All right. Looks like we're ready to begin again. It's been a long day, so I'll welcome everyone again for what was it? Maybe the 10th time today so far. It's been a great conference. Our next speaker is MaxLinear. With us from MaxLinear is Steve Litchfield, CFO of MaxLinear. Steve, thanks for thanks for joining.
Great. Thank you.
As I said, the soccer game is over. Now everybody can pay attention again. That's fantastic. Thanks for being here.
Thank you. Appreciate you having us.
Maybe, for those that aren't as familiar with the company, maybe you can give the quick overview?
Sure
... of segments you play in and what you do. We can kinda dig in with some Q&A.
Yeah. That sounds great.
Mm-hmm.
For those unfamiliar, I mean, MaxLinear, went public in 2010. Mixed-signal analog company. We have really four end markets that we identify. Infrastructure is something we've been investing heavily, captures our wireless infrastructure as well as some of our data center business. We have our broadband business, which is probably the largest, business that we have, primarily SOCs going into all kinds of broadband applications. Our industrial multi-market, which is a lot of power management interface products that are going into really a plethora of opportunities, with probably thousands of customers. The last one is our connectivity business. Connectivity really, to several things.
Our Wi-Fi business, our Ethernet business, we have some MoCA and G.hn standards as well, all, you know, often complementary to broadband, but also there's other standalone applications as well. Those are the kind of the four end markets that we participate in.
You know, maybe, you know, take a brief overview here too, about, you know, market conditions now. We'll get into that in some of the conversation.
Sure.
You know, this has been an interesting cycle for us, and we've seen a lot of them, but never seen a cycle quite like this, where we've seen, you know, certain markets soften and other markets that have stayed strong. In your case, I know in the broadband space, you've seen some degree of weakness, but not everywhere. So maybe that's a place to start in terms of kinda why the cycle's a little bit different and how you're seeing it.
Well, interesting reflecting on the last year, year and a half. I mean, the cycle has been pretty unique. We've seen these shortages in a lot of areas, and we've been doing our best to navigate those as best we can, and I think we've done a pretty effective job. We've been able to take some market share in this environment, executing, outmaneuvering some of the competitors here. I mean, I guess as we look out into the future, you know, we still wanna navigate that. We don't want to overbuild. I think a lot of our customers right now are kind of assessing, you know, where the market's going, what the demand drivers look like. I think for us, I mean, we've got two or three areas that have been performing extremely well.
They're new markets for us, like fiber, for example, the fiber broadband market specifically. I mean, last year, we did less than $10 million of revenue. This year expected to do $30 million to as high as $40 million this year, and then expected to really double that again next year. Fiber is something that we've been very focused on wanting to grow. Connectivity has been a big one. I mean, Wi-Fi specifically, two and a half years ago, we were probably doing $25 million of revenue. We believe next year we can get north of $200 million of revenue, so great growth opportunities with Wi-Fi 6. Now we're seeing Wi-Fi 6E adoption as well. That's been a big growth driver for us. The third area is probably infrastructure.
Infrastructure has been something I mentioned earlier that we're investing in heavily, but it's something that we've executed. We've grown that double digits, expected to do that again next year. Some of that's driven by wireless infrastructure. Talk about supply chain and in shortages, we've still been short on supply of our substrates. That's getting resolved, probably gets resolved this quarter, and we'll start to see that business kinda ramp in the first half of next year. Those are three or four of the big areas. You asked specifically, like some of the puts and takes. I mean, broadband has been strong. It's kinda ebbed and flowed a little bit even this year. I think a lot of the areas of strength are like fiber, cable. It was super strong in Q2, moderated a little bit in Q3.
As we look out into next year, you can see it moderate a little bit, but overall, we're seeing some very strong long-term multi-year trends, where we're seeing upgrades in the home, moving to fiber, but just upgrading broadband in general. You're even seeing the cable guys investing pretty heavily right now in upgrading their own networks to be able to go upstream, you know, improve their upstream capability. It's another example where we see long-term strength. You're seeing a lot of government subsidies in this area as well. As I look out, you know, over the next couple of years, I feel, you know, very good about that business as well as connectivity, going forward.
You know, do you consider some of the areas in broadband such as the gateways to have been, you know, one of those pandemic beneficiaries where, you know, there, you know, there was increased investment, you know, people had upgraded from work from home on that maybe pulled forward some of that demand? Is that possibly reasonable? Was it also 'cause we've also seen consumer weaken in other places as well, which is why I ask, you know, the root cause of some of the slowdown that's happening in that space.
Yeah. Well, I think I would go back to as we sit here today, I mean, there's a large, I think, multiyear cycle going on of investment...
