Q3 2020 Maxlinear Inc Earnings Call
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Greetings and welcome to the Max Linear Inc.
Third quarter 2020 earnings call.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr., Brian Nugent. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining us on todays conference call to discuss Maxlinears third quarter 2020 financial results.
Today's call is being hosted by Dr., Kishore, Seendripu, CEO, and Steve Litchfield, Chief Financial Officer, and Chief Corporate strategy Officer.
After our prepared comments, we will take questions.
Our comments today include forward looking statements within the meaning of applicable securities laws, including statements relating to our guidance for fourth quarter 2020 revenue fourth quarter revenue growth expectations, and our principal target markets GAAP and non-GAAP gross margin GAAP and non-GAAP operating expenses tax expenses.
And and effective tax rate and interest and other expenses.
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 recently completed acquisitions of Intel's home Gateway business end up nano semi.
Growth opportunities for our wireless infrastructure and connectivity markets and opportunities for improved revenues across our target markets.
These forward looking statements involve substantial risks and uncertainties, including integration and employee retention risks related to the acquisitions as well as risks arising more generally in our business from competition global trade and export restrictions potential supply constraints.
Or the impact of COVID-19, pandemic, our dependence on a limited number of customers average selling price trends and risks that our markets and growth opportunities may not develop as we currently expect and that our assumptions concerning these opportunities may prove incorrect.
Information on these and other risks is outlined in the risk factor section of our recent SEC filings, including our form 10-K for the year ended December 30, Onest 2019, and our third quarter 2020 form 10-Q, which was filed today and.
Any forward looking statements are made as of today and Maxlinear has no obligation to update or revise any forward looking statements.
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A stronger than expected broadband revenues were driven both by increase in demand as well as market share greens across multiple product lines.
Our wireless infrastructure business also improved significantly recovering from a week macro backdrop and the first half of 2020.
Before turning to the business highlights I'm excited to welcome our nano semi corporation IP and design team.
We expected acquisition will prove to be a game changer for our <unk> business.
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Sensing business also expand our customer base across <unk> basement test equipment and other wireless applications.
Simultaneously, we are working aggressively to integrate these eyepiece into RF transceiver infrastructure products greatly enhancing our value proposition and fight massive microsystems for both open ran and proprietary <unk> solutions.
With the addition of narrow semi we have significantly bolstered our <unk> wireless infrastructure competitive positioning and offerings in this large and rapidly growing Fiji market.
Now turning to some of the Q3 business highlights and broadband access are required until assets immediately double or target addressable market about $5 billion consisting of industry leading DOCSIS.
Cadieux telco opportunities.
In wired connectivity demand for our flagship Moca 2.5 is strong at a premier us telco operators, even as a transfer and you get the platform the large Canadian telco.
In optical datacenter valid vial the industry's first 400 gig pamfour deployments are slightly delayed we are seeing meaningful progress towards mass production at our tier one hyperscale data center customer.
We are well positioned with the early traction and ongoing adoption by tier one customers.
But for one Hundredg pamfour offering also which we expect to ramp mid 22, even as new designs convert into production platforms.
Both 100 gigabit and 400 gigabit Pamfour markets continue to have a tremendous growth outlook and we'll dominant cloud and data center deployments over the next several years.
With our next generation financing meter Cmos 800, gigabit Pamfour associate product, which we plan to sample in mid 2021, we are confident in our ability to capitalize on this growing long term optical data center opt opportunity.
Turning to Fiveg wireless infrastructure market, we saw strong double digit growth during Q3 as demand recovered from the Covidien related installation delays in first half 2020.
In wireless backhaul maximal use binary RF channel aggregation feature is now a de facto requirement in operator RF queues.
This has uniquely positioned us to both wind and continue to add several new design wins across tier one tier two and tier three payers.
Meanwhile, we have received strong positive feedback on our new 40 nanometer Cmos Fiveg RF Transceiver Association, which is the Industrys first eight by eight massive mimo solution in.
In addition, with Nanosphere made strong IP portfolio, we greatly enhancing our value proposition in fiveg massive mimo systems.
We continue to work aggressively to get our lead customers to market to drive strong growth in 2021.
In summary, our organic initiatives in Fiveg wireless optical datacenter and high performance analog markets combined with the recent two acquisitions greatly expand our target addressable market of high value rapidly growing.
Got band connectivity and network infrastructure platform applications, which will uniquely drive strong profitable growth in Q4 and beyond.
With that let me turn the call over to Steve Litchfield, Our Chief Financial Officer, and Chief Strategy Officer.
Thank you sure.
Our first review our Q3 2020 results and then further discuss our outlook for Q4 2020.
