Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the power integrations fourth quarter earnings Conference call.
At this time, all participants point I listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question. During the fashion you want me to press Star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I would now like they had the comp range over to your speaker today Mr. Joe Shiffler. Thank you. Please go ahead Sir.
Thank you.
Good afternoon, everyone. Thanks for joining us with me on the call today are Balibar Chrisman, President and CEO power integrations.
Sandeep, nor our chief financial Officer.
Our discussion today, including the Q and they session will include forward looking statements, which may be denoted by words like will would believe should expect outlook forecast.
And similar expressions of look toward future events or performance.
Forward looking statements are subject to risks and uncertainties that may cause actual results could differ materially from those projected or implied in our state.
Such risks and uncertainties are discussed in our press release and in our most recent Form 10-K filed with the FCC on February 13 2019.
During this call we will refer to financial measures not calculated according to generally accepted accounting principles non-GAAP measures exclude stock based compensation expenses amortization of acquisition related intangibles the tax effects of these items and in the prior year results a benefit stemming from the 2017 U.S. tax legislation.
The gain associated with the settlement of our patent litigation with on semiconductor is included in our non-GAAP results to be consistent with our path treatment of litigation expenses.
The calculation of the earnings per share benefit of the settlement as presented in our press release tables, along with a reconciliation of non-GAAP measures to our GAAP results.
Andy will provide more detail in the financial impact of the settlement in his remarks.
Finally, this call is the property power integrations, and then you recording <unk> Rebroadcasting expressly prohibited without the written consent of power integrations now I'll turn the call over to follow.
Thanks, Joe and good afternoon.
Closed out 2019 with record quarterly revenues up hurt and $14.5 million up 23% from a year ago.
This performance reflects a recovery from the cyclical downturn, but also strong idiosyncratic growth driven by continued success in fast Chargers for mobile devices.
But in some other communications category grew more than 80% year over year in Q4 and during the fourth quarter be one new high volume Inbox designs I, probably levels of 18, 25, and 30 watch each at different OEM.
All of these designs use of it you know switch to be or you know switched to the pro chips.
Which are gaining share in charter market, thanks to their superior energy efficiency and high level of integration.
These characteristics that are essential to designing fastest charges.
The attractive form factors that consumers expect with their mobile devices.
Thanks in part with the success of these products in the marketplace I want to communications category grew more than 20% in 2019, and we expect strong growth again in 2020 .
Adoption of a faster charges is picking up steam as consumers become aware of differences in charging speed and as Oems in corporate ladder. The batteries event that is bound to intensify we the rollout of Fiveg devices.
Also driving the market the higher power levels is the proliferation of.
I was just fast the aftermarket charges from companies like anchor and Rob Pablo.
Many of these designs use of Innoswitch products with gallium nitride technology Tortue power densities that are not possible with silicon.
Well cost would likely to can fine Gan based charges to the highest end of the market in the near term.
Got encouraged by the level of interest Oems are showing in the technology.
The one our second Inbox design, we again in Q4.
45 Watt design for a Korean OEM.
And we have a strong pipeline of ongoing design activity.
Got it is an important part of a broader.
Product road map beyond the mobile device market.
We have already introduced the waters enough, although lytswitch LCD drivers incorporating gan switches.
And we'll be driving Gan technology deeper into our product portfolio in the U.S. ahead.
Yeah, making substantial investments in this yet in technology products and manufacturing capacity to make <unk> to take full advantage of this important breakthrough.
Turning to the coupon dissolves.
Why rapid charging was the biggest growth driver. We also saw year over year growth in other consumer business for the first time in nearly two years.
Appliances, perhaps more than any other end market have been impacted by tabs and related macro economic factors, resulting in decline Sanofi consumer category in each of the past two years.
Well trade and macro issues continue be continued to be a concern our consumer business is well positioned for 2020 .
We grew more than 20% year over year in the fourth quarter.
And distribution sell through exceeded selling for the fifth quarter.
Consecutive quarter, indicating that channel inventories are at healthy levels to begin the.
More importantly, the fundamentals that have made a successful in appliance for so many years remain firmly intact.
We have long held a commanding market share in appliance power supplies. Thanks to the reliability benefits of about a highly integrated products.
