Q3 2024 Power Integrations Inc Earnings Call
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Speaker Change: Please stand by your program and sit about the beginning. Should you require operator assistance during today's program? Please press the star zero.
Speaker Change: Good day everyone and welcome to today's power integration, third quarter.
Speaker Change: earnings call. At this time, all participants are in elicinally mode. Later, you will have an opportunity to ask questions during the question and intercession. You may register to ask a question at any time by pressing the star and one on your telephone keypad.
Please note this call is being recorded and I will be standing by. Should you have any, should you need any assistance? And it's now my pleasure to turn today's program over to Joe Shiffler, Director of the Relations.
Joe Shiffler: Thank you Brittany. Good afternoon everyone. Thanks for joining us.
with me on the call today, our Balu Balakrishnan, Chairman and CEO of Power and Agreations, and Sandeep Nayyar, our Chief Financial Officer.
During this call we will refer to financial measures not calculated according to gap.
Speaker Change: Nongat measures exclude stock-based compensation expenses, amortization of acquisition-related intangible assets, and the tax effects of these items. A reconciliation of Nongat measures to our gap results is included in today's press release.
Speaker Change: Our discussion today, including Q&A session, will include forward-looking statements that are divided by words like Will would believe should expect outlook for cast, estimate, anticipate and similar expressions that look toward future events are performed.
Speaker Change: Such statements are subject to risk and uncertainties that may cause actual results to different materialy from those projected or implied. Such risks are discussed in today's press release and in our most recent form 10K filed with the SEC on February 12th, 2024.
Now I'll turn the color to Balu.
Balu: Thanks, Joe and good afternoon.
Balu: Our third quarter results were on target with revenues of 9% sequentially to $116 million. Non-gap growth margin of 55.1% and non-gap earnings of 40 cents per share.
Balu: Have a revenue outlook for the fourth quarter is $15 million plus or minus $5 million. The decrease from Q3 reflects a soft demand in mindment, called out this quarter by many of our analog peers.
Balu: and buy some of the key customers in the appliance market.
Balu: Appliances account for the bulk of our consumer category, which comprises nearly 40% of our sales.
Balu: Was a tempering the outlook in consumer is a build-up of appliance inventory at Chinese OEMs, ahead of the China government's long-weighted consumer stimulus program, which thus far appears to be having a limited impact.
Balu: Overall, while the recovery proceeding in fits and starts, we are pleased to be returning to year over year growth with the midpoint of our Q4 forecast up 17% compared to last year.
Balu: We also expect to remain at the high end of our gross margin model. Through a close next year, thanks to the dollarian exchange rate and a favorable end market mix.
Balu: While all four of our end markets should grow in 2025, we expect the strongest growth from industrial which has the highest margins of our four categories.
Balu: We expect growth in multiple sub segments of industrial led by high power with particular strength in high voltage DC transmission projects.
Speaker Change: Long Distance DC Transmission Line, Deliver A Neuble Energy, efficiently to the Great.
Speaker Change: and are also a key part of efforts to modernize power infrastructure to enhance energy security and meet the increasing power needs of AI data centers.
Speaker Change: In Q3, we won high voltage DC designs with expected annual revenue value of more than $5 million, including our second multi-million dollar design mill for tenant.
Speaker Change: A major North European grid operator.
Speaker Change: We also expected to begin delivery of our scale to get drivers in early 2025 for two other major projects.
Speaker Change: Shave one of Saudi Arabia's planned 9 gigawatt link between Yann Bu and Niyom, and an undersea link connecting Japanese islands of Honshu and Okaiida.
Balu: Metering is another growth driver in the industrial category, most notably in India, where our meeting business is on track to double this year as the government continues with this planned installation of 250 million smart meters over the next few years.
Balu: We have undersisable share of that market and expect dollar content increase over time as customers migrate to our 900 and 1250 world can products to achieve higher efficiency and reliability.
Balu: While still early in his revenue rhyme, automotive will contribute to our industrial revenues in 2025, leading up to an inflection in 2021.
Balu: Building on early success in China with dry train emergency power supplies.
