Greetings, and welcome to MaxLinear 2018 Q2 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Gideon Massey, Investor Relations Manager.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss MaxLinear's second quarter 2018 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 third quarter 2018 revenue, gross margin, operating expense, tax expense, tax rate and interest and other expense guidance as well as statements relating to trends, opportunities and uncertainties in various product and geographic markets, including, without limitation, statements concerning assumptions and factors concerning potential variability in our third quarter 2018 and management's current views of revenue and revenue growth opportunities and in subsequent to the fourth quarter of 2018 expectations. These forward-looking statements involve substantial risks and uncertainty, including the risk arising from competition, our dependence on a limited number of customers, average selling price trends and the accuracy of our assumptions concerning the reasons for increased variability and our revenue expectations, risks that our markets and growth opportunities may not develop as we currently expect and numerous other risks outlined in the Risk Factors section of our latest SEC filing, including our previously filed Form 10-K for the year ended December 31, 2017, our Form 10-Q for the quarter ended March 30, 2018, and in our Form 10-Q for the quarter ended June 30, 2018, which was 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 second quarter 2018 earnings release is available in the Investor Relations section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including net revenue, gross margins, operating expenses, income or loss from operations, pretax margin, income taxes, effective tax rate, net income or loss and net income or loss per share 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 do not provide a reconciliation of non-GAAP guidance for future periods because of the inherent uncertainty associated with our ability to project certain future changes, including stock-based compensation and its associated tax effects. Non-GAAP financial measures discussed today do not replace the presentation of MaxLinear's GAAP financial results. We are providing this information to enable investors to perform more meaningful comparisons of our operating results in a manner similar to management's analysis of our business. Lastly, this call is being webcast, and a replay will be available on our website for two weeks. And now let me turn the call over to Kishore Seendripu, CEO of MaxLinear.

Thank you, Gideon, and good afternoon, everyone. Thank you all for joining us today. Our revenue for second quarter 2018 was $101.5 million, which is down 8% sequentially, with connected home down 14%, infrastructure down 5% and industrial and multimarket up 3%. Despite the top line revenue challenges in the second quarter of 2018, we posted strong growth in operating margins, driven by favorable product mix, continued improvements in our high-performance analog product margins and tight operating expense management. As a result, we exceeded our earnings targets in Q2 and grew strong operating cash flow of approximately $36 million. We will continue to manage our expenses prudently to preserve operating leverage and maintain earnings while we navigate through the adverse revenue impact of timing uncertainties of near-term product transitions in our cable business and new design win trends in infrastructure markets. In a few moments, Steve will cover Q3 guidance in detail. I would like to take a moment to update you on our DOCSIS cable business dynamics and market outlook. During Q2, our customers began to signal that their demand for DOCSIS 3.0 data gateways was slowing and also that the production ramp of our flagship DOCSIS 3.1 platform was delayed. Consequently, we are now witnessing a slowdown of our cable data orders as customers draw down their older DOCSIS 3.0 inventory in anticipation of an uplift in DOCSIS 3.1 orders, which have been muted thus far. This was a factor in our Q2 revenue results, but impacts our Q3 guidance to a much larger extent. On the positive side, we strongly believe that our cable data product transition revenue challenges are temporary. We expect our customers to exit Q3 with significantly lower DOCSIS 3.0 inventory, which, combined with the improving visibility of our customers' qualification of their DOCSIS…

Thank you, Kishore. I will first review our Q2 2018 results and then further discuss our outlook for Q3 2018. A revenue of $101.5 million, we saw connected home decrease 14%, driven by the initial step-down in DOCSIS 3.0 shipments affecting both MoCA and cable data products, combined with the lack of meaningful ramp on the DOCSIS 3.1 side. Our infrastructure business was down 5% sequentially. That said, wireless infrastructure continues to provide stability and our bookings outlook continues to be very positive. Within infrastructure, our high-performance analog applications stepped down as expected owing to the ZTE ban. On the industrial multimarket side, sales were up 3% sequentially. We continue to be encouraged by the stability of our industrial business and look forward to benefiting from the new initiatives we undertook over the last year following our Exar acquisition. GAAP and non-GAAP gross margins for the second quarter were approximately 55.5% and 64.6% of revenue respectively. This compares to GAAP gross margin guidance of 54.5% and non-GAAP gross margin guidance of 63.5%. The gross margin improvement was due to a more favorable product mix than expected and continued margin improvement on our high-performance analog products from the Exar acquisition. The delta between GAAP and non-GAAP gross margins in the second quarter was primarily acquisition-related, reflecting the amortization of $9 million of purchased intangible assets and $0.2 million of stock-based compensation and stock-based bonus. Second quarter GAAP operating expenses were approximately $56.6 million, which was $0.4 million below the GAAP guidance of $57 million. GAAP operating expenses included amortization of purchased intangible assets of $8 million, stock-based compensation and accruals related to stock-based bonus plan of $7.2 million and $2 million respectively, $1.9 million in restructuring and $0.3 million in depreciation related to a step-up in acquired fixed assets. Non-GAAP operating…

[Operator Instructions]. Our first question comes from the line of Tore Svanberg from Stifel.

