Power Integrations Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 8 speakers on the call.

Operator

I would now like to turn the call over to Joe Shifler, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, Meg. Good afternoon. Thanks everyone for joining us. With me on the call today are Balu Balakrishnan, Chairman and CEO of Power Integrations and Sandeep Nayar, our Chief Financial Officer. During this call, we will refer to financial measures not calculated according to GAAP.

Speaker 1

Non GAAP measures exclude 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 and A session, will include forward looking statements denoted by words like will, would, believe, should, expect, outlook, forecast, anticipate 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 are discussed in today's press release and in our most recent Form 10 ks filed with the SEC on February 12, 2024.

Speaker 1

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 it over to Balu.

Speaker 2

Thanks, Joe, and good afternoon. Our first quarter results were on target with revenues of $92,000,000 non GAAP gross margin of 53 percent and non GAAP earnings of $0.18 per share. Channel inventories fell by more than a week and a half during the quarter and the improvement in bookings that began in December has continued through the Q1 and the month of April. We expect revenues in the 2nd quarter to be in the range of 1 $105,000,000 plus or minus $5,000,000 That would be a seasonal increase of 15% at the midpoint. We also expect a further increase in gross margin driven by the favorable dollar yen exchange rate and higher back end manufacturing volumes.

Speaker 2

Most importantly, design momentum has remained strong, especially in key strategic markets like high power, motor drive and automotive, where big picture trends like energy efficiency, clean energy and electrification are expanding the opportunity for our products. We also continue to advance along our product and technology roadmaps with 2 key developments in recent weeks, starting with the introduction of Inomax II. Inomax II is emblematic of our system level approach to high level power conversion, high voltage power conversion, combining leading edge switch technology, novel control schemes and proprietary packaging that is not only cost effective and thermally efficient, but also implements isolation and feedback through our flux link technology. Most products with embedded AC DC power supplies require multiple DC output voltages for different parts of the system. For example, a refrigerator might require 15 volts for the electronics controlling the compressor motor, 24 volts for the interior lighting and 5 volts for the user facing control panel.

Speaker 2

In a typical architecture, the power supply provides a single DC output, which is then converted into each of the different downstream voltages by low voltage DC to DC converters. The energy losses at each conversion stage are compounded, significantly reducing the overall system efficiency. Inomax 2 offers a single new architecture eliminating the need for downstream DC to DC stages by providing up to 3 independently regulated DC outputs. This dramatically reduces component count and complexity and also enhances efficiency by eliminating the compounding of losses across multiple stages. The cherry on the top is that InnoMax II features our highly efficient PowerV GaN switch, enabling overall system efficiency of better than 90%.

Speaker 2

Contrast this with a traditional architecture, which is an AC to DC stage followed by a separate DC to DC stage. Even if both stages are 90% efficient, the compounded losses result in a total system efficiency of only 81%. In other words, with Inomax II losses would be reduced by nearly half. Because most products with embedded power supplies require multiple DC voltages, the addressable market opportunity for InnoMax II is large and diverse. We already have a pipeline of design activity across a wide range of applications, including displays, appliances, networking equipment and more.

Speaker 2

Our first production design, a desktop monitor at a top tier PC OEM is expected to begin ramping in Q3. The other notable development on our roadmap is our agreement to acquire the assets of Odyssey Semiconductor as announced earlier today. Odyssey is a developer of optical GaN technology, which has higher current capability than lateral GaN devices and therefore has the potential to address much higher power levels. High current GaN has been on our development roadmap for some time and we are bringing the Odyssey team on board to augment those efforts. Our integrations has led the way in development of GaN technology for power conversion, starting with our 7 50 volt GaN in 2018 and we are advancing our technology along multiple fronts.

Speaker 2

One is cost as we continue to drive our GaN towards the cost parity with silicon MOSFETs. Another is voltage with the introductions of 900 volt and 12 50 volt GaN technology last year and an even higher voltage technology coming soon. These higher voltages expand the opportunity for GaN in power supplies and we are designing system level products for applications such as data centers, comm equipment and 800 volt EVs. The 3rd vector of GaN development is current. Today's lateral GaN is the optimal switch technology for up to about 10 kilowatts, but does not support high enough current to deliver more power.

Speaker 2

High current technology is the next frontier in GaN development and will enable GaN to deliver 100 of kilowatts of power. This would dramatically expand the competitive overlap between GaN and silicon carbide and make GaN a compelling alternative for applications like EV drivetrain inverters. While there are a number of significant technical challenges to solve before high current GaN becomes a market ready technology, we are pleased with the progress we have made to date and we are doubling down with the addition of Odyssey team. With that, I'll turn it over to Sandeep for a review of the financials.

