Q3 2022 Power Integrations Inc Earnings Call

Based on what we control.

Managing the business for long term growth and profitability rather than short term operating metrics, though we do expect to be within our target range of operating margin in 2023.

Design activity continues to be robust.

Not all competitors have retreated from the market and we are not slowing down our efforts to capitalize on the opportunities in front of us.

We've talked in depth about these opportunities at our recent analyst day and I encourage anyone following our story.

<unk> build a replay of the event on our Investor website.

Our presentation covered a wide range of topics, including our unique system level approach to integration our history of innovation in high voltage process and device technologies, including again and the contribution our products are making to a cleaner planet.

We also presented a detailed view of our plan to double over addressable market to 18 $8 billion by 2027.

Driven by a combination of investments in new products and technologies and big picture market trends, creating opportunities in areas like renewable energy home automation appliances advanced charging and transportation.

We expect the largest contribution to Sam expansion from motor drive products as we expand our Reed switch family to cover a wide range of brushless DC motor applications in the years ahead.

Rent bridge switch products covering applications up to 400 watts are rapidly gaining adoption at customers in major appliances, as well as air conditioners and ceiling fans.

As we mentioned last quarter, New regulations in India are driving a wave of design activity in ceiling fans by essentially forcing the adoption of efficient plus lesson.

C Motors.

During Q3, but switch was also designed in at a top tier European appliance maker for our next generation represented a design that will contribute meaningful revenues in 2023.

The designs, we are winning today will not only generate near term revenue growth, but also pave the way for the highest power bridge switch products in our pipeline.

Unlike the Fitch solutions bridge switch and our motor expert software provide a platform solution that can easily be adapted to a wider range of end products by customers. Once they are familiar with the architecture.

We expect an equally large increase in <unk> to come from automotive, where the EV transition brings substantial high voltage semiconductor content to passenger cars and commercial vehicles as we explained at the analyst day, we have a content opportunity of more than $60 today in our passenger car, which.

We expect to increase by more than two X as we expand our product offerings in the coming years.

Heavy vehicles like buses trucks, and construction equipment will have even greater solid content.

While the major revenue ramp is still few years away.

We are making excellent progress establishing ourselves as a key supplier to the EV market, adding almost 200 designs to our opportunity pipeline. So far this year.

The majority of these projects in all our silicon carbide based inno.

Switch Ics, which are ideal for next generation 800 volt systems.

Our success in converting opportunities into wins has been highly encouraging and speaks to the degree of differentiation. We provide within a switch in terms of ease of use reliability space savings and efficiency.

Overall, we have now secured design wins at seven of the top 10 tier one automotive suppliers and we expect to be in production with about 15 and customers. This year a number that should at least triple in 2023. These include not only a wide range of power supply applications.

At automakers in the U S Europe and Asia, but also several designs using our scale I driver gate drivers in drivetrain in waters, mainly at Chinese EV customers.

Another key topic of our analyst day was a detailed discussion of our Gan technology, a cardinal stone of our product roadmap and also a near term driver of share gains and higher dollar content.

We presented not only the rapid growth in Gan based product revenues over the past couple of years, but also the $100 million opportunity pipeline, we are working to convert to design wins and revenues.

These opportunities cut across a wide range of end markets with more than half coming from industrial and appliance applications. In fact half of our Gan design wins in Q3 came from industrial and appliances.

Going forward Gan power switches will feature prominently in the automotive and motor drive products that will drive much of our Sam expansion.

We also have Gan based products in our pipeline that will open up new markets for us such as data center and comm equipment.

Another major piece of our Sam expansion roadmap.

We also expect growth in the Sam for our high power gate driver product driven by wider adoption of renewable energy and the efficient DC transmission infrastructure.

Our high power business struggled to grow over the past couple of years as projects for us.

Slowed by the pandemic, but we have seen a healthy rebound in this business in the past several months and it is now on track to grow double digits. This year, we expect strong growth in high power again next year, driven by design wins in solar wind and electric locomotives.

In summary, our long term growth story is on track and we are looking past the current downturn to the exciting future that we laid out for you at our event in September .

As a reflection of our confidence in that story as well as our strong balance sheet and ongoing cash generation, our board has allocated $100 million.

Share repurchases, which we expect to begin implementing in the days ahead.

And now I'll turn it over to Sandeep for a review of the financials.

Thanks, <unk> and good afternoon, we are well positioned financially to weather the current downturn, thanks to our strong balance sheet and our lean expense structure, and we believe market share gains new products and secular growth opportunities will enable us to emerge stronger on the other hand.

