Q2 2023 Power Integrations Inc Earnings Call
Okay.
Thank you for standing by.
My name is Maria and I will be your conference operator today at this time I would like to welcome everyone to the power integrations second 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.
Please press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again thank.
Thank you I would now like to turn the call over to Joe Shiffler Director of Investor Relations. Mr. Shiffler. Please go ahead.
Okay.
Thank you Maria good afternoon, everyone. Thanks for joining us with me on the call today are bothered by the Krishnan, Chairman and CEO of power integrations, and Sandeep Nair, our Chief Financial Officer.
During this call we will refer to financial measures not calculated according to GAAP non-GAAP measures for the second quarter of 2023 excludes stock based compensation expenses amortization of acquisition related intangible assets and the tax effects of these items.
A reconciliation of non-GAAP measures to our GAAP results is included in today's press release.
Our discussion today, including the Q&A session will include forward looking statements denoted by words like will would 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 rebroadcast is expressly prohibited without the written consent of power integrations now I will turn it over to Bob.
Thanks, Joe and good afternoon.
As expected our Q2 results Mark the start of the recovery from the cyclical trough fixed in the prior quarter.
As the pace of the recovery reflects a soft demand environment, especially in China, We do expect meaningful revenue growth in the second half of the year compared to the first half as inventories continue to improve.
And new designs going into production.
We also expect significant higher gross margin significantly higher gross margins and operating margins in the second half.
Most importantly, our products are winning in the market.
And secular trends like energy efficiency renewable energy and electrification are going strong regardless of the industry cycles.
Each of these trends contributes to a lower carbon future and we are participating in all of that through our presence in renewable energy and electric transportation.
Energy efficient drivers brushless, DC motors and entity lights.
Our leading position in Gan and our expertise in reducing standby power waste.
No standby technology remains as relevant today as ever.
So they are an increasing number of electronic devices, drawing power from the grid.
And it remains a priority for policymakers, who recognize that the cleanest energy is the energy we never used in the first place.
With that in mind do you have the recently revised its eco design standards for standby consumption and I'll talk more about that in a moment.
Second quarter revenues were in line with our guidance at $123 million up 16% from the prior quarter.
Industrial the last category to into the cyclical correction.
<unk> slightly.
All of the categories showed strong sequential growth led by consumer.
It's 35% driven by appliances and air conditioning.
Seattle inventories associated with the consumer market fell significantly in Q2 and are approaching normal levels.
The computer category was up more than 20% sequentially, driven by tablets desktops and aftermarket Gan charges.
Revenues from the communications category.
High teens sequentially.
Despite continued softness in the Android market.
While revenues from Android customers were essentially flat from the prior quarter.
Panel inventories continue to be well below normal and we have received a number of restaurant us in recent months from distributors, serving Chinese Oems.
Overall distributor inventory ended up ended the quarter at 10 weeks.
Now in more than a week and a half from the prior quarter and down about three and a half weeks since the beginning of the year.
We expect further reductions in channel inventory in the September quarter.
Lower channel inventory should enable continued sequential growth in Q3, though all of our expectations for the September quarter do reflect a weaker near term demand environment, especially in China.
Nevertheless, we are pleased to be past the bottom of the cycle and we look forward to a reception up year over year growth in the fourth quarter. We believe we are well positioned for growth in 2024, driven not just by cyclical recovery, but also the strength of our product portfolio and an expanding.
Pipeline of design activity in Q2, we achieved an all time high in terms of potential revenue value of design opportunities created during the quarter. This reflects the increased breadth of applications, we are addressing and rising dollar content and charges in appliances and superior performance and ease of use.
All of our products.
Our flagship in US, which is now in the fourth generation continue to set the state of the art in power supply technology with the highest level of integration available, including primary and secondary site control and flux link isolation technology, we tell them. They have stopped a couple of us.
In our switch IC has offered a choice of silicon Gan on silicon carbide switches as well as an integrated.