Speaker 3

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. 1st quarter revenues were $92,000,000 slightly higher than the midpoint of our guidance, while non GAAP earnings were $0.18 per diluted share, above the level implied in our guidance as we came in better on both gross margin and operating expenses. On a sequential basis, revenue was up 2% with 3 of the 4 end market categories up versus the prior quarter. Consumer revenues increased more than 40%, partly reflecting seasonality in air conditioning, but more importantly, a much improved inventory picture at distributors and end customers in the appliance market.

Speaker 3

Channel inventory associated with the consumer market was slightly below normal entering the quarter and fell even further as the quarter progressed. The computer category was up more than 30% sequentially on new design ramps in notebooks and an uptick in tablets as a key end customer has largely worked through its excess inventory. The industrial category was up mid single digits sequentially as seasonal softness in high power was offset by strength in metering application and improvement in broad based industrial. The communication category was down more than 50% sequentially. The decline was partially driven by market dynamics, including share gains by Huawei at the expense of our customers and some of the incremental share gain at Chinese OEMs during the pandemic shortages now reverting back to domestic suppliers.

Speaker 3

However, the decrease also reflects seasonality continued inventory work downs, and we do expect a healthy recovery over the balance of the year as these transitory factors should be largely behind us. Revenue mix for the quarter was 41% Consumer, 37% Industrial, 11% Communication and 11% Computer. Distribution inventory ended the quarter at 8.8 weeks, down more than a week and a half from the prior quarter as sell through exceeded sell in by about $10,000,000 Non GAAP gross margin for the Q1 was 53%, up 30 basis points from the prior quarter as a more favorable end market mix was largely offset by the effects of low manufacturing volumes. I expect a further sequential improvement in Q2 as we convert more wafers to finished goods and we recognize a further benefit from the favorable dollar yen exchange rate, which affects the cost of wafers from our Japanese foundry partners. Non GAAP operating expenses for the quarter were $41,200,000 up sequentially as expected due mainly to seasonal factors such as resumption of FICA taxes.

Speaker 3

Other income of $3,500,000 was up slightly from the prior quarter reflecting higher returns on our investment portfolio. Non GAAP earnings for the Q1 was $0.18 per diluted share. Diluted share count for the quarter was 57,100,000, down about 100,000 from the prior quarter driven by share repurchases. We used $15,000,000 for repurchases during the quarter, buying back 207,000 shares. Dollars 11,000,000 remained on our repurchase authorization as of March 31.

Speaker 3

The other primary uses of cash in the quarter was $11,000,000 for dividends with an additional $4,000,000 for CapEx. Cash flow from operations for the quarter was $16,000,000 Inventory days were at 349 atquarterend, up 5 days from the prior quarter. We expect inventory days to begin declining in Q2 driven by the anticipated upturn in revenues. Turning to Q2 outlook, we expect revenues to be $105,000,000 plus or minus $5,000,000 a sequential increase of 15% at the midpoint. Non GAAP gross margin should be between 53.5% 54%, up 50 to 100 basis points sequentially.

Speaker 3

The puts and takes here will be the positive impacts from the favorable yen exchange rate and higher manufacturing utilization, offset by less favorable mix as we anticipate a sequential rebound in the communication category. I expect full year non GAAP gross margin to be approximately 54%. Non GAAP operating expenses should be between $44,500,000 $45,000,000 driven by headcount growth as well as annual merit increases, which took effect early in the quarter. For the full year, I expect non GAAP OpEx to be up roughly 7% versus the prior year, including the impact of Odyssey, which adds about $1,500,000 of expenses in the second half of the year. Now, operator, let's begin the Q and A.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Christopher Rolland from Susquehanna Susquehanna International Group. Please go ahead.

Speaker 4

Hey, guys. Congrats on the results. And just a quick clarification, Sandeep, did you say 54 for next quarter? And then Balu or Sandeep, either if you could talk about order trends in Q1, month of March, month of April, what end markets were affected or rebounded the most? And then how that should play into the outlook for next quarter by end market?

Speaker 4

Thanks.

Speaker 3

What I said is for the gross margin, it was 53.5% to 54% for Q2. And I also said for the whole year, I expect it to be around 54% all non GAAP.

Speaker 4

Thank you.

