Power Integrations, Inc.
Q2 2021 Earnings Call Transcript

Published: 1 Aug 2021

[Operator:]

Welcome to the Power Integrations Second Quarter Earnings Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Mr. Joe Shiffler. Sir, please go ahead.

[Joe Shiffler:]

Thank you, Mel and good afternoon everyone. Thanks for joining us. With me on the call today are Balu Balakrishnan, President and CEO of Power Integrations; and Sandeep Nayyar, our Chief Financial Officer. During the call today, 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 our press release.

[Balu Balakrishnan:]

Thanks, Joe and good afternoon, everybody. This was another record quarter for power integrations, with revenues of $180 million, up 69% from a year ago. Demonstrating the leverage in our model, our non-GAAP operating margin surpassed 30% for the quarter and the increased our non-GAAP EPS by more than 2.5 times year-over-year. For the first half of 2021, the revenues grew 63% from the prior year. We are growing well above the growth rate of the analog industry, thanks to broad market share gains and secular trends that will endure even as demand normalizes over the coming quarters. One such trend is energy efficiency, which has been a key part of our story, since the introduction of our EcoSmart technology over two decades ago. Energy efficiency has provided a tailwind ever since, driving OEMs to redesign their products in response to regulatory standards and consumer demand. At times, these tailwinds have been boosted by highly impactful standards like the 2007 California regulations on external power supplies, which quickly drove linear power supplies out of that market. Power Integrations were an outside share of that opportunity because of our LinkSwitch ICs were an ideal replacement for Linears. A similar transition has now taken place in the air conditioning market due to China's Nanotori standards for room AC units, which will announce late 2019 and have been phased in over the past year. China's updated minimum efficiency performance standards essentially rule out fixed frequency AC units, which accounted for nearly half of China's production, before the Chinese look at back. In the response to the standards, manufacturers have transitioned most of their production to variable speed brushless DC motors and have also converted from linear to switch mode power supplies to drive the electronics. Power Integration is a market leader in Switched mode power supplies for air conditioners and our incumbent position has allowed us to capture much of the volume transitioning away from Linears. It has also created opportunities for our BridgeSwitch motor drive chips, which drive brushless DC motors such as those used in variable speed AC units.

[Sandeep Nayyar:]

Thanks, Balu, and good afternoon. As usual, I will focus my remarks primarily on the non-GAAP results, which are reconciled to GAAP in our press release tables. Revenues for the June quarter were $180 million, up 4% sequentially and above the midpoint of our guidance. Consumer revenues were up about 10% sequentially, driven by broad-based growth in appliances and consumer electronics. Industrial revenues were also up about 10% sequentially, driven by a range of verticals, including home and building automation, lighting application and broad-based industrial applications. Computer revenues increased mid-single digits, driven by share gains in notebook charges, which offset broader softness likely reflecting less demand related to work from home. Communications revenues were down mid-single digits, reflecting the lower demand from cellphone customer, offset partially by channel replenishment. Revenue mix for the quarter was 35% communications, 31% consumer, 26% industrial and 8% computer. We stated last quarter that March would be the low watermark for gross margin and that is proving to be the case. Non-GAAP gross margin rose to 51.4% in the June quarter, up 200 basis points sequentially, driven primarily by a more favorable end market mix and manufacturing efficiencies. Non-GAAP operating expenses were $37.6 million for the quarter, up $1.4 million from the prior quarter, driven by annual salary increases and higher R&D investment, but slightly below our expectations, reflecting the pace of headcount additions. Non-GAAP operating margin for the quarter was 30.5%. While I expect operating margin to settle back into the high 20s over the next couple of quarters, crossing the 30% threshold in the June quarter clearly demonstrates the leverage in our financial model.

[Question-and:]

[Operator:]

Thank you. We have a first question comes from the line of Ross Seymore from Deutsche Bank. Your line is now open. You may ask your question.

[Ross Seymore:]

Hi, Guys. Thanks for letting me ask a question. Congrats on the solid results. I wanted to talk about the channel, first and foremost. And really what it means to your second half expectations being higher or less bad than you said a quarter ago. The channel looked like it got back closer to normal. Is that going to be a tailwind and get back to normal in your second half expectations, or do you think that the sell-through is going to be strong enough that refilling the channel is going to take a little bit longer?