USB PD interface for mobile applications, they're moving the need for a separate protocol chip.
I felt the largest cellphone customers has recently taken advantage of this capability designing out the USB PD protocol chip in a higher high volume charger and upgrading to the PD versus Athena switch driving a substantial increase in our dollar content.
Do you want a wide range of other advanced charger designs in Q2 with Gagnon switch products as well as other hyper PFS five Gan power factor.
Correction Ics, including.
Including two aftermarket USB PD charges with 140 watts of output.
And in that switch devices also won designs in a number of non mobile applications in Q2, including air conditioners industrial controls medical equipment, USB wallet receptacles and surge protectors overall, we expect about half of our Gan revenue to see yet to come.
Non cell phone applications.
In automotive we are seeing strong interest in our new 900, <unk> candela switch products for our power supplies in 400 volt passenger cars.
In 800 volt vehicles, we are racking up with wins with our silicon carbide in the switch products, which are far and away. The best solution for a 12 volt battery replacement and emergency power suppliers in drivetrain in Novartis.
Our recent tier one design win for the emergency power supplies. He is now ramping with a major European car brand and we have significant follow on design activity at the same tier one customer.
Two Chinese customers are beginning production with us in Q3, and we expect to be in production with a total of four Chinese car models by the end of this year.
In all our design opportunity pipeline exceeds $100 million and as we have noted in prior calls we are converting opportunities into design wins at a much higher rate in automotive than any other end market.
The transition to brushless, DC motors, and appliances and high back equipment is creating a broad set of opportunities for our brick <unk> motor drive products.
And our strong incumbent position in appliance power suppliers gives us a leg up as sockets become available.
In Q2, we grew our opportunity pipeline to more than $60 million.
And secured our first design in at a major supply out of circulation pumps for radiant heating systems scheduled to begin production in early 2024.
<unk> is not only drive motors more efficiently than competing solutions, but also minimize power consumption of the motor when an appliance is not in use this capability takes on greater importance in light of Europe's updated eco design standards, which mandated a reduction in the allowable stand.
By power for a wide range of electronic products beginning in 2025.
This is the first major update to standby regulations since 2013 and should provide a tailwind across a broad range of applications as the Oems redesign products to meet the strict limits.
Power integrations has been the leader in reducing standby waste since we introduced our <unk> technology 25 years ago.
Because of our technology, all but eliminated standby consumption in power supplies saving more than 2 million homes worth of electricity usage every year by our estimates.
It produces these savings without any loss of functionality for the end user and without added cost or design effort on the part of our customer.
In addition to savings standby power with it called Smart technology, and driving higher active more efficiency with gas. We also contribute to decarbonization with our scale get drivers, which drive IGT and silicon carbide modules in high power applications.
We're on track for another year of growth in this business driven mainly by renewables, where our gate drivers are key components of Inverters for winter buys and utility scale solar installations.
Just as important as generating renewable energy is delivering efficiently to the grid and we have recently won a design for a high voltage DC transmission link connecting a Nazi wind farms to the mainland.
This multiyear project worth millions of dollars in revenues is scheduled to begin production in the second half of 2024.
And while electric passenger cars to get most of the attention we are equally well positioned to benefit from electrification in heavy vehicles and locomotives.
We won a high volume gate driver design in Q2, but attraction in water at Europe's largest locomotive manufacturer and we are seeing strong interest from customers in our CIT scale EV drivers boards for heavy vehicles, such as trucks buses and construction equipment.
In all our high power business is poised to benefit tremendously in the years ahead as the world drives towards a lower carbon future with that I will turn it over to Sandeep for a review of the financials.
Thanks, <unk> and good afternoon, we delivered Q2 results in line with our guidance and while the demand environment is challenging we expect the second half of 2023 to be much better than the first in all key respects with significant improvements in revenues and profitability cash flow and.
Inventories.
