Good day, ladies and gentlemen, and thank you for your patience. You've joined the Power Integrations Q1 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Joe Shiffler. Sir, you may begin.

Thank you. Good afternoon, and thanks for joining us to discuss Power Integrations financial results for the first quarter of 2012. With me on the call are Balu Balakrishnan, President and CEO of Power Integrations; and Sandeep Nayyar, our Chief Financial Officer. During today’s call, we will refer to financial measures not calculated according to Generally Accepted Accounting Principles. Please refer to today’s press release available on our website at investors.powerint.com, for an explanation of our reasons for using such non-GAAP measures, as well as tables reconciling these measures to our GAAP results. Also, our discussion today, including the Q&A session, will include forward-looking statements reflecting management’s current forecast of certain aspects of the company’s future business. Forward-looking statements are denoted by such words as will, would, believe, should, expect, outlook, estimate, plan, goal, anticipate, project, potential, scheduled, forecast and similar expressions that look toward future events or performance. Forward-looking statements are based on current information that is, by its nature, dynamic and subject to rapid and even abrupt changes. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied in our statements. Such risks and uncertainties are discussed in today's press release and under the caption Item 1-A Risk Factors in Part 2 of our most recent Form 10-K filed with the Securities and Exchange Commission on February 29, 2012. This conference call is the property of Power Integrations, and any recording or rebroadcast of this conference call is expressly prohibited without the written consent of Power Integrations. And now, I'll turn the call over to Balu.

Thanks, Joe, and good afternoon. We delivered strong first quarter results with revenues exceeding the high end of our projected range and our non-GAAP gross margin expanding by a full percentage point to its highest level since 2010. We also generated more than $21 million in cash flow from operations and reduced internal inventories to their lowest level in nearly 2 years. The strength in our first quarter revenues was driven mainly by the industrial and consumer end markets, both of which grew at double-digit rates sequentially after declining in the fourth quarter. The strength in the industrial was broad based with growth in LED lighting, process and motor control applications, UPS and metering applications, among others. The growth in consumer was primarily in the appliance market, including seasonal strength in air conditioning, as well as a rebound in white goods after several quarters of softness in that market. The overall improvement in bookings that began in November has continued through the first quarter and the month of April, and we expect significant sequential growth in revenue again in the second quarter. Specifically, we expect second quarter revenues between $78 million and $84 million, an increase of 9% to 17% sequentially. This forecast includes 2 months of revenues from CONCEPT, which we acquired on May 1. For those who may have missed the announcement last month, CONCEPT was a privately held Swiss company developing highly integrated drivers for high-voltage IGBT modules. We acquired them for approximately $116 million net of cash assumed, and we expect them to add roughly 10% to our revenue run rate. Essentially, CONCEPT does for IGBT drivers what we do for power supplies: replacing Discreet Solutions with much more sophisticated designs that offer a lower component count, higher reliability, greater energy efficiency. These products are used…

Thanks, Balu, and good afternoon. I will briefly review the details of the first quarter results and the second quarter outlook, and then we will move to the Q&A. Revenues for the first quarter were $71.8 million, up 8% sequentially and above our projected range of $64 million to $70 million. As Balu explained, the growth was driven mainly by industrial and consumer end markets, each of which grew at a low double-digit rate sequentially. Revenues from communication end market grew mid-single digits sequentially, while revenues from the computer market were down slightly from the prior quarter. Distributors accounted for 71% of sales during the quarter while direct customers made up 29%. Average selling price for the quarter was $0.28, unchanged from the prior 2 quarters. GAAP and non-GAAP gross margin increased from the prior quarter by 90 and 100 basis points, respectively, reflecting continued progress on our cost-reduction efforts, more favorable end market mix and the higher-than-expected revenues, which resulted in more flow-through of cost reduced inventory. Non-GAAP operating expenses were $22.6 million, up $1.1 million from the prior quarter and in the middle of our projected range. As expected, the increase was driven by the resumption of the payroll taxes, as well as the one-time nature of certain expense reductions we took in the fourth quarter of 2011, such as the holiday shutdown. GAAP operating expenses were $25.9 million, up about $2 million sequentially and towards the high end of the projected range due to expenses related to CONCEPT acquisition, which total about $0.5 million. Non-GAAP earnings were $0.36 per diluted share, up $0.07 from the prior quarter. GAAP net income was $0.25 per diluted share. Cash flow from operations was $21.6 million for the quarter while capital expenditures totaled $7.5 million. The other significant use of cash…

Thanks, Sandeep. We'll go ahead and open it up for Q&A now. [Operator Instructions] Operator, would you please give the instructions for the Q&A session?