Speaker 2

In terms of bookings, as I mentioned, December was a strong month and that strength continued throughout Q1, except of course for a dip in February because of the Lunar New Year, which is expected. And then the strength continued through April. So that's very good news. And in Q1, our book to bill was more than 1 for the first time in 1 year. So that's again a very good sign.

Speaker 2

In terms of where we saw the strength was I would say the biggest is consumer and then also a portion of the industrial also came back. The cell phones was weak, the communication was weak, primarily because there is still inventory correction going on. And also Q1 is a seasonally low quarter for us. We do expect the consumer to sorry, communications to come back strongly in Q2 now that the inventory issues gone away and Q2 is also a stronger seasonally stronger quarter for cell phones.

Speaker 4

That is great color. Thank you very much for that. And then I guess, I need to know more about this ODiSI. How big do you think this market could be? How much are you investing here?

Speaker 4

Or are there synergies? How are you looking at it? And then just a quick one for Sandeep. Do you still think you lead the market by 1 quarter in terms of the cyclical recovery? Just curious.

Speaker 4

Thanks.

Speaker 2

Okay. Let me answer the Odyssey question. As we have mentioned before, we have been working on higher current GaN technology because the current technology goes up to about 10 kilowatts or so. Beyond that you really need to change the technology significantly to be able to handle much higher current levels. In terms of voltage, we have always we have already been able to achieve up to 12 50 volts and we expect to go even higher with the current technology.

Speaker 2

The reason we acquired the assets of Odyssey is that the Odyssey people have been working at the vertical GaN technology to achieve very high current levels and very high power levels as a result of that. And we believe with this acquisition of assets, we have multiple benefits. One is it comes with a clean room facility for working on the new technology. It's you can call it a small fab or what we call a fab, a fabslab. Number 2, we are taking on all of the key employees who have lot of knowledge in the high current GaN technology.

Speaker 2

Just to be clear, the technology we are working on is our own technology. It is different from what Odyssey and many others have been working on in terms of vertical gap. Our technology we believe will be very cost effective. That's the most important thing. It has cost effective, number 1.

Speaker 2

And we still have a lot of work to do, but our goal is to get GaN to much higher power levels like 100 of kilowatts so that we can be a very compelling alternative to silicon carbide. Silicon carbide is fundamentally more expensive, whereas GaN, there is no fundamental reason why it can't be very much less expensive than silicon carbide. So that's the reason we are pushing the power levels and this acquisition of Odyssey assets will speed up that process.

Speaker 3

But having said that, I think the way to look at it is we've been talking about we would see keep seeing growth in our revenue sequentially even though visibility is lower for the second half, but we still believe that we will grow sequentially each quarter through the year. You are seeing that a real comeback in appliances, which you saw a nice big growth. Our industrial segment, we are expecting for that to come back more in the 3rd Q4. And even communication, which had a pretty low quarter, should start coming back in the following quarter. And we're doing very well in the computer segment with the design wins.

Speaker 4

Excellent. Thank you so much.

Speaker 1

All right, folks. Sorry, we're trying to get reestablished contact with our operator here. Bear with us for 1 minute longer.

Operator

Sorry, your next question comes from the line of David Williams with The Bench Company. Please go ahead.

Speaker 5

First, just congrats on the improving backdrop here and the Odyssey Semi acquisition.

Speaker 2

Thank you.

Speaker 5

And I guess if you kind of think about what Odysee brings, clearly that's a different type of different process than what you all are working on. You talk maybe a little bit about how you think this will integrate just kind of given the differences between the vertical GaN that they're working on relative to your process. Just trying to understand how you're going to incorporate that and is it 2 different roadmaps and progress points or do those come together over time?

Speaker 2

Thanks, David. So the best way I can explain it is that there are number of companies working on vertical GaN technology. They've been working on it for some time now. There's another company called NextGen, which just closed down. There are a lot of challenges with the type of technology they were working on.

Speaker 2

We think we have a very different way to achieve the same result. And where we can get the help from Odysee is their knowledge of GaN, vertical GaN devices. They have number of patents that is part of the assets we are purchasing. They have a clean room, which is also very useful for us to try our new technologies. So those are the reasons.

Speaker 2

If we didn't do that, it would we could have done it on our own, but have taken more time. And this really helps us reduce the time to market of this technology by somewhere in the 1 to 2 year range. And so it speeds up our process because of the knowledge they bring, because of the patents, because of the clean room.

