Power Integrations, Inc.

Hello and welcome to the Power Integrations Q3 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed into today's call, please press star nine to raise your hand and star six to unmute when your name is called. I would now like to turn the call over to Joe Schiffler, Director of Investor Relations. Please go ahead.

Thank you, Aiden. Good morning, everyone. Thanks for joining us. With me on the call today are our CEO, Jen Lloyd, and interim CFO, Eric Verity. We're doing a pre-market earnings release this morning, since we'll be traveling later today to Chicago, where we'll be attending the Stiefel Midwest one-on-one conference tomorrow. We look forward to seeing some of you there. Later this quarter, we'll also be attending the UBS Technology and AI Conference in Arizona on December 3rd, and the virtual Northland Securities Growth Conference on December 16th. Our discussion today will include forward-looking statements denoted by words like will, expect, should, outlook, forecast, and similar expressions look towards future events or performance. Such statements are subject to risks that may cause actual results to differ 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 7, 2025. During this call, we will refer to financial measures not calculated according to GAAP. Non-GAAP measures in the third quarter exclude stock-based compensation expenses, amortization of acquisition-related intangible assets, expenses associated with an employment litigation matter, and the tax effects of these items. The reconciliation of non-GAAP measures to our GAAP results is included in today's press release. 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 Jen.

