, including risks related to increased indebtedness, competition, the impact of a global economic downturn, and high inflation. The cyclical nature of the semiconductor industry, our ability to sustain current level of revenue, including... from impacts of excess inventory on our customers' expected demand for certain of our products, our ability to obtain or retain government authorization to export certain of our products or technology, and a failure to manage our relationships with or negative impacts from third parties. More information on these and other risk factors is outlined in the risk factor section of our recent SEC filings. including our Form 10-Q for the quarter ended June 30, 2023, which will be 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 2023 earnings release is available in the investor relations section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including but not limited to gross margin, operating margin, operating expenses, and interest and other expense on both a GAAP and non-GAAP basis. We encourage investors to review the detailed reconciliation of our GAAP and non-GAAP presentations in the press release available on our website. We do not provide a reconciliation of non-GAAP guidance for future periods because of the inherent uncertainty associated with our ability to project certain future charges, including stock-based compensation and its associated tax effects. Non-GAAP financial measures discussed today 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 to be useful to investors as it reflects how management measures our business. Lastly, this call is also being webcast and a replay will be available on 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. In Q2, our revenues were $183.9 million, and non-GAAP gross margin was strong at 61%. Our non-GAAP operating margin came in at 16.2%, and cash flow from operating activities was $30.6 million. In Q2, infrastructure was the highlight, recording 6% sequential and 37% year-on-year growth, with 5G wireless backhaul continuing to be the strongest driver. In wireless infrastructure, Q2 marked a record revenue contribution for a wireless backhaul business. In particular, wireless backhaul deployments of multiband hybrid millimeter wave and microwave radios are allowing us to double the silicon content per platform of our modem and RF transfer products. We are very well positioned to benefit from the expanding rollout of millimeter wave technologies across several large geographies and are currently partnered with Tier 1 equipment suppliers to support ongoing 5G network rollouts. In our high-speed optical data center interconnects, the ongoing adoption of AI in cloud is driving meaningful design and activity for our 5-nanometer CMOS Keystone 800-gigabit optical PAMFOR solution. The growth and scale of AI is accelerating the adoption of 800-gigabit solutions and increasing the need for a broader customer-supplier base. We are strategically positioned with the industry's first 5-nanometer CMOS 400-gigabit and 800-gigabit PAM-4 DSP production-ready silicon. Based on our design-win activity and ongoing customer call pipeline, we expect to ship small volumes in the back half of this year, leading to volume ramps throughout 2024. In Q2, as expected, our broadband access, connectivity, and industrial multi-markets continue to be challenged owing to excess customer inventories and the ongoing cyclical semiconductor downturn. Despite the challenging market in broadband access, we continue to have solid market action with our industry-leading single-chip integrated fiber PON and 10-gigabit processor gateway system solution. Our PON access revenue continues to show strong growth off a modest baseline, and we continue to win new designs due to the breadth of our integrated access and connectivity technologies. We expect to see a multiyear growth cycle for our solutions as the industry migrates from legacy DSL and older PON technologies to 10 gigabit PON. In connectivity, though we are early in the design cycle for Wi-Fi 7, we believe that our Wave 700 product family has the exciting potential to drive significant ASP growth and higher attach rates over our previous generations. Wave 700 is the industry's first and only single-chip tri-band Wi-Fi 7 solution targeting access points and gateways. We expect Wave 700 product to ramp across multiple platforms starting in 2024. In our Ethernet connectivity portfolio at Computex in Taiwan, we announced our new four-port and eight-port 2.5 gigabit Ethernet PHY switch solutions for the SMB switch market, and also our 8-port 2.5 gigabit Ethernet PHYs for the enterprise market. While this new and unique product family, we are enabling the industry's transition from 1 gigabit to 2.5 gigabit Ethernet or existing Cat-PHY cabling by offering significant performance enhancement with superior cost structure and power consumption. Owing to the strong positive customer pull and design-in activity, we expect to begin revenue ramp in the first half of 2024. In 2023, despite the near-term challenging market environment, MaxLinear is laying the critical groundwork for future growth with design-in activity, technology innovation, and customer relationship building, spanning fiber broadband, Wi-Fi connectivity, Ethernet, wireless infrastructure, and high-speed optical data center interconnect and enterprise markets. Our discipline initiatives are driving robust design and activities across all our strategic markets, and we expect to have new revenue growth opportunities beginning late 2023 and throughout 2024. We believe that these initiatives will both increase our market share and expand our silicon content in our proven successful customer platforms. 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 second quarter was $183.9 million, down 26% versus Q1, and down 34% year over year. Broadband revenue was $54 million, down 34% versus Q1, and down 62% year over year. Connectivity revenue in the quarter was $38 million, down 43% sequentially, and down 33% year over year. Our infrastructure and end market continued to grow in Q2 as a result of solid demand and growing market opportunity. Infrastructure had revenue of $49 million, up 6% versus the prior quarter, and 37% year over year. Lastly, our industrial and multi-market revenue was $43 million in Q2, down 20% sequentially, and 11% year over year. GAAP and non-GAAP gross margin for the second quarter were approximately 55.9% and 61% of revenue. The delta between GAAP and non-GAAP gross margins in the second quarter was primarily driven by $9.1 million of acquisition-related intangible asset amortization. Second quarter GAAP operating expenses were $108.8 million. including stock-based compensation and performance-based equity accruals of $16.5 million combined and acquisition and integration costs of $3.7 million. Non-GAAP operating expenses in Q2 were $82.5 million, up $1.7 million versus Q1, and slightly above the midpoint of our guidance range. Non-GAAP operating margin for Q1 2023 was 16.2%. Both gap and non-gap interest and other income during the quarter was $1.2 million. In Q2, cash flow generated from operating activities was $30.6 million. We exited Q2 of 2023 with approximately $246 million in cash, cash equivalents, and short-term investments. Our day sales outstanding for the first quarter was approximately 77 days, up from the previous quarter due to shipment linearity. Our gross inventory turns were 1.7 times down from Q1 levels. This concludes the discussion of our Q2 financial results. With that, let's turn to our guidance for Q3 2023. We currently expect revenue in the third quarter of 2023 to be between $125 million and $155 million. Looking at Q3 by end market, we expect all four of our end markets to be down quarter over quarter. driven by continued rationalization of product inventory sitting with both our direct and channeled customers. We expect third quarter GAAP gross profit margin to be approximately 53% to 56%, and non-GAAP gross profit margin to be in the range of 59.5% and 62.5% of revenue. Gross margin continues to be stable despite lower unit volumes with the range being driven by a combination of near-term product, customer, and in-market mix. We expect Q3 2023 GAAP operating expenses to be in the range of $104 million to $110 million. We expect Q3 2023 non-GAAP operating expenses to be in the range of $75 million to $81 million. For Q3, we expect the We expect to record a negligible GAAP tax benefit, and we expect our non-GAAP tax provision to be approximately zero. We expect our Q3 GAAP and non-GAAP interest and other expense to be roughly $5 million. We expect our Q3 GAAP and non-GAAP diluted share count of 82 to 83 million. Before moving to Q&A, I'd like to briefly address the press release we issued earlier today regarding our previously announced transaction with Silicon Motion. As you saw from our press release, we have exercised our contractual right to terminate the merger agreement. Please note that we do not intend to share any further detail on this matter at this time, and our call today will be focused on our quarterly results. In closing, we continue to navigate a dynamic environment in Q3 but on laying important groundwork and strategic applications that will drive our growth as the market recovers. Our solid product innovation and execution in Wi-Fi, fiber broadband access gateways, and wireless infrastructure is positioning us well to capture compelling revenue opportunities in the coming quarters. As always, we will continue our strong focus on operational efficiency, fiscal discipline, and shareholder value. as we optimize for today and plan for an exciting future. With that, I'd like to open up the call for questions. Operator?