As we manage through the downturn, we will be guided by the long term mentality that is integral to our culture, and which was a key theme of our analyst day presentation.

Accordingly, we are adjusting our spending plans, but we'll continue to invest in new products and greater sales reach.

We are moderating production, especially the conversion of vehicles to finished goods, but we will keep our foundries active to ensure access to capacity when demand recovers.

While internal inventories will run above our model for the short term our products have long lives and are fungible across application and customers, resulting in virtually no risk of obsolescence.

This approach paid off when demand came back after the initial pandemic shutdowns and we are following the same playbook now.

I will now discuss the Q3 numbers and the outlook before we begin the Q&A session.

Revenues for the quarter were $160 million within our guidance range, but below the midpoint as demand taper down over the course of the quarter.

Revenues were 13% lower than the prior quarter.

Zuma revenues fell more than 25% sequentially, driven partly by seasonality in air conditioning, but more so by our softer demand and elevated inventories in major and small appliances.

China continues to be the prime resource of weakness in the appliance market, but the slowdown is not isolated to China.

Communication revenues were down more than 20% sequentially, reflecting continued weakness in the smartphone market.

Computer revenues were up slightly from the prior quarter driven by strength in tablet Chargers as well as recent design wins in notebooks with our Gan based switch products.

Industrial revenues also increased slightly from the prior quarter driven by strength in our gate driver business across a range of applications, including solar wind energy exploration and rail.

Revenue mix for the third quarter was 41% industrial 32% consumer, 16% communication and 11% computer.

Okay.

As expected non-GAAP gross margin was sequentially lower at 57, 8% the.

The sequential decrease was driven by less favorable pricing environment as well as lower backend manufacturing volumes.

non-GAAP operating expenses for the quarter were $40 $8 million below our forecast and down sequentially by more than $1 million.

Driven by slower than expected hiring and the timing of spending which pushed some expenses out to the December quarter.

non-GAAP operating margin for the quarter was 32, 4% and non-GAAP earnings were <unk> 84 per diluted share.

Weighted average diluted share count for the quarter was $57 6 million down 700000 from the prior quarter, reflecting the impact of shares repurchased in the June quarter.

No shares were repurchased during the September quarter.

<unk> noted our board has allocated $100 million, where additional buybacks, which I expect to put to work in the days ahead.

We had $363 million in cash and investments on the balance sheet at quarter end.

An increase of $36 million during the quarter.

Cash flow from operations for the quarter was just under $50 million and we used $5 5 million during the quarter for Capex.

And paid out $10 3 million in dividends.

Inventories on the balance sheet Rose 29 days from the prior quarter to 161 days as I noted earlier, the long lives and flexibility of our products.

<unk> has the ability to build wafers.

Paper inventory during a downturn ensuring continued access to capacity at our foundry partners.

I expect internal inventories to remain elevated through the first half of 2023.

And then begin to taper back towards our target level in the second half of the year.

Channel inventories at quarter end was $13 six weeks up two weeks from the prior quarter.

Seven exceeded sell through for the full quarter Dolby saw a crossover in September with sell through exceeded sell in for the month.

Based on our preliminary chicks. This also appears to be the case for October and we expect it to continue through the remainder of the quarter, resulting in a meaningful reduction in channel inventories as we exit the year.

Importantly distribution inventory for communications category decreased significantly during the quarter and sell through was up sequentially, indicating that the worst of the inventory correction in smartphones may be behind us.

We expect revenues for the December quarter to be $125 million, plus or minus $5 million.

And again, we expect sell through to be higher than reported revenues as we work to bring down channel inventories.

I expect non-GAAP gross margin for Q4 to be between 56% and 56, 5%.

The sequential decrease driven by lower backend manufacturing volumes and a less favorable end market mix.

non-GAAP operating expenses for the fourth quarter should be between 42, and a $42 $5 million.

And the non-GAAP effective tax rate should be between 9% and 10%.

Now operator, let's begin the Q&A session.

At this time I would like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad.

For a moment to compile the Q&A roster.

Okay.

And your first question is from the line of <unk>.

<unk> spent sandberg with Stifel. Please go ahead.

Yes, good afternoon, Jeremy calling for Tori.

Quick question first on the the.

Communications.

Sure.

Can you give us maybe.

E.

I guess concrete signs of.

Our early signs that you're seeing of a potential bottoming.

All right.

Channel inventory kind of.

