MaxLinear, Inc. (MXL) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the MaxLinear Q1 Earnings Conference Call. [Operator Instructions] This conference is also being recorded today, April 30, 2013. I would now like to turn the conference over to our host, Mr. Nick Kormeluk. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us on today's conference call to discuss MaxLinear's First Quarter 2013 Financial Results. Today's call is being hosted by Dr. Kishore Seendripu, CEO; and Adam Spice, CFO. During the course of this conference call, we will make projections or other statements regarding future conditions or events relating to our products and business. Among these statements, we will provide information relating to our current expectations for second quarter 2013 revenue, including expectations for revenue growth in our cable and other product segments; anticipated trends in our cable and terrestrial revenues; and our efforts to expand our addressable markets, including satellite, gross profit percentage and operating expenses; and our current views regarding trends in our markets, including the anticipated impact of new design wins and the size and potential for growth on our markets. These statements are forward-looking statements within the meaning of federal securities laws, and actual results may differ materially from results reflected in these forward-looking statements. We are subject to substantial risks and uncertainties that could adversely affect our future results. Our business and future operating results could be adversely affected if our current target markets, including the cable market, do not grow or if we are not successful in expanding our target addressable markets in such areas as satellite through the introduction of new products. In addition, substantial competition on our industry, potential declines in average selling prices, intellectual property litigation, such as pending matters between MaxLinear and Silicon Labs, and cyclicality in the semiconductor industry could adversely affect future operating results. A more detailed discussion of these risk factors and other factors you should consider in evaluating MaxLinear and its prospects is included under the caption Risk Factors in our filings with the Securities and Exchange…

Thank you, Nick, and good afternoon, everyone. Thank you all for joining us today. Before jumping into the financial highlights, I would like to note that in the first quarter of 2013, we experienced a resumption of strong growth in our cable business. We no longer have concerns regarding the inventory issue experienced in the fourth quarter of 2012. We're also making significant progress towards expanding our presence in our legacy terrestrial markets with exciting new product offerings. We are also excited by the progress we're making toward expanding our target addressable market by driving our industry-leading broadband RF technology into exciting new markets, such as satellite TV and other infrastructure opportunities. Moving to the financial specifics. Net revenue in the first quarter was $26.5 million, up 7% from the fourth quarter of 2012 and up 28% from the year ago quarter and right at the midpoint of our guidance. GAAP and non-GAAP gross profit in the first quarter was 63% of revenue, well above our prior guidance of 61%. GAAP net loss in the first quarter was $2.3 million or $0.07 per diluted share, and non-GAAP net income for the first quarter was $2.5 million or $0.07 per diluted share. I will now discuss current trends in our business. Consistent with our prior guidance, our cable business resumed growth in the first quarter of 2013, with revenue increasing approximately 16% related to the fourth quarter of 2012, as our large cable data OEM customers returned to normal ordering patterns following the Q4 2012 inventory issue. Encouragingly, the increasing demand for our cable solutions was broad-based. We experienced strong, double-digit growth in cable data, video server gateways and cable digital-to-analog converter set-top box applications. Here are some of the specifics related to our cable revenues. In the first quarter of…

Thank you, Kishore. I will first review our results and then briefly discuss our outlook. In summary, our Q1 revenue of $26.5 million was right the midpoint of our guidance and brings to a quick ending the inventory correction in cable we experienced in Q4. As Kishore noted, growth in our revenues from cable was broad-based, and cable seems poised to continue to drive top line in 2013. We believe that the weakness in terrestrial revenues is largely attributable to seasonality and remain encouraged that a combination of hybrid TV and ISDB-T digital terrestrial TV set-top box applications will contribute to growth in the coming quarters. Now moving to the rest of the income statement. GAAP and non-GAAP gross profit for the first quarter were both approximately 63% of revenue, above our prior guidance of 61%. This compares to 63% in the fourth quarter of 2012 and 60% in the year-ago quarter. The significant improvement in gross margins relative to our guidance was largely due to favorable product mix changes within cable and terrestrial and better-than-expected improvement in COGS. Our Q1 GAAP operating expenses were $18.9 million, which includes $2.8 million of stock-based compensation, $1 million for an accrual related to our performance-based equity bonus plan for 2013 and $1 million in net professional fees related to the Silicon Labs patent litigation. Consistent with 2012, payouts under our 2013 performance bonus plan will be settled in shares of MaxLinear stock. Net of these items, OpEx was $14.2 million, which was below our prior guidance of $15 million, driven primarily by slower-than-anticipated headcount ramps and a continued tight focus on discretionary spending items. First quarter GAAP OpEx attributable to R&D was $11.5 million, which included stock-based compensation of $1.8 million and $600,000 related to the 2013 bonus plan. The declines in…

