Power Integrations Inc. Q1 2023 Earnings Call
Hello, Ladies and gentlemen, welcome to the power integrations Q1 earnings conference call.
Thank you good.
Good afternoon, everyone. Thanks for joining us with me on the call today are of Alibaba Krishnan, President and CEO of power integrations, and Sandeep <unk>, our Chief Financial Officer.
During this call we will refer to financial measures not calculated according to GAAP.
Our discussion today, including the Q&A session will include forward looking statements denoted by words like will.
I believe should expect outlook plan 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 most recent Form 10-K filed with the SEC on February seven 2023.
Finally, this call is the property of power integrations.
And any recording or rebroadcast is expressly prohibited without the written consent of power integrations now I'll turn the call over to Bob.
Thanks, Joe and good afternoon last quarter, we said that our Q1 results would reflect difficult macro and cyclical conditions, but that.
The next phase of what has continued to fall and that Q1 would be the bottom of this cycle with a recovery beginning in Q2 led by the smartphone market.
Those projections are proving true and while the slope of the recovery is uncertain. We are confident that Q1 was the bottom.
And then a cyclical recovery is underway.
Meanwhile, we continue to make excellent progress on secular growth opportunities such as a motor drive automotive and again among others.
That's on each of those in a moment.
First quarter revenues were in line with our guidance at $106 million.
Sell through exceeded sell in by a wider than expected margin of about $18 million.
But I think a significant reduction in channel inventories.
We also had our strongest quarter of bookings since the first quarter of last year bookings and sell through but especially strong in march likely reflecting a surge of activity following the Asian holidays in China to be opening.
The person at the business booked and shipped within the quarter has increased and is approaching pre pandemic levels, suggesting that business conditions continue to normalize.
We expect revenues of $122 million in the second quarter, plus or minus $5 million, a sequential increase of 15% at the midpoint.
We expect another reduction in distribution inventory, which should bring the channel close to normal levels exiting the second quarter.
While it is too early to forecast beyond the current quarter.
The lower channel inventory should set the stage for the second half.
Well about the plus in terms of revenues.
Smartphones are the first to correct and are leading the way out of the downturn.
But we expect broader improvement later in the year as the inventories are normalized in other categories.
Throughout the downturn, we have remained focused on long term growth rather than short term operating metrics.
That includes continued investment in our proprietary Gan gallium nitride technology et cetera.
So the strategy.
How about inflation. It was the first to market with a high voltage again in 2018, and we have remain the industry leader ever since.
Recent M&A activity offers an indication of the value of our proprietary again and the differentiated products we are designing around it.
Our Gan offerings are unique in multiple ways. Most obviously at the product level, where we incorporate gan switches into a highly integrated system in a package such as in a switch.
Our products eliminate the difficulties of designing power systems around discrete Gan devices.
And cut overall component count by about half in most designs.
I'll, let again is also differentiated at the device level in terms of cost performance and high voltage capability.
While most of the players in gas sell discrete devices made with foundry technology Olive garden is proprietary and purpose built for our system level products.
We have full control of the technology with a robust roadmap for cost reduction that we will achieve pattern David silicon within the next couple of years.
And to have an analyst day last year, we also present, a roadmap to take again to higher voltages.
And we announced the next step in Q1 with the launch.
<unk> products, featuring 900 volt Gan switches the.
The new 900 volt in a switch Ics enabled us to bring the benefits of Gan to a wider range of industrial and appliance applications.
We have also added a 900 volt gan option to our industry III <unk> family, our first Gan products for the EV market.
These products deliver twice as much power as silicon the same form factor.
Shale advantage as EV architectures evolve to more.
To power more systems from the main battery and carmakers increasingly look to eliminate the 12 volt battery altogether.
Overall, we continue to be excited about our progress in the EV market, which we estimate will be $1 billion Sam by.
By 2027.
We are on track for a mid single digit millions this year in terms of revenues and more importantly design in activity is accelerating with a 50% increase in opportunities added to our design funnel.
To the first quarter of last year.
These opportunities are geographically diverse and encompass it.