Balu: We are expanding both geographically and in the range of sockets we are winning as EVs evolved to a distributed architecture, requiring multiple converters to power subsystems from the main battery instead of a 12-volt battery.
Balu: Bihachivnan important milestone in September becoming an approved vendor at the world's largest tier 1 automotive supplier. On the hills of our recent qualification at the major Japanese tier 1.
Speaker Change: They've also had key developments at two American-EV customers in recent weeks.
Balu: Pre-production began last week on a micro DCDC converter socket using our silicon carbide in a switch. While another customer awarded as an emergency power supply socket using the 900 volt and in a switch, the production schedule to begin in 2026.
Balu: In our consumer category, notwithstanding the soft demand environment, our position in appliances remains strong. And we are leveraging our market leadership to capture incremental dollar content driven by connectivity, LED lighting, brushless DC motors, and other features being added to appliances.
Balu: We're also seeing strong design activity related to new EU standby rules set to take effect next year.
Balu: We are capitalizing on these opportunities with bridge switch motor drive ICs and GAN products.
Balu: including InnoMUX2, which enables much higher efficiency in appliances, displays and industrial applications through the use of zero voltage switching and the elimination of multiple DC to DC converters at the output.
Balu: Earlier this week we introduced a new version of InnoMUX 2 featuring the industry's first 1700 volt GaN switch marking another milestone on the technology roadmap we presented at our Investors Day in 2022.
Balu: We developed our proprietary GAN process and device designs with five key attributes in mind.
Balu: Cost, Reliability, Ease of Use, Voltage and Power
Balu: and we are executing to plan on each of them. We concluded early on that even with the superior performance, our GAN had to be cost competitive with silicon to achieve mass adoption.
Balu: Over the past six years, we have executed on an aggressive cost-reduction roadmap that has our GAN on the verge of parity with the most advanced silicon MOSFETs.
Balu: but with far superior performance.
Balu: Reservations about reliability and ease of use are the top concerns we hear from automotive and AI data center customers that have struggled to use discrete CAM devices.
Balu: We designed PoWiGAN to be inherently more reliable than other GAN technologies and we now have over a trillion hours of field operation to prove it.
Balu: Our GAN is also easy to use because of the system level approach that has defined our product strategy for the past 30 years.
Balu: Not only are discrete power devices eventually commoditized, they are also harder to use, and this is especially true of GaN because of its extreme high switching speed.
Balu: All the GAN switches are incorporated in system-level products with our innovative controllers and drivers that provide comprehensive protection and optimize the performance of the switch, eliminating the trickiest aspects of designing with GAN.
Balu: Engineers familiar with our silicon-based products can use GaN versions of the same products seamlessly, taking advantage of GaN's superior performance with no added design effort.
Balu: In fact, this strategy has worked so well with our Interswitch products that we are now refreshing some high-volume legacy products with GAN to enhance performance and extend the power ranges of products that our customers love to use.
Balu: We also have a pipeline of new system-level GAN products targeting higher power applications we don't address today, including AI data center, EV onboard chargers, telecom infrastructure, and more.
Balu: These products will help us reach our goal of expanding our SAM to an estimated $8 million over the next few years.
Balu: In terms of voltage, while the leading foundry technology is limited to 750 volts, our unique process and device technologies offer a clear path to higher voltages.
Balu: Following our announcement earlier this week, we now have GaN devices at 750V, 900V, 1250V, and 1700V, with more to come.
Balu: Many industrial customers prefer higher voltage ratings for three-phase applications and as an insurance against surges and spikes, especially in areas with unstable AC grid voltages.
Balu: In the EV market, a 1700 volt rating is essential for flyback power supplies in 800 and 1000 volt battery systems.
Balu: which today can only be addressed by silicon carbide.
Balu: The final track of our GAN roadmap is power, and we are approaching that from multiple directions.
Balu: The output capability of our current technology continues to increase and is now in tens of kilowatts.
Balu: We are also developing an all-new GaN technology capable of delivering hundreds of kilowatts, which we believe would make GaN an alternative to silicon carbide in drivetrain inverters at much lower cost and with superior performance.