[Balu Balakrishnan:]

So as we said our normal levels are six to seven weeks. And here we are at five. The predominant growth in the channel came from the cell phone area. And we believe, because of the share gains, that we have had and the secular drivers, we are going to have a better second half than we had previously anticipated. So in terms of the channel, we expect to be relatively flat for Q3. There is a possibility, it could go a little bit higher in Q4 eventually it will go to normal, but that's our best guess at this point.

[Ross Seymore:]

Got it. Thanks for the color on that. And I guess as my follow-up, nice performance on the gross margin side of things. Sandeep, you talked about the two reasons, mix, I think we can see a little bit of that mix. And why that would happen. But with the manufacturing side a little bit more of a surprise to you? That you're usually pretty accurate on that, it's always good to be surprised to the upside more than the downside. But I just want to get a little bit more color on the drivers, especially on the manufacturing side, what happened there and how sustainable it is?

[Sandeep Nayyar:]

Well, the volumes are going up. And we've had the yield improvements, test time reductions. And also, as the mix in communication moves to aftermarket chargers that helps our margin also, because the volumes are lower and it has a favorable contribution. And the environment where we are, where costs have gone up, we do value pricing. And as a result of that, when you're competing against the discrete and you're doing value pricing, that also helps a bit.

[Balu Balakrishnan:]

Yeah, utilization and also test cost improvements are probably the biggest manufacturing cost improvements. In the test, we have migrated to a new test platform which is more cost effective and that happened over the last 12 months or so. So that has helped us. But as Sandeep said, even in communications we are seeing improving gross margins for the reasons you mentioned like the aftermarket and the fact that everybody is going to very high-end charges.

[Ross Seymore:]

Got it. Congrats again. And thanks guys.

[Balu Balakrishnan:]

Thanks, Ross.

[Operator:]

Thank you. Next question we have the line of Christopher Rolland from SIG. Your line is now open. You may ask your question.

[Christopher Rolland:]

Thanks guys, and congrats on the quarter. So I actually wanted to talk about the non-GAAP operating margin for a second here. I think your long-term model is 20-plus. And I know you guys had an outstanding quarter of plus 30 this quarter. And I know you said it was going to go back into the high 20s. But I was wondering if you had any plans on updating that long-term op margin target and where that might go overtime?

[Balu Balakrishnan:]

Our long-term model continues to grow our top line low double-digit for revenue growth with OpEx growing at about 60%. And we have always talked about this to be at a three to five-year period on an average. We have had a step function increase in the revenues that has caused our operating margin to move up. And our goal has always been there to maximize our operating margin over a period of time and not in a particular given year.

[Christopher Rolland:]

Yeah. Would you say that, 30% plus could be a stretch goal for you guys overtime?

[Balu Balakrishnan:]

Yeah, I really think if you remember I talked about 20%. And again, you have to look over a three to five-year period could be -- we had talked about this mid-20% goal. We are not ready to again state it, but I think being in the mid-20s plus, seems to be definitely in the direction where we are. And obviously, our goal, as we move forward, where we keep enhancing that towards the number that you indicated. But at this point what we want to do is talk in terms of three to five years. But I think we have achieved the mid-20 s and hopefully can sustain that and we start going in a large direction from there.

[Christopher Rolland:]

Yeah. Okay great. And then, it does seem like there are one or two newer game companies out there looking to go public. And maybe you can talk about that market, how you see share shaking out? And then, ultimately, pricing dynamics moving forward, as we have some more, newer entrants into the market?

[Balu Balakrishnan:]

Sure. Just to be clear, all other GaN companies offer discrete devices. They don't provide a system-level solution. And I think that's where we have a huge advantage. GaN is very difficult to use. It's a very fast device. A lot of customers struggle with it. Whereas, when they use our products GaN is embedded within the whole product. So we take it of all of the idiosyncrasies of the GaN we deal with that. As far as the customer is concerned, they can't even tell the difference from a design point of view. Of course, they can tell the difference in terms of performance. And that's how easy we made GaNs our customers. As far as, the other side of it is that the number of components required to implement our solution is far less. We typically have anywhere from on-half to one-third the number of components, which is really needed to make the power supply small. It's not just a question of using GaN. You have to be able to reduce the size of the power supply for that you have to reduce the component count. We also have to implement features like currently in inside of product in a lossless way. Otherwise you end up having additional losses outside, which really negates the use of GAN. So talking about GaN as a device is not very useful. You have to look at the system. And that's why GaN has had the challenges for many, many years now and we are able to break through that. Lastly, I would say that in terms of the technology, we believe we have the most cost effective technology in the world in GAN. And that's because our structure is very different from everybody else's. And it's uniquely different because we wanted the most cost-effective technology for our switch more power supplies and that's where we are now. I think we are in a fantastic position compared to any of the other competitors.