Mix of AAV, EV startups, as well as traditional automakers and tier one suppliers.
We are finding attractive opportunities not just in passenger cars, but also heavy vehicles, where our scale. Even gate driver board are designed for traction and mergers in the electric buses and trucks.
Dr <unk> vehicles, and other heavy weight vehicles.
Recently enacted in California requires 50% of all heavy vehicles to be fully electric by 2035.
Europe is also moving to require drastic reductions in COPD emissions from heavy vehicles.
Scaling the drivers on a plug and play solution for the heavy vehicle and murders, eliminating up to a year of development time and expense.
Overall, our level of excitement about automotive opportunities continues to grow and we expect it to be material contributor contributor to our revenue within the next few years.
Another key element of our growth story as a motor drive where our bridge switch Acs offers.
And more efficient alternative to driving brushless DC motors.
We are excited about the level of design activity on Brexit and the customer adoption of our motor expert design and control software.
This combined hardware software solution.
Article it simplifies the LDC systems.
Using component down by 50% compared to discrete solutions, while its exceptional energy efficiency eliminates the heat things that acquired with legacy power modules.
In Q1, we won a design for a washing machine pump at a top tier European appliance OEM, which is now in mass production.
Major Chinese Oems is going into production in Q2 with a split air Conditioner design.
That customers second high volume program using bridge search.
Most Oems are long term customers for our AC to DC products, demonstrating the importance of our strong customer relationships in appliances, which are helping us overcome the industry's cautious approach to adapting new technologies.
We continue to be bullish on the opportunity for a bridge switch in the India ceiling fan market, where recent regulations are driving the transition to brushless DC motors.
We expect our revenue contribution in the second half from a recent design win in that market.
We are also seeing opportunities in heat pumps, which are growing in popularity, especially in Europe as alternatives to gas furnaces.
In our high power business, which sits in our industrial category, we are continuing our momentum with double digit year over year growth in Q1 following growth of about 20% last year.
Renewable energy continues to be an important growth driver in high power and in Q1, we have secured a high volume design win but utility scale inverters at a major European supplier to the solar power industry, which should contribute significant revenues in 2023 and beyond.
Before I turn it over to Sandeep I'd like to acknowledge two members of our board of directors Bill jobs and native signer.
Who will step down from the board at our annual meeting later this month.
We are grateful to both of them for their service to our stockholders and I would add a special thanks to Bill George.
Service as a chairman of the board for the past five years we.
We are pleased to welcome Ravi rig pharmacy of Allegro Microsystems, who joined the board on April 1st as we announced earlier this year.
Effective at the annual meeting I will take over the role of the chairman of the board and the rollout.
Lead independent director will be taken up by a bylaw.
Who chairs our audit committee.
With that I will turn it over to Sandeep for a review of the financials.
Thanks, Pablo and good afternoon, while the cyclical correction has been painful we are pleased that things are playing out as we expected as usual we were among the first in our industry to see the downturn and we are now among the first to emerge with a recovery beginning in Q2.
As we anticipated smartphones are leading the way out after having been the first end market to correct and with other end markets to follow.
While the pace of the recovery is still to be seen we expect the second half of the year to be significantly better than the first half not only in terms of revenues, but also margins and internal inventories, which are trending in the right direction, starting with the June quarter.
I will speak to that in greater detail as a review of the Q1 numbers and the Q2 outlook.
Revenues for the first quarter were $106 million in the middle of our guidance range and down 15% from the prior quarter.
As expected the decline was driven by industrial and consumer markets, which fell by 25% and 20% respectively.
Industrial softness was broad based and reflects elevated channel inventories.
The decline in consumer was driven mainly by a major appliances, where revenues have fallen by nearly two thirds from their peak in Q2 of last year.
The weakness in appliances likely reflects a number of factors, including the pull in of demand during the pandemic.
Softer housing markets and the effects of China's anti COVID-19 measures on domestic consumer demand.
The computer category was flat sequentially, while the communication category, which is primarily smartphone charges was up slightly from the prior quarter.
The relative strength in communication reflects an improved inventory position at both customers and distributors.
