Good day, ladies and gentlemen, and thank you for your patience. You've joined the Power Integrations Q3 2012 Financial Results Conference call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, the Director of Investor Relations, Mr. Joe Shiffler. Sir, you may begin.

Thank you. Good afternoon, and thanks for joining us to discuss Power Integrations' financial results for the third 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, promising, 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 1A Risk Factors and Part 2 of our most recent Form 10-Q, filed with the SEC on August 7, 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. Our third quarter operating results was solid, in light of the current business climate, with revenues of $78 million, just below the midpoint of our projected range. And non-GAAP earnings of $0.49 per share is up more than 50% from a year ago. The primary driver of that growth was our gross margin, which increased for the fourth consecutive order, and is up nearly 6 percentage points over the past year. Before I go further into the results, I'd like to touch briefly on the announcement we made earlier this week regarding the likely closure of SemiSouth Laboratories. As you may recall, we announced a strategic relationship with SemiSouth in 2010, with an eye towards utilizing the silicon carbide power devices to address high-power applications. While we were disappointed in the outcome of this partnership, our strategic direction remains unchanged, and we continue to invest in high-power switch and driver technologies that will enable us to expand our addressable market within the realm of high-voltage power conversion. For example, our acquisition of CT-Concept, which closed in May, enables us to address applications from 1/10 of a kilowatt, all the way up to 1 gigawatt, including industrial motor drives, renewable energy systems, electric locomotives and automobiles and high-voltage DC transmission systems. CONCEPT adds $0.5 billion to our addressable market, bringing our total market opportunity to $2.5 billion and growing. Design activity is robust, in spite of the current economic climate and CONCEPT won several high-value designs in the third quarter, including the high-voltage DC transmission system in the U.K., an electric locomotive program for the China market and a wind power in motor [ph], at major German industrial customer. This acquisition has been accretive to non-GAAP earnings from day 1, and we believe we are well…

Thanks, Balu, and good afternoon. I will begin with the charge related to SemiSouth, which totaled $59.2 million pretax. Of that amount, $25.3 million appears as an operating expense on our income statement, while the remaining $33.9 million is shown below the line as other expense item. Those amounts and the related tax benefits are excluded from our calculations of the non-GAAP operating expenses and non-GAAP income as shown on the reconciliation tables in our press release. The expected cash flow included in the charge is $15.3 million. Revenue for the quarter was $78 million, a sequential increase of 2%, and up 4% from a year ago. In terms of end markets, industrial bled away with sequential growth of better than 10%, aided by one additional month of revenues from the CONCEPT acquisition, which contributed only 2 months of revenues in the prior quarter. Excluding CONCEPT, industrial revenues grew mid-single digits, driven mainly by LED lighting applications. Revenues from the consumer end market increased slightly from the prior quarter, driven by continued growth in the appliance market. Communications revenue were down slightly, while computer revenues declined by a little more than 10%, reflecting the overall weakness in that end market. Looking at sales channels, distribute [ph] is accounted for 76% of sales during the quarter, with direct sales at 24%. Gross margin on a non-GAAP basis was 52.9%, up 100 basis points sequentially and 570 basis points year-over-year. As Balu indicated, the relative strength of industrial and consumer application in recent quarters, as well as the CONCEPT acquisition, have resulted in a more favorable end market mix, providing significant margin uplift on top of the benefits of our cost reduction initiatives. Significantly, this margin improvement has come in spite of the continued strength of the Japanese yen versus the U.S.…

Thanks, Sandeep. We'll open it up for Q&A now. I know there's some other calls going on in our peer groups this afternoon. So in the interest of time, I'd like to ask everyone to stick to a limit of one question and one follow-up. And then, we'll be happy to come around for a second round of questions, time permitting. Operator, would you please give the instructions for the Q&A?

[Operator Instructions] Our first question comes from Vernon Essi of Needham and company.

Listen, I wonder if, Balu, you could talk a little bit more about SemiSouth and just anything you'd be willing to provide us in terms of -- I mean, obviously, you seem like you understand the industry very well. Can you give us any understanding what possibly happened here, and how this came down so abruptly and ended so quickly?

Well, I am kind of limited on what I can say, but what I would say is that the company was unable to meet key business milestones, and it's unfortunate that they are likely to close. And we are taking this write-off.

