Q2 2019 Earnings Call
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 simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press. The Penske. Thank you Joe Shiffler director of Investor Relations you May begin your conference.
Thank you Julie and good afternoon, everyone and thanks for joining US with me on the call today are bothered by the Chrisman, President and CEO of power integrations, and Sandeep Meyer, our Chief Financial Officer.
During the call today will refer to financial measures not calculated according to generally accepted accounting principles. Please refer to today's press release, which is posted on our investor website.
What explanation of our reasons for using such non-GAAP measures as well as tables reconciling these measures to our GAAP results.
Our discussion today, including the <unk> session will include forward looking statements.
Which maybe denoted by words like will would believe should expect outlook forecast and similar expressions that look toward future events or performance.
Forward looking statements.
Are subject to risks and uncertainties that may cause actual results could differ materially from those projected or implied mercy.
Such risks and uncertainties are discussed in our press release and in our most recent Form 10-K filed with the FCC on February 13 2019.
Finally, this call is the property of power integrations, and any recording or rebroadcast roughly prohibited without the written consent to power integrations.
Now I'll turn the call over to Bobby.
Thanks, Joe and good afternoon.
Second quarter revenues increased 15% sequentially coming in near the upper end up all the range at $202.9 million.
That's down 6% on a year over year basis, reflecting the impact of trade disputes and the related cyclical slowdown in the semiconductor industry.
However, while trade continues to be a source of uncertainty. We are encouraged by recent trends in bookings as well as distribution sell through.
We did see that selling by a wide margin for the second straight quarter.
Based on these improving trends as well as incremental revenue from recent design wins.
We expect it to turn to year over year growth in the third quarter.
Specifically, we are projecting third quarter revenues of $114 million, plus or minus $3 million.
Which would be up 11% sequentially and about 4% year over year at the midpoint.
Looking more closely at the Q2 revenues, while all four end market categories include sequentially. The largest contributor was the communications category up more than 50% from the prior quarter driven by new fast charging programs for the smartphone market.
The mobile device market is clearly entering a new phase of adoption.
For faster charges capitalize by several converging trends.
Yes.
Is the new U.S.P.P.D. charging standards, which in conjunction with the new type C. Connector that enables the liberty of up to 100 watts to any mobile device.
Second OEM start incorporating larger batteries in their devices in order to extend battery life as usage continues to rise.
Efficiency is essential in fast charges since small form factors are incapable of dissipating much heat.
How about unisys products already offer the highest levels of efficiency and integration in the market.
And we believe our competitive advantage is evident in the growth we are seeing in the handset market.
We are extending our market leadership, even further with the latest additions to the Innoswitch family unknowns to this afternoon in conjunction with our earnings release.
For those that may not have seen it yet we announced today that we are now shipping you know three and you know three pro products incorporating proprietary gallium nitride switches.
We believe we are the only company currently shipping high voltage Gan based products in high volume.
In fact, several aftermarket charges, incorporating our gan based products already widely available at retail.
Including at 30 Watt U.S. be PD charger.
With that footprint smaller than a business card, which easily slips into a shirt pocket.
Such a small part of factors are made possible by the superior efficiency up all of Gan based innoswitch devices, which enable a level of power density not attainable with silicon switches.
Well I love an initial focus with these new products is on high powered Chargers for mobile devices.
Gan plays a major role in our rail road map for the years ahead, and we plan to introduce a range of new products that will bring the superior performance characteristics off again to a wide range of applications in the near future.
Moving now to the consumer category, which is dominated by appliances.
Revenues in Q2 remained well below the year ago level, reflecting trade issues and related slowdown in consumer spending in China.
However, on a sequential basis consumer revenues grew high single digits for the second straight quarter, driven by seasonal strength in air conditioning as well as improvement in major and small appliances.
Importantly, a significant portion of the difference between sell through and sell in came from the consumer category again, this quarter, suggesting that channel inventory associated with the appliances has been worked down considerably.
In the computer category, we saw sequential growth of better than 30% in Q2, reflecting a rebound in the PC market after a weak first quarter.
While our computer revenues have fallen in recent years, reflecting the secular decline of the desktop market, we see opportunities for growth going forward as the U.S. bpd begins to penetrate tablets and notebooks.
We also anticipate growth from our new INOMAX chipset.
Which offers a highly differentiated solution for the display market.