Balu: While the necessary breakthroughs are still a few years away, we are excited about our progress and our acquisition of Odyssey last quarter will help accelerate our development.
Balu: While the full disruptive potential of GAN will unfold over many years to come, we expect wider GAN adoption to be a significant growth driver in 2025, when GAN products should account for more than 10% of sales.
Balu: Recent wins include
Balu: major next-generation game console, now ramping with GaN Interswitch ICs, a 65-watt notebook adapter for WIO, and a 140-watt multiport adapter for ASUS containing GaN Interswitch and Hyper-PFS Power Factor ICs.
Balu: We are also seeing existing designs migrate to GAN, such as our 5G fixed wireless design in India.
Balu: That program ran this year with silicon-based products, but should generate incremental growth next year as customers add GaN to the mix, mainly to reduce the size of the power supply.
Balu: To conclude, though our outlook reflects industry-wide demand softness, we expect strong year-over-year growth in Q4, while 2024 revenues will be down from the prior year due to the losses we suffered in the China cell phone market early this year.
Balu: combined sales into industrial consumer and computer categories will be up mid to high teens for 2024
Balu: We expect that momentum to carry into 2025, sustained by strong growth in GAN products and high power, a broad range of new design wins, and a return to growth in communications driven by non-cell phone applications.
Speaker Change: And now I'll turn it over to Sandeep for a review of the financials.
Sandeep Nayyar: Thanks Balu and good afternoon. As usual, I will focus my remarks on the non-GAAP results which are reconciled to GAAP in our press release.
Sandeep Nayyar: Third quarter revenues were $116 million, just over the midpoint of our guidance, while our non-GAAP earnings were $0.40 per diluted share, above the level implied in our guidance as we came in slightly better on gross margin and operating expenses.
Sandeep Nayyar: Thank you.
Sandeep Nayyar: While we expect sequential low revenues in Q4, we are returning to year-over-year growth as Balu noted, and believe we are poised for strong growth in 2025.
Sandeep Nayyar: reflecting confidence in our outlook as well as our healthy balance sheet.
Sandeep Nayyar: Our Board has declared a 5% dividend increase and authorized $50 million for share repurchases commencing in the coming days subject to price volume thresholds prescribed by the Board.
Sandeep Nayyar: Returning to the quarterly results, revenues were up 9% compared to the prior quarter.
Sandeep Nayyar: Industrial revenues grew mid-teens sequentially driven by high power, home and building automation, and metering applications.
Sandeep Nayyar: Broad-based industrial also showed sequential improvement as distribution inventories declined further in Q3 and are now at historically normal levels.
Sandeep Nayyar: The communication category was up 20% sequentially, driven mainly by the ramp of our 5G fixed wireless business in India, as well as seasonal growth in smartphone chargers.
Sandeep Nayyar: Consumer was flat sequentially as seasonal softness in air conditioning was offset by strength in major appliance and gaming.
Speaker Change: Distribution sell-through for consumer was less than sell-in, reflecting the trends Balu mentioned, and resulting in higher channel inventory for consumer compared to the prior quarter.
Sandeep Nayyar: Overall, channel inventory increased to 8.6 weeks, up from 7.8 weeks at the end of June, with the increase driven entirely by consumer.
Sandeep Nayyar: channel inventory for each of the other categories decreased from the prior quarter.
Sandeep Nayyar: Revenue mix for the quarter was 38% consumer, 36% industrial, 14% computer, and 12% communications.
Sandeep Nayyar: Non-GAAP gross margin for the third quarter was 55.1%, up one percentage point from the prior quarter, driven mainly by higher back-end manufacturing volumes.
Sandeep Nayyar: Non-GAAP operating expenses were $43.7 million, down $500,000 sequentially, despite the addition of about a half a million dollars from Odyssey.
Sandeep Nayyar: Non-GAAP earnings for the third quarter were 40 cents per diluted share.
Sandeep Nayyar: Diluted share count for the quarter was $57 million, unchanged from the prior quarter.
Sandeep Nayyar: Cash flow from operations was $33 million while CapEx was $6 million.