Crossover in.

And sell through versus sell in.

Are there.

Discussions with customers that you can point to anything that you can.

Give us a little bit more clarity on would be very helpful.

Sure.

Jeremy Thanks for the question the Chinese cell phone companies.

It looks like most of the inventory at the OEM has been depleted ended started pulling.

Products from the channel.

In case of Korea, there still seem to have an industry inventory and so they are yet to deplete their internal inventory.

But we think that it's the tide is turning right now we see the overall communications in inventory at the channel has decreased significantly, but we still have some ways to go.

We are thinking that by perhaps the second half of Q1.

We will start.

Getting.

Higher shipments.

To this market.

Great. Thank you for that insight.

Hello.

Maybe a question for Sandeep.

With the weak yen.

Still kind of.

You guys are a beneficiary of a weak yen with with your manufacturing.

And are you taking advantage of that.

And long term strategic lower cost inventory.

And then maybe is there any.

So you can kind of.

Forecast in terms of the potential impact gross margin. Thank you.

Yes, so the way we have always done it.

Just take a step back just pre pandemic weaker commute to build because we wanted to keep up.

Our foundry partners economically.

Profitable as well as what we know that we always come out of this downturn and when it comes we do really well and that really helped us with the having that inventory. This time it is going to be no different.

As we have talked earlier these downturns take three to four quarters and typically this could be a quarter more but as a result of which I am expecting that we may have a reversal of this year, where next year could be like the back half of this year, whereas the back half will be much.

Stronger back half.

From a margin standpoint.

<unk>.

Giving you the guidance for Q4 for next year I think we should be still in the 55% to 56% mainly.

Mainly because the communications sector will come back and the mix is going to be a little less favorable next year compared to this year on an annual basis.

Thank you and one question.

So Jeremy.

Okay.

The impact of FX.

The recent weakening we'll have to go through all the inventory before we get the P&L benefit.

That won't happen until the second half of next year, but you also have to remember that our input costs have gone up that will also flow into that.

At a very high level, they will offset each of the two.

Large extent.

Thank you Bill Lu.

Just one last question.

Mentioned.

Competitors exiting.

Or at least withdrawing from the market and can you remind us how easy or difficult. It is for these competitors do try to reenter if they wanted to.

Is it the case that once customers switch architectures different enough that that's what your costs are too high for the customer. Thank you.

Yes, so thats a good question.

Think that.

The level of integration level of innovation, we bring mix.

It makes it very difficult for western competitors.

To compete with us and make good margins.

So it's a question of.

They can make more margin sales, where they would rather go elsewhere. That's what is happening right now.

In some cases are completely decided to close down like Panasonic, that's closed down but many others are retreating from this market basically theyre shipping what they have but theyre not building new products. They look at our product and it's very difficult for them to think about how to compete with us without infringing on our IP.

And as you know we have been extremely.

Protective of our IP and we've been very successful protecting our IP. So I think we are in such a strong position in terms of being years ahead of our competition and we will continue to innovate.

That's never going to stop so I am pretty confident that this is not a reversible situation.

Great. Thank you very much.

Youre welcome.

Your next question is from the line of David Williams with the Benchmark Group. Please go ahead.

Hey, good afternoon, and thanks for taking my question.

Youre welcome.

I guess sandeep on the first if I kind of think about the industrial revenue, which if I'm not mistaken is one of the higher margin segments.

It was up considerably in terms of percentage of business overall, and it seems like vascular hanging in there.

And fairly healthy I guess as we kind of think about that okay. Can you maybe give us the puts and takes on the margin profile as we kind of think about just that industrial segment and just maybe any moving pieces there.

Yes, industrial is the highest but consumer follows behind that closely and as you saw the industrial kind of did well, but the consumer was quite weak during the quarter, so that kind of.

Offset added to that you heard we obviously with the volumes being lower that had an impact on the margin and also the.

The pricing environment does not as favorable as it used to be that has started to also because we do value pricing has started to also have a bit of an impact and will be have some impact in the coming year also.

Okay, Great I appreciate that and then maybe can you talk about maybe any.

The specific demand trend within industrial.

That are either positive or negative is that holding in and what are the expectations, maybe as we get out even past the fourth quarter, but longer term how do you see that industry in general for your for your business.

The high powered part of industrial which is roughly let's say, 25% or so.

Is doing very well as you as we mentioned in the script.

The last two years, a lot of projects infrastructure projects have been delayed but.