Mm-hmm
...by telcos, by cable operators of upgrading a network.
Mm-hmm.
That's feels like it's just in the beginning stages, just starting this year. A lot of some of the even your Biden infrastructure money that's starting, that has been approved, that $60+ billion, not expected to really roll out until the second half of 2024, which means probably more of a 2024 dynamic. A lot of the telcos are getting more aggressive in dedicating more CapEx dollars to rolling out, addressing more homes. If I kinda take a step back and talk about, well, why are they investing? I mean, these guys are wanting to monetize more of the services within the home. You know, historically, there'd been this kinda you gotta get the pipe inside the home. I think today what our customers really are talking about more is how do we distribute that signal within the home?
How do we monetize other applications? There's lots of applications where you need better Wi-Fi within the home, not just to get to a further place in your home, but also, I mean, it gets into Wi-Fi sensing. You're doing security applications with just a Wi-Fi access point. You're doing health applications where you're sensing heartbeats in the home. There's all kinds. We did a press release with a company called Cognitive a couple of weeks back, and they're doing some of the sensing applications. I think you're gonna see a plethora of these, I guess, new services roll out, and that's where your telcos and where your cable operators are wanting to monetize some of those services, but they've gotta have the infrastructure within the home upgraded. I think that's really just beginning.
Where does MaxLinear fit within that? You know, obviously, there's a big guy a couple miles up to the north that is very large in that space. You know, generally, customers over the years said that, it's often not their favorite supplier to deal with.
Mm-hmm
...for various reasons. And so, you know, how much of your opportunity in that is based on the competitive set as opposed to, you know, some of the advantages that you have specifically?
Yeah. You're right. From a competitive landscape, look, in the broadband market, Broadcom is the primary player there. I think we've done a very effective job of winning-
Mm-hmm
...share from them. I think, we've both benefited to some degree in the market from, you know, this build-out, this multiyear cycle that we're going through right now.
Mm-hmm.
I think they, you know, look, they have had their own struggles, dealing with the FTC and some of the.
Sure
EU dynamics as well. I think from our perspective, we just continue to wanna, we're investing, we're committing long term to our customers, trying to strengthen those relationships.
Mm-hmm.
We've got a whole portfolio. If you think of our gateway today, our gateway, if I go back three or four years, you know, we had, you know, closer to $12-$15 worth of content. Today, we have $30 of content per gateway. In some cases, it even approaches $40 of content per gateway. I think that'll continue to escalate as the SoC itself needs more processing horsepower, but also you need better Wi-Fi capability. You've got other connectivity.
Mm-hmm
...such as Ethernet that goes in, into that same box as well.
What about fiber gateway, which is new for you? What, what's the additional content you get in fiber gateway?
Yeah. I'll talk about the additional content, but frankly, we really didn't play much, and that's-.
Mm-hmm
...thus the-
Right
...the less than $10 million. It just wasn't a focus for the company historically. A couple of years ago, we had always sold into it. Again, it just wasn't a focus.
Mm-hmm.
We've put that focus, improved the product offering itself, more differentiation within the SOC. So the SOC is the primary chip that's in that fiber gateway. You still have the same Wi-Fi dynamics, you still have the same connectivity light then like an Ethernet solution that you would have there. We do some products outside of the home, like in some of the nodes that are going in, but it's a smaller portion of the revenues, and I'd say the majority of it's coming from those gateways.
Got it. What about on the other side, on the connectivity side? It's been growing quite a lot. What, what's the reason for that? Obviously, you've got this Wi-Fi 6, 6E.
Right.
There's some content there. You know, obviously, this is another Wi-Fi has done very good, you know, since the pandemic. It's also an area that seems to have remained stable as well.
Mm-hmm.
Maybe you could talk about some of the drivers in that area from content.
Yeah. I mean, look, Well, I'll say we were late to market with the Wi-Fi 5 solution.
Mm-hmm.
Our Wi-Fi 6 solution really did get a lot of traction.
Mm-hmm.
A lot of that growth was driven by the attachment alongside of our SOC. Keep in mind that most of these operators, most of these telcos wanna have one provider. They've had that in Broadcom over the years. They would like to have a provider that they can go to, kind of that whole one throat to choke, idea. There's more firmware on these gateways as well, so that's an important part. So we've gotta continue to execute, deliver, more of that solution. When with the attachment, we've also got it with our fiber, we're getting that attached, and then we're doing standalone routers. Standalone routers and Wi-Fi is a new area for us. We've not done that. We frankly didn't have enough supply.
