Power Integrations, Inc.

And thank you for standing by. Welcome to the Power Integration second quarter earnings call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on a telephone keypad. And please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Joe Schiffler. Sir, please go ahead.

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 Nair, 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. The reconciliation of non-GAAP measures to our GAAP results is included in our 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 and uncertainties are discussed in today's press release and in our Form 10-K filed with the SEC on February 5th, 2021. 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 the call over to Balu.

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 margins surpassed 30% for the quarter, and we increased our non-GAAP EPS by more than two and a half 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 our link switch ICs were an ideal replacement for linears. A similar transition has now taken place in the air conditioning market due to China's mandatory standards for room AC units, which were announced 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 standards took effect. In response to the standards, manufacturers have transitioned most of their production to variable-speed brushless DC motors and have also converted from linear to switched-mode power supplies to drive the electronics. Power Integrations is the 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 bridge switch motor drive chips, which drive brushless AC motors, such as those used in variable speed AC units. In fact, we won one of our largest bridge switch designs to date in Q2 at a major customer in the air conditioning market. We are also gaining share in major appliances, where we are already the leader in AC to DC power supplies thanks to the efficiency and reliability benefits of our products. Our share gains have accelerated as competitors with capacity constraints have prioritized other products ahead of the power supply chips, and other competitors have de-emphasized or exceeded the power supply market altogether. These gains are compounding the revenue benefit of rising dollar content in appliances driven by tighter efficiency standards and the increasing penetration of electronic features such as network connectivity, electronically controlled motors, and LED lighting. We also expect meaningful revenues from motor drive applications next year as bridge switch begins to ramp in earnest. Another important secular trend in the power supply market is the adoption of advanced chargers for mobile devices, which continues to drive strong growth in our communications and computer categories. Combined revenues from these categories more than doubled year over year in Q2, reflecting the market shares we have gained in OEM-branded chargers for smartphones, tablets, and notebooks, as well as multipurpose chargers from a wide range of aftermarket brands. We have made it a priority to win share in this market today, knowing the revenue stream will be stickier, less volatile, and more profitable than the commodity cell phone charger business of the past. Charger designs have always had longer life cycles than the mobile devices themselves, which are refreshed every year. But while simplistic low-power chargers could easily be redesigned just to shave a few pennies off the bomb cost, today's highly sophisticated chargers are more like appliances with a greater focus on features and performance and longer design life cycles. In short, we expect many of the designs in our pipeline to be in production for a long time, and we are pressing our advantage to lock in these designs today. We want a wide assortment of advanced charger designs in Q2, including a 33-watt inbox charger that will significantly increase our penetration at a top-tier handset OEM. Another OEM recently placed the largest single order to date for our GAN-based inner switch products, which they have selected for a new 67-watt in-box cell phone charger for use with high-volume phone models. We also won a 130-watt design for a leading supplier of gaming notebooks featuring four charging ports and using three GAN-based inner switches. As announced in May, we have also been designed into Anker's next-generation Nano 2 chargers, which comes in 30-, 45-, and 65-watt versions. Notably, the 65-watt version is approximately the same size as the 30-watt charger from the first generation of Nano chargers. This improved power density is enabled by our latest product, InnoSwitch 4, which will be produced exclusively with GaN. GaN enables InnoSwitch 4 to operate at higher frequency, resulting in a significant reduction in the size of the power supply transformer. We paired the InnoSwitch 4 device with our new Clam Zero chip, which implements active Clam technology to recover losses associated with the higher switching frequency enabling a truly exceptional level of efficiency. And then combined with our mini-cap product, which uses GAN to enable the use of a much smaller input capacitor, we can deliver power density far superior to any solution available in the market today. The synergy between these products demonstrates