We believe we have expanded our share over the course of the downturn and we are well positioned for continued gains as innoswitch products gradually penetrate the appliance market.
By eliminating opto couplers and integrating the SEC countryside components.
Okay, lets which not only for that enhances the liability, but also raises although asap.
At the same time, we continue to benefit from rising dollar content as appliances add more electronic features and intelligence such as network connectivity, which increases the power level or in some cases, even necessitates an additional power supply.
Another continuing trend in appliances is expansion of the middle class in emerging markets.
This has obvious implications for the unit growth, but also brings a heightened concern for energy efficiency.
Well efficiency has long been an important consideration for appliance makers it becomes even more important as comfort and convenience appliances become affordable for hundreds of millions of more people around the world.
In December the Chinese government demonstrated its concerned for this problem by publishing new efficiency standards for room Air conditioners scheduled to take the effect on July 1st.
The new standards should accelerate the migration of the market.
We have some inefficient linear power supplies.
And AC motors during.
Towards switching power supplies and brushless DC motors.
Yeah, well position to capitalize on this opportunity without AC to DC products as well as the newer Britt switch motor driver IC.
Which address brushless DC motor us up to 300 watts.
We estimate the addressable market for a bit switch to be $3 million to $400 million comprising a wide range of appliance applications, such as compressor motors water pumps.
And the fancy use in split air conditioning units, such as those subject to the new China standards.
We shipped our first production quantities of bridge switch in Q4, and we have a strong pipeline up design activity at a wide range of appliance customers around the world.
We also anticipate a return to growth this year in our industrial category, which felt picked the effects of cyclical and macro softness in 2019, but continues to benefit from secular trends driving demand for our products.
These include the continuing growth of renewable energy the adoption of battery power for tools and transportation.
Home and building automation and other are your T. type applications, such as smart utility meters.
And why we are still some time away from material automotive revenues, we continue to invest in products and infrastructure for the easy market earlier. This month, we announced a successful qualification about 750 volt get driver under the AC Q1 hundred automotive standard.
This is our second gateway what product qualified for automotive use and if you have more such qualifications underway as well as an active design pipeline with several major automakers.
In conclusion, while our revenues grew just 1% in 2019, we outperformed the analog semiconductor industry by a wide margin and we are entering 2020 with momentum following a strong fourth quarter.
We're also excited to into the new year without the burden of major patent litigation.
The settlement with on semi which we announced in October not only brought us a payment of $175 million, but also eliminated a significant drain on our financial and management resources.
Perhaps most importantly, the favorable resolution was at its sounding validation of the value and durability of our intellectual property and we hope sends a strong signal about our determination to protected from infringement with that I will turn over to Sandeep.
For the review off financials.
Thanks, Barlow and good afternoon, I will begin, but the financial impact of the litigation settlement, which as Joe noted in his included in our non-GAAP results matching our treatment of legal expenses over the course of the litigation.
The settlement resulted in the receipt of $175 million in cash.
During the quarter net of expenses directly related to the settlement, we recorded a gain of $169 million as a contra expense, which is shown as a separate line item on the income statement.
Book tax expense associated with the settlement was approximately $26 million, leaving a net benefit of $143 million or $4.78 per diluted share based on the Q4 share count.
The cash tax impact was approximately $20 million, which we paid out in the fourth quarter.
Turning to the non-GAAP financial results for Q4 revenues $114.5 million, just above the midpoint of our guidance rain and up slightly from the prior quarter.
The consumer category grew low double digit sequentially on a seasonal strength in air conditioning.
Computing revenues increased mid single digits with growth in service stand bar desktops and monitors.
Industrial revenues were down mid single digits, driven mainly by Highpower, where sales for high voltage DC transmission projects fell from the prior quarter.
As we have discussed in the past hvdc projects tend to be lumpy in terms of revenue, but continue to be an excellent application for good drivers and we expect them to contribute significant revenues in 2020, along with renewable energy applications.
Communications revenue was essentially flat sequentially as expected, reflecting seasonality in smartphone charges.
Revenue mix for the quarter was 35% consumer, 30% industrial 29% communication and 6% computer.
non-GAAP gross margin was 52.1% up 10 basis points from the prior quarter as changes in end market mix were largely offsetting.
non-GAAP operating expenses were negative as a result of the litigation settlement.