It has come back nicely. This year, we expect double digit growth this year and it looks like next year and also would be double digit growth. These are things like renewables solar and wind.

High voltage DC transmission systems.

Traction that is electric locomotives and so on so that's doing very well.

The home and building automation, so far has done well.

But.

It is a possibility that could soften I've heard from other companies, we haven't seen it yet, but that's an area that could soften and the same as with the tools.

But the rest of the market, we think we'll do fine.

But the overall industrial.

At least going into Q1, it could be roughly flat, maybe slightly down depending upon as a percentage of revenue.

Okay.

Great. Thanks, so much for the questions.

Youre welcome.

Your next question is from the line of Ross Seymore with Deutsche Bank. Please go ahead.

Hi, guys. This is mark Melendez online for Ross, Thanks for letting us ask a question.

And I guess for first question can you talk about like the linearity of.

Demand that you saw throughout the quarter I guess, what changed from the guidance that you gave 90 days ago.

Anything changed significantly from when you had your analyst day.

And I guess, it's a good sign that cancellations have dropped quarter over quarter I think if I heard you guys correctly. So.

How confident are you guys in your visibility that.

That this is sort of bottoming out in the December and March quarters.

Well.

In terms of.

The bookings that have been declining.

And.

I would say that.

When we started the quarter.

We had indicated that we are within the range of what we are and what we had guided.

But what happened throughout the quarter was they were bookings, but it will also push outs and cancellations that basically offset so we never moved to the middle of the middle of the range.

So thats going forward.

The bookings that I said was relatively.

LOE in the last couple of months as a result.

We we currently have bookings that is within the range and based on that we're giving you guidance, but the good news is there is definitely a turnaround in terms of the turns business.

Turns business that we are seeing now is actually more than the cancellations and push outs. So we expect some turns business this quarter and significantly higher turns business next quarter. So thats, where we are saying we had a stabilizing therefore, we think that fourth quarter and the first quarter.

B roughly bottom of the cycle and we also mentioned that.

The cell phone inventory.

Coming down very nicely. So we expect that to come back first and then appliances and industrial so going to Q1 quarter. Our best estimate as we would be similar to Q4, and then Q2, our expectation is that it'll be incremental growth, but second half.

As we expect a stronger.

Demand as this downturn.

It turns into an upturn.

That's our best estimate right now.

Thank you that's all really helpful. And then I guess I was my follow up I just wanted to touch on you mentioned some softer pricing this quarter.

And that you expect it to continue into next year.

Expectations can we have for that on gross margins and then also is that.

Is that a temporary headwind just as we work through the cycle.

Is there something else going on there. Thank you well, we price it price our products on value that means that the components with the pellet whatever they cost is what reflects solid price of course, we get some additional for the integration and so on so the discrete components.

Yeah.

Prices are coming down supply chain issues are improving at least in China. It has improved significantly so that has some impact on our value pricing as we go forward, but also we have had impact from manufacturing.

Being lower.

Because of the lower revenues and lower backend manufacturing our absorption is not as good. So that has also had a negative impact on the gross margin as far as going forward I will let sandeep explained for next year.

Yes.

Our guidance even at the Analyst day, I had said 56, but right now I am guiding to 55% to 56% because the volumes are much lower and as I said the mix is more going to slug towards communication.

And as <unk> indicated the cost increases from wafers will be offset by the yen more or less.

And obviously the value pricing that expecting to have some impact in the coming year, putting all that together the non-GAAP gross margin guide to the best we can do and with the best indications. We have so the mix is 55% to 56%.

Our 2023.

Got it thank you guys.

Your next question comes from the line of Christopher Roland with Susquehanna. Please go ahead.

Hey, guys. Thanks for the question.

So I guess.

Just digging into let's say the comms market a little deeper here.

So you guys have peaked in the sixty's millions per quarter, and probably down now to mid teens per quarter.

I guess first of all how do we think about that.

That inventory burn versus a downtick in demand.

Sure.

For next quarter or is it balanced 50, 50, and then secondly, what do you guys think kind of cruising rate as our cruising altitude is once everything normalizes for your comms business. Thanks.

Okay.

That's a difficult question to answer.

Let me, let me tell you the landscape, perhaps you can.

Judge for yourself.

In China as you know because of Lockdowns end.

All of the business.

The challenges <unk> had in terms of.

The economy is slowing down and so on many of the consumers.

Delaying purchase of cell phones.

He used to purchase a new phone every 18 months now I think they say, okay I'll keep the phone because I can't afford to buy a new phone when they will start buying I don't know where you are going through this.