Now that we've got more supply, that'll start to ramp in Q4, and that'll be a nice growth driver for us next year as well. I guess I would also just mention that ASPs are growing, right? In Wi-Fi, Wi-Fi 5, ASPs were on the order of $7 per solution or chipset. Today, with Wi-Fi 6, we're up around $10, Wi-Fi 6E can run $11-$12, and Wi-Fi 7 we expect to be even higher.
Mm-hmm.
I guess the other part of that is that a lot of these routers, if it's a dual-band solution, it may be lower end, but you're starting to see the trend moving toward these higher end tri-band solutions. All this is driving a higher ASP. It's not just unit volumes ramping, but it's also ASPs or content increasing as well.
Right. Well, what's your expectation for Wi-Fi 7? Wi-Fi 6, 6E was a pretty big upgrade from Wi-Fi 5.
Right.
What's your expectation for Wi-Fi 7? 'Cause I think there's been some mixed view of that in the market.
Look, Wi-Fi 7's getting a lot of attention. You're hearing more about it. The mobile guys are starting to talk about it more and implement it. I think you should expect to hear more. From a revenue standpoint, I don't expect too much revenue next year from access points with Wi-Fi 7. It'll be pretty modest. I think it's more of a 2024 ramp more than anything. Look, as far as the adoption itself, I think you'll see a big adoption in Wi-Fi 7. I think what we're seeing a little bit is maybe less of an adoption of Wi-Fi 6E.
Mm-hmm.
Wi-Fi 6 is still ramping. We're still seeing tremendous growth and expect to see that throughout next year as well. Wi-Fi 7's starting to come in behind that. You'll see Wi-Fi 6E ramp. I mean, we're seeing that right now, but I mean, as far as a size standpoint, you can definitely see some customers starting to look at Wi-Fi 7.
Okay. just kinda rolling through the product lines on the infrastructure side then.
Sure.
You know, particularly the 5G wireless infrastructure. You know, maybe talk to us where you play there and the content opportunity that you have there?
Sure. Wireless infrastructure as a whole, there's kind of two different product lines. One is wireless access, as you mentioned. These are transceivers going into base stations, relatively new for us.
Mm-hmm.
A lot of focus around O-RAN. We've got some DPD technology that is very unique and very differentiated, that's kinda why we've been winning some of those sockets. That started ramping, call it, 12 - 18 months ago, doing extremely well. The other side of that wireless infrastructure is backhaul. Backhaul is, there's a couple of products there. One is a modem. We've got the only modem solution in the market. It's the only merchant modem solution in the market. Then the transceiver. The transceiver is relatively new. Just started ramping that really this year in earnest, then we were short on supply due to some of our substrate shortages. That'll start to come in, you know, in the first half of next year. We've seen tremendous growth in backhaul.
Some of that is in rural areas, kind of following some of the RDOF money, but then you've also got greenfield applications. Any time that, you know, you're familiar with this, I know, Chris, but having these microwave links versus rolling fiber in between base stations is a big opportunity. We've seen it continue to grow. We're engaged with most all of the big players in this space, but they're all familiar names like Ericsson and Nokia and NEC and used to be Huawei. Huawei we can't address anymore due to sanctions, but we do have a very good footprint there.
You know, in a lot of the comments you made, the shortages have come up. Maybe you could describe that a bit and, you know, have you been more constrained on the substrate side? Has it been the wafer side? Maybe some combination of the both, and where is that starting to ease?
Yeah. So the substrate, I just kind of knocked this one out. I know I mentioned it a couple times, but substrates, this is an ABF substrate, more higher reliability. We have been short on this most of this year. We've got a lot of backlog that we've not been able to address. We'll start to be able to address it late this quarter and the first half of next year. That's really, that's the big piece of substrates. On the wafer side, we've been short. If I go back to Q2, we were short, primarily on our Wi-Fi product line, mostly driven by wafers. We were able to catch up to some degree last quarter, and you saw our connectivity revenues jump quite a bit in Q3, and then expected to grow again in Q4.
As I look out, I mean, I do feel like shortages are... I don't know if they're 100% behind us, but I definitely think things are much, much better today, and I think we'll be talking about this a lot less going forward.
Do you get a sense, as you catch up on some of those shortages, that there's still unfulfilled demand out there that will wind up getting addressed as the shortages come out? This is the debate in the industry, right? We've been short for a while and then, you know, in some segments now, you know, we feel like we have too much. You know, I guess that's the magic question, right? If there's still unfulfilled demand, then we're gonna fill it. Have that benefit in 2023.
Right. Yeah, and there's definitely some of that, right? Where we're literally in the process, I mean, it's kind of happening real-time, call it in Q4, where you're catching up, you're getting additional wafer supply, able to address opportunities that you weren't able to address. I mean, we have that to some degree in our Wi-Fi business. That was demand that we won probably nine months ago, could have shipped nine months ago and didn't have the supply.