Otherwise operating expenses were slightly lower on a sequential basis.
And came in below our expectations, primarily due to the timing of headcount additions and purchases of non production related equipment.
The non-GAAP effective tax rate for the quarter was 14% higher than normal due to the settlement.
non-GAAP earnings were $167.9 billion, a $5 in 16 cents per diluted share, including the benefit of settlement, which was $4.78 per share.
Inventories on the balance sheet rose by about a million and a half dollars during the fourth quarter.
We had 147 days of inventory on hand at quarter end up three days during the quarter, but down 16 days from the fourth quarter a year ago.
Channel inventory fell to a multi year low of 6.5 weeks down more than a week in Q4 and more than two and a half weeks from a year ago.
Over the course of the distribution sell through exceeded selling by nearly $10 million primarily in the consumer category.
Cash flow from operations was $182 million for the quarter driven by the settlement.
Capital expenditures were just under $10 million in the fourth quarter.
And we paid out $5.6 million in dividend.
In all.
Cash and investments on the balance sheet increased by $166 million ending the quarter at $411 million.
While the influx of cash from the settlement further strengthens our balance sheet.
We remain committed to our disciplined approach to capital allocation.
Selective M&A.
Opportunistic share repurchases and further dividend increases will continue to be in the mix.
Our first priority as always we'll be to invest internally to take advantage of the opportunities in front of us, including new technologies such as again.
New markets, such as automotive and the rapid adoption of us bpd.
In addition to incremental investments in R&D and sales.
We expect to spend approximately $35 million in 2024 capital equipment, as we add general manufacturing capacity and build out our manufacturing capabilities for again.
We also plan to invest $25 million this year in new facilities for our high power business in Europe .
As well as updates to our U.S. facilities and an expansion of the solari at our headquarters, which will pay for itself through energy savings.
Looking ahead to the first quarter of 2020, we expect revenues to be in the range of $110 million plus or minus $3 million.
With the industrial communication and computer end markets each contributing to the sequential decrease.
The margin impact of end market mix should be slightly negative, resulting in non-GAAP gross margin between 15, and a half and 52%.
non-GAAP operating expenses will reflect headcount increases as well as typical seasonal factors such as higher FICA and the comparative effects of the year end shut down in Q4.
These factors will be partially offset by lower litigation expenses.
Overall, I expect non-GAAP opex to be approximately $35.5 million.
Finally, the non-GAAP tax rate for the quarter should be around 7%.
And with that I'll turn it back over to Joe.
Thanks, Sandeep, we'll open it up now for questions and answers operator would you. Please give instructions for the Q NSS.
As a reminder to ask a question you want me to press Star one on your telephone.
Withdraw your question press, the pound or hash key.
Please standby, where we compile security roster.
And your first question comes from the line of Tories Sandbox from Stifel.
Yes, Thank you and congratulations on the on the strong into the year.
The Lou you talked about a two new design wins for Gan Inbox.
But you also talked about this technology being book of fine tuned to the high end phones because of the cost.
Could you talk a little bit more about the gating factors as far as getting getting the caused the lower to to make this more mainstream.
Good question further thanks.
We are obviously working very hard on reducing the cost again.
We actually believe.
Proprietary Gan technology is actually more cost effective than almost anybody else's Gan technology.
But like any new technology it takes time.
And the fact that we are using gan extensively in the.
Newer products.
Tells you that we believe at a system level, we are already cost effective.
Otherwise nobody would use this product the real question is how far our customers are willing to push the size and the efficiency of the power supply.
If the size and efficiencies needed we are already cost effective.
But having said that we will continue to work on cost reduction over the next few years.
We truly believe it will replace silicon.
In as a switch in.
In power supplies.
Very good and you talked about $35 million Capex.
Capacity for again.
Should I interpret that as.
Customers, obviously being very interested in the technology and I'm asking you to perhaps you know add some capacity for for this market.
Well you know the fab capacity always takes a longer time. So we have to start now. This is a based on our forecast of what we think the demand side again would be beta in the that is using a number of new products.
Yes in the sense that we're very optimistic that we will need this capacity over the next two to three years.
Entering the 35 is not for again.