In fact channel inventories associated with smartphones are now slightly below normal levels in terms of weeks.
Overall on a backward looking basis leaks in the channel fell to 11 eight down from $13 five at the end of December .
As <unk> noted the reduction was more meaningful in terms of dollars with sell through exceeded sell in by about $18 million for the quarter.
We expect another significant reduction in Q2 with the weeks in the channel likely approaching normal levels by quarter end.
Revenue mix for the quarter was 34% industrial 28% communication, 24% consumer and 14% computer.
Collectively the communication and computer markets increased by seven percentage points from the prior quarter and have increased by 15 points over the past two quarters.
This less favorable mix combined with the impact of lower production volumes resulted in lower gross margin coming in at 51, 5% on a non-GAAP basis.
I expect gross margin to take higher in the June quarter, and then to improve more meaningfully in the second half as the benefit of the weaker yen flows through the P&L mixed tons favorable and backend production volumes increase.
non-GAAP operating expenses for the quarter were $41 $1 million up slightly from the prior quarter, reflecting the resumption of FICA taxes, and the comparative impact of the ear and shut down in the prior quarter.
Opex was below our guidance, reflecting the pace of headcount additions and the push out of some spending into the second quarter.
non-GAAP operating margin for the quarter was 12, 8% and the non-GAAP effective tax rate was seven 2%.
non-GAAP earnings were <unk> 25 per diluted share.
Cash flow from operations for the quarter was $16 $6 million, we used $4 1 million during the quarter for Capex and paid out $10 $9 million in dividends following the dividend increase we announced last quarter.
Share repurchases totaled $1 7 million for the quarter and we had just under 80 million.
Remaining on our authorization at quarter end.
Inventories on the balance sheet increased by $7 million during the quarter. We ended the quarter at 248 days of inventory with lower sales, obviously impacting the day's calculation.
As we have stated in the past the fungibility of our products across applications and customers allows us to build an inventory during downturns to ensure continued access to foundry capacity and to be ready for a sudden recovery in demand.
March was clearly the peak quarter in terms of inventory days and I expect a steady decline over the next several quarters.
Turning to the outlook, we expect revenues for the second quarter to be $122 million.
Plus or minus $5 million.
Sell through should once again be higher than reported revenues as channel inventories continue to fall.
I expect non-GAAP gross margin for Q2 improved slightly to about 52% with a less favorable mix more than offset by a benefit from the weaker yen.
As noted earlier I expect the most significant jump in the second half of the year driven by the yen higher market production volumes and a more favorable mix, reflecting a recovery in consumer and industrial.
Specifically I expect non-GAAP gross margin to reach or even slightly exceed the second half.
Exceed the high end of our target range of 50% to 55% for the second half.
Okay.
Okay.
non-GAAP operating expenses for the second quarter should be about $44 5 million up from the first quarter, reflecting annual salary increases which took effect in April as well as the timing of expenses that were delayed from Q1.
I continue to expect non-GAAP opex to grow roughly 8% for the full year.
Importantly, the recovery in revenue and gross margin should drive non-GAAP operating margin back in our model range of 25% to 30% in the second half of the year.
Finally, I expect non-GAAP effective tax rate for the second quarter and the year to be around 8%.
And now operator, let's begin the Q&A.
Yes.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Your first question comes from the line of Ross Seymore.
Seymour.
<unk> with Deutsche Bank.
Hi, guys. Thanks for let me ask a question congratulations.
Hitting the bottom and popping up.
Just wanted to ask two things on revenue and then a follow up question on gross margin and the revenue side of things can you just talk a little bit about how much less channel inventory burn there will be sequentially to cause that pop up to $122 million and then the other part of that question is once we get past the inventory burn where do you think has been normal <unk>.
Of revenue if you were shipping to.
And demand at these points.
If you remember I had guided that our sell through would exceed centering around $15 million in Q1, we actually did better than that at 18.
That the sell through exceeded sell it what I expect for Q2 is again that sell through will exceed sell in by roughly 12 to 15 million roughly in that range and what that will do to the channel inventory is we will get back to the normal levels of approximately slightly above the normal level.
