Q1 2022 Power Integrations Inc Earnings Call
Good afternoon. My name is Cathy and I will be your conference operator today at this time I would like to welcome everyone to the power integrations first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question.
During this time simply press the star followed by the number one on your telephone keypad, if you'd like to withdraw your question press the star one again.
Thank you and Joseph you May begin your conference.
Thanks, Kathy and good afternoon, everyone. Thanks for joining us with me on the call today are if Alibaba Krishnan.
President and CEO of power integrations, and Sandeep Nayyar, our Chief Financial Officer.
During this call we will refer to financial measures not calculated according to GAAP non-GAAP measures exclude stock based compensation expenses amortization of acquisition related intangible assets and the tax effects of these items our.
A reconciliation of non-GAAP measures to our GAAP results is included in our press release.
Our discussion today, including the Q&A.
Include forward looking statements denoted by words like will would believe should expect outlook forecast anticipate prospects and similar expressions that look toward future events or performance such 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 today's press release and in our form.
10-K filed with the SEC on February seven.
'twenty two.
This call is the property of power integrations and any recording or rebroadcast is expressly prohibited without the written consent of power integrations.
And one additional note before I turn it over to <unk>.
We plan to host an Investor day on September eight in New York more details will be coming soon but please do you save the date again, that's September eight in New York.
Now I'll turn the call over to Bob.
Thanks, Joe and good afternoon.
2022 is off to a great start power integrations with another quarter of record sales and strong earnings growth and healthy cash flow.
Our growth continues to be fueled by share gains and rising dollar content across a broad range of applications, including appliances advanced charges for smartphones in notebooks and a diverse set of industrial applications, including utility meters battery powered tools and home automation.
Yeah.
New growth vectors like I'll, let highly integrated Gan ICD and our <unk> motor drive products will make significant contributions to our top line. This year and we are making good progress on our automotive and initiative. It keep eats up all that roadmap to doubling our addressable market over the next five years.
Yes.
While market share gains are mainly attributable to the strength of our product portfolio and the impact that secular trends like energy efficiency.
And advanced charging we also continue to capitalize on industry wide supply challenges in multiple ways.
But.
Competing products that quiet Baltimore Exxon components to that that what Ice's integration has always been the core of our value proposition, bringing reliability ease of use and time to market.
In today's supply environment integration has the added benefit of eliminating components that are difficult or more expensive bill pay.
Again, our ability to deliver parts in a timely fashion has enabled us to win against competitors that have struggled to deliver our chosen to allocate capacity to other applications.
Our superior delivery performance is enabled by our unique foundry model.
Recent capacity additions and I, but at first the ship through the med.
We have even.
We have even sustain our delivery performance despite disruptions at some foundry locations.
Boeing recently, the earthquakes in Japan.
Strong inventory position and our practice.
Sourcing most products.
Total locations.
Our operations team has also successfully navigated a variety of logistical challenges arising from China Lockdowns.
Our ability to supply parts has been especially impactful in the appliance market.
Spaniard our share of AC to DC power supplies and our entry into motor drives has been aided by the scarcity of incumbent solutions like integrated power modules.
Lastly, as new efficiency standards for air conditioning, and China are providing an additional tailwind for our motor drive products as is a new incentive program in India designed to accelerate the transition to a breathless DC motors in ceiling fans.
We expect <unk> to be in mass production. This year with at least 10 customers and we have a strong pipeline of designs that will enable us to grow this new revenue stream in 2023 and beyond.
Another important growth like that is that a lot of proprietary Gan technology, which is tightly integrated into our power conversion Ics and utilizing the complementary products like many cap and claim zero with reduced the size of input capacitors and transform us.
<unk> components and our power supply.
We were the clear market leader in high voltage Gan products last year, and Q1 was another strong quarter in terms of shipments and design wins.
Wins included multiple designs for notebook Pcs and several multipurpose aftermarket.
Branded charges.
<unk> dual port USB PD charger for a major cell phone and notebook Oems.
We also won a range of industrial and appliance designs, demonstrating the expanding use cases.
Again beyond mobile devices.