[Christopher Rolland:]

Awesome. Thanks guys.

[Operator:]

Thank you. We have the next question comes from the line of Tore Svanberg from Stifel. Your line is now open. You may ask your question.

[Tore Svanberg:]

Yes, thank you, and congratulations on a key records. I think, it's revenue operating margin and up in cash flow. So congratulations on that.

[Balu Balakrishnan:]

Thank you.

[Tore Svanberg:]

First question is on the communications business. It was down sequentially this quarter that you said that the collection seems to be behind you. I assume that business is still going to be down in Q3. Is that how we should view it?

[Balu Balakrishnan:]

We -- to the best we have -- we can model be slightly down in Q3. I think the Huawei Dri distribution has completed to the best we estimate. And that's why we saw a significant reduction offset by of course our channels replenishment. But in Q3, we think that will be slightly down, yes.

[Tore Svanberg:]

Got it. So what takes the revenues down then is the consumer business going to take, or…?

[Balu Balakrishnan:]

The consumer business should be relatively flat from what we can tell. Even though it's usually seasonally down because of AC. AC is down in Q3 but we have so many new design wins that will we believe will offset that.

[Sandeep Nayyar:]

So that's the reason -- sorry we have given the range as we do. It is hard to get precise from what we have guided to if you take the 3% describe the decline plus or minus. That's where it gets -- there will be no directionally communication is going to be slightly down. And typically air conditioning goes down in Q3. But we think because of share gains that would offset that and be flattish. And industrial has so many moving parts that it gets a little difficult to be very precise. So that's why the range gets difficult to say, but it's the best directional answer we can give at this point.

[Tore Svanberg:]

That's great. Thanks for that color. Moving on to the product. So BridgeSwitch, it sounds like that product line is really hitting the momentum. You talked about some big design wins there. How should we think about the margin profile of that product of that business, is it similar to the other products?

[Balu Balakrishnan:]

Well, again it depends on the market and in the consumer market, it will be similar to the consumer gross margin we have. And we expect it to grow very nicely next year. We have many design wins this year, we will get a few million dollars in revenue this year, but it will really start accelerating next year. The revenue growth on BridgeSwitch has been delayed because of COVID, because in appliances when they go to a totally new platform like BridgeSwitch, it takes quite a bit of design work and we were unable to physically go and help them. And so it made the design in process much longer at trying to help them remotely. But the interest level always has been high, but we are finally seeing the benefit of this revolutionary product, we think it's going to do extremely well going forward.

[Tore Svanberg:]

Great. Just one last question. I know the trend that the fast charger market has been for, kind of, shortly moving out of the box. But you talked about several inbox design wins. I think you said even your largest single order to date for InnoSwitch for a 67 watt inbox. So is there still a mixed bag as far as where the trend is between out of box and inbox?

[Balu Balakrishnan:]

Yes, that's still true, because the Chinese OEMs are really focusing on charge time and they believe that their unique approach allows them to charge at a much faster rate. I mean you can imagine, 67 watts lot of power. If you're used to the five watt cube charger this is substantially higher. It's about 13, 14 times higher in charge rate. And they believe that their protocol allows them to do that. So they are not too anxious to go to a standardized protocol like USBPD, because they think they'll lose their advantage. They are able to do something that other people can't do. So we don't see them transitioning in the near future. And could it happen in the long term? Yes. But is it going to happen quickly. I think it's happening slower than even we anticipated. As you already know, one of the major OEMs have switched to USBPD. Another one is switching partially to USBPD. But beyond that we have not seen a significant move to USBPD, which is actually good for us because it's all different designs. And, therefore, they -- the fact that they are focusing on fast charging means that they're going to continue to put it inbox, because each generation has a much higher feature level, whether it's higher power or higher performance. So they use as a marketing tool. So they haven't transitioned out of the box.

[Tore Svanberg:]

Sounds good. Congrats again on an outstanding quarter. Thank you.

