Earnings Call Transcript - MXL Q2 2022

Leslie Green, Investor Relations

Thank you, Paul. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss MaxLinear's second quarter 2022 financial results. Today's call is being hosted by 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 third quarter 2022 revenue, revenue growth expectations in our principal target markets and GAAP and non-GAAP gross margin, operating expenses, effective tax rate and interest and other expense. In addition, we will make forward-looking statements relating to trends, opportunities and uncertainties in various product and geographic markets, including, without limitation, statements concerning opportunities arising from our broadband, wireless infrastructure and connectivity markets and opportunities for improved revenues across our target markets. Additionally, we will make forward-looking statements relating to the completion of the pending Silicon Motion transaction and its anticipated timing. These forward-looking statements involve substantial risks and uncertainties, including risks arising from current geopolitical concerns, competition, supply constraints facing the semiconductor industry, global trade and export restrictions, the impact of COVID-19 pandemic, our dependence on a limited number of customers, average selling price trends and risks that our markets and growth opportunities may not develop as we currently expect, and that our assumptions concerning these opportunities may prove incorrect. More information on these and other risks is outlined in the Risk Factors section of our recent SEC filings, including our Form 10-Q for the quarter ended June 30, 2022, 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 second quarter 2022 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 from operations, interest and other expense, income taxes, net income and net income 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 charges, including stock-based compensation and its associated tax benefits. 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 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.

Kishore Seendripu, CEO

Thank you, Leslie, and good afternoon, everyone. Our Q2 revenue was $280 million, up 6% sequentially and 36% year-over-year. Non-GAAP gross margin was 62.3%, and non-GAAP operating margin was 32.2% with strong cash flows from operating activities of slightly more than $123 million. We continue to see robust demand across our expanding product portfolio, in particular, fiber gateway access, Wi-Fi connectivity and wireless infrastructure are driving exciting growth. They also represent the most significant long-term growth drivers for the company with strong market share gains and content increase opportunities, which are independent of general end market trends. Our long-term and ongoing investments towards expanding our product portfolio to address high-value adjacent markets are bearing fruit, and we are excited about the meaningful multiyear revenue growth opportunities ahead. Turning to the business highlights. Near term, in Wi-Fi, the industry transition to Wi-Fi 6 and Wi-Fi 6E is providing us new design wins, along with higher blended ASPs to continue to drive revenues above market growth. With each new growth, we are benefiting from improved differentiation, increased market share, higher attach rates and higher ASPs. In particular, the new Wi-Fi 7 standard is a major step-up in performance and features, which should further accelerate our Wi-Fi revenue growth mid to longer term, along with driving broadband access gateway platform churn. During Q2, we also began ramping Wi-Fi shipments into third-party stand-alone routers with the increased momentum continuing into Q3. This will also beneficially diversify and expand our Wi-Fi revenues beyond service provider gateways. We now expect to not only double our Wi-Fi revenues in 2022 versus 2021, but also maintain strong momentum to achieve $200 million of sales in 2023. Moving to fiber broadband access gateways. Multiple customers in North America are currently ramping our product shipments, and a healthy backlog is driving growth in 2022. In 2022, we are not only on target to increase fiber access revenues by more than 4x versus 2021 but also expect strong continued growth into 2023. In 2023, we expect continued accelerated ramp at a large Tier 1 customer in North America and to also proliferate our solutions into other regions as well. As you know, the fiber broadband market is significantly larger than cable broadband, which is currently the larger portion of our sales today. We are excited and confident in our ability to drive meaningful multiyear growth and market share expansion in the fiber gateway end market owing to: one, the ongoing and existing CapEx commitments from the carriers and governmental incentives for fiber upgrades; two, our industry-leading integrated PAN and 10-gigabit fiber processor gateway SoC; and three, our significant fiber platform below material content and the breadth of it. Moving to 5G wireless infrastructure. Our products continue to grow despite tight back-end supply, driven by continued strength in access and backhaul demand, market share gains and increasing content per platform. Our backhaul content per platform more than doubles as we ramp our 5G-millimeter wave products into multiband millimeter wave and microwave radios. During Q2, we announced a single-chip solution to enable network OEMs and operators to deliver ultra-high capacity 5G payloads on existing frequency spectrum. We also announced enabling a high-efficiency power amplifier solution that addresses size, weight and power consumption challenges for massive MIMO 5G radios. In high-speed optical data center interconnect, we have the most advanced 5-nanometer 800-gigabit PAM4 and 400-gigabit PAM4 solutions, which are being qualified by multiple OEMs targeting hyperscale data centers. With the right technology at the right time, we feel positive about our strategic position in PAM4 and our opportunities to grow in 2023. Before I turn the call over to Steve, a few words about our pending acquisition of Silicon Motion, which remains on track. Since then, our leadership teams have been actively engaged in integration planning, and I'm excited about the opportunities for our combined business. Our discussions further reinforced to me the potential of the strong innovation we can bring to the market as a combined company. Silicon Motion has proven its world-class SSD controller technology with great success in its target markets. We look to continue supporting its ongoing efforts to differentiate its products and expand into rapidly growing markets, including consumer and enterprise. We are excited about bringing our two technology-focused cultures together very soon. With that, let me turn the call over to Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer.

