MXL - NASDAQ

Greetings. Welcome to MaxLinear Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Leslie Green, Investor Relations. Thank you. You may begin.

Thank you, Sherrie. Good afternoon, everyone, and thank you for joining us today on today’s conference call to discuss MaxLinear’s third quarter 2023 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 the fourth quarter 2023, including revenue, GAAP and non-GAAP gross profit margin, GAAP and non-GAAP operating expenses, GAAP and non-GAAP tax rate, GAAP and non-GAAP interest and other expenses, GAAP and non-GAAP diluted share count. In addition, we will make forward-looking statements relating to trends, opportunities, execution of our business plan and potential growth and uncertainties in various product and geographic markets, including, without limitation, statements concerning opportunities arising from our broadband, infrastructure, connectivity industrial multi-markets, as well as inventory levels, the timing for the launch of our products and timing of opportunities for improved revenue and market share across our target markets. These forward-looking statements involve substantial risks and uncertainties, including risks outlined in our risk factors section of our recent SEC filings including from our Form 10-Q for the quarter ended September 30, 2023, which we filed today. Any forward-looking statements are made as of today, and MaxLinear has no obligation to update or revise any forward-looking statements. The third quarter 2023 earnings release is available in the Investor Relations section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including, but not limited to, gross margin, operating margin, operating expenses, interest and other expense on both a GAAP and non-GAAP basis. We encourage investors to review the detailed reconciliation of our GAAP and non-GAAP presentations in the press release available on our website. We did not provide a reconciliation of non-GAAP guidance for future periods because of the inherent uncertainty associated with our ability to project certain future charges, including stock-based compensation and its related tax effects, as well as potential impairments. Non-GAAP financial measures discussed today are not meant to be considered in isolation or as a substitute for the comparable GAAP financial measures. We are providing this information, because management believes it to be useful to investors as it reflects how management measures our business. Lastly, this call is also being webcast and a replay will be available on our website for two weeks. And now, let me turn the call over to Dr. Kishore Seendripu, CEO of MaxLinear.

Thank you, Leslie and good afternoon, everyone. In Q3, our revenues were $135.5 million and non-GAAP gross margin was 60.8%. Infrastructure revenue specifically wireless infrastructure was the main highlight, up 1% sequentially and 40% year-over-year. Our financial results and outlook continue to reflect the channel inventory overhang, especially in our broadband and Wi-Fi markets. We expect the effects of the inventory to persist into 2024 and Steve will talk more about the actions we're taking to align our financial structure. We continue to make strong progress growing our infrastructure business. Infrastructure represents $50 million in Q3 revenue, and has grown substantially since its inception only a few years ago. Within infrastructure, in wireless, expanding 5G global rollout of new millimeter wave backhaul technologies and multi-band and hybrid millimeter wave and microwave backhaul radios is allowing us to significantly increase the selection content per platform offer modem and RF transceiver products. In our high speed optical data center interconnect market, the ongoing adoption of AI in the cloud is driving exciting design win activity for our 5-nanometer CMOS, Keystone 800 gigabit, optical PAM4 solution. We have ongoing qualifications in multiple hyperscale enterprise opportunities for which we expect to begin ramping in mid-2024. During Q3, we also announced a new member of our Keystone family, a 5-animator Keystone PAM4 DSP for 400 gigabit and 800-gigabit applications with integrated VCSEL laser drivers. This product enables best-in-class power consumption for 800-gigabit short-reach optical optical transceivers and active optical cables for datacenters, AI, and machine learning platforms, and high performance computing applications. Earlier this month, at the OCP Global Summit in San Jose, we also demonstrated our Keystone solution supporting active electrical cables or AECs. Keystone is the only 5-nanometer product with DSP available today for the AEC market providing best-in-class power consumption and programmability. We are also making exciting progress with our Panther III series of storage accelerators for the enterprise all flash array and hybrid storage appliance systems. We’ve entered initial mass production ramp with a Tier-1 leading enterprise storage appliance maker and have visibility into additional new design win volume production ramps next year. We expect this business to double in 2024 with continued strong growth in ‘25 and beyond. Turning to broadband, despite the near term challenging environment, the longer term outlook for the broadband access networks is solid as the industry migrates from legacy DSL and older PON technologies to 10-gigabits PON fiber access. We continue to ramp with the major North American service provider and are layering additional design wins including another Tier-1 service provider, which will begin to contribute revenue in 2024. With our industry-leading single chip integrated fiber PON and 10-gigabit processor gateway and connectivity solutions, we expect continued strong design win traction leading to a multi-year fiber broadband growth cycle. Recently, we also announced Puma 8, our DOCSIS 4.0 system on chip cable modem and gateway platform, which enables the speed, latency and low power consumption necessary for next generation, 10-gigabit service rates for MSOs. We expect to see initial DOCSIS 4.0 launches in the market as early as the end of 2024. In connectivity, the design activity for our Wi-Fi 7 is robust and we anticipate early revenues coming in the second half of ’24. Wi-Fi 7 has the enhanced ability to efficiently manage the increasing number of connected devices, which have grown 10 folds since 2018 and the higher bandwidth requirements in the home. As a result, globally, service providers are embracing the transition to Wi-Fi 7 to improve both user experience and performance. For MaxLinear, Wi-Fi 7 has the exciting potential to drive significant ASP growth and higher attach rate in our broadband access platforms versus prior previous generations. Moving to Ethernet connectivity, we continue to build on our core portfolio of 1-gigabit Ethernet and 2.5-gigabit Ethernet PHY technologies. We not only offer single and quad 1-gigabit Ethernet, and 2.5-gigabit, Ethernet PHYs. But in Q3, we started sampling the industry's first OCTO 2.5-gigabit Ethernet 5 switch product. This new product family of switch significantly expands our addressable market by 300 million through 2027 and addresses both enterprise and SMB switch markets, as well as the gateway and router markets. We expect today's more than two billion copper 1-gigabit Ethernet ports in the market or existing CAT-5 cabling to transition to an optimized and enhanced 2.5-gigabit Ethernet offering. With that strong design win activity, we expect to begin revenue ramp in the first half of 2024. As we head into 2024, we are laying the critical groundwork for future growth with robust design win activity and continued technology innovation. Even as we drive operating efficiencies to navigate near-term headwinds, we are excited that many of our investments over the past several years in infrastructure, broadband access, connectivity, and high performance end of our markets are now poised to contribute meaningful revenue. With that, let me turn the call over to Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer. Steve?