On revenue of $156.6 million, we saw our connected home business up 30% sequentially well above guidance led by strong demand for cable products, owing to the work from home dynamic and share gains.
Our infrastructure business grew 12% sequentially driven by wireless backhaul and access partly offset by weakness in our high performance analog business.
Our industrial Multimarket business was down 11% sequentially due to end market softness in Asia and inventory reductions are.
Our broadband and Wi Fi business acquired through the Intel acquisition accounted for $82.3 million during the quarter well above our prior prior estimates.
GAAP and non-GAAP gross margins for the third quarter were approximately 42.3% and 58% of revenue respectively.
This compares to GAAP gross margin guidance of 51.5% to 52.5% and non-GAAP gross margin guidance of 63.5% to 64.4%, which excluded the impact of the two acquisitions, we made during the quarter.
The delta between GAAP and non-GAAP gross margins in the third quarter reflects the amortization of $14.4 million of inventory step up and $9.9 million of acquisition related intangible assets as well as point $3 million of stock based compensation and accruals related to our 2020 bonus plan.
Third quarter GAAP operating expenses were approximately $100.8 million.
Which was up quarter over quarter due to the acquisitions and acquisition related charges.
GAAP operating expenses included stock based compensation and stock based bonus accruals of $22.6 million combined.
Amortization of purchase intangible assets of $6.1 million.
Acquisition costs are $7.8 million and restructuring cost of 3.3 million.
Non-GAAP operating expenses were 61.1 million up 28.5 million sequentially due primarily to the impact of two acquisitions that closed during the quarter.
Moving to the balance sheet and cash flow statement.
Our cash flow used in operating activities in the third quarter of 2020 was $16.6 million versus $9.3 million generated in the second quarter of 2020.
Our loan balance stands at $387 million factoring in the term loan a raised this quarter of $175 million for the Wi Fi and broadband assets acquisition.
We remain consistent in our intentions around uses of cash with priorities on debt Paydown and strategic acquisitions.
Our day sales outstanding for the third quarter was approximately 61 days compared to 58 days in the prior quarter.
Our inventory inventory turns were 5.2 compared to 4.0 in Q2.
That leads me to our guidance.
We currently expect revenue in the fourth quarter of 2020 to be approximately 185 million to $195 million up 21% sequentially at the midpoint of the guidance range.
While we do expect to adjust our end market reporting breakdown in Q4, we are maintaining the current breakdown in an effort to maintain transparency during this transition.
We expect connected home revenues to be up again with growth driven by cable data and connectivity.
We are expecting tailwinds from the work from home dynamic as well as new customer program ramps to continue in Q4.
We are working closely with our suppliers to support the increased demand to supply constraints have become more of a factor in the market.
We expect infrastructure revenue to be down primarily driven by lower wireless revenues related to the China trade dynamics, we expect our industrial multi market to be down slightly as channel inventories consumed.
We expect fourth quarter GAAP gross profit margin to be approximately 40% to 44% of revenue and non-GAAP gross profit margins to be approximately 56% to 59% of revenue approximately flat with the mix shift towards broadband and Wi Fi, partially offset by gross margin improvement.
In this category.
As a reminder, our gross profit margin percentage forecast could vary plus or minus 2%, depending on product mix and other factors.
We continue to fund strategic development programs targeted at delivering strong topline growth in 21, 2021, and beyond with particular focus on infrastructure and Wi Fi initiatives and our stated goal of increasing the operating leverage in the business.
We expect Q4 2020, GAAP operating expenses to increase approximately 8 million quarter on quarter to a range of 107 million to $111 million driven mainly by the full quarter impact of amortization of intangibles and stock based compensation and bonus.
We expect Q4 2020, non-GAAP operating expenses to be up approximately 15 million sequentially to a range of $74 million to $78 million we.
We expect GAAP tax expense to be approximately zero in non-GAAP tax rate of 6%.
We expect interest and other expenses in the quarter to be $4.2 million to $4.3 million.
In closing we are pleased to report improving dynamics in all of our businesses based on strengthening product cycles improved market dynamics and share gains our infrastructure efforts and Pam four and Fiveg continued to set up well with meaningful growth coming next year as production platforms begin to ramp.
We are encouraged to see considerable recovery and the broadband business as well as Earth early growth from our Wi Fi business.
We are intent and supporting customers through a dynamic market environment with accelerating demand in emerging supply constraints.
We remain focused focused on maintaining strong profitability and cash flow generation, while continuing to execute on our integration efforts as well as our organic infrastructure development with these existing initiatives and our newly acquired assets in their respective growth opportunities. We believe we are uniquely positioned to deliver strong leverage in our business.
The remaining portion of 2020 and into 2021.
With that I would like to open up the call to questions operator.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Keith one moment, please while we poll.
For questions.