Of the eight weeks to about nine weeks. What has happened is that you are seeing as we had said earlier that the communication segment.
<unk> started to normalize and in fact this quarter the weeks in the channel and communication are lower I think that'll start normalizing for other segments with industrial being the last to do so.
And if you remember I talked about in revenue terms that in consumer a year ago, we had a pull in of demand and we're seeing that.
Downward trend in consumer from Q2, the pulling up a year, it's now going to analyze.
Our annualized effect in Q2, so that's why we expect in Q3, and Q4 consumer and industrial to start popping up which also reflects in the margin guidance that I'm, giving.
Got it thanks for that color Sandeep, I guess I'm going to actually change my mind in Africa revenue question, one more follow up and then ill let other people ask.
Whats your view on true end demand by your math at 122 was a nice step up that probably goes up another $12 million to $15 million all else equal in the September quarter, Thats, a nice pop as well, but at some point, we're going to get to the level, where true end demand starts to matter I know Bill Lu you started off saying that slope of that is difficult to predict but whats your fee.
<unk> is kind of the the Guinea pig and the cycle about what the true demand level is is it rising is it falling how should we think of that once this inventory dynamic normalizes.
That's a great question I wish I could answer this precisely but.
It is really hard to tell at this point.
We're very comfortable second half will be significantly stronger than the first half.
In fact, I think the second half will have a significant year over year growth as well.
And a lot of that is related to the inventory is getting to be normal by the middle of this year.
And also the design wins that will go into production in the second half we have several design wins in bridge service bridge switch with the.
Also smartphones and notebooks and so on so.
There are really two or three aspects is one is just the inventory situation getting better number two is we.
We are gaining share they've got very now as always during the downturn. We gained share. So we'll come out of it stronger what is the most difficult part is to see whether the demand itself will come back now I have to believe the appliance demand has been subdued for quite a long time that it's almost a year now.
So it has to at some point come back people will have to replace appliances biennial applies and so on so I'm somewhat optimistic that we'll come back and smartphones as we all know is not going to is not growing as such I mean this year I think.
<unk> a decline in the high single digits, but the only growth I can see there is our ASP growth.
The newer designs at higher power and therefore, they have higher ASP plus we also have more content within their charger because we have other <unk>.
Slide climbed zero in.
E mini cap and so on so and then also have to remember that.
As people transition more to USB PD, thanks to EU regulations.
We will be again, increasing our ASP, we have by far the most integrated solutions, we have the only months, providing a single chip solution that includes the USB PD protocol, which means that our ASP would be higher even for the same power level.
So those would indicate that at least for US there will be growth in all of the segments because of the share gains in <unk>.
<unk> growth, but as far as the demand is so goes it's really hard other than I would say.
My gut says that the appliance should come back to some extent, but the rest of the market is hard.
Hard to tell and of course, the cell phones is well known that it's on a unit basis it will be lower.
Well your Crystal ball is clearly better than mine builders. So thank you for all that color.
Welcome to us.
Your next question comes from the line of tore Svanberg.
With Stifel.
Yes, Thank you and let me.
Echo the congratulations.
Q2 guidance.
<unk>.
I was hoping maybe we could dig deeper a little bit deeper in consumer and industrial.
Paul.
So are you seeing signs that its bottoming that you have a good feel I mean, I understand the channel inventory comment right, but.
Bounce back Youre expecting in the second half.
Yes, let's talk about the consumer business, which is primarily appliances.
For almost three quarters now several of our large customers have literally stopped ordering in fact, one of them is hasnt out of any part at all.
They are aggressively trying to bring the inventory down but it is clear to us that.
The inverter situation will get corrected by the end of Q2, because we see orders already placed for Q3 and Q4 in appliances. So that tells us that the inventory situation is going to get normalized by the end of Q2, and we will see the benefit of that in Q3.
What is difficult to see is the end demand.
That's not transparent to us.
So we again my gut feeling is the end demand will be slightly better I don't know exactly how much because it's been such a long time.
In all the pull in related.
Sure.