Thanks, Kishore. Total revenue for the third quarter was $135.5 million, down 26% versus Q2 and down 53% year-over-year. Broadband revenue was $34 million, down 36% versus Q2 and down 71% year-over-year. Connectivity revenue in the quarter was $15 million, down 60% sequentially and down 82% year-over-year. Our infrastructure end-market continued to grow in Q3 as a result of solid demand and growing market opportunity. Infrastructure had revenue of $50 million, up 1% versus the prior quarter and 40% year-over-year. Lastly, our industrial and multi-market revenue was $36 million in Q3, down 16% sequentially and 24% year-over-year. GAAP and non-GAAP gross margin for the third quarter were approximately 54.6% and 60.8% of revenue. The delta between GAAP and non-GAAP gross margin in the third quarter was primarily driven by $8.3 million of acquisition-related intangible asset amortization. Third quarter GAAP operating expenses were $91.8 million including stock-based compensation and performance-based equity accruals of $8.2 million, combined and acquisition and integration cost of $2.2 million. Non-GAAP operating expenses in Q3 were $75.1 million, down $7.3 million versus Q2 at the low end of our guidance range. Non-GAAP operating margin for Q3 was 5%. GAAP interest and other expense during the quarter was $23.7 million, driven by the ticking fee from the debt commitment associated with the terminated Silicon Motion transaction. Non-GAAP interest and other expense during the quarter was $5.3 million. In Q3, cash flow used in operating activities was $12.8 million. We exited Q3 of ‘23 with approximately $203 million in cash, cash equivalents and short-term investments. Our days sales outstanding for the third quarter was approximately 106 days, up from the previous quarter due to shipment linearity. Our gross inventory turns were 1.4, down from Q2 levels. As Kishore mentioned, we've taken meaningful actions to align our cost structure with the current environment and we expect to begin to see the benefit in Q4. These actions include a headcount reduction, site consolidation to drive efficiency and scale at our primary sites. And more prioritization around the projects that we believe will drive growth over the coming years. MaxLinear has a solid track record of managing our business through downturns with strong physical discipline, and focused spending. This concludes the discussion of our Q3 financial results. With that, let me turn to the guidance for Q4 of 2023. We currently expect revenue in the fourth quarter of 2023 to be between $115 million and $135 million. Looking at Q4 by end-market, we expect connectivity and industrial multi-market to be up and broadband and infrastructure to be down quarter-over-quarter. We expect fourth quarter GAAP profit margin to be approximately 52.5% to 55.5% and non-GAAP gross profit margin to be in the range of 59.5% and 62.5% of revenue. Gross margin continues to be stable despite lower unit volumes with the range being driven by the combination of near-term product, customer and end-market mix. We expect Q4 2023 GAAP operating expenses to be in the range of $125 million to $135 million. We expect Q4 2023 non-GAAP operating expenses to be in the range of $72 million to $78 million. We expect our Q4 GAAP and non-GAAP interest and other expense to be negligible. We expect our Q4 GAAP and non- GAAP diluted share count to be between 82.5 million to 83.5 million. In closing, we continue to navigate a dynamic environment in Q4. But are laying important groundwork and strategic applications that will drive our future growth. Our solid product innovation and execution in Wi-Fi, fiber broadband, access gateways, Ethernet and wireless infrastructure is positioning us well across a number of exciting emerging markets. As always, we will continue our strong focus on operational efficiency, fiscal discipline, and shareholder value as we optimize for today and plan for an exciting future. With that, I'd like to open up the call for questions. Operator?

[Operator Instructions] Thank you. Our first question is from Tore Svanberg with Stifel. Please proceed.

Yes, thank you. My first question is on broadband and connectivity. Obviously, these are both down quite materially year-over-year from this inventory digestion. It does sound like connectivity may have found the bottom as you're guiding for growth there. First of all, sort of make sure you confirm that and then second of all on broadband, are you seeing any sort of bottoming at all in that business, given its $34 million run rate?

Yes, Tori. So, you're right. And I think you're also rightly looking at broadband and connectivity. Somewhat together they have been influenced by some of the similar dynamics of just the massive amount of inventory that we've seen in the channel. It's definitely persisted, more than I think what we had anticipated. But you're correct in we did say that we would see connectivity start to move up a little bit in Q4. I think for both broadband and connectivity, well, connectivity has some growth drivers as we've talked about over time that are a little bit better. I mean both are still being influenced by inventory in the channel and I would expect to see that last through kind of Q1, maybe even some residuals in Q2. But we are seeing an improvements. I mean, we talked last quarter about bookings, I think we're starting to see some bookings. It’s still early days. They're not super robust by any means, but there are some encouraging signs nonetheless.