And allow me to welcome Steve to these calls. So first question, in regards to the connected home business down 30%, 35% sequentially, is it fair to say that that's kind of like a big flush-out of inventory of DOCSIS 3.0 being raised? Or do you think there will be still some reductions in Q4 that will be offset by a DOCSIS 3.1 ramp? I'm just trying to understand how severe the actual correction is for Q3.

So Tore, first of all, thanks a lot for the welcome, and I'll do my best to answer the questions today. So yes, I mean, that is the intent, and hopefully, that was conveyed in the language that we spoke to today. The intent is to kind of see this bottom out in this quarter, and we start to see that recovery. Look, this is a dynamic market, and this transition has caught us offguard previously, but we're optimistic that we'll see that improvement in Q4. Absolutely.

And I think that in the previous earnings calls from some of our customers, you may have noted their own dynamic spend which we referred to in our script.

Got it. And then on gross margin, I'm a little bit surprised that it's coming down. And I get the lower revenue, but I would have thought that the mix would have actually helped you instead of weighing on gross margin. Could you just elaborate a little bit on that, please?

Yes, I mean, just briefly on that, I mean, yes, so revenue is definitely a contributor on it. But it is - I mean, this, the particular cable business, is a higher gross margin business, and - so it does see an impact next quarter.

Okay. Very good. Just one last question for Kishore. Kishore, you mentioned one large hyper-scale customer being very interested in your PAM4 product, but I believe you also - you mentioned maybe an end of '19 production ramp. We've heard from some of your peers that they're actually seeing PAM4, kind of a big thing, pulled in somewhat. Maybe you could just share with us what you believe are some of the dynamics in that market right now.

Tore, as you're well aware, we were the first company to sample a 400-gigabit PAM4 DSP at the OFC conference, and we demonstrated with customers with built systems. And since then, we have been engaged to working with all the major optical system suppliers. So we are talking to the same system suppliers who are, in constant, engaged with the hyper-scale - one particular hyper-scale data center company and with whom we are also directly engaged. It really happens in a phased manner. We basically do a pilot deployment for an interoperability test, which is quite substantial, so you'll see an initial ramp. And then they go through some additional exhaustive checks, and the real production ramps don't start until the end of 2019. So yes, so it's a matter of interpretation of what constitutes a full ramp rather than whether you're going to see some revenues prior to that.

Our next question comes from the line of Gary Mobley from The Benchmark Company.

Welcome, Steve. I wanted to delve a little bit deeper into the cable data business and the composition of that business. Can you confirm that the cable data, the DOCSIS business, in the first quarter 2018 was somewhere in the ballpark of $25 million? Am I in the ballpark there?

So my apologies, I'm the new guy here. I'm on day 4. So Gary, I can't break that out for you today. But I mean, it is the majority of that connected home business, and that's definitely what's driving the decline coming next quarter.

Okay. I mean, the point of the question is, is that in cable data, you're expecting about a $20 million degradation from recent highs in the third quarter. Presumably, the vast majority of that is cable data. I'm just trying to get a sense of whether or not that business can recover to previous levels based on your content and DOCSIS 3.1 and as well your market share at your main customer and your main customer's market share at the cable MSOs.

Yes. So I mean, I think we're comfortable with the content change from 3.0 to 3.1. So I don't think there's any problem on that front. And so we do see this as just a transition. And as we come out of 3.1, we'll feel - we'll be in a very good position.

And I also want to emphasize that if you look at the cable market, the - there are two main systems suppliers on the chipset side, and no matter what the dynamics are in the supply chain, the health of the 2 chipset vendor systems is tantamount to have new innovations, inventions moving forward. Having said that, our major customer has already signaled that they are now qualified and they will be ramping. And we - but however, there's usually lag between them ramping and then them starting to deplete their inventory of only parts that they have taken before we start to see a resumption in orders in a healthy way. But I do want to emphasize that we do not have any doubt in our mind that there is no loss in relative market positions for our products in the cable data market, and we expect to get back to the levels we were before as the ramp picks up steam. So it's a matter of timing, whether it happens in two quarters or three quarters or even lesser than that. So I think, at this stage, it's still early, so we're being very cautious given the history of the last two quarters. So we want to be careful about not getting ahead of where we can really safely guide to.