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Thanks, Kishore. Total revenue for the first quarter was $280 million, up 6% versus Q1 and up 36% year-over-year. We have performed well over the last several quarters in the face of severe supply constraints both on the front and back end of manufacturing process and across the majority of our product portfolio. Despite this outperformance, we continue to see supply chain challenges or difficulties across multiple product categories, which are hindering our growth opportunities. With that said, we posted solid growth in Q2 and anticipate additional progress in Q3. Broadband revenue in Q2 was in line with our outlook at $139 million, up 3% versus Q1 and 23% higher year-over-year, driven by solid demand across our full portfolio of gateway solutions, including cable, fiber, hybrid DSL and fixed wireless access. Our connectivity end market was down sequentially in Q2 with revenue of $56 million, which was still up 80% year-over-year. The quarter-over-quarter decline was solely due to Wi-Fi supply constraints, which pushed a material amount of shipments into Q3. As such, we are expecting strong sequential Wi-Fi growth this quarter. Our infrastructure end market had a solid Q2 with revenue of $36 million, up 8% versus the prior quarter and up 22% year-over-year, largely driven by strength in wireless backhaul and high-performance analog. Lastly, our industrial and multimarket revenue increased by 35% to $48.7 million in Q2. Strength within this segment was broad-based as we benefit from new product and design win ramps and continue to make up ground on supply shortages. GAAP and non-GAAP gross margins for the second quarter were approximately 58.7% and 62.3% of revenue. The delta between GAAP and non-GAAP gross margin in the second quarter was primarily driven by $9.8 million of acquisition-related intangible asset amortization. Second quarter GAAP operating expenses were $125.3 million, with growth being largely driven by Silicon Motion acquisition-related legal costs and the timing of certain NRE payments. GAAP operating expenses included stock-based compensation and performance-based equity accruals of $29.2 million combined, acquisition and integration cost of $6.4 million and amortization of purchased intangible assets of $2.9 million. Non-GAAP operating expenses were $84.3 million, up $7 million versus Q1. Non-GAAP operating margin for Q2 2022 was 32.2%. GAAP interest and other income during the quarter was $4.8 million, and non-GAAP interest and other income was $4.9 million. We had a strong quarter for cash flow. In Q2, cash flow generated from operating activities was $123.4 million. During Q2, we made a $40 million prepayment against our long-term debt position and also repurchased over $5 million worth of stock. We exited Q2 of 2022 with slightly over $235 million in cash, cash equivalents, restricted cash and short-term investments. Our days sales outstanding for the second quarter were approximately 45 days, essentially flat with Q1 levels. Our gross inventory turns were 2.6x, which were also flat from the previous quarter. This concludes the discussion of our Q2 financial results. Before we go to guidance, I want to give you an update on the status of our announced intention to acquire Silicon Motion. We are progressing well through the process and believe we remain on track for close by the middle of 2023. In late June, the Hart-Scott-Rodino waiting period expired. And in early July, we submitted the simplified filing with SAMR. On July 13, our registration statement on Form S-4 was declared effective by the SEC. Furthermore, while we have fully committed financing for the transaction, we are actively working to optimize the debt structure to lower our expected cost of capital. As Kishore mentioned, we are excited about the many business opportunities this acquisition will provide over the coming years. While consumer softness is having a near-term effect on Silicon Motion's revenues, its performance has been within the range of our expectations. Based upon their technology position, we see Silicon Motion is well positioned to post solid top line growth over the long term in the storage space.