Your first question comes from line of Gary Mobley with Wells Fargo. Please proceed with your question.
Hey, guys. Thanks for taking my question.
With the focus on sort of the baseline and gross margin in operating expenses from the fourth quarter level.
Once you fully integrate your acquisitions and so thinking about that 57% gross margin guidance and $76 million. Thanks.
How do you.
See any sort of improvement issue further integrate your two recent acquisitions and start to run I guess more favorably priced wafers from the until business for example, and then as well some opex synergies.
Yes, Gary.
Thanks for joining us so I can comment a little bit I mean, I think I don't think weve found anything different than we initially expected from a kind of a gross margin and the potential that we have on that front. So I do expect you know next.
Next year, we have talked about seeing the the overall business able to exit the year somewhere in the 60% range. So I do see some nice improvements I expect a pretty good step up in the first half of the year.
The homes, it's driving.
Creating the boxes that are being deployed so we are now pretty strongly trending towards full.
Doctor Theodore one rollout in most of the major operators in North America.
And for a specifically we do not we had lost market share earlier on and at a major cable operator in North America and now that's in full recovery mode and but the good news is that.
Even even so are the below materials. We are supplying to these operators has increased quite a bit owing to the deployment or Wi Fi six illusions and.
We definitely see that come down as we take that out of our numbers completely.
On the optical side I think we all know that the pamfour.
Rollout in general has delayed the 200 gig pamfour or 400 gig pamfour. So I think that as a result of that.
You know.
Our own expectation for revenue from the Pamfour market as has pushed out as well, but having said that we have a vietnam. We have a select number of Oh optical module customers, who are who are getting ready for a potential ramp in the middle of 2021.
And we.
Revenues really really take time to come but when they come they are yours for a long time, so thats I would sum it up.
That's really helpful. I'll put myself back in queue. Thank you. Thanks a lot.
Your next question comes from the line of Quinn Bolton with Needham <unk> Company. Please proceed with your question.
Hey, guys just wanted to follow up on Alex's question I guess can you give us some sense. What do you think that hold up has been on the Tam for qualification in five has been shipping I think into that lead hyperscaler now for over a year. So it doesn't feel like it's a market demand issue can you walk us through firmware interoperability.
He testing are you running into some issues or what's what's what's really behind the delay.
Actually what you see the surprise news for me that.
A computer to ship, England, one full year in fact of.
You know the real delays are I don't know how much is pandemic related but they are.
No and India, China trade related issues with the import tax issues or whatever qualified vendors are there.
You know the.
The the import issues with the operational China, it's been one blocker and then there has been an emphasis put on the data center to quantify non China based.
Module makers and their there'd be a little bit slower on that with the module companies.
You know trying to get ready to get to the qualification so I as far as I know.
Both the 200 gig Pamfour and 400 gig sample you know Bayley a few teams offer key tens of thousands of quantities of Bam.
Pamfour modules have shipped actually so in fact, even I've been told that there would be more 400 gig pamfour quantity shipped because it's always a statement that 200 gig pamfour. So I'm still struggling to understand how and a full year of shipments that happened as far as sell through goes.
I cannot speak for salad, let's put it that way.
Okay.
Second question, Steve you gave us some insight I think into the three traditional buckets of core Max linear I might have missed it but I don't think you gave us and outlook for the acquired Intel business I assume that's up because you get a full quarter of over that business, but any any comments you can say about the Intel business would be helpful.
Then I guess, where I'm driving at is I'm, a little surprised with the gross margins stepping down.
In the quarter, especially given some of the strength of the core.
Max linear.
Cable data business.
So just trying to think through the the margin puts and takes into the fourth quarter is that just you are getting a lot more contribution from the Intel business and that's what's what's causing the pressure.
Quarter over quarter, Yes, sure Quinn, yes, no you're exactly right as you're thinking through that so we definitely have a whole lot more contribution in the quarter. So we so to answer the first part of your question, we do see that continuing to improve much like our own broadband business broadband why buy from Intel is going extremely well.
And so we do expect that to grow in Q4 and yeah. There is just a bigger contribution from a frankly, a lower margin product portfolio right and so that is bringing gross margins down slightly I as I mentioned, a little bit earlier I am confident that we see this recover in the.
First half of next year, so it does.
Alright, we were open to actually make that clear in our prepared remarks, but so we did so the way we broke out the earnings. So we wanted to be just kind of transparent and we broke out in the queue three.
Results based on our previous three and markets and then we had effectively one bucket that was for the broadband and Wifi assets from the Intel acquisition.
It really is now ramping a new platform various flavors of platforms, thereby Phi is an add on in the market.
Additionally, the we have we have gotten some share gains.
That's correct great. Thank you.
Your next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question.