Okay. And last follow-up question. What was that $1.9 million restructuring charge related to?

It was primarily Exar-related.

And that's headcount reduction?

At least related to facilities and such basically.

Our next question comes from the line of Quinn Bolton from Needham & Company.

And welcome, Steve, looking forward to working with you again. I guess for either of you, if you look at connected home being down 30% to 35% and cable data being the majority of the business, it sounds like cable data is down by 50% or more in the third quarter due to this transition. I guess as I look forward to your initial thoughts on Q4, guiding revenue up only 3% to 7%, it still feels like there's a lot left for the cable data business to grow as you enter 2019. I'd like your thoughts on that, and then I've got a couple of follow-ups.

Yes. I mean, you're absolutely right. I mean, I think, you've kind of read through the numbers correctly as we see it. We're being cautious. I mean, Kishore's statement previously, I think, indicated that. We are being careful as we look throughout over the next couple of quarters through this transition. But yes, we absolutely see a lot more growth coming in 2019.

Okay. And then I guess the second question related is you're seeing this pause in DOCSIS 3.0 as customers work down inventory. Obviously, your largest customer is starting to ramp with the largest U.S. cable vendor for DOCSIS 3.1. But if you look outside of that customer and that specific cable MSO, are you seeing other cable MSOs and ODMs also drawing down inventory? Or is this related specifically to kind of one OEM and one cable MSO?

Quinn, that's an excellent question, and the answer is twofold, right. If you listened to the earnings call for the biggest customer, you saw them mention heavily about component shortages as well. So it's a very, very important factor. In fact, the reason we were so challenged to forecast correctly in the last two quarters is that due to these important shortages, they have been ordering just in time for other chips if they cannot assemble the full kit assembly. Surely, the MLCC capacitors and memory situation brought into that, they were ordering these on what they could really assemble in boxes. So that is a - and that particular problem is actually pervasive across the industry, and that's all impacting order patterns. So going to the next question, the - outside of the U.S. main operator, Comcast, the other operators that are slated - that are coming online are Charter and then Liberty Global in Europe. And now, of course, Liberty Global has sold masks to Vodafone. So they are all supposed to be coming online sometime in the next 12 months. And at this point, it's very hard to say who is on time and who is late. But I would like to tell that, even through 2019, DOCSIS 3.0 will be the biggest share of cable data shipments. It's just that their inventory worked on what's happening. They reverted our transition as expected. And MLCC shortages have also contributed to an impact on our ability to forecast revenue and our absolute revenue.

Okay. And then just lastly, on the PAM4 solution. It sounds like you mentioned an additional tape-out - or not an additional, but a tape-out in Q4 that will result in some higher OpEx in the fourth quarter. I assume that that's the PAM4 production chipset. If it is, will you be sort of ready to go to production or at least its interoperability in the first quarter of 2019? Could you just sort of address if that is a production tape-out of PAM4? When would you be able to ship that to customers?

Quinn, we're very, very - look, we were not a name that was ever mentioned for inside the data center for fiber optic. And we are actually quite pleased sometimes, with a little bit of a smile, that our competitors mentioned us. Reality speaking, it's a big market, and we are in the frontrunner status even though the leads can change time to time. So the production mask, the one MaxLinear defines, is the real production mask, and that means we are ready to ship in high-volume quantities. Regarding interop, we do not need the production parts. In fact, we are interoping right now with the original silicone that they've already sampled to customers. And the sample quantities, because of the higher ASPs, tend to be very meaningful in terms of COGS, in terms of our OpEx spend and the incremental revenue we derive from sampling itself. Yes, we do not need the production mask for doing interop tests. We're, in fact, proceeding forward, with already more wafers of our first tape-out to go to interop and then follow-up with a very high-volume, high-yield, high-margin gross margin product tape-out with the production mask if we're really high volumes.

Our next question comes from the line of Ross Seymore from Deutsche Bank.

And welcome aboard, Steve. I just wanted to see how the ZTE dynamic is playing in. I know you guys said it was a headwind to some of your high-performance analog business, but what's the assumption on that going forward for you? I believe, in the past, you said it was about a $5 million headwind given the ban in 2018. And I just wanted to see what was in your guide for the remainder of the year.

So that's correct. It is about $5 million. We are, at least on the high-performance side, we're starting to see some of - orders for that product now. But on the rest of the business, it's still probably delayed. So it's probably over the next couple of quarters, you'll start to see it roll back in.