Kishore Seendripu, CEO

So before we get into our guidance for Q3 '22, which I’d like to touch upon a couple of points regarding our current product landscape. As it relates to our industry dynamics, we are seeing strong demand for our products, and we remain confident in our growth outlook. In terms of our guidance for the third quarter of 2022, we currently expect revenue to be approximately $280 million to $290 million, up approximately 2% at the midpoint of the range versus the previous quarter and up approximately 24% versus Q3 of the prior year. While backlog continues to be strong, we continue to experience supply chain tightness and expect that to continue throughout FY '22. Looking at Q3 by end market, we expect broadband revenue to be down slightly quarter-over-quarter, coming off a record level in Q2. Connectivity is expected to be up significantly versus Q2, driven by a material recovery in Wi-Fi as supply chain dynamics improve. In infrastructure, we are expecting revenue to be down slightly compared with Q2. Demand for our infrastructure solutions continues to be strong, but growth is being constrained in the near term by tightness in substrate availability, specifically for our wireless access and backhaul solutions. Lastly, we expect our industrial multimarket revenue to be slightly down quarter-over-quarter. We expect third quarter GAAP gross profit margin to be approximately 57.5% to 60.5%, and non-GAAP gross profit margin to be in the range of 60.5% and 63.5% of revenue. We expect to deliver gross margin within this widened range over the next several quarters, with end-market mix being the primary factor driving sequential fluctuations. We expect Q3 2022 GAAP operating expenses to be down quarter-on-quarter to a range of $115 million to $121 million. We expect Q3 '22 non-GAAP operating expenses to be roughly flat with Q2 levels within a range of $81 million to $87 million. We expect our GAAP tax rate to be approximately 27%, and non-GAAP tax rate to be roughly 6%. We expect GAAP and non-GAAP interest and other expense to be roughly $3.5 million. In closing, our solid execution and innovative product offerings are enabling us to outperform our market and significantly increase our TAM. We continue to grow our presence in markets where we are today under-penetrated, driving strong pull-through of content in strategic markets, which will continue in FY '23. We believe we are well positioned for continued revenue expansion and operating leverage throughout the balance of FY '22, which will create meaningful value for our shareholders. With that, I'd like to open up the call for questions.

Operator, Operator

Thank you. Our first question is from Tore Svanberg with Stifel. Please go ahead with your question.

Tore Svanberg, Analyst

Yes, thank you, and congratulations on the record revenue. So it doesn't sound like a whole lot has changed since last quarter with supply being the biggest focus. Macro obviously has changed. So I was just wondering from your perspective and your customers, what are some of the puts and takes that you are seeing as far as orders, backlog? Are you starting to see any cancellations, anything like that?

Kishore Seendripu, CEO

Hi Tore, thank you. Some of the questions on supply that you have raised are unique to us because we are growing with the various product cycles we have with our BOM, below material content increase in our various platforms and also our success in infrastructure markets in wireless, which all require very specialty substrates, advanced SoC nodes. So we’re getting a little bit of a lag in relief in the supply. So that's creating some volatility across our shipments on the timing of it, which Steve referred to in the talk here. With respect to our backlog, it remains quite strong, as I mentioned in my part of the script here. And so we are managing against the backlog with respect to our supply and trying to make sure that our customers are able to ship their product. At this stage, while there's concern at various quarters about the macroeconomic softening, we feel that given our BOM content increase, our penetration into new markets with market share gains, we will be able to maintain our momentum in terms of growth as a company. So I hope that's an answer that sort of addresses some of the concerns related to our customers that you may have.

Tore Svanberg, Analyst

Very good. Thank you for that. And as my follow-up question, it sounds like you're very actively trying to diversify beyond cable gateways, so obviously, fiber gateways being a great new opportunity. You also talked about getting into, I guess, the third-party router market. Can you just elaborate a little bit on that? What are some of the ambitions there? Because obviously, there's some big competitors in that market. So yes, if you could just add some color on your ambitions in those types of markets, that would be great.