Great. And on infrastructure, obviously, that was the highlight this quarter. You're expecting that to come down in Q4. I'm just hoping you could talk a little bit about the expense of the decline and is this basically just sort of like the volatility because obviously it was up a lot and maybe it’s coming back. But yeah, any and any, anyway, we should think about infrastructure for the next few quarters would be great.

Yeah, so infrastructure, I mean, I think we've been really pleased with the infrastructure. I think we're making tremendous amount of progress in a business that we've been investing in heavily for a long time. I think, as we spoke over the last couple of quarters, the first half of the year was extremely strong that carried through into Q3. But, we still see as some of those product ramps, particularly on wireless infrastructure, kind of slow down. They can be lumpy and so we can see some slowness in Q4, and that probably carries over to the beginning of the year. Before it starts to pick back up and grow in 2024.

And there are several contributors beyond wireless, right? I mean in fact optical data center investments, they're very confident with the progress we are making. We expect to see ramps in the middle of next year. We're going through interop cycles right now, and a lot of design win activity going on. Whether it is in transceiver products or in active optical cables or even active electrical cables, right? And then, over on top of that, there is our storage accelerators, which we have not spent time much. A lot of great design win traction, a very, very strong design win pipeline. It's going to double next year into high teens, if you will and then beyond that, it's going to keep growing very robustly in the next few years. You want to keep in mind, the infrastructure lasts - revenues last a long period of time. That's why they have a long leading time. So, on the – all in all, our anticipation is over the next five years, we should be able to get to double our infrastructure revenue from today’s $200 million runrate to maybe in the $0.5 billion vicinity. And that's the ultimate goal we are after and we feel that we're making very good progress towards it.

Great. Thank for that. I'll go back in line.

Thanks, Tore.

Our next question is from Quinn Bolton with Needham & Company. Please proceed.

Hey guys. I guess maybe a follow up on Tore’s question. Obviously this inventory corrections lasted longer and causing a deeper revenue trough. But, as you look to next year, can you give us any sense how much you under shipped in the channel. These businesses are connectivity and broadband done well more than 50% peak to trough. Do you have any sense for what natural runrate demand is? What kind of snapback might you see, once we've flushed this current inventory? And then, just any thoughts on all of the government spending or government funds that are available for broadband infrastructure? When does that start to benefit this business?

Yeah, Quinn. So, you're right. I mean, it's definitely been worse than anticipated. I mean, there's been a big buildup. We've seen some kind of bad practices, some overbuilding definitely over the last couple of years. That’s kind of playing out right now. The common question that we get is what is it recovered too and when? I guess I would just say that we're confident that we're kind of seeing the bottoming here. I, - you raised a couple of good points about the government spending that we've highlighted. We have seen CapEx commitments. You've seen a great transition to PON more rural areas deploying more broadband and more broadband upgrades. I think we continue to see that. The outlook that our customers and the service providers in general have is the outlook does remain very good. So thus our excitement in some of Kishore’s remarks around Wi-Fi, Wi-Fi, 7 some of our PON business. So there are some exciting things going on. Some of the bigger money like the bead money, and some of that, just part of that infrastructure build starts to be deployed. I should say, it gets allocated at the end of next year. So it's still a little ways off. But we're seeing ramps upgrades in Europe, in the US over the next two to three years. So, we still have good visibility on this. And do expect to see these upgrades. But in the meantime, unfortunately, we're having to work through this inventory.

And you guys thought quarter that September would be the bottom. Obviously, you've updated that guidance today, with December being down. Are you willing at all to make a comment do you think December is the bottom? Steve, you mentioned inventory overhang probably continues through at least Q1 and maybe residually into Q2? Could Q1 be down from the fourth quarter? Is it just too early to call? And then I'll have a quick follow-up.

Yeah. So if I recall correctly, so last quarter, we talked about Q4 expecting somewhat of a modest improvement, but we didn't say we would be out of the woods on the inventory side. We expected inventory to last into next year. But that being said, we thought we would see more of a recovery and we didn't see that. So that that's correct. As we look out into next year what's the shape of that look like, it feels like we get back to the normal seasonality in our business. I wouldn't be surprised to see softness in Q1. But then you start to build off of that. As we normally would our Q2 and Q3 as you know, have been historically much stronger than say Q1 and Q4. And so I think there are some dynamics of seasonality that are starting to play a role again. But I think more than anything right now it's just getting through the rest of the inventory that’s sitting in the channel.

Got it. And then, just quickly, you had mentioned some of the actions you're taking including reduction and forward site consolidation, prioritization of certain projects yet. Your guidance for OpEx, I think is flattish sequentially in December, kind of in line with where we were already looking for OpEx to be in Q4. And so I guess I didn't see much of a change in the OpEx outlook. Are these options - sorry that the cost reduction plans you've talked about, does that kick in really more in the first half of next year is 75 is a right runrate kind of as a baseline or do you think it could move lower next year?