And then you mentioned a couple of times in the transcript, or at least in the press release, about the sell-in versus sell-through side of the equation. Do you have your arms around the dynamic of resale versus sell-in? And what's the expectation built into the midpoint of your revenue guidance as far as channel inventory in 3Q?

Yes. So I'm not going to - on day four, I'm not going to claim I know it perfectly. But as far as where we are right now with regard to the channel and kind of demand in general, I mean, look, I mean, the numbers have come down quite a bit. I think we're very comfortable. I mean, this is not the time to be stretching. I think we're very conservatively positioned with respect - we're not - there's no excess product in the channel. If anything, it's coming down.

And then my last question is one for Kishore on the infrastructure side of the business. On the connected home, everybody is looking forward to that, and bouncing back off is low, but in the infrastructure side, that seems to be really the growth driver going forward for the company. Can you just talk chronologically about how some of those new design wins fold in over the course of the next 12 to 18 months and if that has been pulled-in or pushed-out versus what you might have thought a month or 2 ago?

Thank you, Ross. I think in what we thought a month or two, I think, nothing has changed on the infrastructure outlook. We have been consistent in how the infrastructure revenues play out, but actually, we're very happy that the wireless backhaul is growing very strongly. And that will continue to drive, and it's on pace to really grow, in the next year, very strongly as well. So we're very happy about that and both on the modem and the radio transceiver side. On the - and then the next leg of growth, it's a matter of a timing, is - will be based off - would be based off our Telluride product is the 400-gigabit PAM4 solution. And that timing would be to the latter half of second half in terms of definition of being a production ramp. So that's what we call through the end of 2019. Simultaneously during that period, end of 2019, beginning of 2020, we expect to see our 5G massive MIMO radio transceiver to also start shipping. And then following that, a year or so, or earlier than that, we expect our cable fiber node remote PHY chip to be - start shipping into the cable infrastructure. So yes, four legs of growth, if you will, the wireless backhaul, which has really been the driver of the growth of the infrastructure side currently and is doing very well. We got a very strong booking outlook for it looking ahead. And then we have Telluride, which is the 400-gigabit PAM4 DSP solution, system solution, which includes the TIAs and the driver that is integrated. And then we have the, what we call, the Blackcomb product, which is the 5G massive MIMO radio transceiver, and followed by the cable Full Duplex fiber node solution. So lots…

Our next question comes from the line of Christopher Rolland from Susquehanna.

I want to add on the congrats for Steve on the new position. Congrats, Steve.

Thank you.

So last year, you guys blamed your revenue shortfall on a movement from analog to digital channel stacking, but you really haven't mentioned either in a while. Should we think of that as having a ramp down on the analog side and then digital never really ramped? Where are we on that?

Well, I think, at this point, Chris, I mean, I think we're just trying to kind of pull back a little bit on some of the color that we're adding right here. I mean, you can - I'm sure you picked up clearly the takeaways here. Cable data is really what's hurting the revenues right now, and that's a lot of the driver for next quarter. And so we'll start to give a little color as we move forward and I get a little more comfortable in the role.

Okay. Sounds good. And then you also mentioned headwinds from MoCA as well. I assume that's kind of connected with your largest customer, but perhaps, you can maybe expand there and give us some other puts and takes.

I think as we mentioned in the script, it's really related to our cable data platforms, where we have, in the DOCSIS data platforms, MoCA goes with an attached element, and any time that platform orders drop, MoCA drops accordingly. So there is nothing more material than that other than the fact that they go hand-in-hand basically.

Sure. And then Kishore, while I have you, on the DOCSIS side, what gives you confidence, and you already hit on this, but what gives you confidence that you're not - you or Intel, for example, aren't losing market share to your biggest competitor? I mean, I think there are - were some thoughts that maybe your biggest competitor is bundling more. How do you have confidence that that's not true, that's not working and that your market position is solid?

It's really simple because the operators do make the decisions on who the chipset vendors are. The OEMs don't get to make a determination, especially with the major operators where this transition is going away - going on. So when you talk about us not shipping in DOCSIS 3.1 due to a customer platform qualification being delayed, it just means that this particular chipset platform is not shipping in the time frame where it is being qualified. It has got nothing to do with any diversion of our customer moving to the end of the platform for this operator. So I don't think you need to worry about some, what I would say, some tactics on a competitor's part to somehow gain unfairly market share. So - and I can't speak for the strategies, but they're well known and it's been told. So I think if we have a good - you asked me how do I feel confident that the inventories are coming down, I think it's very simple. You do the throughput demand for the end customer, for your OEM, and you know how much they have shipped and you realize that they're pretty much down to a trickle in the inventories and they won't be able to ship anything if they don't buy anything in Q4. It's as simple as that. So our OEMs do that all the time as they come to the end of the year, but they have been unusually proactive about this due to the component shortages during the last quarter and this quarter. So - and the honest the fact is we cannot respond to their needs if they place delayed orders even though we have got some buffer in our own system.

