Q2 2020 Power Integrations Inc Earnings Call

[music], ladies and gentlemen, thank you for standing by and welcome to the power integrations second quarter earnings call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask questions. During the session you'll need to press star one on your telephone keypad. Please.

Be advised that today's conference is being recorded if you require further assistance. Please press star zero.

I'd like to have the conference over your speaker today, Joe Shiffler Director of Investor Relations. Please go ahead Sir.

Thanks again.

For now thanks, everyone for joining us with me on the call today are bothered by the Kristen.

Got it and CEO of power integrations.

Randy Meier, our Chief Financial Officer.

Our discussion today, including the QNX session will include forward looking statements 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 to differ materially from those projected or implied.

Such risks and uncertainties are discussed in todays press release and in our most recent form 10-K filed with the FCC on February 7th 2020.

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 intangible assets on the tax effects of these items.

A reconciliation of non-GAAP measures to our GAAP results is included in our press release.

Finally, this call is the property of power integrations and any recording a rebroadcast is expressly prohibited without the written consent to power integrations now I'll turn the call over to bother.

Thanks, Joe and good afternoon.

Second quarter revenues were $106.8 million in line with no guidance and up 4% year over year in spite of a challenging demand environment.

The year over year growth was driven by communications and industrial categories.

Industrial grew high single digits year over year and was our largest revenue category in the quarter at 35% of sales.

We saw a combination of the recovery in broad based industrial applications as well as incremental growth across diverse range of verticals. We had 10 like home and building automation and identification on creating opportunities for our products.

On the automation side, we are seeing growth in you as the wall outlets.

With me this and other aiotv applications, such as network Thermostats and build lost Mad high reliability compact size low standby power consumption are critical factors.

Meanwhile, and litigation is creating opportunities in applications like lawn equipment vacuum cleaners, and personal transportation, such as scooters and E bikes. They rechargeable batteries are replacing traditional power sources.

Growth in these areas was offset somewhat by lower revenues from high power due to softer demand in the energy exploration and a slowdown in infrastructure projects due to the pandemic.

However high power has its own attracted one of the goals with strong long term growth prospects, including the new <unk> energy long distance DC transmission and I pick transportation.

Although gate drivers already in use today in electric buses and locomotives and audience testing at several automotive Oems and tier ones supply as well drive train and charging applications in next generation unallocated costs.

So one of the opposed scale I driver IC is also automotive qualified as we've discussed on prior conference calls.

That also aggressively pursuing low poet opportunities in electric cars, which can contain as many as 10 pilots applied to drive radios sub systems from Maine High voltage battery.

I'll, let you, let's say study and Linkswitch t. into like these and other qsb diodes have been qualified on automotive views and be a building a pipeline of design opportunities that should begin to then its revenues in 2021.

Turning to the communications category revenues grew more than 20 person here over the yet in Q2.

And by the continued adoption of fast Chargers for mobile devices.

We believe via the leading supplier our power conversion icees false smartphone charges as already Innoswitch products continue to win is sizable share off designs spanning a wide range of power levels form factors and customers, including both inbox and after the market design.

We won more than a dozen new inbox designs in Q2 with power levels, ranging from 15 to 50 watts.

End users are becoming increasingly aware off defenses in charging speed and the Oems are steadily building, a new higher power charger models.

Expect this trend to continue as five Dubai does incorporate larger batteries to support increased consumption up medio and other power heavy functionality.

While inbox William charges account for vast majority of the market today aftermarket brands are proliferating rapidly. Thanks to you SPD technology.

These new designs, commonly feature power levels as high as 60, if I watch and capable powering capable of piloting nearly any mobile device, including notebooks.

Many aftermarket charges also include two or even three U.S. people outboards.

To enable charging of multiple devices.

Touched designs dramatically increase our dollar content since we typically sell one chip for each U.S. deal or.

I would again basing that's what's the right. Those are providing sets are proving successful in aftermarket charges faster they had exceptional efficiency, which is crucial to achieving small form factors.

Our Gan technology is also being adopted in fixed TSB wall outlets installed alongside AC outlet.

Your cost base is behind the wall is limited these power supplies must be extremely comp back limited space also allows for very little heat dissipation, making efficiency a critical factor.

Standby consumption is also crucial since these devices have continuously connected to the AC my mains and would otherwise caused a significant ways of electricity.

Clearly that charging ecosystem for mobile devices is changing rapidly and gaining in strategic importance. Thanks to emerging technologies, such as you as me PD yen and Fiveg and powered innovations is extremely well positioned to benefit.

From and drive the continued evolution off the market.

Turning to the consumer category revenues declined at a double digit rate year over year in Q2 offsetting much of the growth in communications and industrial categories.

Appliance sales have been severely impacted by the pandemic and this effect was magnified in Q2 by N. In went to connection following strong shipments in the prior quarter.

This is especially true in air conditioning, it sales fell more than happy sequentially in what is typically a peak quarter for this application.

We expect consumer revenues to be roughly flat sequentially in Q3, two they mentioned situation improving but demand still affected by the pandemic as less seasonality in air conditioning.

Longer term, we expect a healthy growth from consumer market driven by growing electronic content in appliances, increasing energy efficiency requirements demand from the expanding middle class in emerging markets and the adoption up a bridge motor driver IC is in appliances, using brushless DC motors.