So I’ll comment a little bit on just overall expense reduction efforts, right? So we did start early in the year. We've made some changes and then more recently, we've made some additional changes that will start to impact Q4 and beyond. So you don't see so much in the Q4 timeframe just because it's beginning now. You'll see that continued to come down throughout next year pretty linearly. Sometimes that's masked a little bit by some of the NRE that we take as an offset to OpEx. And - but I would expect to see the overall OpEx number to climb throughout the year. And so, I think, I mean, if I was to put a number on it, it's probably $285 million to $290 million next year. So that's the kind of the size of the decline. And that also offset some additional NREs that we had taken which were much larger in 2023. Got it. Thanks for the additional color, Steve.

Sure.

Our next question is from Gary Mobley with Wells Fargo. Please proceed.

Hey guys. Thanks for taking my question. Looking at your largest customer, it looks like they purchased by $90 million of products from you in the third quarter of last year, and that's probably down something less than $10 million in this most recent quarter. So, my question is, what's the right level for purchases with this customer, which I presume is, representative of your broadband cable and Wi-Fi business? And does your current fourth quarter guidance and maybe your longer term view contemplate the transition of this business away from that customer to the hands of somebody else?

So, Gary, I mean, with regard to some of the disclosures and the top customers, we've had a very large customer for a while. I think you've heard us talk about our top customers are often kind of more, I'm going to refer to them more as kind of box vendors that kind of sit in, in between us in the operator. And I think you're well aware of most of these services providers are looking to kind of keep multiple silicon vendors in the mix. So that they've got some leverage. We don't see that changing much. And so we don't necessarily put too much weight on these customers they ebb and flow from time to time. And even this year we've actually seen some of our top customers switch as different service providers start to ramp. We've actually seen that through this year, and we've seen some nice improvements on some of these newer customers.

Okay. A question for Kishore as a follow-up. Kishore, you mentioned in your prepared remarks some design win traction I think is how you phrase it for Keystone in the, in the datacenter market. So, I think you also mentioned a revenue ramp into the second half of the year. How much visibility do you have this time in that revenue ramp and how influential can some of these early days design wins be for MaxLinear?

So I think the two parts this question. I mean, the visibility is very, very clear, right? In the sense that you work directly with the OEMs or module makers with this transceivers or cable manufacturers, optical cable manufacturers we directly work with them. And you work with them because they are being aligned up to utilize our silicon at the endpoints which is usually the data center folks. And so you have direct visibility. Now the timing of when each one ramps and now how the distribution portioning of the revenue goes, he's the one that you have a little bit of what I call uncertainty of how the fact that we are in the mix, the fact that certain equals are going well. And the interaction the commitment to take us through all the qualification processes is the direct visibility you have. So having said that, like I said my prepared remarks the interops and quals are going on still and we feel very good that our silicon is sound and strong and the interops will go favorably at this at the stage. That's our conviction and that's our - what I call reading the tea leaves, if you will. Regarding how much influence they will have on our revenues? Absolutely right. Even if you were to - you don't do game plan you always have to do a bottom update plan for revenues. And but if I were to map all of that, we hope to expect about 20% share sometime in the three to five year window of each of our customers. That's our base plan and if you exceed that, you'll do much better. So, how big can the business been five years, obviously it can be somewhere between a hundred to few hundred million dollars. Right? That's a wild card here. So, yes, and that's the basis on which, including wireless optical, and the accelerator business is where the confidence comes that, in a five year window our infrastructure business should be in the in the ballpark of in the $500 million range, right? And that's the goal and all of which I would say optical and storage activities are the greatest growth curve, ahead of them.

That’s good details. Thanks Kishore.

Our next question is from Christopher Rolland with Susquehanna. Please proceed.

Hey guys. Thanks for the question. I guess, the first one is just kind of the swings that we've seen here from peak to now trough going from 105 million in connectivity to 15, for example have just kind of been incredible. So, I guess, first of all do you kind of you guys really view this as all inventory digestion? Like are we done in connectivity? I don't see how it can get too much kind of lower than this. But do you have any idea of how much extra inventory is out there in the channel? And then, moving forward, are you guys rethinking kind of systems to judge this inventory level that's out there - there are new kind of processes that can be put in place to have a better view.

So you know, if you were not analyzing the channel and the inventory, we shouldn't be in this job, right? In the first place. So, obviously, we are analyzing this to get and sometimes it's very difficult because, there is a certain level of guarded disposition from your customer to their customers. So the closer they are to you the more information you get a little bit more accurate. But I just want to hop back a little bit more, one of the most important things we need to start guessing or my educated guesses is about when did the old build start. It started that's assumed the ownership that’s happened in the pandemic period over the last two to three years. And if you think that there was a, let's assume a 30% over shipment, and then you're looking at probably three quarters worth of at least actual planned that is sufficiently provisioned. And how far are we into it? Maybe we are into a quarter of it, right? If that is the logic, you go run through as our logic of people should then you should start expecting a recovery somewhere in the second half of next year. Can you dial it in within a quarter? No. The second part of it is like, have the dynamics in the business changed? No. I mean, always we get excited about the latest and the greatest new offer in technology blah, blah, blah. And our customers talk a bit and our customer's customer talk about it because I hate to say that's what investors want to hear. Okay, but the real revenues are generated by older products. Products that are actually long-term. They're sticky because of software or performance of whatsoever. And they're also costed down for the customer. So they can ship more of it. In that sense, the dynamic hasn’t changed the marketplace in terms of we have a robust Wi-Fi 6, portfolio. We have a robust Wi-Fi 7 offering. We have the SOCs to complement our broadband Wi-Fi offering. Right? I know that the broadband access it's funny when it does well it gets discounted, when it goes down but that's the problem. Sort of – so honestly if you step back, we're trying to build the broad base portfolio company with potential to generate large profits and earnings per share for shareholders. And at the same time, build scale and while investing in what I call more resilient businesses like our instructions and so on so forth, so that we can build a comprehensively a large company. I mean, that's the ultimate goal. And no matter what happens now. We are really focused on the long-term goals and that we're very committed to.