Kishore Seendripu, CEO

We are extremely enthusiastic about Wi-Fi. When you consider the revenue potential from Wi-Fi as an access point solution, it's significant. Recall that there was a company called Quantenna when revenues were at this level. We have made tremendous strides in our Wi-Fi success. Despite the presence of strong competitors, we believe we are a formidable player, particularly in Wi-Fi 6, as we were the first to introduce significant bandwidth expansion and capabilities that have helped validate the market for Wi-Fi. We see ourselves as a leader in this field and are gaining traction. In the past, our broadband business was limited by previous ownership focuses solely on the platform. Now, we are making great strides in the nonoperator market and expect to become a major player in the stand-alone router market. The challenge here is that competition will rely solely on connectivity, but we are also enhancing our offering with a robust platform. This includes Wi-Fi, Ethernet, and power management, which we haven't discussed much in this call since it's part of our comprehensive BOM expansion. Overall, we are well-positioned for growth. Currently, we are managing a balance between what we can deliver to operators and what we can ship to the stand-alone router market, and our constraints stem from supplier issues relative to our backlog.

Tore Svanberg, Analyst

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

Operator, Operator

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

Quinn Bolton, Analyst

Hi, guys. I'll offer my congratulations on the strong near-term results. But I wanted to follow up on the Tore's line of questioning. Obviously, the Street seems to be very concerned about the macro economy and the potential for the industry to go into a downturn next year. And so I guess I'm wondering, have you started to see any sort of cancellations? I don't think you addressed that specifically. Are you seeing greater volatility or variability in your weekly order rates? Was book-to-bill for the quarter above one? Just trying to get a handle on whether you've seen any change in demand patterns that might temper the outlook as we think about 2023?

Kishore Seendripu, CEO

So before handing it over to Steve to respond a little bit more on that, I would say that we have not seen cancellations. The backlog is very strong. So on the volatility part, if there is any, let me get Steve to answer that. Steve, why don't you take that?

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Yes. So look, I think the way I think about this is, as Kishore kind of talked about a little bit earlier, we're still very much constrained. We're not keeping up with demand today. So kind of the second half of this year, it's still really just fighting tooth and nail to get enough product for our customers. I think as we look into next year, and thinking through talking to the customers, I mean, I think that's where probably like the rest of the world, recognize there's things moving around. There's some uncertainty out there. And so we're trying our best to anticipate that and manage that. Bookings in Q2 were very good. Look, as lead times start to improve, which I fully expect they will, we're going to see that bookings come down a little bit, right? I think that's natural that the whole industry would anticipate. That being said, I think what we're also excited about are some of the growth drivers that we have, where we're winning share, these multiyear growth cycles and upgrades that are happening in broadband. Some of the things that are happening on the infrastructure side with some of the data center and wireless infrastructure opportunities. So I think long term, feel very good. Short term, tremendous visibility, and I think it's that next year uncertainty that still kind of looms for everyone. I think we're positioned well to handle it as we gain market share and grow with some of these newer products that we've not had even as late as last year.

Quinn Bolton, Analyst

And I'll throw a two-parter for my second question. Just could you give us some more sort of detail on the breadth of the fiber gateway wins? I think you said at this call that you have multiple guys in North America. I know there's a lot of activity in Europe. But as you look for that more than 4x increase in fiber gateway revenue this year and further growth next year, any more detail you can provide about either content per system or the number of operators, just how broad that growth is? And then just quickly, can you touch on the 400 gig, 800 gig PAM opportunity? Have you started to ship for production yet? Or are those parts still going through qualification? And if so, when would you expect those production shipments to commence? Thank you.

Steve Litchfield, CFO and Chief Corporate Strategy Officer

That was an interesting way to combine two questions. I think there were about four in total. Regarding our fiber solutions, we've been delivering these for a while now. Back in 2021, we mentioned that our revenue was under $10 million, but we expect it to reach between $30 million and $40 million this year, with a possibility of doubling next year. We're gaining a lot of traction and have been supplying Tier 2 companies for quite some time. A significant North American player will start shipments this year, and we've faced some constraints on products going into this market, so we're eager about these new opportunities. You brought up Europe, and yes, there are European companies involved that will begin rolling out; many of their upgrades are scheduled for 2023 and may extend into 2024. This gives us confidence in the long-term nature of these opportunities, as numerous operators have capital expenditure plans laid out over several years. The push for upgrades also compels everyone to improve their broadband services, creating pressure on cable companies and others involved in these rollouts. We are definitely excited about the fiber prospects in the coming 18 to 24 months as these phases progress. Regarding your second question about the 400-gig technology, Kishore might have more insights on that. There is considerable enthusiasm surrounding the 5-nanometer solution.