[Operator Instructions] And our first question comes from the line of Tore Svanberg from Stifel, Nicolaus. Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division: A few questions here. Maybe you could talk first on how your visibility is right now. Where do you stand from a backlog perspective? And how have bookings been so far in the month of April?

We had pretty strong bookings. Like we entered the Q1 earnings call, we had bookings in excess of 80%. So we feel very good where we are with respect to our bookings at this point in the quarter. So we have no concerns regarding our book -- regarding meeting our guidance range based on the bookings legacy we have had as a percentage entering the quarter. Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division: Very good. And it sounds like both cable and terrestrial will be up in Q2. And I think we sort of know what's going on with cable, but could you just talk a little bit about how we should think about the terrestrial business, both in relation to the TV and the ISDB-T business, sort of how it's going to ramp throughout the year? Because I guess Q2 will be the first quarter where you'll see significant contribution from both.

That is correct, Tore. Actually, we did grow some revenue in hybrid TV, though it was almost flattish into Q1. And we expect Q2 hybrid TV to continue to grow. But the good news here is that in the terrestrial set-top box area, which involves the ISDB-T tuner-demodulator SoC for digital TV broadcast in Japan and, even more importantly, in South America, volume shipments have started. And for the first time, we -- a significant portion of our terrestrial set-top box revenues are going to go in favor of operator-driven businesses versus being retail-oriented. So the revenues should be more predictable as we go farther and farther ahead into the year and into the next year. So in some, I would say that we expect the hybrid TV to grow in the -- grow closer to the double-digit percent. And on the terrestrial set-top box, we extended ramping pretty much from a small number on ISDB-T tuner-demodulator SoC. And the ASP of the chip being much higher, because of the combined RF and demodulator, we expect to have a significant uptick in the revenues associated with terrestrial set-top boxes. To be more careful here, the terrestrial solution with set-top boxes, because if you recall, based on our press release earlier, the revenue in the South American market comes from satellite operator boxes, where they're incorporating the terrestrial tuner-demodulator receiver SoC. Does that answer your question? Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division: Yes. No, that's perfect. And it sounds like your Full-Spectrum Capture products will be in production in Q2 as well. That sounds to me like it's a bit earlier than expected. But will we see that product eventually be in production in all your end markets? Maybe you could talk a little bit about which application it's going to go into in Q2. And when should we expect Full-Spectrum Capture to be in all your end markets?

So the Full-Spectrum Capture is actually really nicely ramping with all the designs. Recently, we did have 2 press releases associated with CableLabs certifications. There was an earlier one that was from NETGEAR, another one with -- and more recently, another modem company did have its CableLabs certifications. That means they're ready to go. So however, the one that's entering production in Q3 is the more interesting application. It is probably the highest-end, most glamorous media server box that is yet to be deployed by any operator in the world. So it is for the media server-type of application, where the Full-Spectrum Capture receiver is going to be used. And we have, what I call, good backlog to be shipping into this product to a major operator, starting some time now and going well into the end of the quarter and beyond. So the first shipment will actually be in the media server market, which is very exciting. It's a showcase platform. And on the modem side, we will start shipping towards the end of the quarter. And into the Q3, Q4, we will start layering in all the major modem operators that are current customers. Having said that, in the modem data business, modem gateway business, we expect our mix to prevail between a substantial majority of the mix to be the previous-generation product. And as we head towards the end of the year, you will start seeing more market share shift for our Full-Spectrum Capture with our existing customers. And when you enter 2014, I would say that the share of it will start shifting heavily in the direction of the larger-channel modem data gateway systems. Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division: Very good. Just one last question. I was hoping you could just give us the current status on the litigation with SLAB. It looks like you had $1 million expense in the quarter. Should we assume that to be the run rate, at least, until there's a potential resolution here?