[Balu Balakrishnan:]

Yes. Thanks Tore.

[Operator:]

Thank you. We have the next question comes from the line of Gus Richard of Northland. Your line is now open. You may ask a question.

[Gus Richard:]

Yes. Thanks for taking question. And my congratulations on a good quarter as well. Just real quick, can you talk a little bit about channel inventory on the consumer side? You said it built up in communications, but I was wondering if that was true for a consumer as well.

[Balu Balakrishnan:]

It's not gone up as much in the consumer, because the demand on the appliance side continues to be extremely strong. And as we have said and we have talked earlier, the normalizations in different end markets would happen at different points of time. But the demand on the consumer especially, on the major appliances continues to be very strong. And that's an area we're waiting to see when that normalizes because it has been way above normal levels. But also the other part, which is very good that is happening as we talked about in our map is where our games have accelerated because of people prioritizing other stuff plus people exiting this marketing or defocusing the gains that we would have had over a period of time that actually accelerated. And that is going to be very positive even when things normalize because that will be a nice offset to that the share gain.

[Gus Richard:]

Got it. Got it. And then just thinking, about the model going forward if one were to assume that you hit normal seasonality whatever that is, going forward would your op margins stay above 25% to below 30 going through next year?

[Balu Balakrishnan:]

I think at this point of time because even though I haven't done my annual plan, but I'll do my stuff. I feel if you take where we will end up this year which will be in the range -- somewhere in the range that you're telling I think it in the middle of the range? I think it will be give and take that.

[Sandeep Nayyar:]

Yes. I think next weekend model, will be similar to the whole year gross margin this year because we believe we are going to grow next year. It's hard to tell how much, but we feel very good about growing next year.

[Gus Richard:]

Right. And is the gross margin of the consumer -- I'm sorry communications market better because you've got more aftermarket guys that are taking smaller volume. Is that a good way to think about it?

[Balu Balakrishnan:]

Exactly, yes. Our communication gross margin is increasing because of that.

[Gus Richard:]

Okay. Got it. And then -- all right. So I've talked to you guys have talked to your competitors and trying to suss out what topology is the best and their argument that they have better energy efficiency because they use soft switching. In other words they don't both current and voltage don't cross over at the same time. Could you talk about that topology versus yours and why you think your topology in having -- how that relates to how you spend current, et cetera. Can you in layman’s terms explain what's going on?

[Balu Balakrishnan:]

Yes absolutely. The -- this is almost strange because our entry product is up switching. It's called resident converter. And switch IV is even better at zero voltage switching, which is even more efficient by using our plans see products. So I don't think anybody can even come close to our efficiency at all. I mean it's just if you want to build the smallest that happen in the world we are hit today.

[Gus Richard:]

And does that enable you to use smaller magnetics?

[Balu Balakrishnan:]

Yes. So we talked about it in my prepared remarks that our latest product four offers a high frequency and that's why it's only use GaN. It doesn't have a silicon switch at all because of the higher frequency operation. And when you go to higher frequency can reduce the size of the transformer but you end up increasing the losses in the transformer and the switch. To recover that we have another companionship called clamp zero, which recovers the losses and the sensors to the output. So you cannot only maintain efficiency. You can actually further increase efficiency using zero voltage switching. And so on top of that we also have mini cab that nobody else has by the way, that will also reduce the size of the capacity by 40%. So between mini cap and Clamp zero we are able to reduce the size of the transformer and capacitor which are the biggest components in the power supply. So in both cases we've reduced it by about 40% of each one of them. And then to make the POS very small, even that is not sufficient because you have to have very few components so that you can actually fit it into a small enclosure. That's where we really excel because we have typically one third of the components of a competitor's GaN-based design.

[Gus Richard:]

I understand. Thank you. And then last one for me. You said you're going to add capacity for GaN products because of the demand. Is that MOCVD? Is it testing? What do you need to add?

[Balu Balakrishnan:]

We would like to add primarily, on the front end. I can't go into details but I could say that from a packaging standpoint, we already have enough capacity. We are expanding as we speak. But we'll have -- that's easier to do because of a smaller shorter lead times but it's the back end I said the front end, where we are significantly expanding capacity in perpetration for substantial growth not only next year for the next several years.

[Gus Richard:]

Thank you so much.

[Balu Balakrishnan:]

Thanks, Gus

[Operator:]

Next question we have the line of Karl Ackerman of Cowen. Your line is now open. You may ask a question.