Issues would be pretty much gone I believe but it's really hard to tell.
But we are comfortable that.
The applies.
The appliance business is going to come back nicely in the second half now when you've got industrial it's a little bit more complicated.
The the slowdown you are seeing is primarily in areas like home and building automation, which is the flavor of consumer and housing kind of products. If you can.
Think about because these iot is going into homes.
But we've also seen a very broad based.
Demand reduction, which we primarily related to inventories is a significant amount of inventory build.
Our channel you have to remember most of these distribution customers industrial customers now there is a highlight and industrial.
Which is our high power business, our high power business grew 20% last year and we expect it to grow again, this year and primarily driven by renewables.
I think we just talked about a design win major design win.
Solar.
Power converter manufacturer in Europe , and this is our utility scale solar as you can see a lot of people are installing renewables worldwide and we are benefiting from that so that's roughly about one third of the market and thats doing well and we'll grow it as the remaining part of industrial that's unusually soft and a lot of.
Is it related to just the inventory.
Thanks Bryant helpful and as my follow up question for Sandeep Sandeep.
Three to 400 basis point improvement in gross margin expected for the second half versus the first half.
How much of that is coming from from the yen right because I mean, that's clearly self help right.
Whereas the mix.
That's probably where you can control a little bit less so just trying to understand that two to 400 basis points, how much of it is coming from the weaker yen.
Not only those two those three things there is also the volume impact.
Every 10% change in yen gives us a point. So you can just see when the yen win.
From the one <unk> to 140 <unk>.
<unk> got a couple of at least two two and a half point is coming from there and then you've got the volume and the mix as you know.
With volumes coming back and consumer and industrial will get us to the high arena. So if you really think about it as story actually ties not only in revenue, but the margin because it's all quarterly right now the yen movement happened more towards the end because the level of inventory was so high.
To see a slight benefit in Q2, but the main benefit comes in Q3.
Great and just last on that topic there.
Your inventories at $1 42.
I assume that you did take the opportunity of the low end to buy some some raw material and some some wafer.
And then.
No I don't either.
Our diverse but I think it's more book keeping our capacity and the partnership we have with our foundry partners is very long term, even when the pandemic happened you remember we went to 180 days and we aren't afraid of that.
But I think what will happen to our inventory as the volume increases we will taper down this.
Our inventory levels down and hopefully by the end of the year will be somewhere in the 150 to the $1 70 range and it's still sets us very well for 2024, because we have the second half that we are expecting it will bode very well for 2024.
That's great perspective, thank you.
Thanks correct.
Your next question comes from the line of David Williams with the Benchmark Company. Your line is open.
Hey, good afternoon, and congrats on finding the bottom here, it's great to hear the optimism.
Thanks, David.
Yes, I just wanted to maybe touch a little bit from a geographic perspective, and you talked a little bit about about China and some of the the.
The improving trends there, but just wondering if you could give us any color on what youre seeing from that geographic perspective, if it's better worse and maybe how things are faring so far into the second quarter.
And a great question, we asked that ourselves.
So we did see a significant increase in bookings.
Monday month month of March.
And part of that we believe is related to the long lunar holiday a lot of companies shut down for a lot more than usual and also the opening up of.
China that literally that caused some of the temporary surge in demand.
The question is how sustainable it is now if I look at.
April bookings April bookings is good but not as strong as March it is.
More normal pattern I would say.
So it remains to be seen whether the demand in China is going to come back.
What we are hearing is that a lot of the people in China are spending more of their money on travel and the services like restaurants, and so on and not so much on goods. So I think we'll be in a much better position to answer to your question in the next conference call because we'll have another two months worth of tumor.
And a half months worth of additional information that will tell us where that China.
Demand for goods is going to come back.
But having said that.
We have taken.
Everything into consideration in our guidance. So we are very comfortable with the guidance.
Great great color. Thanks.
And then also just kind of on the automotive space.
A little.
I guess less less.
Optimist about kind of that monetization and when you thought that would turn to revenue you are making a lot of good progress there and you seem very encouraged maybe more so this quarter than typical is there anything that's changed there from your perspective are you seeing design ins that being pulled into more quickly or just maybe more traction there or anything that's giving you more more encouragement in the auto sector.
