Bank of America Merrill Lynch 2021 Global Technology Conference

Jun 10, 2021

Good afternoon and welcome to this afternoon, semicap equipment at BFA Securities. And really delighted to have Steve Litchfield, the Chief Financial Officer and the Chief Strategy Officer of MaxLinear join us this afternoon. A very warm welcome to you, Steve. Glad you could join us. Great. Thank you, Vivek. And maybe just because there are a number of people on this webcast who may not be as familiar with MaxLinear, I thought it would be useful to perhaps give a quick overview of MaxLinear because the business has gone through a fair bit of transformation, including some M and A in the last year, right, with all the other excitement and challenges going on. So maybe just bring everyone up to speed, give us a sense from what Max Linear is today, right? What's your strategy is? And then we will walk through some of the demand drivers. Great. That sounds great, Vivek. Well, yes, thank you for having us and thanks everyone for joining today. Yes, just maybe a little bit of background about MaxLinear. So, the company was founded in 2003, went public in 2010. If I go back in the earlier days, mostly focused around broadband, we did a front end solution that had a big growth driver for us over a number of years and had grown the company, also did a number of acquisitions over the years to grow the company large and small. And then just probably 3 years ago, really focused a lot around the market and made some fairly sizable investments in wireless and wireline infrastructure, as well as some optical products going in the data center market, which we're very excited about and have made some recent announcements at OFC with our new 5 nanometer product. So there's a lot of efforts going on there. Our infrastructure business is did about $76, 000, 000 last year, grew a little over 60% in Q1 of this year. So things are really picking up nicely with some of the newer areas like optical, but on also our 5 gs products, we have a massive MIMO solution or transceiver that's going into those markets. It's getting a lot of traction, early days, but a big market opportunity for MaxLinear. And so we're very excited for those infrastructure products. That said, we still are in very much in the broadband market. And Vivek, I mean, that was 1 of your comments about some of the acquisitions that we did. We did do 2 acquisitions last year, 1 of which was a carve out of Intel, fairly sizable acquisition for MaxLinear, more than doubled the revenues of the company. And it's been quite exciting. It was a market that we had already been participating in, but 2 things that that particular acquisition brought us. 1 was scale. And like I mentioned, more than doubling the revenues of the company, but it also gave us some really unique Wi Fi offerings in the access point. And so that's a it's a big opportunity because we've been selling or we're selling gateway SoCs as well as front ends, but now having Wi Fi and even Ethernet, those are 2 big growth drivers for the company. And we're excited right now because we're seeing a tremendous amount of attach to our existing gateway products in some of the cable modems in the home, which as you're probably familiar with Quebec, just really huge demand drivers within the home, you're seeing operators investing heavily. There's been a quite a shift in the overall market. That market historically, we have viewed it as kind of lower single digit growth drivers. But just over the last say 6 to 9 months, you've seen operators kind of shift directions a little bit. They had over the last couple of years and not a from some of the content drivers, a lot of the big operators were buying content companies and really shifting directions. Now you've seen that flip a little bit and you've seen them even divest some of those assets and along with some of the CapEx that the operators are deploying is pretty exciting. We see it kind of moving the market opportunity to be more of a mid to high single digit grower. 1 of our larger competitors Broadcom has highlighted as a double digit grower over the next 5 years. I mean, we don't disagree with that. I think the outlook is very positive. We're very excited about that. There's been a lot of consolidation over the years in this market. So now it's really kind of down to us Really post pandemic, most of the operators really want to have a healthy ecosystem. And so the engagement that we've had there has been extremely good. We've got great feedback. We're really working closely with our customers and our customers' customer to really understand roadmaps and needs over the next 3 to 5 years. And the outlook is very good. So that's a bit of an overview. Happy to, Vivek, kind of take it in any direction that you'd like to take it. Excellent. Thank you for that, Steve. So maybe let's quickly touch on the supply side and then we will go through all the demand drivers and all the growth side. So widespread supply constraints that the industry is dealing with, what are you seeing in terms of the constraints you are facing? Yes Yes. No, this is a hot topic right now, as we all know. So from our standpoint, we definitely were impacted in Q1 from some of those supply chain dynamics and limited what we could ship. We're definitely going to see it again this quarter and Q3, hoping that things will ease a little bit in Q4. But no doubt, I think we'll see these constraints throughout even next year. So for us, at least in the short term, we're having a few more challenges on the back end. So assembly, test, packaging, substrates, not dissimilar from many of our peers. But we haven't seen too much of a