Revenues for the second quarter $123 million in the middle of our guidance range and up 16% from the prior quarter.
Revenues fell 33% compared to Q2 of last year, which was the peak quarter of the cycle.
The consumer and industrial categories drove the year over year decline with each down by roughly half compared to a year ago.
However, the communication and computer categories have resumed growing on a year over year basis with each of them up mid single digits in Q2.
Revenue mix for the quarter was 29% industrial 29% consumer, 28% communication and 14% computer.
Sell through exceeded sell in for the third consecutive quarter, resulting in a further reduction in distribution inventory we.
We ended the quarter at 10, one weeks of channel inventory compared to 11.8 weeks last quarter and 13 in our heartbeats at the end of December .
non-GAAP gross margin was 51, 8% up modestly from the prior quarter as expected driven mainly by a slight benefit from the more favorable dollar yen exchange rate that began in the second half of last year and is not beginning to affect our P&L.
I expect a bigger benefit from the yen in the second half as well as the more favorable end market mix and a benefit from higher back end production volumes as we convert more wafers into finished goods.
As indicated in our press release this should drive our non-GAAP gross margin to around 54% in the September quarter with a further increase to come in the fourth quarter.
non-GAAP operating expenses for the quarter were $43 $9 million up sequentially as expected due mainly to annual salary increases which took effect around the start of the quarter.
However, we came in below our guidance on Opex as we slowed the pace of head count additions and deferred some discretionary spending.
non-GAAP operating margin for the quarter was 16, 1% and non-GAAP earnings were <unk> 36 cents per diluted share.
Cash flow from operations for the quarter was $6 2 million, reflecting unfavorable working capital flows which should reverse over the next several quarters.
Inventory dollars on the balance sheet peaked in the June quarter and should begin declining in Q3.
March was the peak in terms of inventory days and we ended Q2 at $2 26 days down 22 days from the prior quarter.
Uses of cash during the quarter included $3 million for Capex.
$11 million for dividends and $4 million for share repurchases.
We bought back 57000 shares during the quarter at an average price of about $75 per share.
Turning to the outlook, we expect revenues for the third quarter to be $130 million, plus or minus $5 million.
Sell through should once again be higher than reported revenues as channel inventories continue to fall.
As noted earlier I expect non-GAAP gross margin to be around 54%.
non-GAAP operating expenses for the third quarter should be about 43, and a half million dollars down slightly from Q2, as we continue to manage head count growth and discretionary spending in light of the soft demand environment.
Finally, I expect non-GAAP effective tax rate for the third quarter and the year to be between seven and 8% and now operator, let's begin the Q&A.
Yes.
Yes.
Sure.
Yes.
Okay.
Thank you 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 just a moment to compile the Q&A roster.
Your first question.
Comes from Mr. Christopher Roland with Susquehanna. Please go ahead.
Hey, guys. Thanks for the question.
I guess looking forward in terms of your segments here.
Perhaps you can give us some clues as to the better and worse performer sounds like industrials dragging a little bit here, maybe even four shrink those if you could for us. Thanks.
Yes.
So basically if you look at it if you look at the beginning of the year. What we had talked about was that the communication and computer segment I going to do well and the biggest drag this year would be in the.
Consumer and the industrial segment, and especially the consumer segment. If you remember we had talked about building cologuard. There was a significant amount of pull in of demand and that is getting normalized and that was reflected in the channel inventories now the channel inventories have normalized in the consumer segment and have actually below that.
Immunization why it is industrial.
Still higher, but that's where I think it's a timing issue as we move into the second half we do expect industrial to come back and we are seeing that even in appliances. Because you know in the third quarter. It's typically the where the air conditioning comes down and there were some demand, which we were expecting.
Like from a Korean customer, which has got pushed into Q4, but I think as the year goes by the mix is going to get more favorable which is reflected in our margins along with the yen benefit and the higher volume benefit coming from the revenue growth in the second half.