We expect again to replace silicon across a broad range of power supply market in years ahead.
And the technology features prominently featured prominently in our roadmap as we look to double our addressable market over the next five years.
Our newest Gan product is Haifa PFS five.
The fifth generation of our highly integrated power factor correction Ics.
And the industry is plus power.
I see.
Great again switch.
Although factor correction RFP FC is required in most power supplies about 75 watts.
And it is implemented as a separate stage of power supply prior to the main power conversion stage.
The efficiency of our Gan switches hyper PFS, that's five implement PFC without a heat sink in applications up to 240 watts.
Including game consoles E bikes powered tools and high power adapters for Pcs and mobile devices.
The new IP can be paired with any of our AC to DC Ics for the power conversion states, including Gan based in a switch for Ics all of the new hyper Lcs too for the more efficient rather than more conversion needed at higher power levels.
Introduced last month, alongside the new power factor chip hyper Lcs to illustrates an important difference between power integrations and competitors offering a single technology in the form of discrete transistors.
<unk> is the only company focused on complete system solutions for the power generation market and we have developed a portfolio of switch and controller technologies system topologies isolated communication techniques and proprietary IC packages, all designed to work together to enable customers to build.
The world's best power converters.
As we develop products saw different segments of the market. We can integrate these elements in waterflood combination works best for example, redesigned our hyper Lcs to product with a proprietary cost effective silicon switches known as threat set to achieve the optimum balance of efficiency.
And cost in resident the policies.
This follows our recent introduction of <unk> 1700, volt worsen or arena switch products, incorporating a silicon carbide senses to making it ideal for EV power supplies in 800 volt systems.
We now offer in the switch products with Silicon Gan and silicon carbide options, giving customers a level of flexibility that no one else can provide.
The ability to mix and match technologies in this way you unique to power integrations and provides us a significant competitive advantage.
A couple of final notes before I turn it over to Sandeep.
We recently published our 2021 sustainability data, including I would estimate of energy savings generated by our <unk> technology, which drastically reduces energy consumption from electronic products in standby our idle mode.
This includes products like appliances computers, and Tvs and they are not in years or adapters less plugged into the wall outlet after charging the device.
This technology has been included in all of our Republican Vaginitis since 1998, and we have shipped more than 18 billion Ics with eclipse my technology over that time.
This proprietary technology sales follow up without any effort on the part of the end user and it helps our customers meet a broad range of regulatory requirements around the world.
Last year alone, we estimate that it costs more technologies save roughly 15, Tera watt hours of electricity, Yeah, that's about almost 2 million homes for the entire year.
And this is just one way our products contribute to a lower carbon future our gan.
Technology offers a dramatic increase in active more efficiency all the silicon MOSFET and our gate drivers are widely used in carbon saving applications like solar and wind power high voltage DC transmission lines and electric locomotives.
We also have a huge opportunity ahead of us in EBIT Drivetrains and will hit another milestone in that effort next month, when we introduce a new line of gate drivers specifically targeting the EV market.
Finally, I'd like to acknowledge an important figure in the history of our company, Steve Sharp, who will step down from our board of directors.
Our annual meeting next month.
Steve as a cofounder of power integrations, and we would not be here today have not recognized the potential of the innovative process technology that served as the foundation of the company.
In fact, Steve was such a believer in the technology that he left his venture capital role to help stop the company serving as an interim CEO in its earliest stage.
Steve figured prominently in the glory days of the Silicon Valley semiconductor industry, helping start several other prominent chip companies, including <unk>, where he served as the CEO for more than a decade.
We thank Steve for his enormous contributions to our company and to our industry and we wish him the best as he retires from the board.
Thanks, <unk> and good afternoon. Our Q1 results featured solid revenue growth against a difficult compare strong earnings growth driven by continued margin expansion and very healthy cash flow.
We have also taken advantage of market volatility and the turbulence caused by a promotion to the S&P Midcap index to buyback a substantial amount of stock, which will provide meaningful EPS accretion in the coming quarters.
On a year over year basis total revenues for the March quarter were up 5% to $182 million.