problem on the wafer side just yet. I'm not saying that that won't happen, but at least in the short term, we've been more limited by those other back end constraints. We're working through that. We're getting more suppliers up and running. We're also we've looked at what we can do as far as changing packages, moving to more standard packages, changing tests. I mean, looking at different substrates and so we've looked to redesign where we can. Now that requires qualification and different things, but we're our operations guys are working diligently to see if we can solve as many of those issues as we can in the short term and even in the long term, even looking out into next year, if we can make some of these changes, it will mitigate some of the risks that may kind of persist into 2022. So, working very hard. There's no silver bullet, I don't believe right now, but we're doing our best. Excellent. And you mentioned that you're taking action that hopefully you'll get back on trend next year. Have you quantified, I don't know whether it's in terms of lead times that you have right now, what they have been historically. Just what are you hoping to do by next year in terms of lead times? Yes. I mean, so I don't we haven't seen lead times really change much. We don't I mean, I think the good thing is that well, the demand has been extremely good, but we've also seen customers come in and kind of place orders out over the next several quarters all the way throughout next year. And so we've got more than a year's worth of backlog. And so we're trying to kind of navigate that the best we can. The good thing is we've got the orders. And so then that helps just from a planning perspective for our operations team, but all of our suppliers as well. So we're doing again, I think this is going to be pretty tough over the next 2 quarters. And then as I mentioned, hopefully, we'll see a little bit of easing in Q4. Got it. Now let's go to the more interesting and exciting part, which is on your growth drivers. So pretty broad based business, of course, right? Broadband is a big part, but broadband infrastructure, right, multi market. And kind of just at a high level, maybe hit each of those end markets and talk about where we're going. So, I'll start with the infrastructure, right? Infrastructure, I mentioned previously, kind of that $76, 000, 000 of the $209, 000, 000 that we shipped, That business is expected to grow. I think a lot of the analysts have this doing close a little over $130, 000, 000 this year. So it's a big growth opportunity for the company. We've made some big investments, as I mentioned earlier. Look, this end market, I think $400, 000, 000 over the next 3 to 4 years. These are big market opportunities. And so that's clearly where our focus has been and will continue to be, right, as we continue to expand more our product offerings here. And as 5 gs really starts to take off in earnest, same thing with the optical and data center. I mean, 2 of the bigger drivers within infrastructure were our backhaul business and our analog business as well that falls under infrastructure. Backhaul has been extremely strong. Last year was kind of held back by some of the trade war issues around Huawei. Huawei was a large backhaul customer. But we also had some other big customers like NEC and Ericsson and Nokia that had pushed out just now beginning to ramp. And that will continue to progress throughout the year, while optical and while 5 gs really starts to come on in earnest. So, that's kind of the infrastructure piece. Now, broadband, and I'm going to lump in together broadband and connectivity. So, broadband, historically, that's been over 50% of our business. If I buckle it with connectivity, it's even more than that, right, because you've still got close to 15% or so that's coming from connectivity. I buckle those together because as you're familiar, Vivek, I mean, the broadband piece is really our gateway SoCs and our RF front ends. So those are going into the gateway, that front end really takes the signal in and then the processor processes that data, right? And that is really driven by that box growth that I mentioned a little bit earlier. But really more exciting than that is the connectivity side of the business, right? Connectivity, what we got through the acquisition of Intel and what we've been investing in the Wi Fi and Ethernet products. So now if I think about a gateway in your home, historically, we had $15 of content in with the new content of Ethernet and Wi Fi and ultimately even solutions on top of that, we can see that going up to say $30 ish of content. So it's a big content increase. The Wi Fi solutions are new products. Wi Fi 6 is really just coming to market. We just started last year. We talked about our Wi Fi business doing on or about $25, 000, 000 last year, expecting that to double this year and then really has potential to even double again next year. So we're getting tremendous amount of traction and really pleased to see a product line, always exciting to take a product line from less than $20, 000, 000 north of $100, 000, 000 And I think we've got our sights on 200 plus in the not too distant future is a big, big market opportunity. Connectivity alone is north of a $2, 000, 000, 000 servable market for us. And so and some of the low hanging fruit are these gateways with operators, telecom providers, that is all new business to us, right? We really didn't have much content historically. Wi Fi get introduced next year. Now that bumps up closer to $15 So not only do we have a content play within the gateway itself, but we've also got a content play with just Wi Fi, ASP, just continued