Kishore Seendripu, CEO

Quinn, this process has taken longer than we initially anticipated. In the meantime, we've decided to be the first to offer a 5-nanometer solution for a 400-gig, 800-gig PAM4, with single lane 100 gig per lambda optics support. We're experiencing excellent traction and hope to be production-ready by the end of the year, enabling customers to launch their products by the second half of next year. Everything is on track. While we've benefited from being a supplier in various markets over the past two years, we've faced challenges in establishing ourselves in new markets. However, the situation is looking different now, and we feel optimistic about our progress. The market is expected to keep growing, and for the first time, the entire data center market will converge on a single 100-gig optics, marking a significant milestone similar to the previous transition to 10 gigawatts for Ethernet in data centers. We feel well-positioned with our current developments, leading to a positive outlook. If it weren't favorable, I wouldn't be addressing it in this manner. We have a strong technology and will be present at upcoming trade shows, where we plan to make a notable impact.

Quinn Bolton, Analyst

Perfect. Thank you for all that color guys.

Operator, Operator

Thank you. Our next question comes from Gary Mobley with Wells Fargo. Please proceed with your question.

Gary Mobley, Analyst

Hi guys. Thanks for taking my question. I wanted to double-click on Quinn's second of three questions, and that is about sort of the market transition away from broadband cable, and particularly in the U.S. to fiber-based broadband. It seems though we've now seen a shift with a lot of the telcos gaining a lot of the net new broadband subs here in the U.S., at least. And so I'm curious if this transition to broadband fiber can be accretive to your broadband growth based on the idea that you're generating the same or greater bill material with maybe Wi-Fi attach and Ethernet attach and whatnot and/or given the increased size of fiber broadband and also taking into consideration your relative market share in fiber versus your strong market position in broadband cable?

Kishore Seendripu, CEO

Gary, very, very good question. And the emphatic answer is that cable is not going away. I mean the cost economics of cable being in the various already deploying more and more gigabits per data reception and also both on the receive side and the upstream is unmatched, right, the cost structure. Having said that, the cable guys are not sitting idle. They are upgrading to DOCSIS 4.0, which is going to be very compelling, and you should start seeing solutions that are deployed for DOCSIS 4.0 within the next two years or so. So we are investing there as well. And so while cable won't be an exciting growth driver in terms of units, but the BOM is steadily increasing for us, and the Wi-Fi is going to keep upgrading in cable. And so that's going to be a growth driver, primarily from a BOM expansion direction point of view. With regard to fiber, you're absolutely right. The telcos are very earnest about investing more, and they're driving a lot of CapEx, which again ties back to Tore's question about how does next year look, right? We feel very good that we have products that will keep driving growth. And you're also right that the BOM increment on fiber is also going to be significant, if not comparable, to cable platforms, but maybe even more. And so we should see not just incremental growth on fiber relative to cable once you add them up, but we should also see just raw growth that's going to be pretty strong. So I think it's all good for us. But you are right that the cable growth is not going to be exciting in terms of units, but the BOM expansion is going to be real, and they are combating the threat with DOCSIS 4.0.

Gary Mobley, Analyst

Appreciate the color, Kishore. And Steve, I don't know if you're going to go down this path or not, but I'll ask the question anyway. You highlighted some softness in Silicon Motion's revenue, and they just reported results revenue a little below expectations, but gross margins to the upside. So when you announced this acquisition, I think the comment was you would expect this deal to be roughly 25% EPS accretive out of the gate. And I know there's a long time between now and when this deal closes, a lot of things from an economic backdrop can change. But are you still standing by that 25% accretion level? And can you give us any color on sort of the outlook for Silicon Motion September quarter?

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Yes, Gary. You're correct. I'm not going to provide guidance on Silicon Motion's numbers, but I want to share some thoughts. Everyone is aware of the company's exposure to certain consumer markets and SMPCs. However, we are very excited about this opportunity. We are confident in the accretion numbers we mentioned earlier. We see a positive outlook moving forward. This acquisition was made with a long-term vision, not just for the next quarter. It will enhance our product portfolio and significantly increase our scale, and we're looking forward to what this brings.