Thank you. We're now conducting a question and answer session. If you'd like to be placed in the question queue, please 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'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 star 1. One moment, please, while we poll for questions. Our first question today is coming from Quinn Bolton from Needham & Company. Your line is now live.

Hey, guys. Obviously, a dynamic environment for the core business. And I guess, you know, a quarter ago, you kind of thought, you know, you were coming in to, I think, what was going to be a shallower bottom for the September quarter. Obviously, things are a lot lower than, I think, what you're thinking 30 or, sorry, 90 days ago. Can you Give us some sense, you know, how much of this is inventory correction? How much of it is that orders have just, you know, continued to come in at very low levels? We've heard that from some other semiconductors companies that are reported to date. But just, you know, I guess as the revenues get lower here in the near term, you know, it just kind of makes the potential over shipments of 21 and 22 seem that much larger. So if you can give us any sense what you think consumption, true consumption of your systems are right now, you know, would be helpful for folks.

Yeah, Quinn, I'll jump in here. So you're right. I mean, I think we talked about this in our previous earnings call. I think originally we thought we would move through the inventory in the first half of the year. It's definitely pushed into the second half. I mean, we had a pretty good feel that, you know, it'd be bottoming out in Q3. I think that's still playing out, albeit at a lower level than what we had expected. I think the visibility on the booking side has been the challenge, frankly. We've not seen tremendous amount of bookings. I mean, backlog, you know, we've had a decent level of backlog all year long, and it's really hard to navigate in that environment. And so, you know, bookings, there's still lots of uncertainty out there. I mean, I talked about last quarter about demand generally holding up, and I think that's still to some extent true. I mean, the broadband connectivity side, there probably is a little more softness on that side just from an overall in-demand standpoint. But the primary driver here of the bigger decline in Q3 than anticipated is strictly that inventory that's sitting out there.

And I guess, you know, is there a risk you think this inventory burned? You know, if bookings remain this low and demand certainly doesn't seem like it's recovering strongly, I mean, what's the risk that this inventory correction maybe lingers into the first half of next year?

Yeah, well, I mean, I think we're all across the industry asking that question. You know, I think we've been under shipping demand. I think we remain, we see that today that we're still under shipping where the real demand levels are. But at the same time, demand hasn't been robust per se. So I don't think we've burned off that inventory as quick as we thought we would. You know, different end markets are kind of going through this at different times. I mean, you've seen this from other peers that have announced, you know, You know, and even within our own business, broadband connectivity is different than we've seen in industrial multi-market. I mean, we've talked earlier about industrial multi-market holding up, although you've seen some cracks there across the industry, right? So, you know, does it bleed into the first half of next year? I mean, it feels like we're going to get through it this year and, you know, start to see a little bit of recovery in Q4. But we're watching closely, that's for sure.