Okay. I mean, and I guess, leading into that, though, you -- the milestones were obviously deteriorating. And it seemed as though things were getting more -- the investment level from you was increasing. I'm just wondering, what the thought process was behind the scenes on that?

Well, when we made the last investment, it was very promising. They had orders from very large customers. And the reason they give the money is to -- for working capital and the expansion of capacity. And they were unable to deliver on that.

Okay. And then my follow-on would just be -- you made a mention of the phone charger market going forward. I'm wondering if you're investing more time and effort in that market versus maybe the last couple of quarters? Can you help us understand what you meant by that comment?

Absolutely, yes. As you know, 3 of our largest customers have had challenges over the last year and a half. So we've been focusing on other customers who have been very successful. And so far, we have been able to win about 3 large Asian customers. In addition to that, we have won some smaller cell phone customers. I think we had a total of about a dozen design wins in the last quarter. One of the 3 Asian customers are already production. The other 2 will be ramping within the next 2 or 3 months. So we expect to see an increase in share of business from new customers.

Our next question comes from Ross Seymore of Deutsche Bank.

Yes, in your down 5% guidance, not fairly surprising giving away from everybody else. Can you give us any color on what end markets are doing better or worse, Just a little color by end market into that 5%, please?

It's very hard because our backlog, we really don't know where because the same product for us goes into different applications. So it's very hard for us to tell where. But as you can see from the trend that we have had, we continue to do well in the industrial and appliance market because of the diversity we have, things like LED lighting, our CONCEPT, and they're doing very well in major appliances. But obviously, we do get impacted by the macroeconomic conditions. And I think the guidance is reflective of that.

Were you asking about the last quarter, Ross?

No, going forward.

Going forward, yes. Going forward is very difficult.

And I guess as my follow-up then, and I'll try to sneak it in as a 2-parter. Do you expect the handset portion to go up as you did expect before? And then the follow-up, the true follow-up would be in the gross margin side of things, is the yen impact at least stabilizing for you now as you sell products that have been in inventory for a while? Or is it still an incremental headwind as we look forward?

So on the yen, you're correct. It has stabilized because it's been around JPY 78 to JPY 80 to $1 for quite some time now. So it's pretty stable. As far as the cell phones, we should see an increase in share, assuming everything else remains the same, in the next year. Because of the new customers ramping production, you will see a little bit of impact on Q4, but you'll really see a bigger impact in the next year.

Our next question comes from Andrew Huang of Sterne Agee.

, Maybe just to kind of follow on that last question. Now that Industrial's more than 30% of sales, I was wondering if you could give us some color on your outlook for this segment in Q4? Because it seems like a lot of your peers with heavy industrial exposure are guiding down pretty hard for Q4?

Yes. So in the CONCEPT part of the business, we expect it to be relatively flat because actually it's positive because as I said, most others are actually going down. So they're doing better than the rest of the market. And on our side, it is hard to predict. We did very well in Q3, so it's a little bit more difficult to predict because they have longer, what do you call, they get orders earlier than we do. And so it's a little bit more difficult to predict on our side how well we'll do on the Industrial segment. And the other thing I'd remember is on our side of the -- there is the -- in the non-CONCEPT part of the Industrial segment, the growth has been mainly in the LED side. So when people talk about Industrial, they're generally talking about large industrial. And so, the LED is one of the bright spots for us in the industrial area.

Got it, okay. And my follow-on is, can you remind us on what leverage you have to improve gross margin going forward?

I think most of the improvements are already in place. The only one that is still ongoing is the conversion from gold to copper. That will go on for some more time. But it will be somewhat incremental, and it'll offset any price reductions they're expecting in the next few quarters. So it's not going to be a significant driver for the gross margin.

[Operator Instructions] Our next question comes from Sumit Dhanda of ISI Group.

The first question, on the expectation for the fourth quarter, you noted there wasn't really any pickup in October so far. I guess, 2 questions related to that. First, could you describe the profile of bookings in September on a monthly basis? And then, what is the expectation through the end of the quarter? Is it the expectation that bookings stay flat at current levels, they pick up a little bit? And how does that compare versus typical patterns?