Consumer industrial and computer revenues each grew in the mid twenties, reflecting broad based market share gains.
While communication was down nearly 30%, reflecting last year's strong first quarter.
As you may recall cell phone Oems, but aggressively in the early part of 2021.
As they sought to take advantage of Huawei supply chain challenges, resulting in an inventory overhang that lobster through the duration of the year.
The improved inventory situation is reflected in the sequential growth numbers for the March quarter with the communication category rising nearly 20% from the prior quarter driven by new design wins.
The computer category also increased sequentially growing high single digits, driven by monitors notebooks and server standby power.
Consumer revenues increased mid single digits sequentially on continued strength in appliances and air conditioning, while industrial revenues ticked down modestly.
Total revenues were up 5% on a sequential basis.
Revenue mix for the first quarter was 35% consumer 29% industrial 20.
26% communication and 10% computer.
While the strong sequential growth in communications resulted in less favorable mix.
non-GAAP gross margin Nevertheless expanded for the fourth straight quarter, rising 120 basis points to 55, 7%.
The primary driver of increase with manufacturing efficiencies, including improved at times and yields as well as the supportive pricing environment.
non-GAAP operating expenses for the quarter were $40 8 million in line with our forecast and up $2 million from the prior quarter, reflecting increased head count.
The resumption of FICA and the impact of holiday shutdown in the prior quarter.
non-GAAP operating margin for the quarter was 33% and non-GAAP earnings were 93 cents per diluted share up 22% from a year ago.
Weighted average diluted share count for the quarter was $60 1 million down $1 3 million shares from the prior quarter.
We repurchased one 6 million shares during the March quarter $435 million.
We have bought back an additional 900000 shares thus far in April utilizing most of the $83 million that remains on our authorization at quarter end.
In total we have bought back nearly 3 million shares since November offsetting most of the roughly 4 million shares dislodge from index holders on a promotion to the S&P 400 in December .
Our board has allocated an additional $75 million to the buyback, reflecting continued confidence in our growth prospects and cash flow generation.
Cash flow from operations in Q1 was very strong at $75 million.
In addition to the buyback other uses of cash were $15 million for Capex and $11 million for dividends following the 20% dividend increase in the March quarter.
Cash and investments on the balance sheet fell by $86 million during the quarter to $444 million.
Internal inventories ticked up by one day to 115 days inching closer to our desired level of 125 days and enabling us to continue leveraging our delivery performance to win market share.
Inventory in the distribution channel rose to seven one weeks from six three weeks in the prior quarter.
Looking ahead, we expect revenues for the June quarter to be $190 million, plus or minus $5 million.
We currently have backlog coverage to the midpoint of this range.
I expect non-GAAP gross margin to improve again in Q2, driven by a more favorable end market mix, reflecting weaker demand in smartphone market relative to appliances and industrial.
Also contributing to the higher margin in Q2 is the stronger dollar versus the Japanese yen, which favorably affects our wafer costs.
Specifically I expect Q2, non-GAAP gross margin to be between 56 and 56.5%.
I do expect higher wafer prices and other cost pressures to flow into the P&L as the year progresses.
<unk> in a deep bring down of gross margin in the second half of the year.
However, our near term outlook for gross margin has clearly improved thanks to a combination of factors, including manufacturing efficiencies the stronger dollar.
Pricing environment, and a richer mix.
non-GAAP operating expenses should be $44 million, plus or minus half a million dollars.
The sequential increase reflects annual merit increases our accelerated investments in R&D.
As well as the expansion of our sales force to capitalize on our momentum in the market.
The non-GAAP effective tax rate for the second quarter and the year should be between nine and 10% and I expect diluted share count for Q2 to fall by about one 5 million shares compared to March.
And now operator, let's begin the Q&A session.
Thank you and at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we will pause for just a moment to compile the Q&A roster.
Okay.
And our first question will come from Christopher Rolland of Susquehanna.
Hey, guys. Thanks, Thanks for the question.
And congrats on the quarter.
I guess my first question is.
Any thoughts on how the end markets kind of progressed from here or even kind of force rank the various segments into next quarter as well.
Any thoughts there would be great.