Understood. And just maybe a last quick one for Kishore. You talked about, I think, some growing design wins on the optical DSP side, you know, with some initial volumes, the first half, sorry, second half of this year, and RAM through 2024. Can you say, are these mostly 400 gig modules, 800 gig modules? Is it a mix? Is it multiple hyperscalers? You know, just any more color on the potential growth on the DSP? Because obviously, I think investors are looking for ways to sort of play AI trends, and it sounds like that might be a one of the plays MaxLinear has on growth in AI systems. Thanks.

Quinn, thank you. Absolutely. You know, there's been a longstanding investment of the company. We have been investing now for almost three years plus and starting out in five years ago, actually, as a business development activity. And, you know, we missed the first phase of the actual PAM 4 for 100 gigabit per lambda. And now we are here, but we have a very compelling solution with our 800-gig PAM-4 in 5 nanometers. So that's the strategic position of our product, and we have a lead time on that one with respect to competition. So the qualifications that we are going through, I want to categorize them in two buckets. Firstly, when we talk of design-win activity in pipeline, naturally, it's the module makers, right, who are the ones who supply to the data center folks. and other enterprise players, right, and especially in AI. There's a large demand out there, and we are in activities to get qualified and inter-opt for these 800 gig solutions. And we have design wins with pretty much all the major OEMs for 800 gigabits. And, you know, on 400 gigabit PAM4 as well, but it's really, really the lead and the compelling values in 800 gigabit PAM4. And, you know, you track the design wins because the design footprint is identical and the technology and the firmware, the software is very scalable. So we are also getting drag along 400 gigabit PAM4 design wins. You also want to keep in mind that The transition of the E is going towards either 2 by 400, which is equal to 800, or just 800 itself. So the clear answer is that the design and pipeline activity is with the OEM module makers. The interop and calls are with the module makers and the data center folks. And so you have to keep that in mind. So the expectation is with this level of frenetic activity, And where the performance is there today, we hope and expect to see some initial volume at the end of 2023 and really the ramp happening throughout 2024. At that point, we expect to be a legitimate player in optical PAM4 data center cloud market. Until now, we are the new entrant breaking into the market with a compelling strategic product offering.

Thank you, Kishore.

Thank you. Next question today is coming from Carl Ackerman from BNP Paribas. Your line is now live.

Yes, thank you. Good afternoon, gentlemen. Two questions, if I may. First, I was hoping you could discuss cash flow trajectory over the next few quarters as we're working through this current down cycle and perhaps bottoming in the third quarter. I'm particularly interested in how it relates to working capital. I ask because You know, I would presume you would have to pay the breakup fee, you know, to token motion, whether it would be in the third quarter, perhaps later. Just any comments in terms of capital generation over the next two quarters would be super helpful. And I have a follow-up.

Yeah, yeah, sure, Carl. So, first of all, based on the press release earlier today and based on us filing an MIE, the break fee in this case would not be owed. So that's the first question. With regard to working capital and cash flow generation, I think cash flow has been relatively good. I think we're doing a pretty good job in a typical down cycle of pulling down inventory. I mean, we got inventory down this quarter, which clearly started a couple of quarters ago. We started dialing that back. I think the operations team did a good job on that front. Unfortunately, revenue is coming down a little quicker, so days were still up a little bit. But I think you would expect to see, you know, us work that down over the next couple of quarters. We've also done a really good job on CapEx. CapEx coming into the year, I guess really going back to some of the restructuring that we did back in February, we really dialed back CapEx. And so I think that's been something that the team has done a tremendous job at. And we We had the luxury over a couple of years. We did spend, as we were ramping up some of these product lines, so we've got a lot of equipment already in-house and working and capable. So I think we can actually hold the line on operating cash flows, and once we see this bottoming out of the revenues, we'll start to generate more cash going forward.

Just to clarify once again, by invoking an MAE event and terminating the contract, the acquisition process and procedure. By the deal terms, we do not owe any breakup fee.

That's clear. Thank you for that. If I could ask a follow-up question on the outlook. I'm just curious, I guess, you know, as we think about the various aspects of your business, clearly some are, some have Trost has certainly been much more challenged than others. I think of the infrastructure business doing quite well, the industrial business up until this most recent quarter doing much better than the broadband and connectivity piece of the business. So I guess if you could just speak perhaps at a higher level how you think about, A, the bottoming process of the broadband and connectivity business, And then separately, the risks and or visibility you have with the infrastructure business and industrial pieces of your business that would give investors some clarity on the stability of the different aspects of your business as we think about a bottoming process in demand. Thank you.