Speaker 5

Okay. All right. Thanks. Appreciate the color there. That's very helpful.

Speaker 5

And then we didn't talk much about automotive this quarter like you have in the past. Just wondering if you could give us an update there, how those design wins are tracking and maybe if there's been any positive or developments during the quarter? Thank you.

Speaker 2

Good question. And the only reason we didn't talk about it is we have talked about it in the past and we had a lot of other things to talk about today. But really automotive is doing exceedingly well. We already have a dozen cars in production today. We will have another dozen introduced this year and another dozen next year.

Speaker 2

And we really expect this to grow nicely. The inflection point is probably couple of years away before we see a strong growth in terms of dollar revenue. And our expectation is by 2028, this could be something in the order of $100,000,000 in revenue. So it's doing really well overall. The product is incredibly compelling to customers.

Speaker 2

And the one example I can give you is a Japanese Tier 1 customer who just recently qualified us. They did the audit of our systems, quality management systems and they have qualified we passed the audit with flying colors. So that shows that we can address the Japanese market, which is one of the hardest markets to address in terms of automotive. So that's also a great sign for us.

Operator

Thank

Speaker 6

Thank you very much. Good afternoon, guys. I love the dramatic pauses ahead of questions. It really sets it up. One of the questions I had, Balu, if you don't mind going into a little bit more detail on the INOMAX product and specifically what end markets you think are the most attractive there?

Speaker 6

It seems like an architecture that might be, suited for the data center market. And I wonder if you've gotten a toehold there or how those conversations are going if in fact they're happening in the data center power space? Thanks.

Speaker 2

Thanks, Matt. The first product we introduced, which is the Inomux 1, I guess, was really directed towards displays. Displays is really the only market it was designed to address. InnoMux2 is much broader. It can address any embedded power supply that has more than one output requirement at the system level.

Speaker 2

So that includes appliances, that includes industrial applications, that includes servers, as you said, data center servers, server power supplies. Typically inside a server, you need multiple output voltages, you need 12 volts for the fans and you need 5 volts and 3.3 volts. So it's a perfect match for that as an auxiliary power supply. So in terms of design wins, what we are seeing is that a lot of activity across all of those markets. The first design win that we received is a major OEM that has a display requirement, efficiency requirement that we can very easily meet with the InnoMux 2 and that will go into production next quarter.

Speaker 2

That particular customer is already using InnoMux1, but InnoMux2 will be a much broader application across a broader number of models. So we are looking forward to that. But we are also working with TVs. It's a good match for TVs and then appliances. We have a number of designs going on in appliances and several industrial applications will also use that.

Speaker 2

As far as data centers go, we are just beginning to sample customers and we'll keep you updated on that. This is for the what they call the standby or auxiliary power supply is in the 50 to 70 watt range and that will require multiple outputs. Now I think the question you had is on the main power supply. Now that is evolving as we speak for artificial intelligence. They need to dramatically improve the power level.

Speaker 2

Right now, most of the solar power supplies are in the 2.5 to 3 kilowatt range. But now for AI racks, they need a 5 kilowatt power supply in the same form factor, which makes it really challenging, especially without widebandgap solutions. So there I think our GaN will play an important role, but that's still being defined as we speak. We will work with multiple customers, OEMs and ODMs to understand the requirements and we are working as you know on products for that and that those products are not quite ready yet. That will take a couple of years.

Speaker 2

But in the meanwhile, we can get into the oxalate power supply, which also has to be extremely efficient. So our GaN technology with our 0 voltage switching capability will be very attractive for that application with the InnoMux2 device.

Speaker 6

Got it. No, thank you, Balu. I appreciate all the color. That was really helpful. I guess as my next question, Sandeep, a couple of things.

Speaker 6

1, you talked a little bit about in your script how you are seeing channel inventory levels and order patterns. I wonder if you might comment a bit about customer level inventories to the extent that you have visibility, has that visibility improved any as you work through these some of the challenges in the channel with the customer base? And I guess the second question, just totally unrelated on gross margin, you said 54% for the year. I guess if you could help with the puts and takes there and what kind of assumptions you have on the yen and that 54 number that would be helpful. Thanks guys.

Speaker 3

Yes. I think definitely, especially in the consumer segment, you've seen not only the channel, but even customer inventory. As you remember, in the past, we talked about our major customers in Korea. We hadn't taken for a long time and we are starting to see orders there. So clearly you're seeing a movement and the channel inventory in consumer is well below our what I call a normal average.