Sandeep Nayyar: Other key users of cash were $10 million for the Odyssey acquisition and $11 million for dividends.
Sandeep Nayyar: Inventory days fell to 291 at quarter end, down 21 days from the prior quarter.
Sandeep Nayyar: Turning to the Q4 outlook, we expect revenues to be $105 million plus or minus $5 million.
Sandeep Nayyar: Non-GAAP gross margin should be between 55 and 55.5% as compared to 55.1% in Q3.
Sandeep Nayyar: The slight sequential increase at the midpoint reflects an increased percentage of revenue from the industrial category, which is our highest margin in market.
Sandeep Nayyar: Non-GAAP operating expenses should be between $44.5 and $45 million, up modestly from the third quarter, driven mainly by headcount increases.
Sandeep Nayyar: For the full year, non-GAAP OPEX will be up just 4% from the prior year, with one percentage point of the increase driven by the RDC purchase.
Sandeep Nayyar: Finally, I expect our effective tax rate to remain in the low single digits in Q4 and then to increase into the mid-single digits for 2025.
Sandeep Nayyar: And now, Operator, let's begin the Q&A.
Speaker Change: Thank you. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 if you would like to ask a question. We'll take our first question from David Williams with Benchmark. Your line is now open.
David Williams: Hey, good afternoon everyone. Thanks for taking my question.
Speaker Change: Hi David.
David: Hey, and forgive me, I missed a little bit of the call here, I had some issues, but, you know, lots of things, lots of moving pieces here, but the one thing I did want to ask was just around the 1,700 volt GAN announcements that you had recently.
David: Can you talk maybe just a little bit about that, how you see demand developing, and maybe just where that fits in, is it industrial, automotive, and given what would seem like large markets, how you think that ramps?
Speaker Change: Yeah, the 1700 volt is required to operate from 800 volt and 1000 volt battery systems in automotive applications.
Speaker Change: The cars are moving from 400 to 800, and the larger vehicles, like trucks and heavy vehicles, are moving to 1,000 volts.
Speaker Change: And so this is a perfect fit for that market.
Speaker Change: and also in three-phase industrial applications.
Speaker Change: next to the transformer, for example. As a result, they can get significant transients from lightning and so on, so they prefer the 1700 volts.
Speaker Change: Currently this market is served by silicon carbide. We believe GaN is a much better solution, both in terms of efficiency and cost.
Speaker Change: Great.
Speaker Change: Thanks so much. I really appreciate the color. They're very helpful. And then just lastly I wanted to ask maybe broader But just think of the last election are there areas of your business you think will be will benefit or maybe be impacted?
Speaker Change: by the new administration and specifically thinking about renewables and solar applications, but also just some of the energy efficiency regulations and any other color on that would be helpful. Thank you.
Speaker Change: You know, that's a good question. I haven't thought through all of that, but I would say that the train has left the station when it comes to electric cars and renewables and so on. The renewables are now less expensive.
David: than coal plants.
David: So, most countries are installing additional capacity in renewables for that exact reason.
David: Of course, there is also the environmental benefit, which I think the entire world now recognizes is critical, given all the climate disasters we have had over the last few years.
David: So, I am not at all concerned that it will in any way slow down either electric cars or renewables or high voltage DC transmission systems.
David: Let me talk a little bit more about high voltage DC transmissions.
David: And it is really quite integral to any new power station, whether it's renewable or nuclear.
David: If you have a power station and you have to transmit that to a load, let's say an AI data center for example, you have to have a very efficient way to do that and the DC transmission does exactly that.
David: The only way to get the power onshore, underground, is through DC transmission.
David: AC would be way too lossy in terms of the cables.
David: You know, our business.
David: In fact, I would say in terms of, you know, generating more oil,
David: It will have a positive impact on our high power business because we sell into applications like fracking.
David: They need large motors to pump liquids into the ground, and that's a huge market for us in terms of our high-power, board-level business.
David: Thank you. Bye.
Speaker Change: Thank you and we'll take our next question from Tora Samberg with Stifel Nikolas. Your line is now open.