Tore, it's Adam. So on the Silicon Labs litigation, we did see $1 million, which was kind of the range that we were expecting for the quarter. I think, going forward, I would say we're probably heading into a more expensive period of process for us. So I could see expenses going -- bounce kind of -- for the next couple of quarters bouncing between $1 million and $1.5 million. So I think if you pick the midpoint right there, I think you'll be pretty close to where we think expenses could come in. Again, unfortunately, it's proving to be an expensive exercise.

So -- and it's all timing-driven because we just recently had the Markman hearing, the claim construction for the litigation. And then we entered the preparation for the loss -- for the court hearing in February of next year.

And our next question comes from the loss -- comes from the line of Ross Seymore with Deutsche Bank.

Just a follow-on on that last question about the litigation. Can you just walk us through some of the timetable events that we should be watching for? Is next February now the next time that we should watch out for something to hit the tape?

These things are difficult to predict, Ross. I think that, right now, the major event that happened with the Markman hearing, there wasn't anything, I would say, noteworthy that so much came out of that other than that the trial continues to proceed forward. And so what we're really entering now is the -- the expenses that we're going to be incurring are going to be more focused on depos and depo prep and expert witness support, so they're kind of traditional meat-and-potatoes part of a trial prep, as Kishore noted earlier. So there's really no established next major event other than heading towards the trial in February 2014.

Got you. Well, switching off that to a more predictable, hopefully, topics. You talked about that TAM expansion and you went in some of the terrestrial stuff in the satellite markets in South America, et cetera. As we think about entering the second half of this year and even thinking about 2014, what are some of the benchmarks we should look for as far as MaxLinear opening new markets to expand that TAM?

And I think, firstly, I would want to establish the benchmark here is that, is MaxLinear credible for the -- the major premiums of a satellite market are actually the operator markets. So the first question one would ask is, is MaxLinear credible to be in the pay-TV operator space related to satellite? I think I've just delivered the first proof, announcing that mass shipments for the pay-TV operator in South America with the major operator has started now. I think that's the first credibility test. Now once we're inside these boxes, you should assume that they passed all the quality testing, everything required, to be able to deliver a high-quality, high-end product that is mandated in these boxes by the major operators. So that's the first proof. So yes, we are real in this market. So the next step would be, do we have a product that can go into the gateway in these markets? We have announced our Full-Spectrum Capture product. And to that extent, we have also announced design wins with -- for the satellite-to-IP gateway as we call it with Abilis. And then the recent SES Astra showed the world's first IP-LNB. So those are really, really high-end applications that are proof of concept that we have a great product. So thirdly, what would be the real proof that we are going to be -- we are on -- we're at the turning point in terms of shipment start for major operators. I would say that some time in the fourth quarter or so, you should start -- you should expect to see some press announcement from MaxLinear regarding some very, very beneficial -- a favorable announcement regarding some design win associated with some major operator. I think we're very, very close. We're at a turning point in terms of getting in timeline there. And there's no reason for me to sound not optimistic at this stage about the progress we are making. I think it's been one of the greater examples of some wonderful execution on the side of MaxLinear, along with transition of some really advanced technology notes. I hope that answers your question.

It does. And my last follow-up one is for Adam. On the gross margin side of things, I know you mentioned mix is what's bringing it down potentially in the second quarter versus the upside you just did in the first quarter. But can you walk us through a little bit about the specifics of what could be going on to bring it down by 1 point, 1.5 points?