Yeah, Carl. Absolutely. Great question, and it's something that we're spending a lot of time on, and I think Kishore hit on it in his prepared remarks, you know, as we look into 2024, you know, we have a lot of big growth initiatives that we've been working on for some times. The infrastructure, you're seeing really nice traction. We've gotten, you know, really good growth this year, last year. We've been, you know, it's becoming a real sizable entity. It's been a big investment for us. It's a big opportunity as we look out over the next two to three years. And so as optical starts to kick in, you've already seen the dynamics with wireless infrastructure. some of the improvements there. So we really have a good outlook on that side of the equation. But other growth drivers in the business, clearly Wi-Fi, PON, those still are growth drivers. Yes, we're in a cyclical downturn, no doubt, but there's also big investments being made. And we've got other areas like our storage products with our Panther product, our Ethernet Ethernet is something that Kishore spoke a little bit about. It's a big opportunity for the company, and I think it's a great example of us really being innovative and coming to market, competing against some big guys like a Marvell and a Broadcom in a unique spot in the market with two and a half and five gig solutions that we can really expand our footprint, and I think there's a big need within the market.

Thank you. Thank you. Next question today is coming from Ross Seymour from Deutsche Bank. Your line is now live.

Hi guys. Thanks for letting me ask a question. I guess at the highest of levels, the third quarter guide, I think directionally everybody expected it to be down a bit, but this is significantly worse than at least I expected. What gives you confidence that this is cyclical and not something more structural?

So Ross, that's a very, very important question. You know, a big, huge inventory buildup is, one could argue, is not really a cyclical event. It is a gigantic event, right, in the channel. And so that depletion process really masks any structural shifts that we can glean. The way I look at it as that it is not a, that this, for us, is not a structural shift, is that all our investments and activities and new products are really for new sockets. And is there some risk that those get delayed because customers are not, you know, customers are also delaying their own investments? Absolutely. So, I would say that the first thing we need to watch for is inventory burn-away in the system, and then during that period, how much are customers really investing in new platforms, even if our products already are they willing to absorb. And then every market area where it is quite different. Infrastructure... The headwinds are fewer, a lot of new products. You know, on the quarter we just announced, we had about $200 million in infrastructure, right? That's a major product category on an annualized basis. And then we've got a pipeline of optical data center products, new enterprise switch products for SMBs, and, you know, octal 2.5 gigabit files for enterprise markets, right? So you can see that's an – and then we have our storage accelerators for enterprises. So you can expect infrastructure to continue growing, and it's got the most bundle of products that are new product cycles that are in the corner. So that's a very, very exciting area. Then if you look at our industrial multi-markets, we are investing in new interface product bridges. That's what actually – a big part of the growth that's happened in industrial markets is also new products that have been launched. It has done very, very well for us. on an annual basis, probably grew 20% for us, right, over the last three years or so. So that's a growth area. And then you come and look at connectivity. It's grown, it's growing, but a huge part of the revenue is attached to our broadband access, which is cable and fiber. The attach on the cable is by far the most significant one, and the attach on fiber is just starting, and fiber itself is growing for us. So that brings us to the corner of cable now, right? So what's happening in cable? There are some structural shifts going on in cable, right? You have seen that the cable guys are competing for subscribers from the wireless providers, and the lower end of the subscribers in the database for cable is being eaten away by direct wireless access, right? So they are losing subscribers, right? And then the second part that's happening is that The telcos are more and more aggressively laying out fiber and fiber to the home. So, yes, there is a structural shift is happening that is in cable. And really, cable becomes, I think, more and more a high-end play because of the quality of service on the cable and data throughputs. And the growth is really in cable is increasing. is going to come through content increase on the platforms through Wi-Fi attached, not by volume increases. If anything, they expect the volumes in cable to decrease, actually. By any forecast, the number of cable subscribers has come down as a cumulative addressable total market size, especially in North America.

Thank you for all that, Cutler. I guess two quick follow-ups. One, Steve, you mentioned that you hope that the third quarter is indeed the trough. Do you expect significant growth in the fourth quarter or just, as you said, the visibility is so limited that, you know, calling a trough is about as much as you're willing to do tonight.

Yeah. Yeah. No, I mean, I think we're always conservative about how these things rebound. So, I mean, I think a modest improvement in Q4 would be where my expectations are. We'll see.

And then last, just a clarification. I know you don't want to talk about the deal announcement or termination. The, OPEX guidance that you have, whether it be on the gap or the non-gap basis for the third quarter, is there any significant change in the legal expenses that we should be aware of?

Well, on a gap basis, I mean, we are definitely spending. I mean, there was, you know, a decent amount of spend in Q2. You know, with this going away, I mean, that will reduce the spend in the latter portions of the quarter.

Thank you.

Thank you. Next question today is coming from David Williams from Benchmark Company. Your line is now live.

Hey, good afternoon, and thanks for taking my question. Maybe, Steve, if you can maybe give a little more color on the margin side. I know there's quite a significant decline on the revenue side, but just curious if it's just mix that you're seeing in terms of maintaining that margin or if there's any other moving pieces there that we should be thinking about.

Yeah, David, thanks for the question. Yeah, I mean, look, I think we've done a really good job on the gross margin side. Kind of despite the move on the lower revenues, we've held the gross margins. I think there's multiple reasons for that. I think the mix is playing a role as you're seeing more infrastructure contribution, a little less connectivity contribution. That definitely works in our favor. I think just the easing of the supply chain, we're seeing a little bit less pressure on our cost going up, so that's helpful as well. And then naturally, we're always working towards getting a better cost structure for existing products as well, even as evidenced as our Wi-Fi 7 product going to a single chip. I mean, there's multiple examples of where we're constantly working towards getting to a better cost structure for our products.