Off the 35 million about 10 million as towards Gan, we spend typically around 25 million otherwise so I would say the incremental part of 10 million as towards gap.
That's helpful. Just one last question then I'll go back in the queue. So the channel inventories now running pretty pretty low I think you said you know lowest in two years.
Why do you think that is is it sort of just typical cyclicality or do you think theres just nervousness about the economy and then demand if you could just add over to color there it'd be great.
Well first of all is not that far away from where we would expect the that this the.
Weeks to be in a normal environment. It was unusually high for a long time, we think it should be around seven weeks and is like no six and a half weeks. So it's not that different.
And it's very possible there being little bit careful.
Because of all the.
The trade issues and so on and so forth.
So, but that's not that far wherever we do expect them to go back to seven weeks soon.
Very good thank you.
You're welcome.
Your next question comes from your line of Ross Seymore and what your bank.
Hi, guys. Congrats on the strong results just wanted to talk a little bit about the linearity of the business and see if there's any changes, especially in the consumer side.
I know, that's very China, driven in the unfortunate news about the current a virus is potentially weighing on that so blue any color on the linearity, what you're looking for by end markets in the first quarter in any change recently, given some of those health insurance.
Well based on our bookings.
So far.
It's a somewhat linear through the quarter simply because the new year, a Chinese new year occurred in the last week of January .
General is usually a very strong month, but this year January and February we are very similar and March will be probably slightly stronger based on what I can tell.
So it's it's much more linear than usual usually to you type.
Reality in the.
In the first quarter now as far as the the Corona wireless goals.
It's still happening in real time, so we don't have.
Very good understanding of what the.
Full impact would be.
But what we do know at this time is that our suppliers via by the way we only manufacturer.
We do Bakken manufacturing on some of our old products and packages in China and almost all of that is second source outside of China. So we have the ability to shifted there having said that.
Our Chinese.
Vendors, who will do the packaging.
Assembly and test for us.
They are saying that they will be only shut down in one case for one additional week that is next week.
The other two suppliers.
They are going to be up and running.
As of next Monday.
But not at the full rate because they don't have all of the employees coming back but to the best we can determine at this point our ability to supply.
We'll not be limited unless this shutdown continues for a longer period of time.
What is harder to predict is whether the demand will change because our customers.
Current either get other components.
Are they don't get an up production workers coming to work to do the to build the products.
That's something we are unable to predict at this time.
So that's what we know and Thats, what we have taken into account if things continue to deteriorate. Then obviously it will have an impact not just on us with every other company.
As far as your question on the end market as you as you heard and my comment from Q4 to Q1. The decline is primarily as a result of communication industrial and computer and consumer being flattish.
The communication would would have been typically been a lot lower but what has happened as we won as balu indicated in his script, some more design wins, which actually caught us greater market share and helped us that the decline in coming.
Indication was much lower than we were originally expected.
Got it and then my last question and I'll go back into the queue is the gross margin for the full year I think last time, we spoke especially given the growth in the communication side, you kind of thought this should be around 51% for the full year I know, where you started the year.
Your one Q guidance, but any change in deep in Canada, the trajectory on a full year basis.
I think the full year basis should be around the what I'd indicated earlier at 51% and as you know as the year progresses communication is going to keep ramping and we'll have good sequential growth in Q2 in Q3.
And this year Q4 was flattish with the.
Q3, and that should be kind of similar so I think looking at that trajectory in the best modeling I can do I think the gross margin will keep going down about 25 to 50 basis points each quarter for the rest of the year roughly in that direction, roughly averaging about 51% for the year.
Got it thank you.
Your next question comes from the line of David Williams from <unk> capital.
Hi, Thanks, Congrats on a quarter I appreciate you taking my question.
A little bit on the consumer segment and the return to growth there specifically in the appliances can you remind us how big a portion of classes are that overall revenue and then maybe what you're seeing got driving that.
Can gauge kind of break that down between content gains and maybe just improvement in the demand trajectory. So you know the the consumer as a percentage somewhere around 35%.
You know of if you look at Ed.
For the fourth quarter, but we continue to gain share you know as well as do very well in areas of comfort appliances like air conditioning.