Hi, guys. Thanks, Rob crushing congrats on the strong results and guide you just wanted to dive a little bit into the fourth quarter I know you're switching the segments up but just to just split it maybe at a higher level organic versus inorganic it seems like you're going to have 50% more time.
Owning the the Intel home Gateway business, and then I don't know how much sample semi contributes if any but out of the 190 million midpoint versus the 156.
Sure that is organic versus inorganic.
Probably adding to that as well, but I would.
I would probably start.
Start in kind of echo a little bit of what Kishore, we're sharing earlier I mean, there is that theres, a real recovery kind.
Side, so that'd be good modulate profitability correctly.
No nothing.
Ross I mean, just.
Further clarification and talk about that content increase because I think that's part of your question as to where that's coming from I mean, a big contributor as we look out into next year's Wi Fi right. So we've talked a lot about that size of that business and.
So this year for Max linear so maybe that's in the $25 million range. I mean next year, that's expected to probably double slightly above that so there is good.
<unk>, so you're talking about well where does that upside come from next year and this is all new content that we haven't had historically.
Okay, and I guess, one final one on kind of a kishore was pointing to about modulating the opex side, Steven touched it a little bit on it before but.
Okay. It's please proceed with your question.
Hi, Good afternoon, guys. Congrats on the execution and navigating everything you have going on.
A couple for me if I could.
It is so maybe don't use EPS of the proxy for overall spending.
So Peterson with J P. Morgan. Please proceed with your question.
But some newer products based on these customer input.
Okay, and then I guess the last one thanks for providing me disclosures about broadband Wi Fi business at least at least for now helps us to try to frame the revenue opportunity I guess I would calculate somewhere close to 110 $115 million in the fourth quarter hopefully she can confirm that's kinda right Zip code to think about but but more.
Acquisitions.
Hi, Suji, a yeah I mean, so clearly and we had mentioned that.
We do intend to continue to look at acquisitions and and.
I mean, your specific question about leverage and what we're willing to take on I mean, I I think we're going to be prudent with our market leverage I think very fortunate and the way we were able to negotiate the Intel acquisition, where we really didnt take on a lot of additional debt.
Or leverage in that particular acquisition and I think the cash flows are coming in probably a little faster than what we had originally anticipated so thats going very well. So look I mean, we want it we've got two assets and we're right in the middle of integration, but I think it's progressing well I mean, it is an asset purchase so a lot of our work was done really early in the process. So I think.
That positions us well to be able to do something maybe as early as the second half of the year.
But I don't know that Theres, an exact number of leverage I think a lot of that depends on the market environment as well as the asset itself.
Okay, Great and then I think especially last quarter, just maybe try to ask a more general sense, what but the new profile of businesses. The portfolio. What is the typical seasonality look like I'm 20 one's going to be a typically or not but maybe you can just give us some thumbnail for that.
We've talked a lot about what does that growth profile look like I think in the short term, it's still well in the in the really short term I mean demand has been very good in these in these share gains and are definitely contributing the bomb increases or are very meaningful overall I think.
Kind of that low single digit growth rate is what our expectations are I think as Ethernet and Wi Fi really start to pick up you can definitely start to see our ability to grow this it faster than that low single digit number, but it's still a little early and those are fairly small product lines today, I think where we have been in.
Testing and really where we're expecting a much bigger growth opportunities from the infrastructure business.
Sure.
You talked about a little bit earlier, but our optical business still very excited about that market the market opportunity itself.
Extremely large and and our and our positioning with the technology and the products that we have today I think works out very well and then the Fiveg side again is a big investment opportunity and it's and it's one I think were positioned to take advantage of so thats really where you see that.
Well over double digit growth that you'll expect to see over the next 12 to 24 months.
Got it thanks for the color there and then if I could also for you Steve here. Thanks to gross margin range a bit wider than normal is this just getting a feel for operating the new business and how that's going to play out or is there any more uncertainty in this quarter than others in terms of your mix.
It's time to improve the gross margin so while it's a little bit lighter in queue for as we get our hands on this.
You're going to see a nice progression on the gross margin going forward.
Alright, thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Kishore, It's <unk> for closing remarks.
Thank you operator, I just wanted to let everyone know that will be participating at the you know raw technology conference in November 11th Steeples, 20th 2020 virtual Midwest.
One on one growth conference on November 12th medium secure medium security network and Communications conference on November 17th.
The Veils Fargo Tmt's summit on December 2nd and Barclays Global TMT Virtual conference on December 9th 210.
Just a reminder that all of these countries is a virtual and we hope to connect with many of you there with that being said. Thank you all for joining us today have a happy Thanksgiving. If you don't see you before then I'll talk to you and we look forward to reporting on our progress June explored.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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