Thanks for the color. And Kishore, can you give a little more color? You talked about this in the script about the AI opportunity and it's driving some activity. Can you talk maybe a little bit about the magnitude of that and maybe what you're seeing relative to AI versus the other trends that have been ongoing for some time?

So I think that we can safely say that the big spend that's happening in cloud data infrastructure spend is really towards AI processors. There's a massive demand for that. And we have all seen the excellent results posted in that area by, I mean, really on the financial results, the excellent results posted are really by NVIDIA. Let's be very honest and clear about it. The rest are all riding on the hoopla, right? Let's call it that. So NVIDIA is the big driver here. and then maybe what, and that leads through into the data centers, right? And there's a massive demand for product, massive, and there's a very big shortage of supply. And so there's a lot of all the OEM module makers are jockeying for supplier status, you know, for these AI needs, let's put it that way, product needs. So we are in the thick of that, and hopefully the calls and other things go well and the demand is promising to last quite a bit out and having a strategically very good part where there is very, very low power consumption performance and, you know, quality of performance is very important, and we hope to get a piece of the pie. As I've said before, we are in the optical market not because of AI or anything. We have a core RF technology. high-frequency DSV mixed signal platform that scales from any communication system to any other network communication system. And the PAM4 DSP are just a manifestation of the platform we have. We're latecomers to that market, and we hope to really build a long-term success in that marketplace. So if the AI is driving it, great. If it accelerates it, awesome. But, you know, we are here to stay to make sure we're successful in the cloud data space. And that's a larger ambition that ties in with the infrastructure development product lines that we have lined up that I talked to on Ross's question on trends.

Thank you. Thank you. Next question is coming from Tor Sandberg from Stiefel. Your line is now live.

Yes, thank you. Interesting day in Max Linear land. I have a few questions. First of all, I think you came into the year with quite a bit of backlog. It sounds like you don't have a lot of orders, so I think that means you're probably seeing some cancellations. Could you just give us a sense, Steve, for how those cancellations are headed? Are they accelerating? Are they extending longer? I mean, any sort of read you have there, because that would obviously determine your conviction in Q3 potentially being a bottom.

Yeah, I mean, I guess the way to answer the question, we still do have very good backlog. We're still working on the booking side of the equation. You know, fortunately, lead times have come down, and so customers are waiting longer. And with so much uncertainty kind of in the back half of the year, I think customers, they think lead times are really short now. And in a lot of cases, they also know that plenty of guys have lots of inventory, and so they're waiting longer. And so that's been problematic. I wouldn't say that we've seen a ton of cancellations. Uh, we've certainly seen push outs and, you know, most of these orders are non-cancellable, non-returnable orders. Uh, so, so in most cases they're not cancellations, but we certainly work with our customer base in order to kind of work with them on, on shipment dates.

Sounds good. And moving on to this whole topic about, you know, consumption versus inventory. and specifically for your broadband business. I think it almost reached like a half-billion-dollar run rate last year. Now, based on my math, next quarter, maybe we're looking at like 160, 180. So obviously, it was way inflated back then, and it seems like it's pretty depressed right now. So any guesstimate on what the real sort of run rate could potentially be for that business?

Yeah, obviously, that is the big question. I think we're wrestling with that. Kishore spoke a little bit earlier. I mean, we have great relationships with these operators, with the telcos, and so we have pretty decent line item visibility performance. But that being said, it is hard to tell right now exactly where that's going to land. I mean, there's been a big buildup. We have certain things going on in the market like refurbishments and things like that that we haven't seen in a while. Those naturally come back into play. But our guys have done this for years. And so I think we have a pretty good understanding of it. We're going to continue to work diligently to kind of dig into what that number lands at. I think we're confident, sounds strange word, confident that we're under shipping demand. I mean, we've seen, we know that there's a lot of inventory out there and has been for some time. And so we're, we're getting through that. And I think it's still going to take a little bit more time, particularly on the broadband and connectivity side of the business.

Sounds good. Just last one for Kishore. Kishore, I know you can't talk about the SIMO deal per se, but But just thinking about longer term strategically, obviously that asset was supposed to give you some storage technology to continue to improve your position, especially in infrastructure. How should we think about that now that you have terminated the transaction?

The termination of the transaction is pretty complex. you know, not talking about that particular one. I do feel that, you know, we have the storage accelerators that we have been investing, and that's really for the enterprise market. Number one enterprise appliance maker leading tier one player is starting to shift. We expect that business to double next year and grow very, very strongly over the next four years. In fact, we have very strong visibility of it. And I think that's the way we build into the market, because the pure enterprise play, and that's how we enter the market. That's an organic path to get there. On the dynamics of the Silicon Motion deal, those are very different dynamics, and they've got nothing to do with our technology and our strategic view of how we play in the market. So our entry into our roadmap will be following up our investments in accelerator technologies, And last year at the Flash Memory Summit, we won the best new innovative product in storage category, right? So I do believe that, you know, if you just fast forward the other three years, our accelerator business should be anywhere between, you know, $30 to $50 million revenue per year run rates based on a single tier one customer. So I don't think anything has changed on the pieces on the value of the enterprise storage market.

