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MaxLinear, Inc. (NYSE:MXL)

February 25, 2013 7:00 pm ET

Executives

Kishore Seendripu - Co-Founder, Chairman, Chief Executive Officer and President

Adam C. Spice - Chief Financial Officer and Vice President

Analysts

Vidya Adala - Morgan Stanley, Research Division

Vidya Adala - Morgan Stanley, Research Division

So good afternoon, everyone. We are fortunate to have Kishore Seendripu, CEO; and Adam Spice, CFO of MaxLinear here. I'm Vidya Adala, and I work on the semiconductor team at Morgan Stanley with Jo Moore, and I'll be the moderator for this session.

Before I kick off, I just need to read the disclosure. Please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/resourcedisclosures or at the registration desk.

With that, I thought the best thing for us to do to kick off is to -- for either of you to give us a very brief overview of the story, and we can then jump into different specifics following that.

Kishore Seendripu

Okay. Thank you, Vidya. So it's a pretty exciting time to be at MaxLinear. I think as a semiconductor fabless or a mixed-signal company, we have recorded some of the industry best growths. We had about 36% revenue growth last year. And we did that while stabilizing the gross margin, and in fact growing the gross margin to about 63% in the last quarter. We made some disciplined investments to really increase the TAM. Move the company away from consumer markets with short product cycles to operative class markets where product cycles are longer, 2 to 3 years. And then now making more disciplined R&D investments to move the company more towards the infrastructure markets where the revenue cycles are much longer, 6, 7 years.

What we do at MaxLinear is basically the access at the home. By that I mean that if you really look how you receive your multimedia content or your broadband data via [ph] cable, so whenever you have something coming off your coaxial cable at your home or a terrestrial TV antennae at your home or even a satellite dish, first, it goes into a very tough radio mixed signal product called the -- traditionally called the tuner, but today they're called broadband receivers for a variety of reasons, later I'll tell you that. We do this very tough broadband RF mixed-signal chips that make it possible for you to receive the exploding multimedia content out there, and whether it's over-the-top content or through regular traditional linear video sources such as cable operators or satellite operators. So that's what we do as of today.

But as we move forward, look forward, the company is spending more money and investment into how to get into infrastructure market, be it satellite or cable or outside of it where the plumbing for the content that comes to your home has to be changed or overhauled. And there's a lot of range [ph] radio mix-signal content in the infrastructure side. For example, cable had an infrastructure satellite outdoor units and even data centers and maybe wireless infrastructure. And that's where we propose to play.

So that's the overview of what MaxLinear is about. We have a very, very strong team. One of the world's best, I would say, radio mixed-signal and comm systems technology of about 200-plus R&D engineering staff. We have about 30% are PhDs and 85%, 90% are pretty advanced degree holders. It's a very, very world-class caliber R&D technology team.

And we augmented that over the last 18 months with what I call one of the best management teams for a company of our size, with the senior management having broad experience taking companies from tens of millions of dollars to billions of dollars in revenues. Adam Spice was one of the early employees of Broadcom and he saw Broadcom scale from some billion dollars to several billions of dollars in revenue and be our VP of Operations and so on and so forth.

So we feel really good. I think there's never been a greater opportunity to be a participant, whether as an equity holder or as an employee inside MaxLinear. I firmly believe that.

Adam C. Spice

Yes, I'd like to add one thing to what Kishore is mentioning that's very important. In my career at Broadcom, I was involved in about 50 acquisitions. And I think the one thing that always came through and would made us walk away from more acquisitions than anything else was really kind of was there a core strength or capacity on the analog design side? And we look at all these companies, they might have 75 or 100 employees or engineers and of which you might have 1 or 2 really good analog designers. And if -- you'd actually be lucky if you found that. And I think the one unrecognized gem within MaxLinear, which is allowing us to get into all these markets that Kishore mentioned earlier, is the fact that we have this incredibly talented, very big scale team of analog art designers, which is incredibly rare to find. I think, if anything, that gates companies' abilities to enter new markets. And I think that's the one factor that we don't have limiting us right now, is that scale of that very rare hard-to-find analog design resource.

Question-and-Answer Session

Vidya Adala - Morgan Stanley, Research Division

And just because you brought up Broadcom, they are one of your competitors in some of these end markets out there. And surely, they have these capabilities, too, it's probably a gating factor maybe for other people to enter the markets. But how do you think about how you've got -- you've put in the door already, which is established and you have a good track record of that? But also going forward, how do you remain ahead of these guys with deeper pockets in a way?