As discussed on last quarter's call. The INOMAX chipset pairs of worsen off you know three with the new mixed signal controller chip, enabling a single state power supply that eliminates the multiples DC to DC stages traditionally used in displays.
The resulting in both design simplification and efficiency gains.
With the energy Star eight specifications set to take effect next year.
PC Oems are now in the midst of a redesigned cycle for monitors and we believe the INOMAX chipset is the best available solution.
We expect to begin shipping production quantities in the coming months for a top tier PC Oems with with a meaningful revenue contribution expected in 2020 .
Finally revenues from the industrial category increased low single digits sequentially.
While broad based industrial markets continue to exhibit some softness our high power business is on track for a third straight year of double digit growth driven by design wins strength in renewable energy applications and robust spending on power grid and locomotive applications, particularly in China.
Our high power business continues to set the pace for innovation as one of the only non captive suppliers in the gate driver market.
Our latest product introduced last month is the scale Iflix gate driver system and innovative new architecture for driving high power modules in Heidel applications, such as locomotives wind turbines and industrial motor drives.
The scale Iflix architecture employs a single master controller, which can be connected to up to four modules each with its own driver in a daisy chain configuration.
This consideration allows the customer to scale up in power simply by adding modules to the chain.
And offer significant advantages in terms of size and the liability compared to competing solutions.
The new architecture is compatible with modules from a wide range of manufacturers and is capable of supporting both I diabetes and silicon carbide Mosfets.
In conclusion, we delivered strong Q2 results and we expect healthy sequential growth in revenues and earnings in Q3.
While trade and cyclical concerns continue to weigh on overall demand. We believe we are on track to outperform the broader industry in 2019 based on design wins, and our exposure to secular trends like faster charging energy efficiency and clean energy.
With that I'll turn it over to Sandeep for a review of the financials.
Thanks, Balu and good afternoon as usual I will focus primarily on our non-GAAP numbers, which are reconciled to the GAAP figures in the tables accompanying our press release.
Second quarter revenues were $102.9 million up 15% from the prior quarter and down 6% year over year.
The year over year decline was driven by industrial and consumer markets, each of which was down double digits, reflecting macro and cyclical trends.
The softness in these markets was partially offset by low double digit growth year over year in the communication category, driven by fast charging and mid teens growth in the computer category driven by the tablet charger when we highlighted a few quarters ago.
Revenue mix for the quarter was 37% consumer.
33% industrial 24% communication and 6% computer.
With the upside in the communication category end market mix was slightly less favorable than we had anticipated and as a result, non-GAAP gross margin came in slightly below our expectation at 51.2%.
non-GAAP operating expenses were $36.2 million in the middle of our forecasted range.
Expenses rose about a million and a half dollars from the prior quarter driven by annual Merit raises which took effect at the beginning of the June quarter and by head count increases.
The non-GAAP effective tax rate for the quarter was 6%, bringing our non-GAAP earnings to $16.7 million or 56 cents per diluted share.
Cash flow from operations was $19.4 million for the quarter.
Inventories increased in dollar terms, but fell by 19 days from the prior quarter.
Ending the quarter at 159 days.
We expect another significant reduction in inventory days in the third quarter.
As Balu noted distribution sell through exceeded sell in by a substantial margin in Q2, resulting in reduced channel inventory.
Specifically weeks in the channel fell to 6.7 at quarter end down to four weeks from the prior quarter.
We believe the vast majority of the difference was our distributors, serving the appliance and industrial end markets, suggesting that inventory conditions in those markets have improved.
Looking ahead, we expect third quarter revenues to be in the range of $114 million plus or minus $3 million.
This would be a sequential increase of 11% at the midpoint would the bulk of the growth coming from the communications and industrial markets.
We expect our gross margin to benefit from ongoing cost reduction efforts, resulting in a modest sequential improvement.
Specifically, we expect non-GAAP gross margin to be between 51, and a half and 52%.
non-GAAP operating expenses for the third quarter should increase sequentially driven largely by head count growth.
I expect non-GAAP opex to be between 36, and a half and $37 million.
Lastly, I expect the non-GAAP tax rate for the quarter to be approximately 7%.
And with that I'll turn it back over to Joe.
Thanks Sandeep.
We'll open it up now for the Q and a session.
Joanne would you please give the instructions for queuing it.
Certainly if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from Ross Seymore from Deutsche Bank. Your line is open.