Well, in terms of last quarter, we saw some pickup in July after a very weak June. It went down a little bit in August. And then since then, it hasn't picked up in a noticeable fashion. Going forward, we obviously take a lot of things into consideration, not just the bookings. We look at the customers and so on and so forth. Obviously, that's included. All of those factors are included in our guidance. It's hard to predict exactly what the bookings would be, but from everything we can tell, our customers don't have much inventory. They seem to be ordering as they need products. So I am -- my expectation is the bookings will reflect relatively closely what we ship. Of course, that doesn't tell you what is going to be sold through, but since there is not much inventory, we expect most of it to sell through.

Okay. And then as my follow-up, you noted that X CONCEPT, Industrial's up mid-single digits mostly because of LED lighting. I remember earlier in the year, your -- although you were optimistic on the LED lighting segment, your rhetoric was highlighting more competitive issues in the market. Has that waned a little bit? Or is the implication that despite the competitive issues, this business is perhaps tracking a little better than you have thought? Any color around that would be great.

Well, I think in the first half, the problem was the market itself was weak. And you're right, there are more competitors. But in spite of the competitors, the best we can calculate, we are at least holding our share which we believe is in the order of 20% or so. So we are doing quite well in the LEDs. Obviously, we are not going to grow as much as we thought originally because of the weakness of demand worldwide. But otherwise, we are doing quite well.

Our next question comes from Steve Smigie of Raymond James.

Balu, I was hoping you could talk a little bit about the handset charger strategy for you guys. I guess, on one hand, you said you're trying to push into much higher power areas, I think, presumably to be in a market that's less competitive. At the same time, you still seem to be chasing some design wins. And so my thought was you were sort of deemphasizing the charger handset business a little bit. I just -- maybe you can talk about that.

I don't think we ever said we'd deemphasize the charger business. All we said was, we have the luxury of -- to pick the business we want to take. And whenever we are able to convince the customer that the value we bring justifies the price, we are -- we take the business. If we are compared to alternatives that are not equivalent in terms of quality and reliability, we tend to walk away. But we have no intention -- we'll never have the intention of leaving the cellphone business or any chargers business for that matter.

Okay. My follow-up question is with regard to SemiSouth, I think one thing you had hoped to accomplish with CT-Concept was to work more closely with SemiSouth. Obviously, SemiSouth is having issues, but -- so what are the directions can you now take the business that you were hoping to do with SemiSouth? Are there other silicon carbide products out there you can work with? Can you still develop silicon carbide technology? Kind of help me understand that a little bit better, that'd be great.

Okay. First of all, the CT-Concept business makes perfect sense independent of silicon carbide or any switching technology of SemiSouth. We acquired CONCEPT because they had a very good business. They drive IGBT, which is the main switching technology today, and it will be that way for some time to come. And as far as our strategy, that hasn't changed at all. We have basically given up on the SemiSouth's silicon carbide technology, but we continue to invest in other switching -- switch technologies. And our intention is still to go to higher power levels and -- where we would have both the switch technology and the driver technology. And the driver technology, of course, comes from CT-Concept.

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

Can you remind us of what programs you currently have in place for desktop PCs for primary power supplies? And then what could be ramping ahead?

And what do you mean by primary power supplies, the main power supplies?

Oh, yes. I'm sorry, the main primary supply, main power supply, yes.

I got it. So currently, we have 3 end OEMs, large OEMs. They're well-recognized names. And we supply our parts to 3 power supply companies, who in turn, sell to those OEMs. And some of them sell to more than one. And the third one was recently added, by the way, in Q3, the third OEM.

Okay. But if I look at like the number of -- if I look at the power supplies that are being shipped into the desktop PC market, the mains [ph], what percentage of them do you think are using kind of switching technologies between semiconductor technology as opposed to discrete technology? Do you have an idea of the penetration?

As far as we know, all of the existing solutions are discrete. We are the only ones who offer integrated solutions, highly integrated solutions to that market.

As there are no further questions in queue at this time, I'd like to turn the call back over to Mr. Shiffler for any closing remarks.

Okay, thanks. We'll leave it there. Thanks, everyone, for listening. There will be a replay of this call available on our website, which is investors.powerint.com. Thanks again for listening, and good afternoon.

Thank you, sir, and thank you, ladies and gentlemen, for your participation. That does conclude your program. You may disconnect your lines at this time. Have a great day.