Kishore Seendripu, CEO

So I think that what Steve said is absolutely correct. And some of the positive dynamics you're seeing while you're looking at the softening on the consumer side, they're all stuff we contemplated to some degree, right? So there's always that calculate on our side, too. I think what I really want to emphasize there is the opportunity, Gary, is that perhaps we have not done a good job of how much technology-wise there is sort of a combined province with our analog mixed-signal, digital signal process capabilities that's going to be even more central as the memory densities increase in flash and the defect densities increase. So we have the IP to bring that to bear. We have very, very strong traction and proven storage accelerator and high-speed interfaces that are already designed into enterprise markets. So I think all in all, this is going to really create a massive expansion in TAM for both the companies' combined as well. So it's very, very exciting. And really looking forward to the acquisition. Now that we have made a commitment to do it, we can't wait for it to happen, okay?

Gary Mobley, Analyst

Okay. thanks guys. Appreciate it.

Kishore Seendripu, CEO

Thank you.

Operator, Operator

Thank you. Our next question is from David Williams with the Benchmark Company. Please proceed with your question.

David Williams, Analyst

Good afternoon, thanks for taking the question. And congrats on the quarter. Just wanted to see maybe if you could talk a little bit about the customer feedback that you received on the SiMo transaction? And just maybe any commentary around that, how your customers are seeing it? And what your opportunities you think the full synergies between the two companies will be?

Kishore Seendripu, CEO

So I'm afraid we cannot comment on the customer side of things, right? But we definitely can comment about our customers' stand-alone MaxLinear and their reaction. They're super excited, right? If you look at the broadband platform, there's always a storage controller device that we can put in our reference design, and that creates real growth opportunities in markets. Second, we have a pretty wide channel distribution sales. You now will have noted that industrial multi-market is about running at, what, this quarter was $50 million. And so that's a significant channel we can sell storage on to. And the general operational scale it provides in terms of advanced technology nodes, we're talking with suppliers, right? And what that could potentially mean when we have the abnormality of the last two years behind us, I think our customers are super excited. And so I can speak for our customers, but I cannot speak for their customers right now.

David Williams, Analyst

That's fair. And I appreciate the color there. So maybe one for you, Steve. Can you talk maybe a little bit about the gross margin and the leverage there? You're running in this kind of 62% range. You expect it to kind of stay there. How do you think about this longer term as we kind of think about pricing dynamics and supply chain issues and everything as we get into 2023?

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Yes, David. The team has been working diligently on improving gross margins, and product mix is a significant factor at play. While we are actively addressing costs, we are also facing challenges from this mix. Our Wi-Fi business has seen substantial growth, and we expect to continue that trend with forecasts of over $200 million next year. However, supply chain dynamics can be unpredictable, and we are facing cost increases, particularly in newer, lower-cost regions, which may pose challenges for gross margins. Despite this, our long-term outlook remains unchanged, and in the short term, we will keep addressing rising costs and the evolving mix of our products.

Kishore Seendripu, CEO

It's fairly public, right now, right? The foundries have gone ahead and declared that they're going to increase prices, right? And they have increased prices. And our guidance contemplates those increases that we'll have to deal with. So when we give you gross margin guidance, we are steadfast on our goals here.

Suji DeSilva, Analyst

Hi Kishore, hi Steve. Steve, just a question on the OpEx guiding flat. Can you talk about the puts and takes there? Are there moving parts in there? Or are you just able to kind of get leverage at this level as you grow through the next several quarters?

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Yes, Suji, no problem. As you noticed, operating expenses increased quarter-to-quarter. This rise was largely due to our expanding business, which is a positive sign indicating support from our customers. However, these initiatives require careful navigation and management, as they come with varying contract dynamics. We've handled this well, which influenced Q1. Operating expenses increased slightly in Q2, but I'm confident that they will stabilize. It's also likely we will see a reduction in Q4. This trend is mainly due to the influx of non-recurring engineering projects. Overall, our expectation for operating expenses this year aligns with our initial projections.

Kishore Seendripu, CEO

Yes. And if the reality is that we're also fighting to hire talented employees, and all of the industry is facing those dynamics and skilled labor, I still feel shortages of that in terms of where we need and what we need to execute on the projects. So I think there's going to be a healthy tension in terms of volatility on the OpEx relative to that. So Steve and me will have to figure this out together.