Hi, guys. This is Melissa on for Ross Congratulations on the solid quarter I was wondering if you could tell us how you're thinking about the stickiness of the revenues from fast charging wins going forward and if we should be concerned about any risk at like a design now or dual sourcing.
Well first of all our Gan based designs.
Our unique in the sense that there is really no other technology that can achieve the size benefits. We can offer with the Gan based innoswitch is so those are at least for the time being relatively safe and we have a significant number of aftermarket.
Providers already using the product it's available at retail outlets and the Amazon Dot com and so on.
Now as far as a general cell phone market goes.
Again as long as they as you go to higher and higher power levels, we offer such a compelling advantage. We think we have a.
A significant benefit.
That we provide to our customers. So once we win the design we are confident that at least for a period of time, we will have that advantage.
And so we think it will be a much more stickier than the lower end market, where it has become commoditized.
Okay. Thank you and then could you remind us how we should be thinking of any incremental spending on opex as far as all of the.
Stretching Lynch.
Well I think as we had indicated we have given guidance for the quarter for the next quarter, we should see expenses to grow sequentially through the year should be somewhere around a 6% growth.
We are continuing to make investments as we had talked earlier in automotive.
But I think if you look at our model over a period of time, if our topline growth to our model the low double digit expenses will grow at 60% of that so that model given take over a period of time should hold.
Just a clarification.
It is less to do with faster charging because we already have.
The infrastructure to support the cell phone Oems and mobile Oems.
Most of our headcount addition is too.
Go into other markets broader markets, we have so many new products now.
That we are actually limited by our reach in industrial and consumer markets.
Okay got it and then one more if I can still in the car and make it as any way that you can.
Quantitatively or qualitatively give some color on the impact of the walkway ban that has been impacting all of your peers.
It has not had any impact so far with us we have we don't directly ship to walk away.
There are subcontractors, who do use our chips to build the adapters for walk away.
The overall business to the best we can estimate is.
Relatively small it's a low single digits in revenue.
And.
We we havent had any significant change.
In the business, but going forward.
We will not be able to engage with them on new designs. So the trade issues continue then it could have some impact in the longer term.
But in the short term there is really no significant impact.
Okay. Thank you guys and congratulations.
Thank you.
Your next question comes from David Williams from Loop Capital. Your line is open.
Hey, good afternoon, and thanks for taking my questions.
Hi, congrats on the quarter first off.
Secondly, I guess, just kind of thinking about your new Gan based product and Youre. Your silicon carbide drivers can you kind of talk about your automotive positioning and where you're kind of thinking about that longer term and if you.
If these new products are geared towards that or kind of what you're thinking in terms of automotive plant retirements.
Okay.
So the Gan products, we announced are not directly related to automotive.
But let me just first talk about automotive.
We believe automotive is going to be the largest.
A single Sam that we can address in the long term.
So we are actually making significant investments to get into the market.
And we get into multiple areas in automotive, but at all to do with power train our power conversion.
Like driving the main motor charging the batteries and also converting the high voltage battery.
To lower voltage for the electronics and subsystems.
So we will not only sell drivers.
For IGBT and Silicon carbide modules that drive the motor that that do the.
Conversion for charging, but we'll also be selling our low power devices like Innoswitch is and the links switches.
To do the high voltage battery to low voltage conversion.
So.
We are already engaged with one of the largest Oems.
In developing a product for them.
At board level product for them, but we are also working with other we have started talking to other Oems and we expect to work with them.
To develop.
Our system level products for them.
But as you all know.
The the design cycle time for automotive is relatively long.
And also the electric vehicles.
Our <unk> as a percentage of total vehicles at this point in time is relatively small, but it's expected to take off in the 20 324 timeframe.
And by that time, we should be in a very good position to start generating revenue.
And I think we are very well positioned in terms of time, we're also well positioned in terms of the benefits, we bring which is.
Hi, reliability no optical no after a couple of years.
Which are considered not so reliable and we provide a lot of safety features that the automotive guys. Appreciate in fact, most of the engagements. We have had to date is actually driven by the customers.
They came to us asking to provide.
Products for them.
Great. Thanks.
And then if we look at the industrial segment. It sounds like the renewable energy side was up was fairly healthy can you talk about the other parts of the industrial side I was like I was expecting a bit more I guess in terms of growth Q to Q and it looks like they came in about flat or maybe just a few points of upside.