Kishore Seendripu

Okay. I think there is what they call the metaphysical answer and there is the reality, right, of dollars and cents. But I would say these things that firstly, we compete with Broadcom not directly. In the cable space, in the cable-wise data money markets, the DOCSIS 3.0, where we are a significantly meaningful revenue generator, for us, the competition is really within the Intel-placed DOCSIS platform and the Broadcom platform. And we are the front end on the Intel platform, right? And traditionally, the DOCSIS 2 said the market will be split half-and-half between the 2 players. And in the DOCSIS 3.0, that's skewed more in favor of Intel today. We'd like to think that our technology, and I think it's a fact actually, that our front-end technology is a differentiator that make the entire Intel platform incredibly compelling that they have been able to gain market share. And so I would say that there is a traditional way of doing RF technologies, and there's a new way of doing them that scales with advance in silicon technology node. And their fundamental learnings and executions that are involved with getting on the learning curve executing, as long as MaxLinear continues to execute and stays in front of the curve, we should be able to maintain our lead. Having said that, while we have a fantastic relationship with Intel and we work with ST and all the other non-Broadcom back-end players, one of the strategic things we've talked about just in the brief overview was how the company moves from sharper [indiscernible] cycle, low gross margin, consumer cycles to operative base, difficult to enter value markets, less competition because tough stuff to do and then infrastructure markets is where we are focused on. The other important factor we are focusing on is that our solution is not being dependent -- or the factors of our solutions aren't being dependent on any particular back-end. So that means there are 2 categories of the market. One, the back-end is not a factor. The other one is you are the solution, and nothing else, right? It may not be silicon-related but more functional dominance-related.

So I think that the infrastructure markets we are focused on, the OEMs tend to differentiate much more on the FPGA platforms. And if you look at satellite infrastructure, audio markets, outdoor unit the dish signal, the broadband RF technology is the chip, right? So we are taking measures and diversify along that vector as well. So I think all in all, I think the spectrum of RF is what is daunting for everybody and not the spectrum of Broadcom, right? And I think that specter, I think we've done pretty good with the our full spectrum captor chips and we are the only ones that are shipping those products today in the world.

Vidya Adala - Morgan Stanley, Research Division

Absolutely. Can you -- sorry.

Adam C. Spice

No, I was going to add on to Kishore just a little bit there. Also, if you look -- if you really kind of compare in the most recent, I would say, technology example of full spectrum reception what they call full band capture, you can kind of take a look at what the Broadcom offering is. And if you look at MaxLinear offering, and we've done press releases and talked about, done demos on, and we out-integrate them, we outperform them. We're lower-power, high levels of integration. So I think that gives you an idea of like even though they got the deeper pockets what have you, I would still argue that in the areas that we -- that our platforms compete, I don't think they outresource us. I actually think that it may actually be the other way around if you look at the amount of focused resource we have in those markets versus how they kind of spread their analog resources across a lot of different areas.

Vidya Adala - Morgan Stanley, Research Division

Very impressive. So on that, if you can talk a little bit more about the satellite opportunity and the win that you announced recently. Tell us how you're thinking about it and what is the growth potential for this? What does this mean for MaxLinear in 2013 and onwards?

Kishore Seendripu

Okay. So I think if you really look at the growth drivers of the company, right, the -- in '12, '11 -- 2012 was a big cable growth driver year. And the startup -- '11 was the beginning and '12 was the big growth year. And '13, we continue with growth years. If we look at 2013, the big growth drivers are cable and the terrestrial market, maybe the hybrid TV and ISDB-T, digital broadcast standard, tuner-demod solution for the South American markets. So if you go beyond 2013, cable will continue to be a growth factor, but satellites have start generating revenues. And if you look at the satellite market, what's happening is that the satellite operators do want to compete against the offerings of cable and stuff and also they want to keep their users -- they really want to service the multiscreen home very, very effectively, which is video smartphones or -- so the architect is more and more towards the media server architectures where you receive as many channels as you want and then you digitize them and you stream them out to the remote devices or IP. And so if you really look at the satellite market, it has always been a multichannel PVR-type market. And that if you look at satellite box, set-top box over 90 million boxes out there. There'll be a gearing of those markets. And if you look at per channel of reception satellite, the cost is about $2. And then you can see that there are 3 channels in the box. If there are 90 million units, that's about $800 million in the high end in terms of the addressable market. On the low end, clearly, the cost per channel has come down, it's what companies like MaxLinear do, you could come down as low as $500 million, $600 million of addressable temp. And I think that's the big growth opportunity there. But beyond that, the transformation that's happening at the home necessitates the dish technology outdoors also change from analog ways of doing to the digital ways of doing things. So they can capture all the satellite channels and send them down into the home. And that's the reason MaxLinear is investing in the satellite infrastructure as well as the second generation of outdoor unit technology starts rolling out from analog to moving to digitized -- digital technologies that are very core to what we do as a broadband platform. I think we are very ideally positioned to own both sides of the piece in that market.