Thanks for that Kishore. And then secondly, about your infrastructure business, the upside there, you guys kind of highlighted millimeter wave and 5G backhaul. I would say, first of all the millimeter waves side, I think it's been very slow adoption. So it's interesting to see you guys picking up why now? And then secondly, on the 5G side, we've seen builds really start to slow even in India now. What are this specific programs that you guys are linked to that are kind of swimming upstream here?

Yeah, it's just real quick maybe a clarification, Chris. I think you're aware, most of our businesses have been backhaul. So, these backhaul transceivers that we've been shipping this year has been a big driver right? So very different than the markets you know, the access, 5G access markets that you're describing. And so, these are microwave backhaul that's replacing fiber, kind of in between base stations. So very - again just want to emphasize a very different market than the decline that you're referencing, which we also see. We sell into the wireless access market. We are familiar with it. Not surprising. There's definitely been weakness there. So, but we've been able to gain traction in some of these other markets that are little niche, nichier markets. They're a little bit smaller, but they've been great growth drivers for MaxLinear. There's a trend in the microwave millimeter wave backhaul deployments as well, right? The people are deploying more and more multi-band deployments and multi-band, I mean like millimeter wave band microwave kind combined radios or hybrid radios. So that increases the content, as well. Yes, India has been a driver as India was rolling out strongly on 5G. And now we see a slowdown. So we expected the slowdown as of guidance - guided accordingly. And you also keep in mind that we did not have excess inventory in the infrastructure channel. We basically - we're running short in supply and the supply to the market. So, the growth, you're seeing, what you call our ability to pull us out and go upstream is really based on the fact that the channel was not overstocked. So we are shipping to natural demand. Now with the slowdown, we will be caught up with this slowdown as well. So really the growth is coming in the backhaul to these multi-band hybrid deployments, which millimeter is a part of. And you also want to think about the fact that as the access bandwidth increase, the front haul and backhaul data pipe is no longer going to be provisioned sufficiently by microwave and they have to use millimeter wave. It's cost effective to - in combined with microwave and they're making trade off versus fibers. So you can imagine countries like India and even in the US in metropolitan zones and things like that, people are trying to do lot of hybrid deployments. Now does it slow down? Yes, absolutely. We have guided so accordingly and it's going to be a little - what I call the telecom at CapEx being dramatically slowed down as lot of the telecom OEMs have talked about. In fact some have pre-announced right? We should see some impact of it. But this is where our infrastructure is going to really be driven by our growth in our storage accelerators and our optical datacenter investments. So I think it's turning out to be a pretty nice portfolio, which I'm quite pleased actually they also been taken a while.

Thank you guys.

Yes.

Our next question is from Ross Seymore with Deutsche Bank. Please proceed.

Hi guys, just wanted to ask a couple questions. For the fourth quarter not going up sequentially. Was that that demand change more inventory was out there than you expected? And I know those two things are interlinked. But what changed from three months ago to today that leads the fourth quarter to be down sequentially?

Yeah, I mean, I think it's exactly as you stated, I think it's both, right? I mean, there's definitely more inventory. We saw more push outs. I mean, we saw bookings in the quarter. So we saw some improvements, but it wasn't as much as what we had originally expected three months ago. Honestly, we ourselves are sort of baffled if you will as to how much inventory is out there and just slow down and how to reconcile that. Right? So you know it it's getting clear as the slowing economies sort of is all the catching of with us. I think there are two parallel economies over their right now. A tech economy and there's a chip economy. And maybe there's a consumer economy, I don't know there, maybe they're three of them and we're definitely in the cheap economy. And we're seeing some of the downsides of that.

I guess just a second question, I have two quick follow-ups. The first one is from first year as a whole, I know you are not going to guide the total revenues. You talked a little bit about the linearity of it with the seasonal comment earlier. But from a high level what do you think are the idiosyncratic tailwinds or headwinds that you guys as a company have as you look at ’24?

I think it's pretty straightforward. I mean, I don't - I'm not going to guide of course next year, but I mean, I think the shape of it is probably the opposite of this year, right? I mean, we started the year out really strong and we saw that kind of deteriorate to some degree. We are working through this inventory and I think you're likely to see us continue to improve and a lot of that's coming from just naturally inventory burning off. But it's also coming from new programs. New products that are going to ramp in that kind of the second half next year. I mean, you got a lot of new wins coming from optical. That starts to ramp next year. Wi-Fi 7 starts to ramp next year. So you've got several new programs that are going to ramp on top of the inventory just naturally burning off. So both of those will help. I mean, I guess the only other thing that I just mentioned on another question was seasonality. I think you probably see a little bit of softness in seasonality. But I think it's more influenced at least in the short term by the inventory that sits in the channel.

Yeah. And then my last one and forgive me for speaking in three. I know it's a confidential process in the arbitration with Silicon Motion. But any sort of update on either the timing, reiteration of what you said before. But the timing of it or the potential magnitude any sort of color on that in fact tends to be the most frequent question I get. And I again I appreciate your somewhat, if not significantly limited in what you can say.