Got it. Thank you. Yep. Thank you. Next question today is coming from Gary Mobley from Wells Fargo. Your line is now live.

Hey, guys. Thanks for taking my question. I see, per your guidance, you're expecting, what, a $4 million to $5 million sequential decrease in your OPEX I presume most of that's variable, a variable reduction. And we just spoke about some structural changes taking place in broadband cable from slower net new subscriber additions, maybe some share loss to fix wireless access and whatnot. So at what point does it make sense to right-size the OPEX based on some of those structural changes to some of your larger markets?

Steve, why don't you start off?

Well, I was just going to answer the bigger question. So we announced last quarter that we were going to see declines. We're expecting to exit the year closer to a $75 million, $76 million run rate. So we've already taken some action earlier in the year just kind of based on the whole industry downturn. I would expect to see some more improvements next year as well. I would expect OPEX to come down again in 2024. just based on kind of projects rolling off and just normal attrition there. So I actually see continued improvement on the cost structure side, but I'm sure you can speak to the, I think, the broadband portion of the question.

Well, so Gary, talking about structural changes in the broadband, really it's primarily, like you mentioned, I feel constrained to the cable market. It's very, very clear that the cable market and subscriber base is under siege from multiple players, the fixed wireless access and the fiber deployments. And I think that they'll continue to feel the pressure. On the cable side, the response has been to move to DOCSIS 4.0, right? So from our investment – and these investment cycles last about seven years or so, new technology points. And they are largely behind us in terms of the bulk of our own investments in MaxLinear. I do not look at Wi-Fi as a cable-specific investment, right? So I think that structurally, the investment levels in cable go down, barring a new fork in the cable industry's ability to compete. And generally, these have been seven-year cycles, and the bulk of the investment is behind. But likewise, our expectations... or revenue growth in that sector is really going to come from silicon content increase and not from a pure broadband cable access revenues. So it's more a platform-level revenue, and we hope to maintain our revenues on a footprint-based basis post this inventory burnout. So you're absolutely right. I think cable is the market area, and we are looking at it very closely, and we have told ourselves, well, this may be You know, this may be one of the more last, longer-lasting generations of cable for deployment. And for us, the expenses in investment in cable should significantly go down.

Appreciate that, Connor. I wanted to ask about the impact of some weak North American wireless infrastructure spending, as highlighted from some recent reports. guidance and results from some of the larger infrastructure players. To what extent is that impacting your business as we look through the balance of the year or maybe even longer?

So our big wireless infrastructure growth has really come from mostly coming from 5G rollouts where wireless backhaul is the dominant backhaul mechanism. And that's really outside of North America and China. So the North America slowdown does affect somewhat, but it's not a pronounced impact. Having said that, the wireless telcos in general, whether they're investments in fiber rollouts or fiber deployment, et cetera, I am sure that will also get impacted somewhat. For us, we don't have much exposure to that because we're starting off a smaller revenue base and we are growing our revenue and design main share of that particular area of the market. So there we don't see any slowdown expectations. on our fiber growth, but the overall of the market, I do see a slowdown on the wireless telco carrier spend. We just happen to be the ones that won't be as impacted because we are starting off a smaller base.

Thanks again, guys.

Thank you. Next question is coming from Suji De Silva from Roth MKM. Your line is now live.

Hi, Kishore. Hi, Steve. Since you're early in the earnings cycle and you guys have been through a lot of cycles, I just want to ask, start with a big a high-level question. What feels most different about this cycle versus past cycles you've been through? I'm just curious to get your opinion there.

Well, you know, as Max Lee, we have been through two similar cycles, right? And the outcomes were, it's a different phase. You know, I don't know how many of my peers will say this, but if you really look at the extent of the comedown because of the excess inventory channel, it almost feels like a semi-inventory company is kind of post-2008. I hate to say that, but I will say that, okay? So the only difference is the macroeconomic conditions are not the same sentiment. That's the difference. So for us, the cycles that we've been going through have not been related to macro conditions or the semiconductor demand conditions. It's been through what kind of transformations Max Linear was making in the public eye. So as we try to broaden and diversify our revenues and grow the company, we had to go through painful cycles of where the smaller TAMs we had to get out of and move towards bigger TAMs, and we went through revenue troughs, if you will. So for us, this one feels similar. The company is going through sort of a transformation right now to position itself to go to, you know, billion to $2 billion revenues. And that transformation is once again happening in front of your public eyes. So be it what happened with Silicon Motion, be it what happened with the acquisition we did with the Intel connected home assets, or our organic investments in wireless infrastructure or optical data centers, they are all manifestation of cycles that are very unique to MaxLinear because you rarely come across a public company that's trying to grow, enter new markets from where it was never born in. So there is not a peer to compare as a fresh company that went public in 2010 trying to do the things we are doing. So our challenges are unique to us. So from my experience point of view, What's happening in terms of demand, it really feels like a post-2008 issue without the macroeconomic panic and fear that we had at the time. I hope that answers your question. Maybe you're not expecting that answer, but that's how I look at the world.