Yes. So I think that it really does go to mix. I think when you think of the -- when we talked about it, we see growth across both cable and terrestrial. And I think we've been relatively consistent with the fact that, in some areas of terrestrial, the margin could be a little bit more of a challenge. The -- particularly, if you look at the ISDB-T product that's going to be ramping, that Kishore mentioned, is the operator business in Latin America. That does -- that comes at somewhat south of the corporate average on the gross margins. So as that starts to ramp up, that has challenge. I think we've always been pretty consistent that the hybrid TV revenue comes in at margins that are a little bit challenged. Even though we are moving pretty successfully from our lower-margin, first-generation, 130-nanometer product to our 65-nanometer solution, the margins still are a little bit below gross -- the corporate gross margin average. So it's really just a mix issue. I think that our ops group, for the last several quarters, has done a really good job in bringing some of our standard costs down even more than we anticipate. So could we have some more goodies for us in going-forward quarters? It's certainly possible. But I think it's prudent to expect that the mix impact is going to be there and while still keeping us right in the meat of our longer-term range of gross margins. So I think if we came in at 61.5%, which is the midpoint of the range of 61% to 62%, I think we'd be pretty comfortable that we're executing well. And we'd like to think there's some upside opportunities to that, but we're not counting on it at this point.

And if I can sneak in one more. You mentioned about getting the 65-nanometer part out to get the cost down on the hybrid side of things. Any way to ballpark what percentage of the hybrid business is already the 65, how far along that transition you are today?

I think -- right now, I think you can expect the transition is more than halfway down on the hybrid TV piece of the revenues in the terrestrial market now.

And our next question comes from the line of Quinn Bolton from Needham. Quinn Bolton - Needham & Company, LLC, Research Division: Kishore, I wanted to follow up on Ross's question about the satellite business. You talked about some potential announcements in the fourth quarter with major operators. I wasn't sure if that was for the satellite-to-IP bridge products that you've sort of talked about previously or rather those are more traditional satellite set-top box applications. And then I've got a couple of follow-on questions.

I would say that -- first things first, I think the satellite-to-IP announcements have been made, and we really will have more announcements. So you can't expect to see that as any new pathbreaking news. What would be more pathbreaking for us is more inside the satellite set-top box. In fact, even more so, in the higher-end media server-type of gateway boxes that the satellite operators want to roll out. An announcement from MaxLinear would be Full-Spectrum Capture satellite chips embedded inside those boxes. And that's what you should look forward to. And that's what we are really excited about. But I think that is more to even that. I think -- I talked of TAM expansion opportunities. We look at TAM beyond the data and infrastructure side. And I think I would be really thrilled if we can end this year with announcement even in the infrastructure side with some design wins at some major places. So I think that's what I would look at in Q4. And maybe I'm getting a little ahead of myself here, so I will hold it there. Quinn Bolton - Needham & Company, LLC, Research Division: Okay. When you say infrastructure, is that more back to the DOCSIS 3.1 infrastructure? Or is that satellite infrastructure?

At this point, I would say that it's more satellite infrastructure. Quinn Bolton - Needham & Company, LLC, Research Division: Okay, great. And then just a question on the cable side looking into the second quarter. Can you give us some sense as to video versus DOCSIS? It certainly sounds like the DOCSIS inventory has been purged, and you're seeing good order growth there. You talked about some strength in gateways. Can you just give us a sense what's going on with the DTA side of the video market?

So I would say that the -- I think that there are 2 ways to look at it. One, what would be a good result for the company? I would say, right now, the way we look at it is that our cable revenues are trending towards 60% data and 40% -- approximately, okay, it's not exact numbers, 40% towards video revenue. So I'll say there's a very good balance, even though it seems like data tends to be growing more jumpier sort of thing. But I think video has been growing consistently across the quarters. That's really exciting for us. But even more so now, it's even more interesting and exciting because the existing -- in North America and Europe, and this is one thing I talked to in my script section, is that these media server-type box are becoming the new trend where people want -- the architecture of the media server and then client devices. What that is doing you is that it's taking the traditional video set-top boxes in North America and Europe, it's moving it more towards these video configurations. If you recall, our share of the video boxes has been low because that's just the way the market is. But what it does is it brings our platform to be very strong, which is basically Intel-based platform with a MaxLinear front end. And that the headless gateway-type segment of the market, that's where it's growing, that's where the part is spreading in. So I do not -- I will not be surprised if 2 to 3 quarters down the road, that both -- that data gateways and the headless server-type gateway revenues are growing on an equal pace. And as -- overall, cable continues to grow very strongly for MaxLinear. Quinn Bolton - Needham & Company, LLC, Research Division: Okay. And then my last question, I know you're obviously not giving guidance beyond the June quarter. But just trying to think about your views on seasonality, it seems certainly that in the terrestrial business, it would appear that the September quarter would be the seasonal peak. And I think, in years past, you haven't seen that much seasonality in cable. But can you guys talk about what you would think sort of normal seasonal patterns would be in Q3 and Q4? Or is it really, there aren't any strong seasonal patterns? It's really just the timing of product-specific ramps that is most important to driving revenue.