Yeah, I don't think anything's changed just as we had updated before. I mean, the only change is that Silicon Motion filed for arbitration. Confidential process. So you're correct. And that we can’t add any more color there. Still expect that arbitration process takes 12 to 18 months.

Thank you.

Our next question is from David Williams with The Benchmark Company. Please proceed.

Hey, good afternoon. Thanks for taking the question. Kishore, maybe you could talk a little bit more about the traction you're seeing in the in the Keystone platform and what's the magnitude of that ramp do you think for next year? Is there any maybe just a little more color that you provide around that to help us understand that that traction in growth?

We don't to the future in that sort of short timelines. But I think from where we are today, we are pilot build right now as the interop cycles continue. And hopefully next year, we are somewhere in the teens or beyond that and hopefully beyond that because that would be disappointing it is in the teens. And then, but I can talk to you in terms of three year - in a three year window could we cross a $100 million, yes, I mean, that would be a natural expectation, right? So, can we do better than that? Absolutely, that's based on share shifts. And I think one wile card is the timing of the deployments of multiple datacenters in the transition to 100 gigabit or whether it’s 400 gig or 800 gig or 1.6 terabit on the 100 gig platform, if you will. And so, you are counting on multiple layers coming on. Right now we have confirmed transitions from one big datacenter guy. I know that in the NVIDIA AI clusters they are deploying 100 gigabit. But you know what? It's like we have to land into it rather than win into right now. So we are trying to win into it and as we increase the supplier base, hopefully we are one of the selected ones. But yeah, I'm not saying that we are selected or we are in it. So please don't mistake that. I'm just trying to say, our focus is right now winning. And some good luck on the share basically, okay?

Okay. Can you say is that progressing as you would have expected? Or is it maybe a little slower than you had hoped?

You know, it’s always be slower to me honestly. It's been a few several years since we've been investing in the optical datacenter. And I can't - every time, it seems slower – it’s slow for me because I'm dying with anticipation, right? So, but so far, we feel very good about where we are. And like I said, if you read the tea leaves, I should actually be more positively disposed than my forecasting will indicate to you.

I think David, another positive, I mean you're starting to see you know, our IP that we've developed in optical is starting to broaden out and we can go after AEC opportunities, AOC opportunities, and that really helps us to leverage the development that we've done thus far. Those are also types of programs that can ramp quicker versus some of the other transceiver platforms. Yes.

Great color. Thanks so much. And then, maybe lastly, just on the carrier or maybe the operator side. If you look out, are you hearing anything in terms of beginning of the year of CapEx planning or is there any sense of optimism that you're beginning to hear maybe for 2024 deployments and maybe CapEx spend?

You know, it's always the hardest thing in all these years in broadband, I can tell you very clearly that, they start their process some time in Q3. And then, Q3 I don’t know anything and Q1. By the time at the end of Q1, then in sometimes they just go super aggressive as well. So but these are unique times, because there's a lot of inventory sitting out there even if they're going through that process, I am feeling the impact of their OpEx decisions is going to be delayed for sure, right? Because we're going to be depleting everything the inventory. So, you won't feel the urgency. They would come rushing towards the end of Q4 or in the middle of Q1 in the past pre-pandemic period, right? But now there is still enough inventory in the channel that it's going to be dampened. And so we wouldn't be getting that signals much. But I think, but I think you should all expect that everybody is going to be tightening their belts, right? And so, it will be subdued whatever they're going to be up to.

Our next question is from Karl Ackerman with BNP Paribas. Please proceed.

Yes. Thank you. Hi Kishore and Steve. Just two questions.

Hi, Karl.

Hi. I guess, my first one, I would ask, there have been many questions on this call, sort of asking whether there are structural impairments to some of the broadband and connectivity portions of your business. So I’d like to ask specifically about your connectivity business, how much of that business today is on a rough and tough basis split between wireless and wired? I think that would be certainly helpful as we contemplate some of the content drivers that you talked about earlier on this call as it relates to Wi-Fi 7 next year as well as some of the growth opportunities today for Wi-Fi 6.

Okay, I would say there is little or no exposure to wireless access from a connectivity side. To the extent that we have exposure to the wireless access on the broadband connectivity side for our Wi-Fi's offering, it's really the telco platforms where they tend to be the gateway box where, for example, they have our fiber PON chip with our gateway processor and a Wi-Fi. And they will be, they will be what I call a input to that box that comes from a 5G access video. So very little or no exposure to wireless broadband access, okay? So if you take our data, on the wireline, we are pretty much 100% over exposured to wireline access. However, it may be, so let's say 90% of it and 10% off it is what I call standalone router gateways that we are we started making progress towards at the beginning of the year to get revenues that are outside of the operator gateways, right? That would be the landscape. So you should - on the practical terms you should associate 90% of our Wi-Fi connectivity reviews with our wireline broadband access gateways, okay?

And maybe Karl, just to add on a little bit, so, don't forget on connectivity side. We also have the Ethernet. So, while a lot of our declines in the gateway, I mean, it's been driven by both Wi-Fi and Ethernet. One of the big things going on is we're seeing more exposure Kishore said some commentary around what's going on with this transition at 2.5 gig, we are seeing a lot more interest in that and we do expect to see more growth in ‘24 and ‘25 from Ethernet as well as of course, the Wi-Fi opportunities.