the value of a comprehensive approach to power supply technology, including proprietary process technologies, high voltage transistor technologies, highly integrated controllers, proprietary packaging, and system level know-how. This has always been our approach, and we have continued it with our GaN technology, which we have seamlessly folded into our product offerings. In fact, a GaN InnoSwitch works exactly like a silicon-based InnoSwitch, such that the customer doesn't have to know anything about GaN in order to realize its performance benefits. Other GaN devices offered in the market, including some marketed as ICs, are essentially discrete switches that require dozens of external components, and many times even a separate circuit board, which are incorporated into a power supply using an external controller chip sourced from a third party. Engineers must learn the idiosyncrasies of GAN to design a working power supply, and even when successful, they end up with a design containing two to three times as many components and multiple circuit boards. This greatly complicates manufacturing and brings compromises on reliability, time to market, cost, and form factor. While the transition to GAN is a secular trend that will lift many boards, The benefits of integration are inescapable, and we believe our approach is proving superior in the GAN world just as it has with silicon over the past three decades. In fact, based on recent design wins, we are accelerating our capacity additions for GAN to accommodate a substantially higher level of growth than previously expected. Looking ahead, we had been anticipating significantly lower revenues in the second half, reflecting reduced demand for cell phone customers after aggressive handset bills meant to capitalize on the Huawei sanctions. We now believe that a significant portion of this adjustment took place in Q2, as evidenced by a sharp reduction in sell-through as customers rapidly adjusted their charger inventories. With this correction largely behind us and taking into account our continuing market share gains and new design wins, we expect a more moderate reduction in the second half revenues compared to our prior expectations. For Q3, we expect a 3% sequential decline in revenues, plus or minus 5%. And we believe we are on track for a full year revenue growth in excess of 40%, compared to a projected growth rate of about 20% for the analog center country industry, according to WSTS. With that, I'll turn it over to Sandeep. Thanks, Paulo, 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 cell phone customer, offset partially by channel replenishment. Revenue mix for the quarter was 35% communication, 31% consumer, 26% industrial, and 8% computer. We stated last quarter that March would be the low-water mark 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 more favorable in-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. This leverage can also be seen in our ETS growth. Non-GAAP earnings were $50.8 million in the June quarter, or 83 cents per diluted share. That's an increase of more than 150% from the second quarter of 2020 on a revenue growth of 69%. Cash flow was also strong with $67 million generated from operations, while CapEx was just over $8 million. We paid out just under $8 million in dividends, and utilized $26 million for share repurchases, buying back 335,000 shares, or roughly half a percent of our flow, at an average price of less than $79 per share. Buyback activity has been ongoing since the end of the quarter and will continue to be driven by a preset price-volume matrix. Cash and investments on the balance sheet rose by $24 million from the prior quarter and stood at $515 million at quarter end. Internal inventories held steady at 92 days, while channel inventories recovered from the unsustainably low levels reached last quarter, ending June at 5.2 weeks, still below our expected steady state levels of about six to seven weeks. Looking ahead, we expect third quarter revenues to be down 3% sequentially, plus or minus 5%. At the midpoint of the range, that would be an increase of 44% year over year. While it is too early to project revenues for the fourth quarter, we believe we are on track for revenue growth in excess of 40% for 2021, and we believe they are very well positioned for growth in 2022 based on the market share gains and the secular drivers that Balu outlined in his remarks. Our gross margin outlook for the year has improved, reflecting our expectation for end market mix and the impact of manufacturing efficiencies. I expect non-GAAP gross margin for the third quarter to be approximately 51.5%, and around 51% for the full year. Operating expenses will continue to rise gradually as we headcount in both R&D and sales and work to bring more products to market with our industry-leading technologies such as FluxLink and GAN. For the September quarter, non-GAAP OPEX should be between $38.5 and $39 million. For the full year, Expenses should grow about 9% to 10% coming off a flat year in 2020. Other income for Q3 should be in the range of $300,000 to $400,000, while the non-GAAP effective tax rate should remain at approximately 8%. And now, operator, let's begin the Q&A session.