<unk> timeframe, where the demand for the phones in China.

Low and in fact across the world things are slowing down as you know because of inflation and so on people not replacing phones as often but the actual.

The performance is different for each and every.

OEM is differs from one to the other so Chinese Oems are doing the worst right now.

And then as you know.

Other geographies that are doing better so our best estimate is that at the current rate of demand, we can see how they're depleting their.

Their internal inventory, so we've already seen that the Chinese companies.

Started pulling from distribution so that tells us that how much that is in distribution we system sometime in Q1.

We will they will start auditing products now out of the careful theyre already auditing some products because there was a mix issue.

<unk> a product thats not a distribution we still have to ship. Obviously, we are still shipping products, but it has to non mall to non Chinese customers and less to Chinese customers.

So our best estimate is that it is likely to come back.

Strong in the second half, we will see I believe.

As some revenue coming back in Q1, but increased Hyatt in Q2, but bigger.

And demand in the second half and that is our best I would say, it's speculation of when the demand will come back to normal.

Okay. Thank you for that.

And then secondly, I was wondering if you had some extra color into the guide.

From a segment perspective.

Whether you want to force rank that or just call one or two out or however, you want to do it.

If you are talking about Q4.

Yes.

Bob.

Computer will be higher.

And you will see the other segment, that's why part of the margin impact but.

I think all four segments bleed down.

In terms of the.

In terms of the.

Dollar wise as a percentage, it's kind of in that direction I gave you.

Oh, sorry, all of them down in the same on a percentage basis.

I would say the.

Industrial will be down.

In that.

Industrial will be.

Down from where it is at.

All forward I would say the direction is down $100, but percentage wise, you will see common computer slightly yet.

Okay. Thank you.

Your next question is from the line of <unk>.

Richard with Northland. Please go ahead.

Yes, thanks for taking the question.

Real quick I, just want to make sure I get this right.

Okay.

Channel inventory decreased by about $15 million in the.

The September quarter.

The channel inventory.

In dollar terms.

Decreased from Q3, Youre talking from Q2 to Q3.

Correct Yeah.

Yeah. It went down about yes, Bob said, roughly about $10 million or so.

Okay, and sort of what do you expect the cash burn to be I'm, sorry, the inventory burn in the in the fourth quarter, how much do you expect to come out.

You are comping the channel inventory went up Linda it's going to say, yes, that's one element.

<unk> went up by $8 8 million.

Channel inventory went up in the last two quarters.

In Q4.

We expect that channel inventory to come down in fact.

We are trying to get that done until it is higher than we need in the channel.

And I would expectation is roughly about.

But roughly about $15 million will be the reduction in Q4, obviously, we won't get to our target.

Weeks until a few quarters later, we can correct all of it overnight.

And the lease calculations get impacted by.

But the denominator so even though we got a big you have to remember that there is a double whammy right.

The dollar value goes up but the denominator also comes down and that amplifies the <unk>.

Change in weeks.

Yes, absolutely.

And then do you have any.

I think in the communication market, you do but for the other markets.

The your customers customer the Oems.

Do you have any sense of what the inventory looks like downstream from your customers.

We have a failure they have been relatively open obviously, we can't do it with our customers, but the top customers.

As I mentioned the biggest challenge we had was in China and that inventory seems to be seems to have come down because we see them pulling from the channel.

And.

Then now more recently I would say from Q2 for.

China, we saw the inventory problem in Q2, but in Q3, we saw a significant inventory correction in Korea, both in the cellphone and appliance.

Yes.

And they are really correcting very hard right now and that won't be collected until probably end of Q1.

Because they do have that built more inventory.

Based on their concerns before.

During the pandemic.

The whole thing if you look at it what happened was they were trying to build enough inventory. So that they don't have supply chain issues, but the demand dropped absorbed roughly they were not prepared so they now are trying to correct it and China to a large extent is collected at the OEM level not at the <unk>.

<unk> level, but in Korea, it's still there at the OEM level.

Okay.

Got it got it.

Right.

For me thanks, so much.

Youre welcome.

Yeah.

Once again, if you would like to ask a question Press Star then the number one on your telephone keypad.

At this time there appear to be no further questions I will now turn the call over to Joe Shiffler for any closing comments.

Alright, thanks, everyone for listening there will be a replay of this call available on our Investor website, which is investors power dot com. Thanks, again for listening and good afternoon.

Thank you all for joining today's call you may now disconnect.

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