That's very helpful. And I appreciate that color. For my follow-up question, I guess, are lead times and backlog back to normal I guess pre-COVID levels, is that a fair way to think about it today? And then second, it's nice to see the decline in inventory, but any thoughts in terms of a target level of inventory as we could manage expenses over the next couple quarters. Thank you.

Yeah, it's a good question. So I think we've been doing a really good job on inventory as far as bringing it down. But we got to do better and we will continue to do better. We jumped on this pretty quick and going all the way back to the tail end of last year. But unfortunately, the revenue declines just been such that we've not been able to get the inventory out as fast as we'd like to. With regard to lead times, with regard to lead times, I would say we're kind of back to normal. I mean, we're kind of quoting 16, 18 weeks lead times, which is pretty typical in our business. I mean, there is a couple of businesses that are probably a little faster than that, but that's kind of our normal. So I wouldn't say that that is problematic whatsoever at this point. The backlog - also backlog and bookings so, bookings as I've talked about, I mean, have been very low because you had super good backlog for well over a - I don't know, almost two years now. And so now, I feel like we're through that adjustment phase where you're going into a quarter with, whatever, 50%, 60% backlog whereas you, historically you've been running for the last two years, you've been running at a 100% backlog. And that and that's changing and that that’s getting back into that normal rhythm. That's what we're used to. That's what we know. And so, actually looking forward to kind of getting back. Some of the uncertainty has been around backlog pushing out of a quarter. That's really where the problem has been. And so, we're starting to see that improve. But to be honest, Steve to the extent that can save you on zero inventory in our books, so that we get the PO bookings going on our customer side. I've bet you have all support you on that.

Of course.

Thank you.

Thanks Karl.

Our next question is from Ananda Baruah with Loop Capital Markets. Please proceed.

Hey. Yes. Good afternoon guys. Thank you for taking the question. Maybe just, kind of dovetailing right off of that last topic with Karl. It seems like everything you guys just talked about would suggest that new normalized inventory levels with customers exiting this would be the same as they previously were going in? Do you think that that's based on what you can see a fair - set a fair assumption?

Yeah, I'm not sure that I followed you on that. I'm sorry.

Well, your customers hold, I mean, they probably view their inventory level, like to them they have what they would interpret is normalized inventory levels. I would imagine. And that looked at the particular way going into 2020 they can change what that looks like, Steve but it sounds like maybe they could change it higher, they could change it lower, they could leave it the same coming out of this. But it sounds like based on what you're saying, well here's my thoughts. So does that make sense though? When I'm saying like, they probably say we want to hold some number of weeks of MaxLinear inventory.

Sure.

Yeah, yeah. So, it sounds like - it sounds like what you're saying is the lead times are back to pretty typical and you're at 50%, 60% backlog, it sounds like ship out is meaningfully higher than ship in because you have typical times. So it sounds like they're operating you guys with typical lead times just working down the inventory to the 50%, 60% backlog. So, that would sort of suggest to me, I just really counterpart to the question, it sounds to me like they're already working you guys, as if getting you back to pre covet inventory levels. I was just wondering if you have an opinion on where that might settle in. I mean, also informed when you guys inflict.

Yes. I look, I if I understand your correct - your question correctly, I agree that they, I mean, I think the whole industry sees that lead times have come down and so, they're waiting and they're taking more risk. They know they actually kind of – I am not sure if we're seeing eye to eye on this, but I think customers do have still have. If you look across the industry, they're still a lot of inventory either in the channel or even sitting at end customers. And so while that is still high, I mean they are still burning that down and - but we're getting back to those normal times. As I stated, I mean, I think it's another couple of three quarters. But we are seeing improvements.

Yes and I guess, the question really was do you think that they settle you at lower levels than previously, what things get back to normal do you think …

Yes, look, yes, I mean absolutely that's what we see in every cycle. It swings to the other way, right? They will take more risk. They will wait too long. That's exactly what's going on right now in my opinion, across the entire industry is that they are waiting, because they either they know, or they think they know that there's enough inventory out there. And so they're going to wait as long as they can and nobody is, every one of these customers, their operations guys getting pounded on for having too much inventory. So they're going to they're going to not order and they're going to risk being late. And in this environment where demand is kind of so, so that's probably okay.

And then just a quick follow up, Kishore, you mentioned a couple times about the storage accelerators and picking up in ‘24 and then potentially will be robust for a few years. Do you - any context around how impactful those could be?

It's very impactful, right. I mean, generally by and large whenever we invested any new product areas, we hope to build at its peak run cycles on there in the $50 million to $100 million per year product infrastructure product. Otherwise the economics don’t make sense. And there's a rhythm to it. What is the next product going to be billed and that's one of the things is a sustaining revenue and growth, right self sustaining growth of revenue and revenue. So that is the expectation for this product that it's going to be something in the $50 million to $100 million per year revenue when it hits peak revenue. So initially you have really rapid growth. Like you said, double next year and maybe grow 50%, 60% in the following year from there. And maybe it hits the peak point in somebody in the third and the fifth year from now, right? Hopefully the third year, not the fifth year and then it holds there for a long time and we launch new products. And the more important thing and this is where - this is the key point here and maybe you never have a connected the dodge very well here is that there is a place and need for these accelerators in the cloud market, as well. And as the AI and the cloud and the EDGE increase actually doesn’t become essential to it. So right now it investigating partnerships with AI vendors if you will where there could be a joint offering and you're seeing a lot of what I call openness for that joint collaboration of a joint this thing. And that really is the key to the storage business is the enterprise is going to be a massive consumer of storage. And latencies and access speeds and all of this is going to be incredibly important at the edge and even inside the cloud moving forward even if the AI is going to get even worse. And really this is the play that goes together with all the offerings on the AI processors, as well. So that's the next step in the evolution of our storage accelerator business. And maybe it is the first time I really connected the dots in that sense for you.

