Power Integrations, Inc. (NASDAQ:POWI) Q1 2024 Earnings Call Transcript

Power Integrations, Inc. (NASDAQ:POWI) Q1 2024 Earnings Call Transcript May 7, 2024

Power Integrations, Inc. beats earnings expectations. Reported EPS is $0.18, expectations were $0.12. Power Integrations, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Meg, and I will be here conference operator today. At this time, I would like to welcome everyone to the Power Integrations Q1 Earnings Call. All lines have been placed on mute to prevent any background noise. After speaker’s remarks there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Joe Shiffler, Director of Investor Relations. Please go.

Joe Shiffler: 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 Nayyar, our Chief Financial Officer. During this call, we will refer to financial measures not calculated according to GAAP. 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&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-K filed with the SEC on February 12, 2024. 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.

Balu Balakrishnan: Thanks, Joe, and good afternoon. Our first quarter results were on target with revenues of $92 million, non-GAAP gross margin of 53% 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 first quarter and the month of April. We expect revenues in the second quarter to be in the range of $105 million plus or minus €5 million. 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 exchange rate and higher back-end manufacturing volumes. 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 two key developments in recent weeks starting with the introduction of InnoMux-2. InnoMux-2 is emblematic of our system level approach to a high level power conversion, high voltage power conversion, combining leading edge switch technology, novel controls games and proprietary packaging that is not only cost effective and thermally efficient but also implements isolation and feedback through our flex linked technology. Most products with embedded AC-to-DC power supplies require multiple DC output voltages for different parts of the system. For example, 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.

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. InnoMux-2 offers a new architecture, eliminating the need for downstream DC-to-DC stages by providing up to three 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 InnoMux-2 features our highly efficient, PowiGaN switch, enabling overall system efficiency of better than 90%. 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 percent efficient, the compounded losses result in a total system efficiency of only 81 percent.

In other words, with InnoMux-2, losses would be reduced by nearly half. Because most products with embedded power supplies require multiple DC voltages, the addressable market opportunity for InnoMux-2 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. 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. Power Innovations has led the way in development of GaN technology for power conversion, starting with our 750-volt GaN in 2018, and we are advancing our technology along multiple fronts. One is cost, as we continue to drive our GaN towards a cost parity with silicon MOSFETs. Another is voltage, with introductions of 900-volt and 1250-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 level products for applications such as data centers, comm equipment, and 800-volt EVs. The third 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. High current technology is the next frontier in GaN development, and will enable GaN to deliver hundreds 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 will 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. First quarter revenues were $92 million, 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 three of the four 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.

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 and high power was offered by strengthened 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 gains at Chinese OEMs during the pandemic shortages now reverting back to domestic suppliers.

However, the decrease also reflects seasonality and continued inventory work downs and we do expect a healthy recovery over the balance of the year as these transitory factors it 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 million. Non-GAAP gross margin for the first quarter 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 $41.2 million up sequentially as expected due mainly to seasonal factors such as resumption of FICA taxes. Other income of $3.5 million was up slightly from the prior quarter, reflecting higher returns on our investment portfolio. Non-GAAP earnings for the first quarter was $0.18 per diluted share. Diluted share count for the quarter was 57.1 million, down about 100,000 from the prior quarter driven by share repurchases. We used $15 million for repurchases during the quarter, buying back 207,000 shares. $11 million remained on our repurchase authorization as of March 31st.

The other primary uses of cash in the quarter was $11 million for dividends with an additional $4 million for CapEx. Cash flow from operations for the quarter was $16 million. Inventory days were at $349 at quarter end, up five 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 million, plus or minus $5 million, a sequential increase of 15% at the midpoint. Non-GAAP gross margin should be between 53.5% and 54% up 50 to 100 basis points sequentially. 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 $44.5 million and $45 million, 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 $1.5 million of expenses in the second half of the year. Now, operator, let's begin the Q&A.

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

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