Are you seeing I guess softness or weakness anywhere outside of the renewable and just kind of what are your thoughts I guess through the end of the year for the industrial segment.
Yeah, and then there was just as we talked about like the.
Consumer appliances, we did see a little bit of softness and some of the other industrial segment.
But we are hoping that we will get as we talked about in our route.
Our guidance, but the more of the growth is actually coming more for the high power than in the rest of this area.
Okay very good and then lastly for me, David David and David One of the point there we did see a significant difference between the sell in and the sell through related to the industrial category sell through was significantly higher. So thats does suggest that some of the the inventory in the channel related to.
The industrial customers has been worked down somewhat.
Okay, all right very good.
And so you're feeling pretty good about the health of the channel inventories and may be shipping to consumption, there or do you get a sense that maybe there is some some backfilling that needs to happen.
Well, so I wouldn't be surprised that you know if you saw that our overall weeks went down to about 6.7, so I wouldn't be surprised if it goes back into the seven other low 707 point bill because but traditionally we have brands around that level of this.
Seven weeks, so, but I don't im not seeing that to increase significantly in somewhere in that ballpark.
Great. Thanks, again, guys and good luck on the quarter.
Okay. Thanks, David.
As a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad. Your next question <unk> question comes from Tory Sandberg. Some Stifel. Your line is open.
Yes, thank you and congratulations on the quarter.
I do recognize this is an earnings call but.
Given the Gan announcement, but I was hoping you could elaborate a little bit more on what this means for you know not just obviously right now with Innoswitch three and three pro but maybe you could talk a bit about the supply chain you have forgotten and.
When should we start to expect revenues even outside of the smartphone market.
Okay.
Thanks, Brett.
The Gan technology is very very important for us not just for.
The adapters, but.
Power conversion in general.
We definitely expect to spread the technology into a number of new products and I would say in general anything about 30 or 40 watts, we expect to be using Gan technology because of the benefits it brings.
And there are really two aspects to it one is.
Our Gan technology is quite differentiated from all other Gan technology is that people have been talking about.
And thats because its proprietary we have developed it completely internally.
And.
It is really geared specifically towards power conversion. So the all of the specs are specifically designed to be optimum for power conversion.
Thats one aspect the second aspect is the reason.
Again as a technology has not been commercialized.
His because gan is very difficult to use it as a discrete component.
It's so fast people have a great difficulty driving it.
They also have a great difficulty protecting it because it it can.
Before you will have a chance to protect it can get to very high currents and destroyed south.
But that problem, we are completely solve because it's fully integrated inside our system level chip.
So the customer who doesn't have to worry about it at all in fact, if you take out the you know three with Gannett it'll look just like any other industry.
Except for the performance.
They'll see a huge improvement in performance, but it is as easy to use as any of our existing industries and we handle all of the difficult.
In us safety features and.
The driving the math the Gan in appropriate manner.
So we have been at it for many years, we have solved all the problems I believe.
We have we have we are already shipping in high volume.
We have had very positive feedback from our customers and it's a.
We expect to use a lot of it going forward.
In terms of the supply chain, we are actually using one of our.
Existing foundries.
To do production, but as you know as like all of our other technologies. The Gan technology that we have is is our own is completely proprietary not available to anyone else.
That's all very helpful. Thank you.
And you also mentioned that the U.S.P.T.D. is now relate inflection point I was hoping you could elaborate a little bit on how diversified.
Your your business is split.
Specifically with the with the smartphone market.
Yes, you could just elaborate that because obviously youre expecting pretty strong growth both Q to Q3.
So is that growth coming from many different players.
We have a number of Oems, who contributed to our growth in Q2 and will contribute to growth in Q3.
But.
In terms of the largest growth it comes from primarily from Chinese.
Oems.
Because they are pushing the fast charging much more so than others.
They.
They have gone to a much higher power levels in charging batteries.
But going forward, we expect fast charging to be a theme across.
Almost all Oems.
Very good and maybe moving onto consumers. So you obviously talked about the inventory in the channel are really coming down.
But do you know do you expect the consumer business to start gradually growing here again.
And I'm thinking more obviously you know what the sell through starting to act better that was that across the board including consumer.
Yes, and basically as far as you know we said it grew sequentially and I think you know the third quarter I don't expect that much. The trade is still an uncertainty both in the third quarter typically the air conditioning business tends to taper down.