[Operator Instructions] Our first question comes from Tore Svanberg of Stifel, Nicolaus.

This is Evan Wang. I'm calling in for Tore. Could you break down the CT-Concept's impact on all your financials in the coming quarter? In terms of OpEx, for example, how much would they be contributing to your R&D versus SG&A?

As we had indicated in our previous call, basically CONCEPT will account for about 10% of our revenue. And the expenses, as a percentage of revenue, will be slightly below the percentage that we incur as a percentage of our revenue prior to the acquisition.

And the breakdown between R&D and SG&A is roughly the same as yours?

It's roughly the same percentage roughly, but it's approximate.

Okay, could you also talk a little bit about the -- your industrial is up significantly? I assume that LED is one of the main drivers there.

The LED is definitely one of the main drivers, but we also had a very broad improvement across the entire industrial applications, such as UPS, power supplies, meters, motor control, process control. So a very broad-based increase in industrial.

Our next question comes from Andrew Huang of Sterne Agee.

Just a quick question on CT-Concept again. Since you're only going to get 2 months of contribution for the June quarter, I guess my first question is, should we assume that there's going to be further improvement to margins in the September quarter, all else being equal because you're going to get a full contribution? And then the follow-up would be down the road, are there additional synergies that maybe we haven't seen yet?

So as you know, it's 10% of our -- CONCEPT is 10% of our revenue. So it does benefit incrementally to our margin, but it's a small percentage. But considering you're having a full quarter, you're correct. It'll be slightly more better for the full quarter.

Yes, just to add a little bit more color. We explained in the last conference call about the CT acquisition that they are on the high end of our model, our 50% to 55% gross margin model. They're on the higher end of it. Therefore, you can compute from the roughly 10% revenue relative to ours what the impact would be. And it will obviously be small compared to the total improvement we are seeing in gross margin.

Okay, and if you don't mind me asking, the $18 million loan to SemiSouth, can you give us a little color on specifically what that's for?

It's basically to fuel their growth in terms of capital equipment and working capital. They are getting traction with their product, and they need to expand their capacity, and they also need working capital.

Our next question comes from Steve Smigie, Raymond James.

Not sure if I heard you right, but did you say that you were hoping to get to 50% gross margin by the end of the year? And if that's the case, is there some chance you could get above that 50%?

It's hard to predict as we said fully, but our expectation as we have said all along in the fourth quarter, that we will get to the 50% level.

Okay. But I mean it seems like you should be able to get above that pretty easily. I mean, you seem pretty close right now already.

Yes, it's possible to be slightly above that. But at this point, it's hard to predict everything that happens. So we've been making steady improvements, and we are pretty much on target to hit that mark.

Yes, and again to add more color to that. We have seen pretty much all of the -- we would have seen pretty much all of the cost improvements that we've set out with the last year in Q2. We will get incremental improvements in Q3 and Q4, primarily related to the copper conversion from gold. That is going to be gradual. So you'll see some improvement. So the large part of the improvement would have occurred by the end of Q2.

Okay, and then my other question was just, I know September's a long way out, and you guys typically, when you go through distribution, you don't have a great visibility. September for you has traditionally been a pretty strong seasonal quarter. I think you've been diversifying away from that communications, handset business, whatever you want to call it. So is it fair to think you'd be up, have a pretty nice potential seasonal growth, but maybe not the double-digit as you've had in the past. And if I could just sneak in like a housekeeping item. The tax rate was up here a little bit. What should we be thinking about through the balance of the year, maybe into next year?

Let me answer your first question, and then Sandeep can answer the second. It's -- we do have an average seasonality, but every year, it seems to be different. It's very, very hard to predict what's going to happen. So yes, you're right. Q3 is usually a growth quarter for us. Although if you look at the last few years, Q2 and Q3 both have been growth quarters of somewhat of equal magnitude. And that's not a prediction by any means, I'm just telling you what historically we have seen. So internally, we are modeling some growth in Q3. And once again that's not a prediction, that's just an internal modeling that we do for the September quarter. And maybe you can answer the...