Right.
But I think as an industry, now you're getting those products, you're able to address it, and I think you're approaching the point where customers are now going, "Okay, well, what's my demand look like next year," right?
Yeah.
In some cases you've not... Some of these markets where they've over-ordered, you're gonna see pullbacks, right? I mean, like, on the consumer side, you've already gone through that. You've been going through that for six to nine months. We don't do as much consumer business. Clearly, there was over-ordering, and you've seen the industry kind of burn that off over the last couple of quarters. I think that's the big question that kind of looms out there for the industry in 2023 is, do we see a slowdown or, you know, or is it pretty modest, and we just kinda roll right through it?
I understand. We'll move on to the acquisition, Silicon Motion acquisition. I get the perception, and I'm, you know, don't cover MaxLinear, but I do get the perception that that's been a little controversial. Maybe you could start with, you know, kind of the rationale behind it, you know, why it's a strategic fit and, you know, why you elected to do that acquisition?
Sure, sure. Level of controversy.
Okay.
Look, and it was a very exciting opportunity for us. We announced the acquisition in May of last year, May of this year.
Mm-hmm.
So exciting. The rationale itself, I mean, for those of you unfamiliar, Silicon Motion is storage controller company, been around for a number of years. There's a lot of similarities, frankly, between them and MaxLinear. Founder-led company, grown it over the last 20 years. Very impressive product offering. We announced it in May. I think, some of the Well, let me tell you the rationale first. First of all, the storage market is a big market.
Mm-hmm.
It's growing double digits every year, expected to see that continue. That's across all of the storage controller markets, right? That addresses the client side, like consumer and handset, but it also gets into industrial, automotive. It gets into data center, enterprise storage. These are big, big markets that are growing quite a bit. That was the attraction from us.
Mm-hmm.
We don't have a huge storage exposure. We sell into the enterprise storage markets today with several of those players. We clearly, we're talking about optical. I mean, optical, we sell into the data center, so there's a couple of overlaps. Neither of us or Silicon Motion, have huge exposure just as a % of our revenues to the enterprise market, but it's a place that we both see as a big growth potential for the company, and we think we can benefit from that. I guess, the second thing I would mention is scale. I mean, this was a big rationale behind the deal itself. I mean, all of you know the consolidation that's happened in semiconductors over the last several years.
You know, we're competing every day against companies like Broadcom, like Marvell, that are four, five, six times bigger than us.
Mm-hmm.
We need to have the scale. It's always been important in semiconductors. The acquisition that we made, Silicon Motion, was doing two to three times more wafer volume than we're doing at TSMC. That'll give us tremendous amount of leverage from a cost standpoint on wafers, on back-end assembling test, but also on the front end, as I think about, like, R&D dollars. We're both investing heavily in IPs for next generation products.
Mm-hmm.
We have a 5 nm solution for our optical products. Naturally, some of those IPs will be needed when Silicon Motion develops their next generation 5 nm, 7 nm product as well. Now we can leverage that across a much bigger business, taking a $1 billion business, moving it to $2 billion. Just the scale alone gives us a lot more capabilities to pursue other things. Long term, naturally, we wanna continue to grow organically, but we'll also wanna do more acquisitions down the road and continue to roll out more semiconductor companies. Financially, it's very a very accretive transaction. I mean, the structure of the deal was a little over 80% cash, a little less than 20% stock. It'll be funded with a term loan.
It'll be done in Term Loan B, Term Loan A, debt facilities, and that'll be syndicated out close to the time of close.
Mm-hmm.
Maybe to hit some mechanics of the transaction, the only thing we're waiting on is SAMR approval.
Mm-hmm
... through China. Antitrust approvals in China are taking close to 12 months right now.
Right.
Some cases more, some cases less, but that, as a general rule, that's about the time, and that's what's kind of dictated our view of us closing kind of mid-next year.
Right. What's your accretion targets for that acquisition?
We announced at the timing of the deal, accretion of about 25%.
Mm-hmm.
I think, for most of you that were familiar, I think if you plug the models together, there was $100 million of synergies, the accretion levels were much higher than the 25%.
Mm-hmm
... that were announced. That was just kind of baking in some cushion. Clearly, when we announced the deal in May, part of the controversy, that you mentioned was, you know, why this deal, why now? I talked through the rationale itself, but I think there were some part of the concern at the time was why the consumer market? Consumers were slowing down in April of last year, April and May, right? Then we were putting some additional leverage. First of all, I mean, look, We weren't necessarily buying the company to be in the consumer market per se.