improvement, so whether it's in easily double digits. And so that will definitely be a big grower along with the infrastructure. Our last end market is really industrial multi market. This has historically been a broad 10, 000 plus customers, diversified power management, interface products and had historically grown kind of GDP like 2% to 4% a year. I think we'll start to revert to domestic supply. But I think going forward, we had a really nice quarter in Q1 and I'm expecting to see continuation get back to some normalcy in that business. So those are kind of like 4 end markets. Your specific question was, what do we want that mix to be? I don't know that we care necessarily what that mix is as long as each of those drivers continue to get bigger and we're growing. But I think that should give you a perspective on what the growth rates on of each of those are. Got it. On the 5 gs side, Steve, what is your kind of China versus non China exposure because there has been a difference in the pace of rollouts in the different regions. So what have you experienced and how does that kind of guide your thinking about growth on the 5 gs side over the next year or so? Yes. So, we're very excited about our new 5 gs part. We just actually announced that we just moved into production last quarter. That was the first production part. It was a 5 gs transceiver. It's a solution. We also have an 8x8 solution that's coming. Well, customers have them now. I don't expect revenues really to be material this year, probably much more so next year. So but it is an encouraging market. Look, I mean, we were kind of anticipating China really ramping more this year and that's clearly I mean, it pushed out last year, it's pushing this year to some degree. We're there's 4 or 5 of these guys that really matter in the world. You've got your Ericsson, Nokia, Huawei, ZTE, kind of your Tier 1 guys and then you definitely have Tier 2 guys like Samsung or NEC and Fujitsu that are starting to really get a little bit more traction, particularly post the Huawei dynamics. So, we're not necessarily picky. I mean, what we saw previously is that China was really leading on the 5 gs side. And since that slowed a little bit, we've seen everyone slow down, right? Huawei was always always has been a really strong technology leader. And so that's I think that's slowed the market, slowed the other competitors as well, because they're not necessarily pushing the limit on technology. I think some of the encouraging signs in North America, clearly with the C band auction behind us, I think you can see more activity there kind of pick up throughout this year and into next year. So I think 'twenty 2 and 'twenty 3 should be bigger years, I should say, as far as the rollout happening. I think that's consistent with what our views are. And so we're working on all the major guys globally, but we're new to this market. I mean, to answer your question, we weren't in this is our first 5 gs access product. We weren't in 4 gs, so we don't have as much exposure to the previous generations. Got it. On the broadband side, Steve, how much of you think the growth effect that could perhaps get to more normalized level of growth? I know you folks have been pretty conservative, right, about modeling that business, right? I know Dotcom has given a bigger number, right? You're kind of sticking with the mid to high, right? You're saying mid to high because you are conservative or because you really think that perhaps there was some incremental boost last year? Or you think that just addition of Wi Fi 6, right, 6C gateways and whatnot, but this could be an extended growth cycle for you on the broadband and connectivity side? Well, so I don't think there's any doubt that it is an extended growth cycle for us. Out of the content, it's definitely we've talked about some share gains as well. So that's happening. I have no doubt that we're going to continue to outpace the market just because these are all new products for us, right? Expected to see some moderation in the midpoint of this year. Now with supply constraints, I mean, it's kind of different challenges now because we basically can't meet those needs and won't be able to meet those needs for another couple of quarters, right? So while we're making improvements and we're trying to meet that demand, we haven't quite gotten there yet. I think my commentary about the mid- to high single digits and even for that matter Broadcom's comments of double digits, all that commentary is really how the market has shifted and that outlook, not just over the next quarter or 2, it's a little more of a 2, 3, 4 year outlook. And the dynamics that are happening, you're seeing the cable guys really step up and invest further. They're looking at DOCSIS 4.0, you're seeing the telecom carriers invest more, you're seeing more fiber rollout. I mean, you probably remember this that when Google Fiber was rolling out aggressively, you saw all the cable guys really step up with their own investment cycles, right? They had to upgrade that technology themselves in DOCSIS 3.1. I think you're seeing the same thing right now as fiber is getting more traction. You're seeing the cable guys going, hey, well, we've got to respond to this. You're hearing a lot more activity around DOCSIS 4.0. And for that matter, you're seeing upgrades in DSL, you're seeing upgrades in fixed wireless access. And so, in our mind, I mean, it's good, right, because we're supplying to all these tests. I mean, we're that arms dealer, just kind of keep all of them deploying more products and they're all upgrading. I think 1 of the differences is that what you've seen from the operators, the