At the start of October, I concluded that uncertainty would remain the name of the game for shares of MaxLinear, Inc. (NASDAQ:MXL) after the company outlined a dismal third quarter earnings outlook over the summer, but also after it terminated its previously announced deal with Silicon Motion Technology Corporation (SIMO).
These two events, which coincided, caused a lot of volatility in MXL share price, as a likely legal overhang related to the cancellation of the deal and poor organic business performance made the situation too uncertain, and thus not attractive for me. The much-awaited third quarter results were weaker than expected, and a likely further decline in fourth quarter results makes it very hard to see any green shoots here.
A Boom-Bust
MaxLinear was a $20 stock pre-pandemic which received a real boost from some bolt-on M&A and demand in the wake of the pandemic, causing MXL shares to peak around the $80 mark late in 2021 and early in 2022.
Dealmaking and operating momentum meant that revenues rose from $479 million in 2020 to $892 million in 2021, as GAAP operating profits of $65 million worked down to earnings of $0.53 per share, while adjusted earnings came in at $2.69 per share, with the realistic earnings numbers coming in somewhere in the middle.
First quarter sales for 2022 showed some kind of normalization with revenues posted just over $200 million, already trending below the 2021 run rate. The organic investment thesis for a $40 stock in May 2022 (which valued MaxLinear at $4 billion at the time) changed overnight, as the company announced a $3.8 billion acquisition of Silicon Motion, with most of the deal to be paid for in cash. Pro forma net debt of $3.3 billion would result in a leverage ratio of more than 5 times EBITDA at a good point in the cycle, making it easy for me to stay out.
In the end, 2022 sales rose to $1.12 billion, with GAP earnings posted at $1.55 per share and adjusted earnings reported at $4.23 per share, as the situation looked quite good.
The company started 2023 soft, with first quarter sales down 6% to $248 million and second quarter sales down 26% to $184 million as the company guided for third quarter sales between just $125 and $155 million. On top of the declining revenues (with earnings power lost as well), the company furthermore terminated the deal with Silicon Motion over the summer.
I believed that this was a good thing, as the company could not handle the leverage to be incurred with the deal, although it opened up the way for litigation which at the very least would involve a termination fee of $160 million, as the question is how big further damages could become.
I concluded that a focus on the standalone business, while building up net cash balances to pay the legal bills and penalties, would be the most logical way, as the associated uncertainty (with the core business not posting any profits) did not automatically made me upbeat at $20 in October.
Another Setback
Forwarding to today, shares of MaxLinear have fallen another quarter, trading at $15 per share after the third quarter results were not too pretty, which is quite an understatement.
Third quarter sales of $135.5 million were down a whopping 53% on the year before, as the degree of the shortfall suggests that there is more at hand than just tough end markets.
The company posted adjusted earnings of two pennies, down from a $1.05 earnings per share number this quarter last year. GAAP losses came in at $0.49 per share, with losses coming in at $40 million in dollar terms.
Diving into the numbers, we see GAAP operating losses of nearly $18 million as net losses were much larger due to other expenses (mostly debt fees related to the terminated deal with Silicon Motion), as GAAP earnings were hit by stock-based compensation expenses and amortization charges as well. Fortunately, the company still holds an $80 million net cash position, which has come under pressure a bit.
The real shocker is again the guidance with fourth quarter sales seen at just $115-$135 million, as operating losses are likely ballooning a great deal with gross margins under further pressure and costs not really coming down. In fact, I think that GAAP operating losses might top $60 million based on the guidance.
And Now?
While the legal uncertainty on the Silicon Motion deal is still pending, MaxLinear is longer in a position to build a war chest to face its unknown liabilities surrounding this deal, as the business is losing money, causing pressure on the dwindling net cash balances.
Worrying is that the company cites continued channel inventory overhang in broadband and Wi-Fi markets, for which there is no quick avail. All this makes me quite frankly quite cautious here, as there simply are no MaxLinear, Inc. green shoots other than still a net cash position and lower share price.
Given all this, I am not yet convinced about MaxLinear, Inc. stock here, taking a cautious wait-and-see approach given the dismal operating performance and wildcard prospects regarding litigation.
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