I wasn't sure quite what to expect, so thanks for that. At the risk of sounding tone deaf, I'll also ask this question. You guys demonstrated the potential for strong debt capacity with the recent inorganic activity. I'm curious if thoughts of pursuing alternate where you wanted that versus pausing, and what level of leverage you would consider in that pursuit.

Look, I mean, we've always been an acquisitive company, and we're very excited about our organic growth potential ahead of us. We've also done lots of good acquisitions over the years, and we will certainly get back to that. We've got a lot of product areas that we're very interested in investing in on the infrastructure front, on the connectivity front, and even on some of the industrial efforts and power management and the like. So we'll certainly continue to go down that path. I mean, the balance sheet is good.

So a lot of opportunities there. Look, we evaluate every opportunity that comes our way, and we pursue them based on how it increases shareholder value, and we are not afraid to do what's in the long-term interest of the company.

Can I sneak one in real quick? Kishore, have you seen the hyperscale guys redesigning and pausing rack designs based on gen AI versus past AI efforts, or have you not seen that phenomenon?

Look, I have not seen any such phenomenon, right? It seems like a natural progression as far as the products we look at where the data rates and speeds are increasing in the same, you know, footprint, right? So I... you know, I really think that AI just adds the number of interconnects and the TAM dramatically will increase because that will become the big growth driver inside the interconnects inside the data center. I think the TAM forecasts with AI will be a lot, lot more than what we were seeing in the data center without this sort of excitement that's built around chat, GPD, and AI, right? AI was always there. It's just now There's a need for it that is suddenly, you know, exploding.

Thanks, Kishore. Appreciate it, guys.

Yep.

Thank you. Next question today is coming from Richard Shannon from Craig Callum. Your line is now live.

Hi, guys. Thanks for taking my questions. First one for Steve, probably more just tactically speaking here in the third quarter. I just want to get a sense of which – segments you're expecting to do relatively better or worse. And then also, as you see this bottoming process come and manifest itself, hopefully in the fourth quarter, there are segments where you have incrementally more confidence in that. I can probably guess what the answer is, but I guess I'd just love to hear from you.

Yeah, look, I mean, Q3, I mean, we talked about each of the end markets being down. We had a very strong first half of the year with infrastructure. And as expected, we're seeing a little moderation in the second half. just as that business is a little lumpier. But as we look into 2024, I mean, you know, we do expect to see that recovery really across all of our end markets. You'll start to see that in industrial multi-market. You're going to see it in broadband and connectivity. And, I mean, we've got some underlying growth drivers with all of these. I mean, whether it be Wi-Fi winds or PON winds, you know, one of the things we haven't talked much about, PON continues to do well. you know, despite the overall broadband environment, that's something that's doing well. I mean, we're underexposed to it. So anything, you know, any incremental is a positive. And we've got several other good growth drivers, such as Ethernet, that'll start to drive growth in 2024. So I'm not going to get into guiding what, you know, Q4 looks like by end market.

Okay, that's fair enough. Kishore, I want to follow up on Your comments about structural changes here in the cable TV market, and obviously as we look forward to a next cycle here, you've obviously just mentioned you've already largely committed and finished your investments here as we get to DOCSIS 4.0. But what's your feeling of the cable maker or cable operators, particularly in North America, about their interest in either accelerating or delaying DOCSIS 4.0 in response to these structural changes?

It's very, very hard to say. They're also sitting in a lot of inventory situations. and the cable operators and what we are seeing are slowed down. Our revenue is really reflective of their own, you know, plans, right, to some degree here. And so I think that DOCSIS 4.0 will start deploying in small quantities and probably in 2025 is when it starts ramping because the products are just available, barely. and then the platforms have been validated, and there will be announcements about, you know, we are doing it, but really the infrastructure spend has not happened on DOCSIS 4.0, and all of that has to come together. So I think it's really a 2025 event for sort of a resumption of growth in cable to the higher performing platforms. And so the ASP is going to offset some of the decreases in the volumes and qualities, but the net effect of that is not clear yet. Okay.

Okay. Fair enough. That's all for you guys. Thank you.

Thank you. Next question is coming from Christopher Roland from Susquehanna. Your line is now live.

Hey, guys. Thanks for the question. Just back to the inventory kind of burn situation here. Have you talked to your largest customers about how much inventory they have or what their inventory plans are? I mean, you know, for, like, broadband, for example, I got you guys at, like, call it $40 million, which is a third of what you were doing a year ago. Have you talked about planning and worked, you know, further out on what order trends might be like for them? Absolutely. just kind of tying onto this as well, it doesn't seem like your competitor, you know, Broadcom in the space is having these inventory issues. So is it just a customer dynamic? You guys are tied to different customers or what's, what's going on there?

Yeah. So, so Chris, we certainly have very good visibility on channel inventory. So, so we, know we've been watching that for the past few quarters we expect to see us continue to burn down that channel inventory over the next couple of quarters um i think you know with respect to to broadcom i mean they're the other big guy i mean clearly we don't break out apples to apples comparisons i don't think you see this i mean they're seeing the same dynamics in these markets as we are they've got a lot more exposure to pawn so it's a little different they have some a bigger wi-fi business so So, again, you can't really compare apples to apples. And, you know, they're seeing that same softness in the areas where we see the softness. I would just reiterate that.