telecom carriers, they want to own that home, right? And they want to own those services within the home. And as not historically, it was kind of all about bandwidth and just downstream bandwidth. Now you've got to have down stream and upstream, you've got a lot more activity, you've got security cameras where those are services that of course the operators want to capture, there's gaming, there's AR, VR. You've got of course, we've got Zoom calls as well. But all of these dynamics are driving more needs within the home. The operators also seem to want to really control the quality of that experience in the home also, right? Historically, you bought your own router. You just got the pipe coming in and then you took care of everything else. But now they want to control that. They want to make sure that distribution is happening within the home. That quality is better as well. And that's where I think it's interesting, right, because historically, we would just have the cable modem. And I mean, the great thing about that market has always been, it's very mature, it's us and Broadcom, we only have to the product cycles are long, there's only 2 of us, they want to kind of keep us close to fifty-fifty. So what's changed there? I mean, now they want to deploy the Wi Fi. They want to have the Ethernet. They want to we have MoCA in the home. So you've got this wireline distribution as well to improve quality. And so it's just the dynamics have changed quite a bit. Now we're we're of course on the cable side, but we're selling into the fiber guys. We've actually we've talked about 1 North American carrier. We just won another North American carrier recently that will start to ramp in the mid part of next year. As a sizable 1. We've gotten great traction in Europe as well. And that's a place that I mean, fiber is actually probably 2, 2.5 times the size of the cable market. And so and Broadcom has a substantial position. We've not focused much on this, but we see a nice opportunity to continue to grow there. And that market is growing into double digits every year. So I think we can take that. And it has the same attach rate or the attach opportunity, if you will, right, where you can win the Wi Fi, you can win the Ethernet in these gateways. In some cases, those gateways can run north of $30 per box. And so that content is a big play for us and I just can't stress enough how the operators, the telecom carriers want to deal with 1 provider, right? They don't want to have multiple providers. I mean, they've been pushing us for that for years. And so to be able to deliver on that, I just the stickiness that you get with that is super important. Got it. So, Asia, right, Marvell, Inphi. How would you describe your competitive positioning in the PAM4 DSPs? What's the strategy for growth? And do you think you have the end to end, right, so not just DSP, but the amplifier as driver, like the Ultrabank to really go after a customer with the same intensity as some of these other larger players players do? Yes. So it is an exciting meter. So look, a couple of years ago, we entered this market targeting the 400 gig data center inside the 400 gig data center. And yes, there were a lot of competitors, right? There were 6 or 8 guys that were coming to market. Now since then, that has consolidated or guys have kind of moved away and just kind of focused on smaller parts of the market. We've continued really resolute and I think we've executed on performance. The differentiation, I mean, on power, on integration, we were the first to market with that 16 nanometer integrated driver. Now we're the first to market on a 5 nanometer solution ahead of Broadcom, ahead of Inphi. And so really excited about the positioning that we have. We are new to the market. We came with 400. Amazon is really the 1st data center to really roll out 400 gig. And Google and Facebook came out with 200 gig and now they'll be transitioning over to 800 next. And so we'll be able to intersect those guys naturally with our new Keystone product, which we're very excited about. So then we'll have Amazon. I mean, we can start to focus on the bigger guys. I mean, the other big 1 is Microsoft, right? Now they're the next 1 coming with a 400 gig data center. Now they're still lagging, right? They're still probably at least another year behind Amazon. So, still early days in this market, frankly. Our Telluride solution, what we've said is that we'll start to ramp in the second half of the year. And then more material contribution in 'twenty 2. But I think we've done extremely well. We're building out more kind of module partners. That was Amazon's kind of been guiding us as well. We're working closely with them and the respective module guys that will sell into Amazon. It is a big investment, no doubt about that. But it's also a big market, right? We've identified this to be kind of a $300, 000, 000 to $400, 000, 000 market opportunity. It's really us Broadcom and Inphi. And so I think we're really well positioned. Talking about the portfolio, yes, we're coming with a DSP, right? And really the only guy beneficial to the customer, right, a customer like any of these hyperscalers rather than to be beholden to 1 guy, it's been very helpful to them to have an individual guy that they can go to on the DSP front. And so we think we're executing on the performance side and really excited what's to come. I mean, we'll build out the portfolio. We're partnering with other guys on the chip side. We're partnering with other guys on the optical side I mean, I'm sorry, the optics side. So but I think that's just kind of smart business where we can partner As an example on Yes, yes, that's