As well as major appliances, and as we talked about in US a script with the change in regulations coming in China as well as the middle class growing we believe our and the channel inventory getting where we've had sell through greater than sell and for the last five quarters I think.
I have indicated earlier that add a feel and this is where it kind of further supports that in the coming year, we should see growth in this category.
And David I think you asked whether what percentage of the consumer category is appliances and I'd say that's somewhere in the.
90% range it varies by quarter, but smaller on 90% of the consumer category comes from a point.
Okay. Thank you very much.
Maybe thinking about the rapid charging.
Obviously still.
Early in the stages, but we're seeing the power levels progressed fairly rapidly expand the aftermarket Chargers.
Kind of talking about how you think that trends over time, and just kind of where that we all within the saturation of adoption.
And does that I guess.
Increases does that kind of what you're thinking internally or had you expect to see I guess a little bit less.
Each generation in power levels.
Well.
No it took quite a while for you SPD to take off but now that it has taken up we are seeing it faster adoption.
Than what I, what Alex expected and we're seeing it into we're growing over revenue in two ways one is.
If you look at the power levels that people are using the center of gravity seems to be around 20 watts. We have lot of designs about 18 watch, but we also have designs at 25 Watts 30 Awards 45 awards since if I watch, but most of the volume was around us at 20 to 25 watts.
And if you look at how many of the cell phones are using.
Power levels about 18 wants.
In 2019, our estimate is about roughly 20% of all cell phones.
In 2020 based on our projections it looks like it'll be more than 30% of the phones will use greater than 18 watt.
Power supply.
And within that range that is greater than 80 megawatt range. We are also growing share against our competitors.
We think this year, our shared will be in excess of 50% of that market.
So what is happening is we not only are gaining share in the smartphone our phones.
We're also seeing that more and more phones are migrating away from the five and 10, what charges to 2018, plus what charges, which means that we are actually gaining share against.
The low end commodity suppliers in the indirect way if you will if you can see so the net result is we are seeing faster growth than I expected and I think that will bode really well for us in 2020 .
And then.
Maybe just thinking about the automotive segment and just the opportunity there how do you think about maybe the infrastructure Saturday outside of Korea, where else can you play within the up the market in terms of charging infrastructure or just just elsewhere.
So there are multiple areas. The most difficult one that takes a long as time is the drive train if you're actually driving the main motor.
That has lot of safety requirements and it has lot of qualification and also wrote testing they apparently tested for one full year on various weather and road conditions. So that drive train revenue is likely to be.
Three to four years from now before we see any significant revenue.
Now if you go into other areas like Chargers, whether it's the onboard charger our external charger those have shorter design cycles. The other area is.
Our supplies that convert the 400 volt battery.
To lower voltages for various sub systems, whether it's a computer or the guidance system or.
Whatever.
Electronics, you have that needs to be powered from the foreign appalled battery, that's what happens on the existing electric vehicles. They use a separate 12 volt battery for all the electronics, but for the future Waco, They want to run everything off of 400 walls, because as much more efficient.
So we can see several sockets for our AC to DC products.
Because they will also work from DC voltage. So they will work from 400 was down to 12 wells of five also whatever voltage they would need.
Those have.
Faster design cycles and less restrictions. The other one is over Q3 diode, which is very attractive for several.
Sockets within the car and we're already seeing a design wins there. So in terms of revenue growth. We will start seeing some low level of revenue this year, probably under $1 million and then it will gradually increase but we won't see this significant.
Increase until maybe 20 324 time period.
Great. Thanks, much I certainly appreciate.
You're welcome.
And your next question comes from the line of Christopher Rolland from Susquehanna.
Hey, guys. Thanks for the question.
I guess the first one is on Ghana.
Maybe you guys can talk about.
Whether or when you think new competitors could potentially come into this market or do you have 2020 to yourself.
Like you did last year.
And then I know you ultimately think candle replaces silicon but.
The top five Oems handset Oems, how many would you expect to offer at least one skew our cana inbox. Thanks.
Okay. Thanks Christopher.
First of all.
There are several competitors in fact, the probably my guess is about 15 different companies, who have been talking about Gan for many many years some of them go as far back as 10 years.
But the the factual information is we are the only one supplying in high volume.