Vidya Adala - Morgan Stanley, Research Division

Got it. So maybe we can spend some time just on the DOCSIS 3.0, the transition. Generally, the perception is that this transition is more or less complete or is nearing the end of its upgrade cycle. So talk to us about what percentage of the installed base today in the U.S. and in Europe is -- has already converted, and so what is your incremental from here?

Kishore Seendripu

Very interesting, right? When the transition is going to happen, it's going to happen too late. It's going to take forever. But when it's happening, it's kind of late now, it's only gone. No, the world is not like that. But I will tell you the real story here. So last year, about 60% of the U.S -- 65% of the U.S. is DOCSIS 3.0 penetrated. But by and large, the penetration is what is called the 8-channel market. That means you take 8 channels worth of data bandwidth, broadband, and you supply to the home. This year, it will be 100% penetrated. That means the market grows by 50%. So we'll get 50% growth. But then the market is now moving towards 16 channels, 24 channels. At 24 channels, they can start supporting over 800 megabits per second. Then they want to go to 32, which is well above the 1 gigabit per second. As long as you believe in this team that we're never in a broadband, I don't know how many of you followed the involvement cuff [ph], was the anniversary providing the Ethernet spec. He said that even when they were doing 1 kilobit per second, they said the bandwidth is more than what you want to do with some text messaging. So it continues to date. And the thing is that, that paradigm, that adage is going to stay through and therefore you get 16 channels, 24 channels if you're going to keep growing the ASP as well. And then, okay, that's all well and good. Let's say we get the 24 to 15 and you say that, "Gosh, what's left? There's no growth here," but well there's more tricks because every 7-year cadence or 5-year cadence, cable cadence keep getting upgraded to basically [ph] more things. And the biggest trend of our times is you need symmetry bandwidth. Cable is very intensive downstream bandwidth, and now with the DOCSIS 3.1 cable and that's basically if you want to fit into more upstream bandwidth, so they can load up your devices -- your pictures, store -- a cloud storage being accessed and also user-generated content being stored in the cloud as well. So what that means is that we get a new opportunity now to get a radio reach and more [ph] on the transmitter side, on the cable side and then more ASP. So cable will continue to grow as long as the bandwidth demand is there because MaxLinear is about meeting the bandwidth possible. We are the data bandwidth company. We are not some watching old Ten Commandment movies in analog quality. We make it possible in -- but the -- and The Ten Commandments is there for a reason, right? So we're going to -- we are playing off that trend basically. So I think we're all well and good on the cable side. So there's lots of growth left. So today, we're at $4 per average chip in the DOCSIS 3.0. And the -- it will come down because of all -- it will be 100% penetrated. But meanwhile, the Full-Spectrum Capture chips with 24 channels, 1 gigabit data per second is going to be start launching in the second half of this year, and we are well-positioned. We have announced CableLabs certification with some major OEMs, and those shipments will start. We should get a 50% ASP bump in the next year. So we feel pretty good about the cable market itself.

Vidya Adala - Morgan Stanley, Research Division

And what about DOCSIS 3.1, how is that standard progressing? And what kind of a role are you playing in that?

Kishore Seendripu

So we have the CableLabs standards come in. We'll collaborate with [indiscernible] this thing, and we're not just on observer status. We're trying to implement the standard. And in DOCSIS 3.1, I think there'll be a final spec in the June, July time frame. Obviously, start working in advance of that with your partners. And so we feel that when DOCSIS 3.1 happens, starts being to happen. There's no reason why we cannot be the first movers along with the partners. We're going to make that happen. But for us, the even more exciting part is what it means for the infrastructure side now. So if the DOCSIS 3.0 is going to get symmetric band in both direction, the entire infrastructure has to be transformed too. And there is a lot of radio-rich content that they -- you need to provide. And the thing about credibility is a gift that keeps giving. So today, if we look at the cable side, there's ARRIS, there's Cisco, there's Motorola, the main players. ARRIS met -- made it with Motorola. So these 2 are -- all of these are good customers for us and very consolidated. And they want us to invest in infrastructure. And we are very excited about this because it is a match of trend up for strategic direction.