Great.
Thank you Sandeep and you talked about higher gross margins in the second half you just alluded to the yen.
But I think you called out yen.
Rising production volumes and a more favorable and mix.
Maybe talk about gross margin progression through the year, our how we might end the year.
And then what we would attribute to each of those kind.
Three factors thanks.
So if you look at it we had talked about at the first half as you know in Q1 people that arent 51, and a half in stubhub bed in 50 to 51 eight in Q2, and if you remember we talked about how the yen had moved in the second half of last year and it takes typically about six months, but to move into our P&L, but now with.
The inventory levels, it's taking a little longer about nine months.
So in the in Q3, we will see our gross margin non-GAAP at around $4, 54% and then it will inch up from there.
As I have talked about in the past we are going to be in our model, but more towards the higher end of our model and I think as the revenue starts coming back into the half second half. It is more reflective of what I've discussed, but I think the benefit in both those quarters come from mix.
Williams and the yen benefit.
Thanks, so much guys.
Your next question comes from Mr. Ross Seymore from Deutsche Bank.
Hi, guys. Thanks, Matt ask a question.
Just wondering you guys have done a great job on the channel inventory and being very clear on that it seems like coming out the other side that the rub two the situation is that true end demand is just weaker than you might've otherwise hoped you still express the confidence in the second half being bigger in the fourth quarter being up year over year any sort of even just directional color on the Mag.
Two to the fourth quarter, because you know the third quarter is up you set the bottom, but it's not up quite as much as you might have hoped earlier this year.
Yes.
Hi, Ross this is Bala.
If you look at the last 10 or 12 years the seasonality for the Q4 is slightly down about 2% down.
Yeah.
And this year because of the inventory depletion.
And hopefully some of the areas coming back.
Turning to the best we can estimate it will be an incrementally higher revenue quarter compared to Q3.
What we don't know is exactly how much higher it is going to be big.
It will really depend upon whether that demand comes back on number of this.
The end markets.
By the end of this year available some of it will come into Q4.
So we feel comfortable.
Comfortable that it's going to be a increase from Q3 to Q4, but we don't know by how much.
Gotcha that seems fair.
Well I know visibility is limited to the extent you guys have that over 100 billion dollar pipeline or million excuse me dollar pipeline you have a ton of different design wins diversifying within Gan in a number of different end markets in general if we talk talk just about the stuff you can control for the company specific design wins that.
Do you think generally speaking will layer in next year, how would you look at the puts and takes macro might be a negative or an uncertainty but for the stuff you can control walk us through what those incremental drivers could be for 2024.
2024, I am optimistic that we'll have a strong growth quarter. This is based on our test of our previous experience that whenever we come out of there.
In a down cycle, we actually do better than.
The industry because of the share gains we have during the downturn.
We expect.
All markets to grow next year, if you look at it this year a lot of the revenue growth, we're seeing in Q3 and.
Q2, and Q3 are coming from just inventory depletion.
The replenishment I should say.
The real demand is still very weak, but it has to turn around at some point now whether it happens in Q4, our Q1 I don't know, but the magnitude of growth next year will depend upon when that turnaround happens lets say it happens.
By the end of this year.
Q4 could be a pretty strong growth year.
Just based on history and based on the fact that we have significant design wins.
In the consumer.
Consumer and industrial.
In automotive, but automotive a lot of big impact next year, but it's a 11th.
Incremental increase and computers.
So and even in cell phones, we are gaining.
ASP.
The market itself is not growing.
We are gaining ASP increase because of a higher level of integration as we just mentioned about the end up PD design win.
Ross the other thing as we had talked about is if you really look at it.
The pull in of demand during Covid and if you remember we talked about that how that is going to get adjusted if you took a year and the anniversary was at the end of this Q2, which has an impact on the 40 years. If you really look at that segment. The other area is that we are continuing to have content share gains in communication as <unk>.