And we are the only once a with Oems who are very very strict in quality and reliability and so on and so forth.
So far we have two big Oems using as in high end of their charger.
Designs.
And we have several other Oems who are working with.
The real question is how fast it will be adopted its a.
It depends upon.
What the consumer will demand in the consumers get attached to verify a fast charging times.
For example, the first design, we got the Inbox design was a for 65 what design.
And that can charge a battery from zero to full in 25 minutes.
In many cases, you don't need to do more than 10 minutes, because you're not trying to charged to the full level.
And if that catch Hassan and if there is a competition between different Oems.
That the adoption that could be much faster, we just don't know we had to wait and see.
But as I said earlier.
Even at the higher price.
At a system level, if you're trying to say reduce the size of the adapter, which means yet increased efficiency adapter.
We are already cost effective there is no other way to do that cost effectively.
Other than using our technology.
And in terms of the technology, even though we have lot of competitors.
Most other competitors use a different gan processing technology than we do we have a unique proprietary technology, which we believe is superior not only in terms of performance reliability and also in terms of cost. So we think that we are in a much stronger position than most of our compare.
Hitters in being able to offer that technology.
That would be attractive to our customers. The fact that they've been around for a long time tells you that the technology has been around but it's either has a has cost issues our system level use issues.
And are there has some quality issues.
The the second important factor that is different for US is not only we have a unique gan technology that Gan technology is almost.
Transparent to the user because we take care of how we drive it efficiently how we protected.
As a discrete device, it's very difficult for customers to use Gan devices, I think thats, where most of our competitors struggle because they're offering discrete gan devices. We don't offer the state Gan devices. In fact, we have been shipping Gan devices, even before people realized we are shipping Gan devices, it's only when.
Somebody figured it out and did the report we had to come out publicly to talk about it because the way. We think about technology is just a means to the end not in a and then an end in south.
So that gives us a huge advantage because it is testament to the use that it looks just like silicon, except as much higher efficiency.
And that much that's what makes our again so much more attractive because the customer doesn't have to worry about how to drive drive gan or how to protect again device.
Sure. Thank thank you for that.
And then perhaps looking at the segments for Q1, we secured a little bit of color, but any more color there would be great and then you know as we're moving through.
The very beginning of 2020, but maybe you could talk about your expectation for the full year.
So it's going to be comps to drive top would love your.
Sure your thoughts.
I don't have a lot more to add on Q1, but for the whole year. We think this will be a good very good growth year for us.
If you look at 2019, even though we only grew 1% we were significantly better than the analog industry.
And we believe that will be the case again this year.
The analog industry is expected to grow somewhere between zero zero to 3%.
Also depending on whose data you look at.
And we think we're going to beat that hands down this year. Thanks to.
Their communications.
Market.
We are particularly the fast charges, but also because the consumer we believe we'll come back this year.
Okay and any any color for Q1 thing I think you might have said that industrial was going to contribute to the decline and so.
Let me, let me take another Tim I'll talk sequentially, what I said in my comments is that the decline from Q4 actuals to the midpoint of the guide.
Was primarily coming from equally from communication computer on industrial and that consumer wouldn't be flattish from Q4.
And industrial is typically.
I believe in Q1, so yes, it's actually typically down in Q1 and that is because you know the funding and these are infrastructure spend the budgets come our come about in Q1 and then the gradually drivers. So typically industrial is down in fact communication would have been more down as.
Mentioned too earlier question, but because of the design because typically that's what happens, but because we want more design wins and go to market share or even offset that potential decline.
Okay. Thank you.
And your next question comes from the line of Gus Richard from Northland.
Yes. Thanks for taking my question first of all congratulations on prevailing.
On the legal matters, that's just fantastic Im glad that's behind you.
Thanks, Mike.
Yeah, no it's been a long time.
My first question is.
In the guidance you provided for Q1.
What's factored did a current outbreak at the current a virus play did it did you temper your guidance at all because of that or not a factory just any any sense of a magnitude.
So.
We worked I think I discussed earlier, so we believe based on what we know currently which of course is subject to change.
That we can supply the products.
To the to our customers.
Because we have talked to our assembly vendors and by the way in China, we only assemble some old products.