Okay. That's fair. I guess, you know, if you do have a little bit of visibility from your guys, just talking about the snapback here – Would you expect any segment beyond infra to be up year over year next year? How should we think about this snapback kind of longer term? And do you think we start getting super seasonality into March? Is that fair?

Look, I don't want to get into guiding quarter by quarter over the next four to six quarters. But, I mean, as we look out into 24, I mean, I think Keith Shore and I have both talked a little bit about some of the growth drivers for next year. I mean, there's certainly going to be a recovery in all these markets. It's tough to forecast year over year just because kind of the way the shape of the year has gone, right? You started out the year on a much higher run rate, and so you're going to end up exiting the year on a lower run rate. And so that has some effect. But, I mean, certainly you're going to start to see quarterly improvements, you know, off the bottom here, you know, hopefully, as we talked about in Q3 here. and some improvements. Do we have seasonality? The answer is yes. I mean, we've historically always had a little bit of softness in the March quarter as well as Q4 to some degree. Do we see that again? I mean, potentially, yes.

I guess lastly for me, when it comes to PAM4, would you consider like a direct sale of the DSP business? Do you think that might be a better way to monetize it? Is there any hyperscale interest in just buying the part itself? It seems like, you know, going the road of engaging with cable makers and transceiver makers, and it seems like that's a pretty big slog. And then secondly, you know, on the AEC market, DSPs for AEC, any update there? Thanks.

So look, first of all, I mean, as we talked about in our prepared remarks, we're very excited about the optical market. We have been. We're seeing great traction. We're ahead of the competition with our five nanometer products. So I think we're better positioned than we ever have been in this market. We've got our second generation solution. So I think we're really excited. I think one of the things that's changed since last quarter, and you've seen it very closely, I mean, we're seeing the market. We're seeing a little more growth than even what we had expected last and that's driving a lot of our customer engagements as well. So, I mean, there's definitely a flurry of things going on. It's driving all the PAM4 design wins that we have. With regard to the AEC market, I mean, that's definitely an emerging market that we've talked a little bit around. We absolutely are working with customers with AEC design wins. I think If I think about our own revenues, it's probably going to be driven on our kind of PAM4 transceivers first and then AECs because AECs are still a relatively nascent market as of yet. But, I mean, over the next couple of three years, we can certainly see it growing.

I don't think the direct sale of silicon to data center, for them, this is too puny to entertain such an engagement from a silicon perspective.

Okay.

Understood. Thanks, Kishore. Thank you. Next question today is coming from Alec Valero from Loop Capital Markets. Your line is now live.

Hey, guys. Thanks for taking my question. Can you guys talk about your ability to access the scale that you would have gotten with the Silicon Motion Yield, whether through future M&A or organic means?

Could you repeat the question, please?

For sure. Can you guys talk about your ability to access the scale that you would have gotten with the Silicon Motion deal, like whether through future M&A or organic means?

Yeah, yeah. So, of course. I mean, we're definitely, you know, we've done a great job over the last, whatever, five, ten years growing organically. We'll continue to do that. We'll definitely do more acquisitions. We've done them, I mean, even – Over the last three years, I mean, I think we've still more than doubled the size of the company. We'll be able to continue to do this. Balance sheet is still very good. We generate tons of cash. I mean, we are positioned very well to go off and do more acquisitions as well as continue to grow organically. We compete head-to-head against big guys every day, and that's never been a deterrent. The innovative product technology capability engineering team capabilities that we have will continue to enable us to differentiate and drive more shareholder value.

Awesome. Thank you for that. And I have another question around generative AI, and I apologize if you might have addressed this beforehand. But are you guys experiencing any impact on your 800G 30 nanometer getting to market or any increase in customer interest?

You know, so far we have discussed about 800 gigabit PAM4 5 nanometer product and its traction. And really the next generation of products is really, you know, the industry has inhabited OFC for us to launch new technologies and new products. But I really don't see anything grand or brand new coming up that will be absorbed anytime soon. I think the next leg of the optical investments or products is really 200 gigabit per lambda DSPs, and you should be looking for us to be an investor in their roadmap. So I think that's – and we constantly evaluate nodes, foundries, packaging technologies, and all the gamut of it to build an extremely competitive low-power product and cost-competitive product. I think that for now we're in a good place, and we need to make sure we get our fair share of the market in the data center market. Okay. Awesome. See you guys. Yeah. Thank you.

Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over to Kishore Sanjupu for further closing comments.

Well, thank you, operator. I just want to let everyone know that this quarter we will be participating in the virtual Oppenheimer Technology Internet and Communications Conference on August 9th, the virtual Needham Semiconductor and Semicap Conference on August 23rd, the Deutsche Bank Technology Conference on August 30th in Dana Point, and the Benchmark TMT Conference on September 13th in New York. With that, I want to thank you again all for joining us today, and we look forward to reporting on our progress to you next quarter. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.