Suji DeSilva, Analyst

Okay. That's helpful information. Regarding the fiber side, for the North America Tier 1, as you ramp up, has that ramp experienced an initial inflection? Will it have an inflection, or are supply constraints causing this customer to have a steady start?

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Yes, yes. So still early days on that. I mean we said it would originally kind of start in the second half of this year. I mean supply has been challenging for us, but we're making some good progress. So it'll it will ramp kind of as expected in the second half of this year and into the first half of next year.

Suji DeSilva, Analyst

Okay. Thanks. Congrats, guys.

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Thanks.

Operator, Operator

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

Ananda Baruah, Analyst

Hi, good afternoon everyone. Thank you for taking my questions. It’s encouraging to see that things are holding strong. I would like to get some additional context regarding the comments made by both Kishore and Steve. I'm particularly interested in the context around their remarks. If conditions were to weaken in 2023, how confident are you in your ability to sustain growth? Any insights on the extent to which growth could be maintained would be appreciated. I’m not looking for specific guidance, but any information on current levels would be helpful. I also have a quick follow-up question. Thank you.

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Yes, Ananda, that’s a challenging question. We are all trying to figure out what customers will do in 2023. Therefore, I won't provide specific guidance for that year. Overall, we need to keep executing. Our infrastructure is performing very well, and I expect that to continue. Right now, broadband and connectivity are both in short supply, and we are making efforts to get more products to our customers. The industrial multimarket saw significant growth last quarter, and we are gaining good traction in those areas. There was some catch-up from the previous quarter, but as we look ahead to 2023, we need to keep executing and deliver more products to our customers.

Ananda Baruah, Analyst

And Steve, in the comments you and Kishore made, did you suggest that some customers are starting to feel a bit uneasy about the macro situation? Is that an accurate interpretation? If so, can you provide any insight into which areas of the business or which markets this pertains to?

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Yes. Ananda, I mean, look, I mean, you've heard all of this from plenty of our competitors, our customers. I mean, there's definitely some concern out there about next year. So make no mistake, I mean we've had guys moving around orders. We've had moving around orders this year as well as in 2023. So there's no doubt that there's concerns out there, right? And some of that is based on getting enough product today. And some of it is based on shipment dates for next year and how they ramp. So yes, things are going to continue to move around in this world.

Ananda Baruah, Analyst

Is that fairly broad-based?

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Yes. Yes, yes, across all of the end markets, sure.

Chris Rolland, Analyst

Thanks guys. I just wanted to understand the relationship between supply and demand here. Three of your segments were guided down. Is that due to supply tightening from one quarter to the next? Will that ease in the fourth quarter, or does demand factor into this as well?

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Yes, Chris. We have discussed this previously. The infrastructure challenges we are experiencing have persisted since last quarter, which we anticipated would continue until we see improvements in Q4. The Wi-Fi business was underperforming last quarter, impacting our connectivity somewhat. However, we expect a strong recovery this quarter. The supply chain issues were certainly present in Q2. In terms of broadband, while we had a solid Q2 with fewer supply challenges, there are still issues with product pairing, as customers want both products instead of just one. Last quarter was significant, but we anticipate some moderation this quarter. Similarly, on the industrial multimarket side, we continue to face challenges and experienced some volatility in the first half of the year. We were short on supply in Q1 but made up for it in Q2, and we expect moderation in Q3.

Chris Rolland, Analyst

Thank you for the clarification. My second question is more focused on the bigger picture. What do you estimate your current Wi-Fi market share to be? Looking ahead a few years, do you anticipate this will align with the fiber gateway as well? Additionally, do you have any insights on what your Wi-Fi attach rate might be, or your Ethernet attach rate? Thank you.

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Yes, this is exciting. A significant portion of our early growth has been linked to our cable SoC, which has driven much of our expansion. We're not at full capacity yet but are reaching about 70% to 80%. We've made considerable progress despite some supply constraints, and things are going extremely well. Our fiber revenues have been relatively low over the years, but I've mentioned earlier the progress we're making and the growth we're experiencing. The fiber market is likely 2 to 3 times larger than the cable market, which naturally leads to increased Wi-Fi product opportunities, and we plan to capture that. Earlier, Kishore discussed some of our gateway products and the content included in those gateways. In many cases, we've previously talked about $30 of content in the gateway, and in some fiber opportunities, that figure is even higher. There is more Wi-Fi potential to explore. Additionally, we have significant opportunities with third-party routers, which we expect to ramp up in the second half of the year and drive substantial growth for us next year. While I won't provide a specific Wi-Fi market share figure, we remain underpenetrated compared to a couple of other competitors in this space.