Yes.
Well.
We all know that there is a lot of things going on around the world. We have the war in Europe , and Lockdowns in China and.
And of course higher fuel prices and the overall inflation.
For Q2, as we mentioned we have backlog to the midpoint of our guidance already.
And so.
We really have to wait till the end of Q2 to see what the sell through is like and that will tell us how things will turn out in Q3 and Q4.
We have had.
Some cancellations in the cell phone area for all the reasons people node cellphone has been weak.
As a whole.
And so as a result, the orders have moderated and we have had some cancellation, but that's all taken into account in our guidance for Q2.
What we don't know in the second half is whether there will be overall demand reduction across the.
The macro type of issues.
Just have to wait and see how that turns out.
So the cell phone is well understood to us what we don't understand is the impact of.
Any slowdown fueled by the water in Europe , and Lockdowns and inflation.
Great. Thanks for that and then secondly, you guys talked about this tight market and how you guys are a beneficiary of integration for example.
But also just having capacity if we were to see a slowdown in the second half do you think the share gains that you've taken like for example in motor controller or something like that do you think that's going to be sticky or do you think you'd get some back to to competitors that are.
Maybe more aggressive on pricing or something like that.
That's an excellent question I believe that our products are so attractive.
<unk> gotten our share over time anyway, what has happened is.
Thanks to the supply issues with our competitors that share has transferred all share gains are happening in a very accelerated manner, but once we get those share gains.
We really don't believe it'll go back because the attractiveness of integration attractiveness of efficiency lack of heat sink all of those things are the reasons, we will stay the course.
Thomas will stay with us so we're feeling very good this is a permanent share gains.
Awesome. Thanks, guys.
Our next question will come from Matt Ramsay of Cowen and company.
And Mr. Andy Your line is open if you could just check your mute function.
And hearing no response, we'll move to our next question and that will be from David Williams of D Benchmark company.
Hey, good afternoon, and congrats on another really solid quarter.
Thanks, David.
Yes, just wanted to maybe dig in a bit on the industrial side. It was off a little bit sequentially, just kind of curious if there was anything in particular from.
From the industrial perspective that might be shifting around or moving moving a bit.
Not really I mean, if you look at it year over year. It grew something like the 2500, 46%. So that shows how well. It is done it is doing and there are some cyclical issues, where industrial is usually weaker in Q1.
But we are actually growing our share very nicely in many areas like Iot power tools.
And so on so there is nothing to be concerned about in industrial I think it will grow very nicely this year.
Along with the.
The computer and communicate consumer and the only one that is not as clear as the cell phones, because it's down across the board. Although some of our Oems are doing actually better than they projected and some others. Some of them are doing much worse than they projected.
Thanks.
And then maybe just from the the ongoing China.
Covid Lockdowns I know you've talked about this a bit on the call already but is there anything that youre seeing there maybe from a supply or a demand side that you think is going to be impactful and do that.
The second quarter, and maybe even the third quarter, just how do you think about China in general here, just given the volatility and the Lockdowns.
The Lockdowns surprisingly, maybe we were very fortunate.
It didn't affect any our ability to sell to our customers. We don't have any major customers in Shanghai area.
The Shenzhen so the lockdown was a relatively short lived.
And other areas have not impacted us what it did do was really complicate our logistics than Shanghai airports shutdown, we have to find ways to get our products to our assembly plants through other channels.
And the same thing happened in Shenzen mandates shut down we have to bring wafers and.
Assembled units in different.
Different routes and actually pay quite a bit more to do that in some cases, we have to track it to the next available airport.
But those were all very well managed by the company, but our team did a fantastic job it had really no impact on our ability to.
Supply of products to our customers.
Now as far as we know.
Our Chinese customers are not directly impacted by these shutdowns in terms of production activities. What we don't know is secondary effects of this shutdown.
And only time will tell what happens because I have to believe if people have to stay at home for so long they are not going to be able to buy anything.
Certainly not by cell phones appliances, and so on on the other hand.
It also appears to us that if there is a reduction in demand that might be just temporary because it's just a situation. They are going through now once the lockdowns are lifted.