Speaker 3

But industrial is still a bit higher. So that we know will work out. But I think definitely, if you really look at it, it's playing out as we expected. As far as the gross margin, it's basically, as you will see is, you're going to see the yen is going to be favorable. The volume increase for the back end utilization is better as we go.

Speaker 3

Obviously, the mix will go a bit unfavorable as the quarter progress year progresses as communication starts coming back. But if you want to look at the whole year, it is really everything mix in and basically the utilization. But the input cost is the headwind. And even for next year, I think that's going to be the case where yen continues. Now in Q1, the yen was actually a little bit down.

Speaker 3

The reason being, if you remember last year, the yen had moved down to about 130 level for a period of time. And it takes a while for it to flow in the P and L. But as you can see, the yen has strengthened and I mean the dollar has strengthened. And as a result with the inventory carrying I think that benefit will even flow quite a bit into next year. So I kind of feel that even for next year, we will stay at a higher level even though input costs maybe are a headwind, but we'll remain if you look in our model on the higher end of our model.

Operator

Thank you. Your next question comes from the line of Horace Bamber from Stifel. Please go ahead.

Speaker 7

Yes. Good afternoon. This is Jeremy calling for Tore. Just two things here. Maybe if we could just circle back on the INOMAX 2, it looks like a really fantastic product here.

Speaker 7

I was wondering in terms of the DC to DC power conversion, it seems like you had to develop some expertise there. Are there other areas where you want to take this, where it's maybe more standalone DC to DC conversion products? Or is the ACDDC plus DC to DC market big enough near term to take up all your resources at this point?

Speaker 2

Thanks, Jeremy. Just to clarify, we don't actually implement DC to DC converters. What we have done within Amux II is that with a single power supply and single magnetics, that is single transformer, we are able to deliver multiple output voltages or current for that matter that are individually regulated, meaning that they can be independently controlled and regulated. For example, one output could be an LED driver where the voltage can vary with the intensity of LED and so on. But the rest of the outputs will not be impacted by that.

Speaker 2

And that's a unique topology we have developed. We have a number of patents on that. So it actually eliminates the DC to DC converter. So we don't build DC to DC converters. We just eliminate them because you don't need them anymore.

Speaker 2

So we are still focused on high voltage. It's still a single stage high voltage power supply. Now this uses a flyback topology, which is useful up to several 100 watts. So anything that falls within that power range that requires more than one output voltage is a good market for that. So basically that's everything other than adapters.

Speaker 2

Adapters typically only have one output voltage, but literally everything else that's inside the product, whether it's a TV, monitor, appliance or any industrial application requires more than one output voltage. And that's where InnoMax2 becomes very attractive. It is actually a quite an amazing invention I think. When we tell people this, they are quite surprised. And it's made possible by 2 things.

Speaker 2

1 is a very unique control scheme. Number 2, our FlexLink technology. Without FlexLink, you cannot implement this because it requires very precise control of how much energy is delivered to each output through the same transformer. That's just one transformer.

Speaker 7

Got it. Thank you. That's very helpful for the clarification there. And I guess maybe switching gears again back to ODiSI, It's was there I guess a couple of questions within here. First is in terms of the technology, is this something where you're it sounds like you're integrating the vertical GaN into what you're already developing internally?

Speaker 7

Or do you see like a slight bifurcation within the supply of GaN where there's one focus on low cost, there's a different technology focused on this very high power and you need both technologies in order to address the full range of GaN applications?

Speaker 2

Okay. Good question. I had to be careful how far I want to go with this. We normally don't discuss our R and D efforts. Let me see how I can answer this question.

Speaker 2

First, let me make it one thing very clear. What Odysee was doing, what NextGen was doing and others are doing are very different from what we are doing. The reason to acquire Odysee is to get the expertise, not their technology, but the expertise. Now there are many aspects to our development. There are 2 or 3 challenges to overcome.

Speaker 2

And we believe that the team at Audacy can help us with that because they just have fundamental background in GaN, especially vertical GaN. So we think they can help us accelerate our efforts. And beyond that, I'm not comfortable giving a lot of information because it's very competitive information. I think for competitive reasons, we would like not to discuss that too much in detail.

Speaker 7

Fair enough. Thank you very much Balu.

Speaker 2

You're very welcome, Jeremy. All right. Well, it seems

Speaker 1

if we have no further questions. So thanks everyone for listening. There will be a replay of this call available on our website, which is investors. Power.com. Thanks again and good afternoon.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Power Integrations Q1 2024
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