David: Thank you. This is Jeremy calling for Tory. Yeah, let me add my congrats on that 1,300 volts product. We've been waiting for that and it's very nice to see you.
David: Just to follow up on that point,
David: I guess, can you talk about maybe, you know, how much of a lead you have in high-powered GaN? And you talked about the price, almost price purity with silicon, can you talk about maybe how it compares to silicon carbide? How much of a...
David: I guess the advantage you have in that space. Thank you.
Speaker Change: Thanks, Joey.
Speaker Change: which primarily competes with MOSFETs and there we think we're getting very close to being parity with, you know, even the high-end MOSFETs within the next year or so.
David: at 750 volts, we are also very cost competitive with silicon or silicon carbide. Of course, if you are cost competitive with silicon you are
David: dramatically cost competitive with silicon carbide.
David: And these applications include AI data centers, it includes on-board charges for electric vehicles.
David: It also includes telecom infrastructure.
David: All of these are in the, I would say, 1 to 20 kilowatt range, and we already have products in development. These products will be ready sometime in 2026.
David: and that opens up a huge market for us. So with our existing 750 volt technology, we can be very competitive with silicon and of course much more competitive than silicon carbide all the way up to tens of kilowatts.
David: Now, when you go to higher voltages like 1250 volts and 1700 volts, the real competition is silicon carbide.
David: That's where we need new technology. We are working on that for some time now.
David: And with the acquisition of Odyssey Semiconductor, we will be able to speed up the technology because it comes with the fab, it also comes with people with the knowledge of the device.
David: And when we get there, we'll have a very competitive offering compared to silicon carbide. It'll not only be lower cost than silicon carbide at those power levels, but it'll also be much higher performance than silicon carbide.
David: So and as you all know a silicon carbide requires a lot of capital investment whereas the GAN does not
David: and GaN inherently is going to be cost-effective long-term because of the temperatures at which they are manufactured, which is similar to silicon, and therefore it doesn't require anywhere near the amount of energy consumption that silicon carbide requires.
David: Silicon Carbide, as many of you know.
David: requires manufacturing at 2,000 degrees, which is about half the temperature of the sun, by the way, and it takes a lot of money, a lot of energy, and a lot of capital investment to do that, and that is not the case with silicon, with organ.
David: So, we really think GaN would be the most attractive alternative to silicon carbide all the way up to several hundred kilowatts once we have this new technology up and running.
Speaker Change: is consisting of GAN now and how much maybe you intend to convert. I know you also targeted 10% of revenue for GAN. I think that's next year. You know, as you look, it might be kind of further up at three to five years out, how much revenue do you expect to drive from GAN? Thank you.
Speaker Change: You know GAN is going to replace silicon as a high voltage switch in pretty much all of our products. Everything we are designing now is using GAN, you know except at very low power levels which is really not our focus at this point. We are focusing on higher and higher power levels.
Speaker Change: are on board Charger products. Those are all Gantt products.
Speaker Change: That's the only way to get...
Speaker Change: The performance you need is the only way to get the power levels you need.
David: You know
David: The silicon just won't cut it at those power levels, you know, 10, 15 kilowatts, even though...
David: Silicon is predominantly used today, that's only because GaN technology is not high enough reliability, at least from a customer's point of view, not easy to use.
David: That's where our technology will shine. We have much higher reliability than anybody else's GAN technology
David: So the customers don't have to deal with all the idiosyncrasies of GAN, not only in terms of protecting the GAN, but also getting the most performance out of the GAN.
David: So, I think that the future of our company is going to begin.
David: If you were to ask me where we would be in terms of revenue, I wouldn't be surprised if we cross $100 million by 2028 in GAN products.
David: But that's only because in some areas it takes longer for the GAN to be the new products to be adopted But we are seeing GAN growth in all four of our markets
David: We actually grew our Gan revenue in all markets, except cellphones, where as you know the people.
David: People are going out of the box and therefore, there was a little bit of a drag in that market, but if you take out cell phones. We grew very nicely. This year and of course, we're going to grow very nicely next year.
Speaker Change: Yeah, Jeremy in the next few years Gavin is going to be really growing quite a bit.