Demand should come back at least that's our thinking.
Great color. Thanks, so much and one last one if I can real quick, but just from a compute standpoint and the volumes. There is a lot of discussion there about what the volumes could be this year, but we are hearing of a better mix into the enterprise and maybe pro consumer type of applications are you seeing something similar and then is there any way.
To kind of parse out your potential dollar content as we think about the higher end versus the mid or lower end units.
Just to be clear when you say the computer you talk about the computer market.
Yes.
Yes, the good news for us in the computer market is we have such a low share of the <unk>.
Notebook market it almost doesn't matter what the overall market is doing because we have lot of room to grow and we expect computer to be a very strong growth segment. This year for us we already have one number of notebook designs that are going into production as we speak and we had a fantastic fit for notebook.
<unk>.
Our dollar content is very high because in many of them you have to use Gan.
And many of them are multi port and so there are multiple devices and you also have to remember it's not just our in our switch power conversion device. We can also sell many cap to reduce capacity the size and also climbed zero to reduce the transformer size.
So there is quite a few they use all of that you would have multiple dollars of content. So it's a it's a quite a attractive market for us and it's a very good fit for our technology and products.
Thanks again, certainly appreciate the help.
You're welcome David.
Okay.
And our next question will come from Sean <unk> of Deutsche Bank.
Hi, this is <unk>.
Asking on behalf of Ross Seymore. My first question is you had a great upside to gross margin both in the print and the guide could.
Could you talk about what were the drivers here, how much was pricing versus manufacturing efficiencies and <unk> and then I'll ask my follow up.
Yeah.
I talked about on my.
Sure.
In my script basically the manufacturing efficiencies have helped us a lot in this and.
I'm not going to try to quantify each one but the pricing the way. It works for US is that we do value pricing. So we just value of with all the discrete that we eliminate and the reason our Q2 margin is going up is because youre getting a yen benefit but the one part I think you should realize is that the there is a tie.
<unk> difference of this benefit was the cost importantly, we've already seen some increases by Q3 and Q4 are going to see further impact from these cost increases that we know off today and how the dynamics of that market is but the good news is also that the efficiencies have.
He helped us and typically we do these efficiencies to offset pricing declines that we have to give which in this environment, we don't need to do.
Because of the challenges of cost increases. Additionally, as <unk> mentioned earlier with what's happening in the cell phone the mix as we had anticipated at the beginning of the year is changing now what happens for the rest of the year is harder, but the best we can model. We are definitely seeing that the cell phone is going to be a harder area.
For growth versus most of the growth will be coming from the other three areas as a result of which we will have favorable margins.
Thanks.
Follow up of that you have been now been at the high end of your gross margin long term gross margin range.
With that given that and what are you modeling do you expect one your prior target of 53 to 54 range for the full year to.
Upside and is this going to be the new baseline going forward long term.
It's a good question so for this year.
Really depend on what's going to happen in the second half, which <unk> mentioned is hard but typically what happens in Q3 is air conditioning also tends to taper off so youll along with the pricing pressures you are going to see the mix also have a little impact side as a result in the third and fourth quarter as I mentioned on the.
Script margins will taper down from Q2.
The best I can model right now for the year for non-GAAP is around 55%.
Again, the mix can really change stacked and the volumes can impact that but my modeling tells me somewhere around 55% for the year could be slightly higher.
As far as our model our model is going to remain in the $50 to 55%, though as you know we have changed our operating margin model, which used to be we.
We had these three running in low twenties, but we had a target of 25% and we have up back to 25% to 30% because of the inherent leverage that we have in our model. So I think you should think about our model in the form of our gross margin in the $50 to $5, 55%, though I think we will be tapering more in the higher end of that model in the near term.
And the operating margin in the 25% to 30%, even though we are at the higher end of that model, but I think you should again see will taper back as we look ahead.
Towards the 30%.
Thank you.
Okay.
And again as a reminder, if you'd like to ask a question that is star one on your telephone keypad. We will now go to tore svanberg of Stifel.
Yes. Good afternoon. This is Jeremy calling for Tori.