Right.
That being said, it drives tremendous amount of volume, tremendous amount of scale.
Right.
We'll be able to benefit from that. With regard to the leverage, I mean, look, you've seen us do deals, historically that we put leverage on the company. We were very quick-
Mm-hmm
... to pay down that debt. We would intend to do that here as well. The leverage we announced or that we estimated to be at close would be a little less than 4 x levered at close.
Mm-hmm.
18 months beyond that, we'd be below 3x levered.
Right.
That's still the focus today.
Right.
Maybe one other point to note, as many of you know, is interest rates have moved up. When we announced the deal-
Right
... the interest rate was, on or about 4.5%. Today, that's probably running closer to 7.5%, maybe as high as 8%, if we were to close today, which we're not. As we syndicate that deal out, you know, call it next spring, you know, we'll see where that interest rate lands. The deal is still very a-accretive-
Right
... and very exciting long term for MaxLinear in growing the company.
It sounds like that there was enough cushion in the accretion targets when you announced the deal that even though we've got higher rates, you know, softer consumer market, you still feel you can hit those targets.
We do feel very good about that. In fact, I'm often mentioning that I think in a downturn, you can get in there, and you can make some corrections. We can make, you know, realize more synergies during tough times, tough markets, versus when times are good, it's a little more difficult to realize some of these synergies. Maybe I'll just hit on the synergies briefly.
Sure.
There's $100 million of synergies, $30 million were expected to come from COGS and $70 million from OpEx. That $30 million, you can imagine at what? $2 billion of revenue, a little less than $1 billion of COGS.
Mm-hmm
$30 million of synergies, I think that's a pretty conservative number. Hopefully, especially as we look out going forward and you're seeing, you know, suppliers', utilization go down, I think we'll see some more pricing leverage on that front.
Mm-hmm.
Very confident that we can realize the $30 million. On the $70 million side, it's a little less than what we would normally target. We don't have as much overlap in the business, but that being said, I think we're more than confident that we can hit the $70 million and potentially even higher than that.
Great. Just again, any questions in the audience? I'll look out if there's anyone there. Generally, there have been none. Maybe, and you spoke about some of the margins and that. Let's speak about the pricing environment too.
Sure.
Certainly, this has been something different in the semiconductor industry, where we've been seeing pricing, moving higher, and that's been largely a function of tight foundry supply, tight substrate supply. What's your outlook on that into 2023? I've heard some mixed things that, you know, certainly in, you know, industrial markets such that it still sounds like pricing is going higher into next year. How do you look for your business? Because certainly, it seems that TSMC pricing is going higher next year. What's your ability to pass that along to your customers?
I think you're hearing mixed views 'cause I think there's a lot of mixed things going on out there.
Sure.
I think everyone's kind of in this negotiating phase right now. I think you're hearing from suppliers, everyone wants to pass along more price increases. Clearly, there is some inflation out there. Energy prices, et cetera, are still going up, and they'd like to pass that along. We'll see if they'll be able to.
Mm-hmm.
I think there's a lot of suppliers that would like to but yet demand is going down, and they're gonna have to deal with that, right?
Right.
I think the same thing applies to our customers as well. I mean, to the extent that we can pass that along, we will pass that along where applicable, right? A lot of negotiation. I think there are parts of the market where you will still see price increases next year, and I think you'll.
Right
... see other places in the market that I think you'll see prices come down. I think you've kind of seen this reset in the market. I don't know that we're gonna go back to prices two years ago. I don't expect that at all. I also think there are certain markets that you're gonna see kinda what I'll call typical ASP erosion...
Mm-hmm
Just like we've seen in historical cycles as well.
Right. What about from a foundry standpoint? Where is your sweet spot in terms of, you know, where, what process nodes you're using and, you know, the supply-demand dynamics in those nodes?
Yeah. The majority of our wafers today are 28 nm, soon to be 16 nm.
Mm-hmm.
I'd say that's where the majority of volumes are. We have a broad supply base. We're buying some products from Intel via the previous acquisition that we did.
Right.
TSMC, UMC, as well as a little bit from GlobalFoundries. All of those are suppliers. You know, as I mentioned earlier, not seeing any tightness. I think, different places, you know, we may be able to see some price reductions as well going into the new year.
Right. I think that those nodes are a little bit looser than what we've seen.
Sure
... both leading edge and,
Trailing.
... and the trailing edge.
Sure.
Okay. Looks like we're just about out of time. Anything you want to leave us with in the last few minutes?
No, no. Should be an exciting year. Thanks again for having us.
Absolutely. Thanks for coming.
Thanks, everyone.