Vidya Adala - Morgan Stanley, Research Division

So on that point, given the recent ARRIS, Motorola, the assets from Google, does that make you optimistic and much more, well, I guess, confident about your growth with ARRIS? Or, because that's been a stronghold relationship for you so far. So do you view that really positively for yourselves?

Kishore Seendripu

Absolutely. Motorola is a very good customer of ours. In fact, on the DOCSIS 3.0 data, the boxes you've see retail, they have our chips inside them. So it's not like the new thing. I think all in all, it's a very good thing because it -- ARRIS is a fantastic partner and customer for us. They've always been one of the first guys to adopt new technologies. They give a company like us a chance, and we really love their culture. And I think it would be great for us, with ARRIS and Motorola combined, now you have 2 players on infrastructure side, Cisco, ARRIS-Motorola combination on one side. And then on the CPU side, you'll see the -- and Motorola brings a lot of video strengths to it. And I think it will really help us grow our business within our existing customers, which is the best way to grow basically.

Vidya Adala - Morgan Stanley, Research Division

Really. So I had a few more questions for you, but I just wanted to see if there's any questions from the audience? Well, let's keep going. So I just wanted to touch on some of the near-term dynamics coming off recently, coming off your earnings. So one thing that was very clear from your statement was that you're really positive that the trough -- we're either at the trough or is behind us. So what gives you this confidence at this point? And how is conversations with your customers progressed since?

Kishore Seendripu

Okay. I think, I want to first say that it was not a trough. A trough means that a company is really going down, down in revenues and then it's not ready to come back up, right? No, no, it's nothing like that. We had almost 6 quarters of steady growth. We will be the few companies that's been growing steadily in our peer class of companies. And there was -- there was a sudden inventory build up in the channel in the fourth quarter for DOCSIS-related products, and we were worried that there was an inventory issue. Then -- since then, you have seen the -- what our media customers like ARRIS, there have been no decrease in their revenue shipments on the [indiscernible]. So what happened was that they depleted their inventory and now they're back to pretty strongly. In the earnings call we said that we're very well booked for the quarter, and we gave details regarding that. And maybe Adam can add more color. So that's -- and one of the fears in the fourth quarter we had, before Adam can add more color is that, is that the -- we were worried that we had such a good market position. Disproportionately, it was favored in the Intel platform and DOCSIS 3.0, with that -- well the natural forces made clear or it can be possible that the balance is restored to 50-50%. So we lose some positioning there. And it turns out that based on what we're seeing that and checking on the channels, it looks like we are well-positioned to continue our share position with the DOCSIS 3.0 with respect to our customers and I think for the first half of the year and we don't see much clouds hanging for the second half of the year as well. So on that basis, I said that that's behind us, and therefore we've guided a very strong Q1 up related to Q4.

Adam C. Spice

Yes. If you look at our Q1, where we went into our Q4 guidance and how that changed when we gave our Q1 guidance. Typically, we go into the quarters -- when cable was going strong, we'll be going north of 80% to the midpoint of our guidance kind of booked. And things were going very well in for Q4 bookings until they're relatively late in the process. And then basically, again, our key customers kind of put the brakes on as they basically returned and wind down their inventory towards the end of the year. What we saw going -- it happened for a relatively brief period of time because as we got towards the end of December and as we came out of CES, kind of a 2-week window, the customers just seem to come back to life. And we got a lot more healthy backlog coverage and things look like they were back on track. So I think that -- we do believe that Q4 was a very brief inventory correction. And again, it looked like it wasn't an issue that our customers' customers are feeling but more our direct customers were on to kind of lean down their inventories ahead towards in the end of the year. So I think we're feeling much more comfortable now. I think that the backlog coverages an area that we feel better about, and I think that things feel like they're back on track.

Vidya Adala - Morgan Stanley, Research Division

Great. Can we touch upon your 40-nanometer revenues, how is that ramp coming along? And when does that start showing up in your P&L a lot more for this year?

Kishore Seendripu

So the first 40-nanometer product that will be entering the revenues will be the cable-related Full-Spectrum Capture products. And those are the latest offerings. And like I said, we will enter production sometime in the second half of the year, maybe a little earlier, but not in a meaningful way. I think that you won't see a significant contributions of revenue on a quarterly basis, maybe until the fourth quarter of this year, but there will be a mix of 40-nanometer revenues. And we really look at 2014 as the 40-nanometer ramp in terms of incrementally affecting what are metrics and what are measure revenue composition, what it's COGS or gross margins or any of those issues.