Okay. So let's start with the new normal, if you will, right? So what we are seeing is that there is a seasonality in terrestrial. No doubt about it. I mean, the 2 components of terrestrial, wherein the hybrid TV revenue that is TV-related, September is a peak quarter. And the other part of terrestrial we have historically had is the digital-to-analog converter set-top box market. Now to be precise, the digital-to-analog converter set-top box markets depend on country-by-country transitions from analog-to-digital terrestrial transmission. However, the 2 seem to be tracking the retail behavior of seasonality in the terrestrial as well. So the overall volume maybe up or down. But at a whole, if you we look at the gradient through the calendar year, they seem to have the same behavior as the TV market. And now you come to the cable market, now we are down to finishing our second December, and cable is a part of our revenue in a reasonable way. And what we have noticed consistently is that there is a down quarter in Q4. And my friends at Intel tell me that -- in the cable side, tell me that, "Kishore, there used to be a down quarter either Q4 or Q1." If Q4 is a down quarter, Q1 will be recovery. And if Q4 is not a down quarter, Q1 will be a down quarter. So if I go by that, so far, the bet is Q4 is the down quarter. So in the new normal, with cable part of our portfolio, we now think that Q4, if it is a flat quarter, flat related with Q3, that's a great outcome. But if it's not, it's going to be a down quarter. And right now, I do not foresee one which I -- let…

And our next question comes from the line of Anil Doradla with William Blair. Anil K. Doradla - William Blair & Company L.L.C., Research Division: A couple of quick ones. Can you give some color on the channel mix, how -- the breakdown by 8 channels and maybe 16 channels, so forth?

So Anil -- so basically, right now, all our cable -- so let's -- you're referring to the cable side of the market trend. We have the terrestrial side of the market as well. In the cable side of the market, there is no platform that is in data that is shipping with less than 8 channels. Anil K. Doradla - William Blair & Company L.L.C., Research Division: And what about 24 channels?

The 24 channels, we mean design wins that will not be shipping until the end of -- later half of this year. Anil K. Doradla - William Blair & Company L.L.C., Research Division: So if you look at North American cable guys, they're talking about 30 megabits per second going to 50 megabits per second sometime in the next month or so. Is that all going to be 8 channels, multiple 8 channels?

8 -- that -- there will be 16-channel deployments starting in the -- some time in the middle of this quarter onwards. Anil K. Doradla - William Blair & Company L.L.C., Research Division: And can you remind us when you'll have a 24-channel solution?

We already have a 24-channel solution. We have the 8-channel solution, with a 16-channel solution, with a 24-channel solution. And they're all being designed and they've got design wins as well. It's just the timing of the various OEM operator-related deployments. And so the 24-channel, for sure, is going to deploy to the latter half of this year. The 16-channel will happen in the next 3 months or so, and we -- it's happening. We talked of the video server platform, and then the 8-channel is an ongoing deployment on MaxLinear's part. Anil K. Doradla - William Blair & Company L.L.C., Research Division: And on the terrestrial side, would it be fair to say that, in 2013, this was a trough, this was a bottom?

I have to look at the data. I would think so.

[Operator Instructions] Our next question comes from the line of Alex Gauna with JP -- JMP Securities.

I was wondering, Kishore, if you could talk about market share and how you see it evolving right now. Are you making any strides on that front? And as we start to think about the Full-Spectrum Capture, are there question marks in terms of who wins by securing either, a, the OEM sockets or, b, those OEMs then which carriers they lock up?