That's really helpful context. All right, great. Thanks guys.

Thanks, Ananda.

Our next question is from Suji Desilva with ROTH MKM. Please proceed.

Hi, Kishore. Hi, Steve. A question about the carrier PON program. I'm curious if that is the rollouts happening as you'd expected or whether that carriers pushing out at laying that roll out because of the macro content?

So, the roll is already happening. We've been shipping for this whole year actually. The only difference is that the earlier part of the year, the rollout was slower than we expected. So they were sitting on a bunch of inventory and then they started shipping. Now, they're shipping on a actual cadence, and we are already working on the next generation platform. But my expectation is the next generation is going to be delayed and the existing generation platform with 10 gigabit PON, - PON and Wi-Fi 6 or 2, which is enhanced throughput one is going to have a long life. Having said that, we got the next generation offering as well. So, I don't think there's any change in plans yet. There'll be natural slowdowns and seasonalities and that's sort of the thing, but nothing out of the ordinary. Because to start with, it is not as much inventory on our side as was in the beginning of the year.

That's helpful Kishore. And then, lastly on the AEC market within optical that's kind of coming online here. Can you help us just think about the relative size? Do you think that that market will be a year two out versus the AOCs and the passive cables just to understand how big you think that market grows as a share of the cabling?

That's a very, very interesting question. I know there's a lot of excitement in AEC. But AEC has been a very, very tiny market looking backwards. Right now rational for AEC comes in as the speeds have increased dramatically where passive copper cannot meet the performance. And you need active electrical cables. It’s a place for AOCs as well, I mean our AI cluster I don't want to do anything with AECs, right? I want to go optical. So it’s really is a mix and match. So this market can be huge, gigantic and I think any forecast will underestimate the volume it can be over the long-term. It's just like USB 3.0, right? It can just keep growing. How are the prices are going to be a lot more optimistic than they really will play out to be, right? All in all I expect the markets, I don't know anywhere between $200 million size for a chip guy to as big as $1 billion for transceivers, active optical cable, and active electrical cable combined. But there is this cards in the last 20 years of existing is MaxLinear for me. I’ve never seen a single chip supply in the communication segment more than $300 million of product. So the billion dollar TAM, a $300 million TAM is my point. So put it differently is going to take generations of products to really access the $1 dollar TAM and that's going to take a few years to get there. But I think we're very well positioned with our technology evolution.

Okay. Thanks Kishore.

Our final question is a follow-up from Tore Svanberg with Stifel. Please proceed.

Yes, thank you. I just had a two-part question on the recent Commscope Vantiva deal. First of all, did that also have an impact on sort of purchasing behavior? Obviously, when you have an event like this, perhaps customers are bit more, careful about buying inventory. And then the second part of the question, does this change anything at all for MaxLinear? The reason I'm asking that question is because, now that it’s going to sort of like two customers in one, I would think that the qual for DOCSIS 4.0 going to be a bit more simpler. So, if you could answer those two questions that would be great. Thanks.

So Tore, the first part of the question is very, very easy. I don't think anybody knows which deal happens when. It's a very non-linear process, M&A activity. Having said that, there's so much inventory in the channel. I don't think this - the deal itself had any impact on that. It's really driven by the end market throughput. And the end-market itself has got a lot of inventory sitting on it, right? So I think our customers are in the same bad place we are in, number one. Number two, regarding the DOCSIS 4.0. cycle. Yes, we got a great chip. The lowest power. The most beautiful thing in the world that sort of a chip we have compared to any competition out there. However, we have seen the way the DOCSIS cable market plays out it really takes three to four years to get to the ramp point where you hit 50% of the volume, at least four years to get a 50% of the market. And then a seven year life to it, right? Having said that, DOCSIS 4.0 is not the same for everybody. It already has - in the marketplace. There are two flavors of it and it's a very, very costly network rollout. And I think often it’s going to be very, very selective about DOCSIS 4.0. It's going to be a very small share of the market. However DOCSIS 3.1 has got many flavors. There is something called the ultra DOCSIS 3.1 which is going to meet all the category of services that the market needs with this 10 gigabit received bandwidth, and upstream multi-gigabit. It's going to meet all those things. It's called the higher split ultra DOCSIS 3.1. And that can roll out today based on all the network out there. And that's what the operators are going to lean towards, and that's going to be 80% of the market. And so DOCSIS 4.0 is great, but 3.1 is even more beautiful. Ultra DOCSIS 3.1 is what I put my bet on.

Great perspective. Thank you.

Thank you.

We have reached the end of…

Sorry. Go ahead, please.

I was just going to hand it back over to Dr. Kishore Seendripu for closing comments.

Well, thank you. Thank you, operator. So, I just want to thank you all for attending this call. I would like to tell you that we'll be participating in a number of conferences in November through January. The Stifel Midwest Growth Conference in Chicago on November 9th, the Roth Capital Technology event in New York on November 15th, the UBS Technology Conference in Scottsdale on November 28th, the Wells Fargo TMT Summit in Rancho Palos Verdes, California on November 29, and the Needham Growth Conference in New York on January 18. With that I want to thank you all once again for joining us and we look forward to speaking with you again soon. Thank you.