Which most of that a second source if necessary, we can shift it but at the moment it looks like that's not necessary because they are saying they can supply to as even though the shutdown in one case that shut down next week in the other two cases, they will open on Monday and that operate that says.
Some a partial level because they can't get all of the employees back to production floor, but based on what Theyve told as we believe and we also have inventory at remember we have quite a bit of inventory and we also have inventory of raw materials and therefore, we are comfortable that we can ship.
Add to demand in Q1.
What we don't know because it's still such Chinese holidays that they won't come back until Monday is whether there is any impact on that demand itself.
And there could be multiple reasons, one is that they don't get an up production workers to build products thats, our customers I'm talking about the second potential impact would be that they can get our parts, but they can't get some other component and so they can't build the end product.
Those are the two things we cannot take into account, it's we don't know.
But that is going to be a problem.
And also it depends upon how long the shutdown last.
You can speculate.
What is going to happen what we are hearing from our vendors is that the Chinese government is planning to shut down a until end of next week, which happens to be like 14 days, which they say is that gestation period for this wireless.
And they're thinking as if it doesnt spread any more odd is the number of people infected goes down that would be the end of it that is they won't be normal shutdowns, but that's just speculation at this time, if they continue to shut down it will have an impact, but I don't know how to quantify it and thats not taken into.
Account in our.
Guidance.
Got it and then just I know that most of your sales or to distribution the sell out of distribution what percentage of that is into China itself as opposed to say, Vietnam or Taiwan et cetera.
[noise] Ross round numbers.
Well. So if you really look at it is that what we sell our distributors that are typically to the disties. They sell to a great extent, it's the end product goes it going out from China that we don't know, but if you look at it typically sell into China into the distributors, it's 40% to 50%, yes. The I think we all question is how much up it is.
Actually manufactured outside of China.
So.
Roughly speaking I would say.
50% as some they've said.
We'll be shipped into China from our warehouse in Hong Kong.
So whether some of it will go outside of China I don't know usually put is done in Vietnam, We would ship directly to Vietnam I presume.
But most of our Chinese customers do manufacturing in China.
Okay got it got it so so roughly half of your product goes into something that's still in that in China.
Correct.
Got it and then just real quick on the lift expense it was $5 million to $6 million as I recall and how much of that are you going.
How much of that we realized in savings on an ongoing basis.
So if you remember the run rate was somewhere around about 8 million in change.
Q4 was a little higher what we had guided was that we would get on an annual basis. You know up you know what we had said is all that 8 million, we would realize about 4 million in savings and what we said is that after taking this new account.
Annual growth rate would be still by 5% to 6% in total for total year on for total expenses.
Got it. Thank you that's very helpful Alright, great. Thanks, so much.
Thanks, guys. Thanks, guys.
Okay.
And once again I would like to remind everyone. If you would like to ask a question to press star one on your telephone.
Your next question comes from the line of 20 Schanberg from Stifel.
Yes. Thank you I just had a few housekeeping ones.
So deep what was the operating cash flow, excluding the settlement I get about 33 million, but just wanted to go on that.
Yeah, I mean, what our Doe is take.
The.
And 70, 169 and take out 20 million. So that's about roughly 149 million as roughly related to the settlement.
Very good.
And Balu, you mentioned that the switch, which is now sampling and sounds like you're going to get some revenues. This year is that going to be specifically tied to the defense for air conditioners because of the Chinese government.
Policy.
Part of it is the others are also into appliances, we go into water pumps.
We go into.
The main model for the dishwasher and also compressor drivers for refrigerators.
And then the other ones of fans I talked about fans for air conditioners.
So we we started actually shipping.
In production in Q4.
We had little bit of revenue in Q4, but this year, we're expecting something in the.
Few million dollars, maybe low single digits. So this year and then it will gradually grow into the appliance market primarily.
Appliance market is.
Slow, but very steady growth. So this growth will happen over many years, but so far the indications are extremely positive they loved the product. It's just a question of getting it designed in and then once it gets designed in will be copy to other products.
Within each company.
Great. Thank you so much.
You're welcome sorry.
And there are no further questions at this time.
Okay, then we'll leave it there thanks, everyone for listing there will be a replay of this call available on our website, which is investors that power dot com. Thanks, again for listening and good afternoon.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].