Richard Shannon, Analyst

Hi, guys. Thanks for taking my questions as well. I'll follow up on the topic of Wi-Fi here. Thinking about kind of bridging this year's revenue number into the $200 million plus number for next year. Wondering how you think about the various contributions from a dollar point of view between kind of the three major areas: the cable, the fiber and kind of the third-party routers? Is there anyone that's going to be dominant or easily bigger than the other kind of contributed to that growth? Any way you can characterize that?

Steve Litchfield, CFO and Chief Corporate Strategy Officer

Cable is indeed the larger contributor. As I mentioned earlier, the third-party router segment is just starting to grow in the second half of the year. We haven't had enough supply, but that should improve in the third quarter and more significantly in the fourth quarter. We're really just at the beginning of that growth phase, which will continue. Therefore, a significant portion of our growth next year will come from third-party expansion.

Richard Shannon, Analyst

Okay. Fair enough. And a follow-up question in broadband and specifically fiber. Maybe you can talk to the kind of the competitive dynamics here of the wins that you've talked about, alluded to as well as the ones you hope to hope to get over the next 6 to 12 months here. Are you winning like flagships at some of these large customers or high-end SKUs? Or maybe you can characterize how the competitive dynamics play into where you're winning and how you expect that to change and evolve over the next year?

Kishore Seendripu, CEO

We are indeed excited about our growth this year, but in the grand scheme of fiber, we are still on a smaller scale. Our contribution is just a single-digit percentage at best, focused purely on fiber. What I mean is that it excludes low-end processors and other technologies like Wi-Fi. The significant growth is anticipated next year when we aim to charge ahead with flagship players. Additionally, there will be derivative products targeting the mid-market, which is crucial. Our strategy has always been to progress from high-end to low-end offerings to establish differentiation. With our recent flagship success in North America, we now have the leading platform for gateways globally. This success positions us favorably, creating demand for our derivative mid-end platforms as well as our high-end products. We are well-positioned to succeed in both high-end and mid-end categories. I hope that addresses your question.

Tore Svanberg, Analyst

Yes, thank you. I just had a follow-up on the industrial and multimarket business. And I understand your comments about timing and catch-up and things like that. But it's approaching the size of your connectivity revenue. It looks like it's going to be the second strongest growth driver this year. So what else is going on there? I know you have some power products for the supermarket. Just wondering where we stand there? Are you also seeing some high ASPs from the interface products? So any more color because, obviously, this has now become your second largest growth engine this year beyond connectivity.

Kishore Seendripu, CEO

So Tore, with your question, you got me really excited, but I'm not sure how to break it down. There are many exciting developments in the industrial multimarket, with significant growth in interface average selling prices due to the addition of many new products. We're gaining market share from our competitors in the industrial sector, which we don't discuss often. Additionally, there is growth in power management. While you've mentioned servers, there is also growth occurring in the non-server market, particularly with major platforms that we hope to be able to talk about once we get permission. We're also exploring power management growth in other platforms that aren't ours, as we supply Ethernet products that are used across various markets. This has sparked discussions about our power offerings and other interfaces we can provide. The scale we're achieving is giving us considerable traction, which we didn't have three or four years ago as standalone entities. We've also had a significant number of SKUs and products that have been quietly growing, but we haven't had a clear thematic analysis of that growth. Internally, we have decided to hold an Analyst Day so that each of our general managers can present their respective businesses, which we hope will occur in the next six months, allowing us to share more details. Thank you, Tore. I want to let you know that we have a busy schedule for investor conferences coming up. In Q3, we will be participating in the Oppenheimer 25th Annual Technology, Internet and Communications Conference on August 9, the third annual Needham Virtual Semiconductor and Semi Cap Conference on August 24, the Deutsche Bank Technology Conference on August 31, and the Wells Fargo Leverage Finance Conference on September 8. We look forward to speaking with you again. Until then, have a great summer, and thank you, operator. Goodbye.

Operator, Operator

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