Absolutely what has changed is the number of opportunities is growing large faster than I anticipated.
The interest level on our products.
Our very high but probably the most important that the conversion of an opportunity into a design win is lot higher than we've ever seen in any other market.
Typically if you had 100 opportunity we would convert maybe 30.
One third of that into real business.
But in automotive we are seeing is at least two X from that 60% to 70% of the business is getting converted into design wins.
And if I take specifically the.
Switch that illustrates that as a 1700 volt illustrates I would say the conversion rate is even higher at 80% and the reason for that is there is no. Other solution. That's even close to our solution. There is really no. Other compelling solution. So that's what has changed our view of automotive market. We are more optimistic.
<unk>.
About automotive than we will ever.
<unk>.
And so we expect the revenues to grow very nicely, but not in the short term as you know automotive it takes at least couple of years, depending on the application in some cases, it may take longer than that if youre in the drivetrain and so on.
In power supply applications.
I won't see a significant change.
In the in this year or next year, but it could we could see an improvement in the following year, but the real revenue is going to come from.
Revenue growth is going to come around 2026, as we have said before.
Great. Thanks for all the color I appreciate it.
Youre welcome David.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad now.
Your next question comes from Christopher Rolland with Susquehanna.
Your line is open.
Hey, guys. Thanks for the question you may have answered this.
I just want to make sure that I got it right.
So pre pandemic you guys were like 400 to 500 million call. It $500 million a year you guys peaked out at $700 million a year.
I guess would you think that normalized in the near term would be kind of 600, a year and that I think you said 150 to 170 was that a quarter that you were trying to get to.
So do we kind of think about that as a normalized revenue range for you guys 600 to 680 was that.
Was that what you were discussing.
Well.
What we were saying was that the demand picture is not very clear to us because of the inventory being debated at this point. So we don't actually see the end demand.
And sometimes even our customers don't know exactly how it's going to come back. So it is really difficult for us to say what the.
The real demand is obviously, we will see that once the inventory goes out of normal levels, which we expect to happen sometime in the middle of this year, we should start seeing real demand, but I'm really afraid that.
I don't have a clear cut number for you at this point.
Okay.
And of course, the way I think.
Nice number we don't have but I think we're feeling very good as <unk>.
Consumer and industrial will start tapering back to some reasonable levels, providing us the growth that we're expecting in the second half and we are expecting the second half to be meaningfully higher than the first half.
Yes, yes, certainly understand.
And then your message on Comms was pretty clear I was wondering what the other segments. It sounds like maybe industrial is a little slower than the other two but.
If you could kind of force rank that for us as we.
Accelerate into June here, just to understand Directionally and.
Kind of the speed at which these guys will come out.
Well.
Communications.
<unk> declined first.
Downturn started with communications in the second quarter of last year.
And so is the first ones to come out of it and we're already seeing that we saw that in Q1, and we see that again in Q2, that's one of the reasons our mix is a little bit.
Unfavorable.
Next thing Thats going to happen I believe is there.
The consumers, but that from what we can tell the inventory situation won't get normalized until the end of Q2, So we should see a nice jump in.
<unk> in Q3 industrial was the last one to slow down and it is the last one that will come back and again a portion of that industrial is doing very well products, which is the high power, which is about one third of the industrial it's the more fragmented part of the industrial is the one that has <unk>.
Significant inventory in the channel.
But we are optimistic that we will get normalized.
Probably just after the middle of the year that'll be the last one probably in Q3, it will get normalized.
Excellent. Thank you guys appreciate that.
Youre welcome.
Yeah.
With no further questions I will now turn the call back to Joe Shiffler.
Alright. Thank you thanks, everyone for listening on what I know is a very busy day of semiconductor earnings so.
Thanks, again, and there will be a replay of this call available on our website, which is investors our dot com.
Thanks, again and good afternoon.
This concludes today's call you may now disconnect.
Please wait the conference will begin shortly.
Okay.
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No.
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