So Alex, could you clarify with respect to which market you're referring to?

Oh, I'm sorry. I'm referring to the cable side of things right now, the majority of your business.

Okay. So on the -- thank you. On the cable side, really speaking, MaxLinear's solutions are, in the data gateway side, avidly with Intel back-end platform. And really, today, we look at -- and we have declared so in our filings, that either Arris is our -- is the biggest player. And they are the biggest player in the data gateway market. So our share of that OEM today is pretty close to 100%. And as a result, with respect to their biggest operator customer, we should be in a very, very strong position. And you have recently seen the announcement of Arris Motorola acquisition being complete, and Motorola is also our customer. But we believe that in the Motorola case, there is a -- they sell both platforms. One is the Intel-based platform, the other one is probably the Broadcom-based platform. So having said that, in the combined Arris entity, you would have some small share split there with respect to the data gateways. On the video server gateway, we shipped -- there are other major players such as Cisco, Technicolor, Arris and even Pace and Motorola, as part of Arris. And they're -- likely, most of these guys do dual platforms. And currently, there's only one platform with a 24-channel capability. That's the MaxLinear Intel-based platform. To the extent that it's critical to operators, we have the edge in that deployment process. And we hope to be -- and I think, we believe, we are winning on the video server platform in a very, let me be careful, in a very nice way. So that's where we are. So all in all, good progress. We're excited about the video server gateway wins, as well on the headless gateways. So we don't see any breaks or any impediment at this stage to our momentum in cable. So I hope that answers your question.

It did, very thorough. And if I could add a follow-up to your answer on the terrestrial side of the business. You gave a lot of the puts and takes on how you saw seasonality evolving. But to ask the question more simply right now, would you think, come the September quarter, there's an upward bias to gross margins, based on the new product ramps and seasonality with cable or a downward bias from the more consumer-centric nature of the terrestrial?

What do you say, Adam?

I think on the gross margin bias, I think that, right now, we're seeing a pretty strong stability on the gross margin line. I think we looked at -- when we went into -- when we're heading into Q1 for our guidance, we were thinking it's going to be 61%. We came in at 63%. I think that we've been doing better in the last couple of quarters in getting COGS reductions as we talked about earlier. I don't believe, right now, that there's any strong indications of any major change in either direction for gross margin. We hope that we can manage the portfolio to deliver pretty consistent gross margins. And I wouldn't be modeling anything significantly different than kind of what we're experiencing right now based on our latest guidance for the -- for Q2.

And also, if I could ask about OpEx as well. We're stepping up here in the June quarter. What do you think in the back of the year? Does it level out or there are more planned increases as well?

I think -- as I talked about in the prior quarters, I think that we're looking to be in a range for OpEx. We came in light in Q1 for the reasons that we already talked about. I think the 15.5 on the non-GAAP side that we pointed to for Q2 is pretty consistent with where we said we would be, somewhere between, I would say, like -- we said we're going to be between 14.5 and 16. Now for non-GAAP OpEx, on a quarterly basis, as we kind of move through 2013, I see no reason to kind of think that we're going to be outside of those bounds. So I think, Q -- could Q3 be up a little bit from Q2? I think there could be, because there's some -- we have a continued roadmap of 40-nanometer developments, some of which will be R&D tape-outs, which will hit the P&L. But we still think all those things, taken in consideration, we think we'll be within that range of kind of 14.5 to 16. But I think we've seen the 14.5 low end happen. And I think now, for the remainder the year, it's going to be more in the meat of the remainder of that range of somewhere between 15 and 16.

[Operator Instructions] And I'm showing no further questions at this time. Please continue with closing remarks.

Thank you very much. As a reminder, we will participate in the Deutsche Bank Conference in San Francisco on May 9, the JMP Conference on May 15 and the B. Riley Conference in Santa Monica on May 22. And Adam and I hope to see many of you there. We thank you all for joining us today, and we look forward to reporting on our progress during the next quarter as well. Thanks a lot.

This concludes the MaxLinear Q1 Earnings Conference Call. Thank you for your participation. You may now disconnect.