Our next question comes from the line of Alessandra Vecchi from William Blair.

Just on the MoCA side. I think, over the last couple of quarters, you guys have been stating that you expected the rollout on a major telco operator will start beginning at the very end of this year or early 2019. Sort of any update on that?

Oh, absolutely. That preparation for the rollout is going quite well. I think we have some limited order quantities in Q4 slated that we have some bookings for. But the real - so we - and they are already sitting on some inventory, honestly, so we feel that they may start - it could happen Q1 or Q2 depending on how the order patterns flow, but that is expected to happen right now.

Okay. And then similarly, just on the G.hn side of things, you had sort of talked about, this year, revenues getting to $20 million from $5 million last year. Do you guys still feel pretty confident in G.hn holding up and continuing to be strong?

So I think the way we look at the whole product line is a full connectivity category, and G.hn right now is clearly the growth driver for us. And that's looking very, very promising, and it is - I do not recall, well, that we said $20 million per se, but the bottom line is that it's been a great acquisition for us, great technology, and it's growing very nicely. And it's getting tremendous interest in applications, a variety of power networking solutions outside the home, in industrial IoT and other applications. So those are more in the initial business development and customer interoperability phase, but you should expect to hear us to start talking about powerline network in the industrial IoT space over the next couple of years.

Our next question comes from the line of Suji Desilva from Roth Capital.

Steve, good to be working with you again. Good luck in the new role here. So on the data center, optically, you talked about a customer who wanted you to pull that in. It sounds like a fairly high probability opportunity for you guys. What's the magnitude of that addressable market for that customer for that end market for the optical part?

So Suji, it's very, very difficult to seize the opportunity by the customer. But suffice it to say, that you want to look at a huge data center, how many ports they have, and generally, they don't start replacing ports in existing data centers. So the way it works is they try it out in a sort of a mini data into a sort of environment. And then the interoping event, once that is looking good, they start rolling out. So you can look at it as a substantial opportunity in 2020, that's data in between 250,000 ports to maybe 500,000 ports in 2020. So if that's the case, you can see that based on the market share assumptions that we would get off the data center, it's a very, very meaningful growth opportunity, right? So you have to do the math on the ASP, let's say, 250,000 ports, then you run the math on the chipset solutions and maybe get $50 to $100. And then if there are only 2 suppliers at that point in time because they begin interop today, then it's a very, very meaningful growth opportunity for the company at this data center alone. But hopefully, by that time, there are other data center companies that are coming online, and it will be a larger visibility to a much bigger ramp. And I think that's a critical statement to make, right, in a sense that here we are, we have been talking about infrastructure, we are the brains of some major things happening. We have visibility into the design win pipeline, design that - design wins that will ship in the next 12 months or so. I think that if you call you the "show me" story, well, then I think it's getting to the brink of the point right now. So I'm pretty excited, and we've always executed the technology so I feel really good about it.

Okay. And then just a quick clarification on DOCSIS 3.0. I just want to understand. Are we at the point where these programs are starting to wind down in favor of 3.1, or do we still have a long tail here and this is just kind of an interruption about the sales demand?

I mean, 3.0 is going to be a long-lived story because so many of the world outside of the United States is really even DOCSIS 2.0, and 3.0 piggybacks on 3.0, right? And so I think 3.0 will be one of the longest-lasting DOCSIS standards, and 3.1 will take a few years to get to kind of a market penetration outside the U.S. and in the major - and then in the major operators, so in Europe for a while to come. That actually is actually an interesting point for us, right, because we have a great position and stability in 3.0, and 3.1, we will get the major operators, our, what I call, meaningful share, and so it's not a bad place to be as a company.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Kishore Seendripu for closing remarks.

Thank you, Operator. As a reminder, we will be participating at the Piper Jaffray Technology Select Conference on September 5 in Laguna Niguel, California and the Stifel Growth Conference on September 6 in San Francisco and the Deutsche Bank Technology Conference on September 13 in Las Vegas. We really hope to see many of you there and share all the exciting progress we have made in between. With that being said, we thank you all for joining us today, and we look forward to reporting on our progress to you in the next quarter. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.