Thank you, Joe, and good morning, everyone. I'm gonna cover three topics in my remarks today. First, I'll review current business trends and the Q3 results. Next, I'll expand on the opportunity for power integrations in data center following the announcement last month of our collaboration with Nvidia on their 800 volt DC power architecture. And finally, I'll offer some thoughts on my first 100 days in the CEO role and priorities for the months ahead. Starting with recent trends, we said on the Q2 call that we had seen a slowdown in orders in July with bookings down about 20% compared to the monthly run rate of the first half of the year. The lower run rate continued through the third quarter accompanied by weaker distribution sell through. Appliances are by far the largest driver of the slowdown with orders down about 40% in Q3 compared to the first half. Appliances make up the bulk of our consumer category, which accounted for about 40% of our sales in the first half. Throughout the year, we have called out the sensitivity of white goods and other appliances to tariffs owing to their high dollar value and their steel content. We've talked about the unusually strong growth in our appliance business in the first half, And we've highlighted commentary from the largest US appliance OEM regarding what they've called quote extensive preloading unquote of imports from Asia and the first half. This was a key topic again on their Q3 earnings call last week. All of this is to say that the softness we're seeing in the second half is not a surprise. Appliances are a great business for us and typically generate a steady and fairly predictable revenue stream. But tariffs have severely disrupted that industry, adding to the difficulties caused by stagnant home sales in the US and China's weak housing market. And because it's such an important part of our business, we are seeing volatility in our revenues. We expect fourth quarter revenues of 100 to $105 million with the consumer category driving a large portion of the decrease compared to the third quarter. We also expect industrial to be sequentially lower, directionally consistent with recent Q4 seasonality, but our industrial business continues to be strong with revenues up nearly 20% for the first three quarters of 2025. That growth is coming from a broad range of applications where we're capitalizing on big picture trends like electrification and grid modernization, encompassing renewables, energy storage, high voltage DC transmission and smart meters. Our high power gate driver business sits squarely in line with these trends and continues to gain momentum with revenues up more than 30% year to date. In Q3, we built on our already strong position in the growing Indian rail business, adding a major new customer with our first design win at one of India's largest suppliers of systems for electric locomotives. We also won our largest design yet with our scale EV automotive driver boards at a major German manufacturer of drive systems for heavy vehicles. In low power, we continued our progress in passenger cars with six more design wins in Q3, adding to the 40-plus EV models now on the road using our products. We continue to win a robust share of inverter emergency power supplies and are using that foothold to go after other high-voltage sockets like auxiliary power supplies for battery management and onboard charging. We see strong interest in our GAN-based solutions helping to drive the market to higher power micro DC to DC converter architectures. We have a strong pipeline of design activity in these applications and expect a healthy revenue ramp over the next several years. Eric will cover the finer details of the quarterly numbers, but I do want to highlight our cash generation and return to stockholders. We generated $30 million in cash from operations in Q3, and are on track for more than 80 million in free cash flow this year. We naturally expect free cash flow and free cash flow margins to rise as revenues recover, and that confidence is reflected in our cash returns. Including our fourth quarter dividend, we will return nearly $150 million to stockholders this year through buybacks and dividends. Our board has also declared a half cent per share dividend increase effective in Q1 of 2026. Turning now to data center. At last month's OCP Global Summit, we published a paper demonstrating the advantages of our 1250 and 1700 volt GAN technologies in 800 volt DC AI data centers. We also announced our collaboration with NVIDIA to help realize the potential of the new architecture to improve efficiency, use less copper, and reduce the amount of data center space consumed by power infrastructure. The white paper is available on our website, and I encourage you to take a look at it. In short, our proprietary 1250-volt GAN accommodates an 800-volt input in a conventional power supply topology, while standard 650-volt GAN requires stacking of multiple devices, compromising power density and reliability while adding complexity. Another alternative, silicon carbide, can handle 800 volts, but has significant limitations in terms of power density due to its slower switching speed. The paper also explains why our 1700-volt InnoMux 2 is an excellent fit for the auxiliary power socket in the 800-volt architecture. The white paper includes reliability data comparing PowiGAN to other GAN technologies. Reliability has been an obstacle to GAN adoption in the data center as well as the automotive market. And the fact that we're seeing traction in both these markets speaks to the superior reliability of our unique GAN technology. In fact, one of the key attributes of our technology that NVIDIA and others in the data center ecosystem have found attractive is the fact that it is automotive qualified and already shipping into the automotive market. While we're excited about the 800 volt opportunity, GaN can also bring significant improvements in power density to existing AI data center architectures, which are expected to remain prevalent for years to come. By the end of this year, we expect to deliver early samples of our system level GaN product for rack level AC to DC converters with production release planned for late 2026. And now I'll conclude with a few thoughts on my first 100 days in the CEO role. As I said on our call last quarter, just after I joined, that I was excited about our unique technologies and the depth of our expertise in high voltage processes, packaging, and systems. I could also see that the need for innovative high voltage technology is growing because of the global trends that we've talked about. Grid modernization, electrification, decarbonization, and of course, AI. 100 days in, I'm just as excited about the opportunities ahead of us and developing a clearer picture of the steps we need to take to best capitalize on them. As I said last quarter, our core power supply business is back on a growth trajectory with a mix moving toward higher margin industrial applications. The growth in our high-power and automotive businesses shows that our products and expertise have significant value in those markets, while our collaboration with NVIDIA validates the unique capabilities of our GAN technology. We continue to receive encouraging feedback in our conversations with other key participants in the AI ecosystem. I'm confident we have a lot of what we need in terms of technology and engineering talent, So it's clear to me that we need to adapt our organization and our processes to increase the ROI on our R&D spending and better match the needs of the markets that we expect to drive our longer term growth. Data center, auto and high power have different requirements and a different geographic footprint than the mass market power supply business. And we'll be taking steps in the months ahead to better align our R&D and go to market resources with those markets. And while we need to reallocate some resources, I don't believe we need to spend more to accomplish what we need to do. We have important hires to make, including some at the senior level, but are limiting hiring to critical needs, and I'm pushing the team to tighten up on ABEX and capital spending. Our top priority is to drive shareholder value by growing our cash flow. While revenue growth is really the key to that, Discipline spending will enable us to expand cash flow margins faster as we grow our revenues. So it's something I'm emphasizing as we plan for 2026. And now for a review of the financial details, I'll turn it over to Eric Berty. Eric has been with Power Integrations for more than 15 years, serving as Senior Director of Finance for most of that time. And we're very pleased to have him step into the interim CFO role. Eric.