I also expect Gan to play a significant role in consumer end market and have a number of designs in progress for Tvs and appliances as well as notebook charges and monitors and server standby power supplies in the computing category.

Well at all we remain cautious on the demand environment in light of the economic impact that pandemic, but we are maintaining an elevated level of inventory to be prepared and even to appear southern recovery in demand.

Considering the long sell flies several other products and the fact that most of her products can be used in a variety of applications, particularly when kept in may perform we believe this is a prudent approach to the current situation.

In Q3, we expect revenues to increase sequentially driven by continued growth in fast charging.

At the midpoint of other revenue range, we would be up slightly on a year over year basis in Q3 and up about 8% for the first nine months of the year, which would put us on track to outperformed the broader analog industry by a significant margin for the full year and now I'll turn it over to somebody.

Thanks value and good afternoon as usual I'll focus my remarks, primarily on the non-GAAP results, which are reconciled to GAAP in our press release tables.

Q2 results were on target with revenues of $106.8 million down 3% sequentially.

Consumer revenues were down more than 25% sequentially with air conditioning, and major appliances, both down sharply reflecting weaker demand and an inventory correction as Barlow noted.

All other revenue categories increased sequentially.

Communications revenues were up more than 24% on strength in smartphone charges as well as residential networking driven by work from home.

The computer category also benefited from work from home in addition to normal June quarter seasonality.

Increasing more than 25% sequentially with strength in desktops and monitors.

Industrial revenues were up low single digits sequentially with increases coming from broad based industrial applications as well as high power battery operated tools and home automation, which includes I already connected devices as well as you as be charging receptacles.

Revenue mix for the quarter was 35% industrial.

31% consumer.

28% communication and 6% computer.

That's a decrease of 10 percentage points in consumer from the prior quarter and an increase of six percentage points for communications.

The shift resulted in lower gross margins with non-GAAP gross margin falling 150 basis points sequentially.

51.1% inline with our guidance.

Non-GAAP operating expenses were $34.7 million roughly flat on a sequential basis.

Expenses were moderately below our expectations driven partly by unanticipated credits and employment incentives in Asia related to the pandemic.

Other income for the quarter was $1.5 million down from prior quarter due to the lower interest rate environment.

Which reduced income on cash and investments.

The non-GAAP effective tax rate for the quarter with just under 7%, resulting in non-GAAP earnings of 66 cents per diluted share.

Cash and investments on the balance sheet increased by about $23 million during the quarter driven by operating cash flow of $36.7 million.

The strong Q2 cash flow was driven in part by a decline in accounts receivable due largely.

To the timing of collections.

Capital expenditures for the quarter were $10 million.

We paid out $6.3 million in dividends following the dividend increase we announced last quarter and used about $600000 for share repurchases.

The average price per share on the repurchases during the quarter was $82 and change.

Internal inventories rose by about $7 million during the quarter and we had 178 days of inventory on hand at quarter end.

We continue to her on the side of the higher than normal inventories given the long shelf lives of our product and the uncertainty of supply and demand environment in light of the pandemic.

We also prefer to maintain a minimum level of activity at each of our foundries to help maintain capacity, though we have slowed wafer starts in light of the weaker demand environment.

I expect inventories to gradually begin declining.

Trending down in Q3 and to return to our target range by second half of 2021.

Channel inventories fell slightly during the quarter ending June at 7.3 weeks compared to 7.6 weeks in the prior quarter.

Looking ahead to the third quarter, we expect revenues to be in the range of $115 million plus or minus $5 million.

With the sequential increase driven mainly by the communication category, reflecting both seasonality and the ramp of new cell phone designs.

While communication should increase meaningfully as a percentage of revenue the resulting gross margin pressure will be largely offset by cost improvements.

As a result, I expect just a slight reduction in non-GAAP gross margin into a range of 50.5% to 51%.

Non-GAAP operating expenses should pick up offer lower than expected results in Q2.

Specifically I expect non-GAAP opex of around $36 million for the September quarter.

Thanks to reduce litigation spending and belt tightening measures such as a reduced piece of hiring and savings on travel and events. We are on track for growth of roughly 2% this year in our non-GAAP opex.

That is inspite of the fact, we gave normal salary increases in April and have not reduce headcount in response to the pandemic.

Other income, which has driven mainly by interest income we continued to trend down as higher running securities rollover into lower rate instruments.

Specifically I expect other income to be around a million dollars in Q3.

The non-GAAP effective tax rate should remain around 7%.

Finally as noted in our press release, our board has approved a twofold one stock split in the form of a stock dividend with one share of common stock to be issued for each outstanding share.

The additional shares will be distributed on August 18, two stockholders of record as of August 14.

Our quarterly cash dividend, which was 21 cents Bush share pre split will now be 11 cents per share equal into 22 cents on a pre split basis.

Add this new level, our quarterly payout will have risen by almost 30% over the past three quarters.

Operator, please open up for questions.

At this time, if you'd like to asked a question over the phone lines. Please press Star then one on your telephone keypad.

You will pause for a moment to compile that she Monday roster.

Your first question comes from line of tourists Spartanburg of Stifel. Your line is open.

Yes. Thank you first question for Buffalo Bills, you talked a little bit more.

But automotive and it does sound like automotive revenues going to come in a little bit earlier. This thing in the past you talked about being more 2022 that it sounds like you expected.