a great example, yes. Right. So Steve, talk to us about kind of the overarching strategy now in that. Do you so you made this very interesting acquisition of the carve out from Intel's assets, right? Do you see other such opportunities in the future, right? Not asking you to name specific names per se, but do you see other such opportunities? And if there are, how do you go about them? Like are there certain markets you think you want to target? Are there certain technologies you want to target? What is guiding that thinking, right, from your kind of strategy hack? Yes. So we've done big acquisitions, carve outs, standalone companies, we've done small tuck in acquisitions and each 1 kind of has a different methodology. I mean, we've done smaller things that we can really accelerate our existing product development efforts or maybe it brings a customer relationship or both. We've done sizable things. We did a company called XR where we got power management capabilities and that diversified us, made us bigger. As we look forward, I mean, we're still very much interested in growing in kind of the existing markets where we play. Like semiconductors, as you well know, all about scale and we're competing against these big gigantic companies. And so which means that we've got to continue to focus on the technology execution and we don't want to spread ourselves too thin, right? And so if we can pick up more assets, more capabilities, even more technologies to some degree that we can lever into these same customers. More products to sell to the same customers is kind of the way I think about it. It's a simple concept. But if we can continue just to bring more, it's exactly what we did with Intel, right, because we could we bought that we were already selling to that entire Intel assets and we can sell more products to the same customer base, right? We did the same I mean, even the XR acquisition that we did, a big part of that play is to bring power management and sell it into a remote radio head where we were already focused on the 5 gs access space. So those are good examples of what we want to do more of. I mean, I don't we don't want to kind of go into this adjacent market. I think there's less assets out there, but there are still plenty of standalone assets. Some of the private company valuations are quite high right now, but we'll continue to work there. I think there will be more carve outs over time. So, we're always on the hunt for carve outs as well or a standalone company, either 1. Got it. Final question, Steve, is how is the business model in terms of gross and operating margins? Where are you today? What are kind of the points of leverage from here? Sure. Yes. So, our gross margin guidance for this quarter was 59%. Historically, prior to the acquisition of Intel, the company was running 63%, 64% and kind of moving our way back up to the mid-60s. The acquisition of Intel, Intel was running this business at low gross margin. Frankly, that was what kind of deterred us in the beginning, but we were able to negotiate a favorable agreement, a favorable supply agreement, but they were running it in the low 40s. And so with that supply agreement, along with a couple of other tweaks, we were able to get that number up closer to 50%. But we still have a lot of work to do. We see the ability to raise prices, to kind of focus on more profitable aspects of the business. And then, of course, more efficiencies. We think that longer term, we can redesign parts. We think we can be more effective in the cost efficiencies that we're going to be able to design with, right? I mean, just simple things like not doing custom substrates or not doing multi chip modules where yields are low. I mean, there's a we can move to other suppliers, right, and get a little more leverage. I mean, there's a lot of things that we can do and intend to do. We don't see any fundamental reason why we can't get that business up well north of 60 percent. And so the long term, I think we can get I mean, we're talking 3 to 4 years kind of get back up in the mid-60s. In the short term, we've said that we expect the consolidated business to hit 60 by the end of the year. And we remain comfortable with that despite some of the price increases that we're seeing with our supply base. A lot of that we can pass along to the customers. On the operating margin side, so operating margins, when we did the acquisition, we were running kind of low 20s. Historically, MaxLinear had run up into the 30s before, kind of prior to some of the bigger investments in infrastructure. Now, the infrastructure investments are starting to moderate a little bit. Those were big investments, so they'll moderate a little and revenues will start to take off. So there'll be a lot more leverage in the model from infrastructure. And then secondly, on the broadband side or specifically in this case, the Intel business, I mean that's a bit Broadcom runs this business like north of 40% operating margins. So I don't see any reason. I mean, we're not as big as Broadcom naturally, but we can definitely run this business up in the 30s. And so I think the consolidated business can get up into the 30% range in the not too distant future, a couple of years out. It seems very reasonable as we continue to get more leverage with more revenues and as the integration continues to take place as well. Great. On that positive note, Steve, thank you so much. Really appreciate your time. Thanks for sharing your insights about the industry and about MAX India. Really appreciate it. Thanks to everyone who joined the call. Great. Well, thank you, Vivek, and thanks everyone for joining. Take care. You too.