And when he was talking about at the high bar business continues to do well.
And so we really believe if you look at it in analogy what happened back in 2018 and before and then the three years that came after we came back and came back much stronger than the market. So considering depending on when this thing guns to tipping.
Typically if you look at historically when it does we'll come back and we do much better. So that's why the hope for 2024.
Issue is when does the ramp is it Q4 Q1, and that's the part that I think it will be a timing issue.
Got it thank you.
Thanks, Chris.
Our next call is Mr. David Williams from the benchmark.
Benchmark company. Please go ahead.
Thanks, Good afternoon, gentlemen, and thanks for taking my questions.
I guess Sandeep you had talked last quarter, just about the strength of the second half and had expected.
Replenishment and talk about some expedited orders as well just kind of curious if you can give some color on maybe what changed dramatically versus where it's soft around the edges. Just any color I guess on the magnitude of what you might have changed during the quarter.
Hi, David This is Bob let me take this question last quarter, when we talked at the earnings call.
We declared Q1 was the bottom in the second half should be significantly better than first half.
But the slope of the recovery will depend on the demand all of that is still true, but what has changed is our short term view of the demand environment.
And that has significantly weakened over the last six to eight weeks.
Wow.
A lot of people are in the last quarter, we're thinking about reshape recovery and we believed in that based on strong bookings we had in March April and May.
And then the orders fell off the Cliff in June June was.
Very low in orders.
And I was actually in China, visiting customers and it was clear they were very pessimistic and the reason being that taught after the COVID-19 restrictions were lifted the demand would come back strongly and Thats why they place the orders not just in Q2, but also Q3 and Q4, that's what gave us the confidence that.
Second half will be much stronger.
But what really happened was that the demand level came back and they were very pessimistic for in terms of demand not only for local demand, but also for <unk>.
Demand.
Export demand.
Which is a little bit confusing because export demand should be better than local demand. We truly believe China has a serious genuinely serious problem in terms of demand, but I believe.
Europe is better and U S is actually much better than that but I think the Chinese customers have become very pessimistic because of what they see.
That is going on in China.
And in some sense there probably.
Erring on the side of too much caution and they really don't want to keep any inventory I mean, that's very evident in cell phones in.
Inventories were below normal, but theres still worn by parks until they need them and when they need them. It is always a rush order. So that's kind of the mentality in China and I think they might have gotten too too cautious and it is possible that this demand.
Issue is only a delayed by maybe a quarter or two it's hard to tell it is more of the psychology of customers, that's causing this short term weakness so I am.
Crossing my fingers, and hoping that this demand will restart.
Hopefully in Q4.
This year, which will really bode well for our 2024.
Because eventually that they might have to come back right, even though there was a lot of pull in during Covid times.
It's more than a year now and it has to come back. It's just a question of time and.
Fundamentally we are in a very very good position and so we are.
Very confident then the demand comes back we will outperform the market.
The in terms of Q3 guidance.
Based on what backlog, we have we will need roughly about 30% turns to meet the midpoint of our guidance and we are very comfortable with that because July bookings have improved actually there was significantly improved from June but still below March in March through May.
So it's it's better than June but more important we have.
Had a very strong turns business that again tells me people are.
No.
We are trying to minimize inventory and order parts only when they need them and they have that luxury because our lead times are so low.
We're able to get the parts when they need them. So that makes the visibility of Q4.
Not as clear, but as I said I personally I'm optimistic.
Great.
Really good color there thank you for that.
And then maybe just on the automotive side.
That revenue is still some time out but any updates there.
I'd like to share.
As I said in my.
Script.
The level of interest in our products is just extraordinary.
We have $100 million or so plus in the identified opportunities, but more interesting is how many of those we are able to convert to a real design wins that conversion rate is at least twice as much as the rest of the market and so that gives us.
What is that.
Automotive is going to be a very very attractive business for us even though there is a couple of years away in terms of <unk>.