But with Q4, I'm expecting that to start ramping back up.
Because of the air conditioning business.
Great.
Yes.
Just a question on sell through.
The strength in sell through primarily came from consumer and industrial applications.
So that gives us a positive feeling that the inventories are being worked down in both of those areas.
Great and just one last question on your own inventories Sandeep. You said, you expect another big decline or inventory days.
For Q3.
Sure do you think you get sort of back to the levels of a year ago.
No I think Thats further now yeah, I think you know as you know our model as somewhere between 110 to 125 days, even though we'll have a step down in Q3 I think for the near term you will see our inventory a little more elevated than our model.
Very good congratulations guys. Thank you very much.
Sorry.
Your next question comes from Christopher Rolland from Sig. Your line is open.
Hey, guys congrats.
Are not strong.
Com.
Results.
That's fantastic.
Perhaps following up there on the U.S. PPD.
Can you talk about what kind of linear or do you expect.
In the next few quarters and into 2020.
On Qsb PD and then.
How meaningful is that PC OEM that you talked about there could we see that drive.
Let's say, 20% year on year growth for.
For that segment.
Okay. So let's talk about the SPD first.
You must be PD is going to be a driver of our revenue for several years to come is not going to be in a quarter by quarter thing, but rather a continuous expansion of faster charging into smartphones.
And as far as the seasonality generally Q3 is our strongest season for cell phones in general and therefore, we expect the same with us bpd.
Having said that.
We do have lots of other design activities. So we think that.
Q4 will be slightly higher to the best we can model because we think that the consumer will come back a little bit.
In Q4.
So we think.
That will help Q4, a little bit in terms of sequential growth.
No.
Coming to the PC OEM I believe you're referring to the INOMAX product that we've talked about this is the product that replaces an AC to DC power supply and multiples DC to DC power supplies into a single power supply.
And we have won a major design with one of the larger PC Oems that will start generating revenue later this year.
But this year the revenue will not be material.
But next year.
It will be.
A reasonable revenue in fact, if you take that if you take the PC area in context, it would be actually quite significant if you take the overall company revenue.
It will be obviously not that big but we but that's just one design we are still working with many other companies.
Including not just displays but also Tvs. So we expect the.
More revenue from that product as time goes on.
I hope I answered that question I I mean were you talking about the INOMAX.
No no that's a that's exactly that's exactly the the design I was talking about.
Switching gears, a little bit too.
Again again I know some other guys have talked about Ghana.
And on for example.
I started off again, I think maybe anthony onto for a lot of power applications and then they switched over to silicon carbide.
For this particular application.
That you guys.
It is silicon carbide on an alternative good alternative.
And if so why did you choose Canada over silicon carbide.
Well silicon carbide is a relatively mature technology, but it's quite a bit more expensive than silicon again is more cost effective than silicon carbide.
For these types of applications. So that's the reason we are using again I mean, we have nothing against Silicon carbide, we think silicon carbide.
He is a very valuable technology, especially when you go to high voltage is like 1200 volts and 1700 malls.
At 600, 700 volts. It will have a hard time competing with the gallium nitride technology.
To answer the first part of your question why.
There are so many people.
Who have talked about an off of have offered samples of Gan, but have not been.
Have not been successful commercializing it it is exactly what I had mentioned earlier.
As a discrete device.
Gan is extremely difficult to use.
Customers have tried very hard to do so fast that.
Driving the Gan is it with the discrete component you know customers run into serious problems.
We have completely solve that by integrating it inside our products our customers don't have to worry about it.
And that is the major difference.
The second differences our technology, we believe is uniquely different.
It is.
Much better suited for power conversion, because it's a design from scratch.
To meet what our requirements are a worse as a discrete device, which is usually designed to be a very ubiquitous and it can be used as a discrete device in any application. So we have the luxury of fine tuning the device plus we use a totally different technology.
So it's it's very different from everybody else and we have taken our time to make sure it's very reliable and robust and I think.
With the customers are.
Given us very positive feedback on that.
Great. Thanks again guys.
You're welcome.
We have no further questions I turn the call back over to the presenters.
All right. Thanks, everyone for listening there will be a replay of this call available on our investor website investors that power Dot com.
Thanks, again for listening and good afternoon.
This concludes today's conference call you may now disconnect.