Power Integrations, Inc.

Good afternoon. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to Power Integration's third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's 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. To withdraw your question, press star one again. I would now like to turn the conference over to Joe Schiffler, Director of Investor Relations. Please go ahead.

Thank you. 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 this call, we will refer to financial measures not calculated according to GAAP. Non-GAAP measures for the September quarter 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. Our discussion today, including the Q&A session, will include forward-looking statements denoted by words like will, would, believe, should, expect, outlook, plan, forecast, anticipate, prospects, 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 7, 2022. Finally, 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. Two quarters ago, we called attention to a slowdown in the smartphone market and signs that other markets may begin to fade after the strong demand of the prior two years. Last quarter, we noted that distribution sell-through had in fact slowed across all of our end market categories, likely signaling a broad-based downturn in demand. We also reminded investors that PI has historically been among the first in our industry to experience cyclical and macro-driven slowdowns. The summer slowdown has given way to a more rapid deterioration in the business environment over the past couple of months. End demand appears to have declined significantly and distribution sell-through has continued to slow. particularly in our consumer category, which is about a third of our business and is dominated by appliances. Our revenues for the third quarter were within our guidance range, but below the midpoint, down 13% from the prior quarter, and we expect December quarter revenues to be down more than 20% sequentially at the midpoint of our range. For those less familiar with our history, it's not uncommon for us to experience large cyclical fluctuations than our peers because we sell primarily to power supply manufacturers and therefore have an additional layer of inventory between us and the end markets. That same dynamic applies on both the downward and the upward swings of the cycle. And just as we are typically among the first to see a downturn, we have historically been among the first to see the eventual upturn. And while it's difficult to predict the timing of a recovery, we do see indications that our business is likely to hit bottom over the December and March quarters. For communications category, which was the first category to experience the downturn, distribution sell-through and our direct business were sequentially higher in Q3, and channel inventory fell significantly during the quarter. Across the entire business, cancellations were lower in Q3 than in Q2, and we have seen a modest uptick in turns orders in recent weeks, with many customers already having eliminated much of their excess backlog. When the broader demand outlook improves, we expect recent market share gains and contributions from new products to enable the kind of outperformance we have historically delivered coming out of a downturn. In the meantime, we will focus on what we control, managing the business for long-term growth and profitability rather than short-term operating metrics, though we do expect to be within our target range of operating margin in 2023. Design activity continues to be robust. Several competitors have retreated from the market, and we are not slowing down our efforts to capitalize on the opportunities in front of us. We talked in depth about these opportunities at our recent analyst day, and I encourage anyone following our story to view the replay of the event on our investor website. Our presentation covered a wide range of topics, including our unique system-level approach to integration, our history of innovation in high-voltage process and device technologies, including GAN, and the contribution our products are making to a cleaner planet. We also presented a detailed view of our plan to double our addressable market to $8 billion by 2027, driven by a combination of investments in new products and technologies and big picture market trends, creating opportunities in areas like renewable energy, home automation, appliances, advanced charging, and transportation. We expect the largest contribution to SAM expansion from motor drive products as we expand our bridge switch family to cover a wide range of brushless DC motor applications in the years ahead. Current bridge switch products covering applications up to 400 watts are rapidly gaining adoption at customers in major appliances as well as air conditioners and ceiling fans. As we mentioned last quarter, new regulations in India are driving a wave of design activity in ceiling fans by essentially forcing the adoption of efficient brushless During Q3, BridgeSwitch was also designed at a top-tier European appliance maker for a next-generation refrigerator, a design that would contribute meaningful revenues in 2023. The designs we are winning today will not only generate near-term revenue growth but also pave the way for the higher-power BridgeSwitch products in our pipeline. Unlike discrete solutions, Bridge Switch and our motor expert software provide a platform solution that can easily be adapted to a wider range of end products by customers once they are familiar with the architecture. We expect an equally large increase in SAM to come from automotive, where the EV transition brings substantial high voltage semiconductor content to passenger cars and commercial vehicles. As we explained at the analyst's day, we have a content opportunity of more than $60 today in a passenger car, which we expect to increase by more than 2x as we expand our product offerings in the coming years. Heavy vehicles like buses, trucks, and construction equipment will have even greater total content. While the major revenue ramp is still fewer years away, We are making excellent progress establishing ourselves as a key supplier to the EV market, adding almost 200 designs to our opportunity pipeline so far this year. A majority of these projects involve our silicon carbide-based switch ICs, which are ideal for next-generation 800-volt systems. Our success in converting opportunities into wins has been highly encouraging and speaks to the degree of differentiation we provide with InnoSwitch in terms of ease of use, reliability, space savings, and efficiency. Overall, we have now secured design-ins at seven of the top 10 Tier 1 automotive suppliers, and we expect to be in production with about 15 end customers this year, a number that is at least triple in 2023. These include not only a wide range of power supply applications at automakers in the US, Europe, and Asia, but also several designs using our scale iDriver gate drivers in drivetrain inverters, mainly at Chinese EV customers. Another key topic of our analyst day was a detailed discussion of our GaN technology, a cornerstone of our product roadmap, and also a near-term driver of share gains and higher dollar content. We presented not only the rapid growth in GAN-based product revenues over the past couple of years, but also the $100 million opportunity pipeline we are working to convert to design wins and revenues. These opportunities cut across a wide range of end markets, with more than half coming from industrial and appliance applications. In fact, half of our GaN design means in Q3 came from industrial and appliances. Going forward, GaN power switches will feature prominently in the automotive and motor drive products that will drive much of our SAM expansion. We also have GaN-based products in our pipeline that will open up new markets for us, such as data center and comm equipment, another major piece of our SAM expansion roadmap. We also expect growth in the SAM for our high-power gate driver products driven by wider adoption of renewable energy and efficient DC transmission infrastructure. Our high-power business struggled to grow over the past couple of years as projects were slowed by the pandemic, but we have seen a healthy rebound in this business in the past several months, and it is now on track to grow double digits this year. We expect strong growth in high power again next year driven by design wins in solar, wind, and electric locomotives. In summary, our long-term growth story is on track, and we are looking past the current downturn to the exciting future that we laid out for you at our event in September. As a reflection of our confidence in that story, as well as our strong balance sheet and ongoing cash generation, Our board has allocated $100 million for share repurchases, which we expect to begin implementing in the days ahead. And now I'll turn it over to Sandeep for a review of the financials.