Significant ramp we are feeling better every day.
We are engaged with a large number of.
Big Oems that all of you would recognize and.
Another large number of tier ones that supply to the Oems.
And the other thing that we're finding is the number of sockets that will fit into keeps increasing every time, we talk to the customer in some cases the <unk>.
Fact that we can offer such a integration and efficiency actually changes the architecture that they want to use.
For example replacement of 12 volt batteries is really driven by the fact that we can offer a very efficient.
Very reliable.
Our supply directly from the main battery voltage, whether it's 480 nipples and totally eliminate the 12 volt supply.
The 12 volt battery.
Great. Thanks, again, certainly appreciate the color.
Youre welcome.
As a reminder, in order to ask a question Press Star then the number one on your telephone keypad.
Our next call.
Our next and next question is from Mr. Tories Vanbergen stifle.
Please go ahead, yes.
Yes. Thank you that's a stifel.
Sandeep do you have what would you expect channel inventory to be at in the September quarter. I think this quarter was just about 10 weeks I know your target is eight to nine so what do you think it will come in in the September quarter.
I think it should come out on the nine and I'll tell you you know I had expected this quarter the sell through to exceed sell in buyback.
<unk> and it came in at 10, and that's why you see that as being reflected in Mike Our Q3 guidance.
For the next quarter, I, do expect about $5 million to $10 million and sell through to be higher than.
Sell in and that should enable the inventory to come to the nine.
Somewhere around nine given deck.
Got it perfect.
And below.
It sounds like.
Grid switches really starting to take off now.
And I was just wondering.
Is the gross margin higher for bridge switch or is it still in line with the corporate average because I guess debenture this could potentially be like 10% of your revenues right.
Absolutely I mean, the bridge switches could be that level in the automotive could be in the similar level remember there are similar in terms of.
Sam there about $1 billion in <unk> <unk>. So we're very optimistic about both of them.
In terms of.
Design wins, we have a lot of design wins.
But thanks to demand being low we are not seeing the ramp as fast as we originally anticipated.
But nevertheless, we expect this year.
First which will be in the mid single digit millions, but next year. It could have a very strong growth.
Simply because many of these designs will go into production by that time as.
As far as gross margin again, it's consistent with a lot of that.
Overall gross margin for various markets.
Perfect and then my last question is.
You mentioned.
The computing category was up because of the third or like an accessory charger.
I guess.
I'm just starting to feel confused right because I don't know anymore, what what is.
PC adapter versus itself and at that especially as we move to PD. So how do you classify what's what should be in a communications.
Accessory adapter versus in the computing accentuate that.
That's an excellent question. So let me talk about various cuts of one of the areas that are variable and our computers tablets.
It's grown very nicely for us, but in terms of aftermarket charges, we classify them as computer elevated about southern power level.
Tony.
I think about clarify what's ourselves plus multi port and adequate as multiple what we always classify it as.
Notebook adaptor simply because usually the very high power and it can charge of notebooks on one part and a cell phone on the other part, but we have to pick up probably a pick that power, where we said okay. It was below that it is definitely cellphones if it is about that.
It's not.
<unk> books, so thats, how we classify it so the growth there came from aftermarket Gan charges primarily.
And we also had a strong quarter on that.
Desktop power supply of standby power supplies for that so.
But we are actually making significant inroads in terms of design activity for notebooks. So that should help us grow even further because notebooks, we still have a relatively low percentage of.
Sure and that should allow us to grow computers.
Or over time.
Perfect. Thanks for clarifying that thank you.
Thanks correct.
I will now turn the call back over to Mr. Joe Shiffler director of Investor Relations for closing remarks.
Okay. Thanks, everyone for listening, we'll leave it there there will be a replay of this call available on our website, which is investors power com. Thanks again for listening on this busy earnings afternoon and.
Have a good afternoon.
Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Please wait the conference will begin shortly.
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