Yes, for the tax rate, it can vary based on the geographic distribution of increment. That's why we gave you -- so the approximate number, the 18% plus or minus, and that's why we gave you a range for the second quarter, but non-GAAP 18% plus or minus is a good one. And for the GAAP, it's somewhere around 21% plus or minus.

Our next question comes from Ross Seymore of Deutsche Bank.

This is Mike Chu for Ross. Just a question on maybe if you could provide some color on where you see relative strength in some of your end markets, your 4 end markets. And maybe you could speak specifically to whether or not you think the industrial and consumer strength that you saw in first quarter will continue on into the second quarter?

So let me make a few comments on that. Industrial, historically, has been seasonally strong in Q1. Part of the reason is the -- I think the industrial, if you look at even other companies like Linear and so on, they always see industrial being strong in Q1. And the consumer side, the strength was primarily in appliances. And that was, to some extent, driven by air conditioners, which are normally built in Q1 for summer. So Q1 is the peak for air conditioners, but we also saw the rest of the white goods coming back very strongly after several quarters of weakness. And so it looks like finally, they are flushed through the inventory, and they are buying products. So those were the 2 big ones. And communications was up in the mid-single digits, whereas industrial and consumer were up in the double digits, and computer was flat.

Okay, and maybe just as a follow-up. Maybe you could talk about some of the underlying trends in the comms. It was at 4. Typically, it's a seasonally weaker quarter. How do you expect the communications segment to kind of play out through the rest of the year?

I'm not quite sure. It's a very -- it's somewhat dominated by the cellphone market, which is quite volatile in terms of who gets share every quarter. I am somewhat optimistic that we will grow that segment based on many of the design activities that's going on.

Our next question comes from Christopher Longiaru of Sidoti & Company.

So the first thing I just wanted to check and see where channel inventory is in your estimation now? I think the last call you said it was at the lowest level you'd seen since 2008, but I wanted to know if there's any relative commentary there?

Our lead times are between 4 and 6 weeks. And in the last call when we had seen it go down, we had expected it to nudge up, and it exactly did. So we're expecting it to be between around 5 weeks give and take because of our lead times being in the 4 to 6 weeks.

Okay, and that's because pushing that low end is just to -- there's not enough time to get product. Is that how I understand it?

Well, you have to remember that 70% of our business goes through distribution. And the distributors, if they don't have approximately 5 weeks of inventory, they can't service their customers with a 4 to 6-week lead time.

Right, okay. The only other thing is, could you give us kind of just an update on your idea for how the LED business is going to progress over the next 12 months?

Well, it's hard to predict except that we continue to have strong design wins. So I think we projected earlier that -- not projected. We've said earlier that we could grow 50% this year relative to last year.

We have a follow-up question from Andrew Huang of Sterne Agee.

I just wanted to ask a follow-on, on the LED lighting. Can you give us a sense of what percentage of your lighting business is for light bulbs versus fixtures?

That's a great question, and I've asked this question many times. We had a hard time nailing that down, because when we sell the product to the LED customers, sometimes we are actually involved in the design of the board -- PC board, but we never know exactly what form factor it goes into. But if I look at across the board, it's really a mixture, probably a good mixture, I would say, of individual lines and also fixtures for commercial applications and some street lighting.

Okay, and then I guess another question along those lines. I guess when you're kind of competing for business for your drivers for LED lighting, what do you think gets you to win more often than not? Is it your features or is it your price, like what makes you win?

I think the main thing is cost. We have a very low-cost solution with a single-stage approach. And we have the lowest component count of anybody. And the third one -- actually, there are really 3 reasons. The third one is we have the highest efficiency solution. Those are the 3 reasons people would pick us.

[Operator Instructions] And gentlemen, there appear to be no further questions in queue at this time. Are there any closing remarks?

No, thank you. We'll leave it there. There'll be a replay of this call available on our website at investors.powerint.com. And thanks, everyone, for listening.

Thank you, sir, and thank you, ladies and gentlemen, for your participation. That does conclude your Power Integrations Q1 2012 Financial Results Conference Call. You may disconnect your lines at this time. Have a great day.