Vidya Adala - Morgan Stanley, Research Division

And how should we expect any impact to gross margins as you transition to that? Should we expect any change? Or do you manage to your gross margin targets that you've laid out?

Kishore Seendripu

I think we're very proud of the gross margin targets we have set ourselves, so no need to apologize if I'd say that we will see with our long-term targets of 60%, we have done better than that. But I don't see any reason to comment on any direction about the gross margin other than the fact that we mean to -- we take that 6 as a pretty temperate line for us that we should cross. So that's how we look at it.

Vidya Adala - Morgan Stanley, Research Division

You spoke about the infrastructure markets a little bit. And so I was wondering, when you think about where you're allocating your R&D dollars today, is that where a bulk of it is going? And speak to us about this cloud transition. It's a long-dated one. But as investors, what should we be watching out for in terms of milestone?

Kishore Seendripu

Okay. So I would say that until now, until a quarter ago, until maybe this Q1 period, satellite as a whole, whether infrastructure or the CPE site, is where the bulk of the R&D investment has been going on. Now as a company, you have to always invest in existing product lines to refresh them or add a more ASP increasing, hopefully, keep willing to buy more integrating all the RF components around it. That's what we are doing, and we'll have such investments for our cable product lines. So looking forward, you should see maybe, I would say, 70% of the investment is going to infrastructure direction, 30% to existing product replenishment. Now that's a bit aggressive. In terms of future products versus existing. But we have to realize that the company's strategic thrust is about TAM expansion and really being as high key markets where things are really tough to do. I mean, it's very clear, if you have great technology, you want to play in market where things are tough to do. It's like you think -- if you can jump 7 feet, don't hang out in a sports place where the 4 feet is the high jump bar, right? You just want to go to the higher end markets. So that's what we look at it. That's right. So I think they will all play out nicely. So satellite is pretty much the rearview as the bulk of the investment. Soon it will be the 30% category. Infrastructure would be in the 70% category.

Vidya Adala - Morgan Stanley, Research Division

Right. And that's -- you see that as a 12- to 24-month cycle? Or do you see that much longer than that given these are longer design wins than product cycle?

Kishore Seendripu

I think the development cycles are now, today, are in about the 2-year range, 18 to 24 months. Design in process, maybe longer because of infrastructure. But the key is that, for example, in satellite infrastructure, we'll enter the market sooner than is normally considered normal. In a sense that because you get in and -- because the most important thing in the infrastructure market is to time the entry point. And the entry point is now because of the fact that the disruptions are happening because the Wii [ph] content is being delivered, many people are using these stuff, the bandwidth demand and stuff. So we call a very good point in time where I think 24 month is not a bad number. Otherwise, it should be normally be longer. But in satellite infrastructure, we will do it in 24 months [indiscernible]

Adam C. Spice

Yes. I also think it's worth noting that, and I Kishore may have mentioned it briefly earlier, the customers that we're targeting for infrastructure are target customers we have for the CPE side. We've got a lot of credibility there. So we're just basically expanding our TAM within our existing customer base for the most part. Will we go beyond that in the future? Yes, we will. But I think it gives us a higher degree of confidence investing where we are because we're investing with customers that want us to -- they're basically dragging us along to a certain extent in these new opportunities. So I think that helps. And I think the other part is the technology we've developed on the CPE side, be it like for example, Full-Spectrum reception, is actually being leveraged on the infrastructure products also. So it's -- there's a lot of reuse of IP that is actually coming into the picture now, which is going to help longer-term on the operating leverage.

Kishore Seendripu

I mean, the way we look at it is we look at combined Motorola-ARRIS, for example, right, they're now a $4 billion revenue company. We think the silicon content is 30%. It's about $1-plus billion, right, $1.3 billion rate. And even if you think that the RF content inside is 30%, right, then you look at $400 million of accessible revenue within our existing customer base. So we could spend a long time just trying to harness the potential, right? So that's what we're very excited about.

Adam C. Spice

If you look at ARRIS, Cisco and Motorola, I think all 3 of those are in our top 10 customers, right? So it's a very concentrated opportunity.

Vidya Adala - Morgan Stanley, Research Division

Absolutely, that sounds like a fantastic opportunity. And with that, we are out of time. So Kishore and Adam, thank you very much for your time. Glad to have you here.

Adam C. Spice

Thank you.

Kishore Seendripu

Thank you.

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