Speaker Change: I can see it being about 20% of our revenue in the next two to three years.
Jeremy: Great. Thank you very much appreciate that.
Speaker Change: Thank you and once again that is star and one if you would like to ask a question. We will take our next question from Christopher Rolland with Susquehanna. Your line is open.
Christopher Rolland: Hey, guys. Thanks for the question.
Christopher Rolland: I guess first of all if you guys could help us kind of force rank the segments for your outlook next quarter.
Christopher Rolland: I guess, maybe versus the I think it was down nine sequential what would be better or what would be worse.
Christopher Rolland: And I know, it's probably a bit early for March, but we track that seasonally is flat I.
Christopher Rolland: Wonder if you had an early expectation there for for growth.
Christopher Rolland: Thank you.
Speaker Change: So I think for the next quarter.
Christopher Rolland: As we indicated the industrial segment.
Christopher Rolland: From a dollar standpoint, we will be kind of flattish so as because the revenue is lower will be higher as a percentage of revenue and the other three segments will be down. So that's the directional answer we can give you at this point of time for <unk>.
Christopher Rolland: The Q4 in Q1, it's a little early but I think in historical terms in Q1, typically you will see the high power business, which is in the industrial segment tends to be a little lower and cell phones are a little lower.
Christopher Rolland: <unk> AC which is an air conditioning starts ramping up so that's the directional.
Christopher Rolland: The idea that I can give you for Q1, but it's a little too early.
Christopher Rolland: Yes.
Speaker Change: Thank you Sandeep.
Christopher Rolland: And then.
Christopher Rolland: Uh huh.
Christopher Rolland: Just to understand I would like to understand a.
Christopher Rolland: The inventory across these end markets.
Christopher Rolland: You know, where where it's still worse overall, our sell in versus sell through.
Speaker Change: How do you think that.
Speaker Change: Kind of.
Speaker Change: <unk> finished a cross distribution for the quarter.
Speaker Change: And then lastly, tying all into this the appliance market I think what you were saying is finished white goods inventory was built ahead of this China stimulus, if I understand that correctly and.
Speaker Change: Yeah, just just putting all this together from inventory.
Speaker Change: And then sell in sell through would be great. Thank you.
Speaker Change: Yeah, as we said on our call that the major sell through.
Speaker Change: The sell in was.
Speaker Change: Higher than sell through and the reason was mainly in the area of consumer if you look at the prior quarter, our consumer inventory was way below our eight weeks, but.
Speaker Change: This quarter because of the Chinese inventory build.
Speaker Change: Our sell in was greater than sell through it was entirely in the consumer segment. So as a result, our consumer and inventory in the channel is slightly above the eight weeks, which is normal one is all the other area. It has come back to the normal level.
Speaker Change: Okay understood.
Speaker Change: Sorry did that would that include did I get the dynamic correct.
Speaker Change: Ah the build ahead of a white box and appliance inventory was that correct yes.
Speaker Change: Correct.
Speaker Change: First half we had very strong.
Speaker Change: Consumer business.
Speaker Change: Which was kind of a false positive.
Speaker Change: Our consumer customers, which is appliance customers.
Speaker Change: Our second half will be very strong.
Speaker Change: Especially in China because of the incentives they were expecting the government to provide.
Speaker Change: For purchase of appliances.
Speaker Change: First of all the employees that came very late.
Speaker Change: Incentives and also the incentives not a uniform they are different in different parts of China.
Speaker Change: And it's not clear to us so far that there is any significant benefit or impact.
Speaker Change: <unk>.
Speaker Change: Incentives on the demand so the appliance.
Speaker Change: Customers, who were expecting a strong demand in the second half they don't see it they didn't see that the demand is continues to be weak. So they ended up with a bunch of inventory and you have to remember they always build a power supply for us before the build the end product because they don't want the end product to wait for the power supply.
Speaker Change: So we had a very strong consumer business in the first half and.
Speaker Change: Unfortunately in the second half it is.
Speaker Change: Slow down significantly because of the finished goods inventory.
Speaker Change: The end product at our customers our.
Speaker Change: Distribution inventory is slightly above its not so bad but.