[Karl Ackerman:]

Yes. Good afternoon gentlemen. I wanted to follow-up to last question that Gus had asked, which was -- in some of your prepared comments you indicated that channel inventory could possibly creep higher into Q4 and maybe eventually get back to normal. I know you had invested in late 2020 and early 2021. On an additional capacity adds on the front end which did prove fortuitous for you as other shorter capacity. But my question is does a normalization in channel inventory dampen any plans for you to further expand capacity from here? And I have a follow-up.

[Balu Balakrishnan:]

Well first of all until the market normalizes we want to keep as much inventory with us because that really can serve the real demand most effectively. If the -- if our inventory gets distributed among many customers and distributors, it makes it really hard for us to take care of upsides like we are seeing in appliances. We are seeing a significant upside that we did not anticipate simply because our share gains have certainly accelerated for reasons that Sandeep has already mentioned. So it's really important for us to have that with that. However, as things normalize we will be able to build inventory as close to as normal as possible. When it happened in Q3, I don't think so. I think the demand is still pretty high. And in Q4 there's a likelihood that we could go up or creep up a little bit. But it's also possible that we won't be able to do that. It all depends upon how much -- how long this normalization will take in the cell phone the normalization has happened to a large extent in Q2. But in appliances it's still very, very hard. I mean the demand is very high. And so it is possible to take one, two, or three quarters for it to normalize. But having said that, we are continuing to expand capacity across all of our technologies especially in GaN is where we see the most dramatic growth in terms of capacity requirements. So, we are focusing on that. But we also need silicon capacity which we are expanding as we speak and we'll have more capacity available next year. You can see we are going to grow 40% were on target to grow 40%-plus. And the only thing we could have done that is we have the capacity in place we put the capacity in place. We have -- we built enough inventory. So, we are in a much better position than almost anybody in the semicon industry. And we also have a very unique manufacturing model. We don't use what we call standard foundries. We use -- we use fabs that are owned by product companies who have excess capacity to give it to us and it's committed to us. Because we have committed through contracts. So, we are able to do this much better than almost any other select a company can pick up.

[Sandeep Nayyar:]

The other thing I'd like to add is our internal inventories are only sitting at 92 days. Our running models is 125 days. So, we're well below the model that we would really like around. And in spite of the growth that we have this year and the growth in the prior year, we feel very good because of the share gains in the secular that we will grow again very nicely next year.

[Karl Ackerman:]

I appreciate that following Sandeep. Very helpful. There's been much discussion on today's call regarding I think your competitive differentiation within GaN, sorry I don't want to belabor that point. But I think what is interesting is and one of the questions that I've received quite a bit intra-quarter is the growth trajectory that your peer has articulated over the next couple of years for GaN. And the question is, is that indicative of a rapidly expanding TAM that's also greatly beneficial to you, or does that constrain your growth? And so as you address that question, I was hoping you could also talk about whether you are seeing new opportunities to maybe move into the server market or outside of your consumer offerings that could also expand your TAM overtime. Thank you.

[Balu Balakrishnan:]

Yes, let me answer the last question first that is that GaN will enable us to go at much higher power levels with an integrated switch. However, we don't talk about products in the higher power areas until we have them. So, that's one of the reasons we don't go crazy on what this could be in the next five years. If you're being -- if you're going public to the pack you can -- you have complete freedom to show whatever you want for the next five years. So, we are just very conservative in that regard. As far as the GaN propelling other companies, yes, GaN is a very, very important technology. So, when as GaN gets popular it will lift all the boats obviously. The question is who is going to benefit the most? And I believe the one who will benefit is the one who makes it easy for our customers to use again. And secondly, the company that has the most cost-effective and reliable technology. And I think we have really proven that by shipping very high volume for the last four years that we have a very reliable technology and a very cost effective technology. The proof is in the fact that we are now in a mainline in the box charge at six to seven months. This is the first large volume GaN design that we know of. We are in a very high volume charter design with one of our OEMs.

[Karl Ackerman:]

Very helpful. Thank you.

[Operator:]

Thank you. There no further questions at this time. Please continue presenters.

[Joe Shiffler:]

All right. Thanks everyone for listening. There will be a replay of this call available via our website investors.power.com. Thanks again and good afternoon.

[Operator:]

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