A quick question on in terms of the the backlog coverage for the current quarter am I correct in understanding that you have it's fully covered in backlog as.
As of right now.
Yes, that's correct.
At the midpoint.
For the mid point right.
If there is additional turns orders is it possible to have some upside in that situation.
Yes, that's a good question surprisingly because of the.
The supply situation people are booking way ahead, our turns business is relatively small it's actually quite very small compared to what it used to be.
And we also have to assume there could be some push outs in fact <unk> seen that in every quarter. So when you look at the turns business plus or minus push outs.
Just watch us that's why we are saying.
<unk> hundred 90, <unk> midpoint, even though we are fully booked to that and as <unk> indicated earlier. We also have a lot of uncertainty going on with the cell phone business and you know some of our Chinese and Chinese OEM are exposed to the Russia area and others and that is impacting business. So I think we have to factor all of them.
This is based on that we feel.
The pluses and minuses as the guide we gave.
And then just to follow up on that.
There is some shifting in terms of some people pushing out orders some people wanting to take orders.
Absorb those those chips, how how fungible is the inventory whether its cell phone manufacturers from one to the other.
Can you give us any color on that.
Well one of the things, we have done actually very well, especially compared to other companies as I've heard is that we are very careful to ship to real demand and the way we do that is.
We monitor the distribution inventory, whether it's 75% of revenue.
And you could go through distribution. So we don't ship unless they are shipping through.
We don't want to distribute our inventory reword this way the inventories all in one place that's with US so that we can take care of all of our customers well.
And we have also talked to the Oems the end customers.
We have discussed this with them and they have been extremely cooperative and they are they also want to make sure that they have supply and so they at least tell us that they don't have much inventory and so we we are reasonably sure, especially in appliances that there is very little inventory at our customers.
Cell phone is a little bit more dynamic because their demand is changing as we speak so some of them might have some inventory, but I would say overall there is very little inventory at the end customer there is reasonable inventory at the distributors as you can see there coming within our range of seven to eight although they're on the low end of the range.
Seven to eight weeks.
They can serve the market very well as long as they are in the 7% to eight week range. So the rest of the inventory, we keep and we don't ship it distributors unless we know it's going through.
Great. Thank you and as a second question I guess.
Your new I guess automotive qualified.
Switching I E.
With the integrated Silicon carbide MOSFET is this.
This your own silicon carbide, MOSFET that or can you help us understand that have a little bit more insight into that product.
Seems like a very very interesting product.
Yes. This particular, one is not our own technology that the volumes are not high enough for us to.
Although we could do it sometime in the future I guess, but.
For the foreseeable future, we would be just outsource that particular diet.
Great and in terms of.
Potential for seeing this in production and I understand automotive tends to have long.
Our long development cycles, but.
It can sometimes be a little bit acceleration you have a sense of how soon the skin market.
Market adoption.
Good question again, it depends on what application you're in.
If you are for example, a gate driver in an inverter for the main motor.
That has like a four to five year design cycle, because that becomes a safety component.
For example, this particular product goes into what's known as an emergency power supply and that has a shorter design cycle. In fact, we got a major OEM design win that it does just gone into production.
Ed that's use us the.
Our silicon based.
In a switch.
Because it's a fortinet volt battery, but this silicon carbide based in Australia, which is a total of 1700 volts, which is used with 800 volt battery. We are actually engaged with one another major OEM and as the design is in process and it is very very possible, we could get designed in.
<unk> got and get into production in something more like two year timeframe, rather than 40 year timeframe simply because that particular item.
Is less stringent from a safety point of view.
Very good thank you very much.
Youre welcome.
And once again as a reminder, that is star one if you'd like to ask a question and will pass again for Jessica I'm Amit.
And it does appear we have no further questions I would like to turn the conference back to our presenters for any additional or closing comments.
Alright, Thanks, Kathy Thanks, everyone for joining us on a busy earnings afternoon, there'll be a replay of this call on our website, which is investors power dot com.
Thanks, again and good afternoon.
Okay.
And this does conclude today's conference call you may now disconnect.
Yes.
Please wait the conference will begin shortly.
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