Good afternoon. My name is Tushan and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Power Integrations' First Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. I would now like to turn the call over to Joe Shiffler, Director of Investor Relations. The floor is yours.

Thank you. Good afternoon, and thanks for joining us. With me on the call today, are Balu Balakrishnan, President and CEO of Power Integrations and Sandeep Nayyar, our Chief Financial Officer. Our first question results are calculated using the sell-in method of revenue recognized on sales to distributors, reflecting our adoption of ASC 606 effective January 1st of this year. On today's call and in our press release, all comparisons to prior result make use of recap financial information calculated as if the new accounting standards have been in effect for this period. As a reminder, we published the recap data for all eight quarters of 2015 and 2016 in conjunction with our fourth quarter earnings release in February. That data can be found in the historical financial tables posted on our investor Web site, investors.power.com. Also, during the call today, we will refer to financial measures not calculated according to Generally Accepted Accounting Principles. Please refer to today's our press release for an explanation of our reasons for using such non-GAAP measures, as well as tables reconciling these measures to our GAAP results. Our discussion today, including the Q&A session, will include forward-looking statements denoted by words like will, would, believe, should, expect, outlook, estimate, plan, goal, forecast and similar expressions that look toward future events or performance. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected or implied in our statements. Such risks and uncertainties are discussed in our press release and in our most recent Form 10-K filed with the SEC on February 08, 2017. Finally, this conference 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. 2017 is off to a great start for Power Integrations. Our first quarter revenues grew 19% year-over-year, coming in near the high end of our forecasted range at $104.7 million. Non-GAAP earnings were $0.63 per share, up from $0.55 a year ago. Our growth in the first quarter was broad-based with double digit increases in each of our three largest end market categories. The communications category grew 40% year-over-year, driven by fast charging applications for the smartphone market. Consumer revenues grew at a high-teens rate, driven by continued strength in appliances while industrial category show double digit growth driven by a wide range of applications, including smart utility meters, home and building automation, power tools, LED lighting and high power applications. We expect all of these revenue categories to grow at a healthy cliff in 2017, and we believe we are on track for another year of double digit top line growth overall. In the communications end market, our InnoSwitch products continued to win a substantial share of the fast charging opportunity, thanks to the unparallel level of integration and energy efficiency, which enable designers to maintain small form factors, while delivering up to 4 times as much power as standard low power chargers. In the first quarter, we won nine high-volume fast charging designs for five different OEMs, including several multi-chip designs, pairing InnoSwitch ICs with our digital interface chips, implementing the quick charge 3.0 protocol. While fast charging has already been a significant growth driver for our business over the past couple of years, we believe the emergence of USB-PD standards and the new type-C connector will accelerate the adoption of faster charges and facilitate even higher power levels over the next couple of years. Well the migration of USB-PD is just beginning…

Thanks, Balu and good afternoon. I will quickly touch on a few financial highlights, focusing mainly on the non-GAAP numbers, which I'll reconcile to the corresponding GAAP figures in the tables accompanying our press release. As Joe noted, our Q1 financials are calculated using sell-in revenue recognition following our adoption of ASC 606 on January 1st, and all prior-period comparisons are to the recast numbers we published last quarter. First quarter revenues were $104.7 million, up 19% from a year-ago and 2% from the prior quarter. On a sell-through basis, sales grew approximately 17% year-over-year and declined 1% sequentially. From an end market perspective, the 2% sequential growth in revenues in the March quarter was led by the industrial category, which grew more than 10% sequentially on broad based strength in the end market, including metering, lighting and power tools. Consumer revenues increased low single-digits sequentially, highlighted by growth in air-conditioning and TV markets. Communication revenues declined by mid-single digit percentage, driven mainly by seasonally low revenues from cell-phone chargers, while computing revenues fell sharply on a sequential basis, which is fairly typical of the March quarter as that market is heavily impacted by the Lunar New Year holiday. Revenue mix for the quarter was 37% consumer, 31% industrial, 28% communication, and 4% computer. Non-GAAP gross margin was in line with our expectation at 49.2%, down 100 basis points from the prior quarter. As expected, the decrease was driven primarily by the flow though of higher cost inventory stemming from the relatively unfavorable dollar yen exchange rate that was in place last summer. As a reminder, a stronger yen puts upward pressure on the cost of wafers sources from our Japanese foundry partners and typically takes about two quarter to affect our results. We do expect a meaningful recovery in…

Thanks, Sandeep. We'll open it up now for the Q&A session. Operator, would you please give the instructions for the Q&A.

[Operator Instructions] Your first question comes from the line of Ross Seymore with Deutsche Bank. Your line is open.

I guess as we talk about the revenue side first, I believe you mentioned three out of the four segments that you thought would be stronger growers this year. I know computing is always very volatile in the short-term. But I thought in prior conversations, you expected all four segments to grow. Did something changed in the computing side?

Interestingly, we are growing on a portion of the computer business, which is monitor. So we talk about a major design win we had with a Korean display manufacturer, which we believe will expand to other monitor customers. And we also have a tremendous level of interest in using Inno 3, our next generation InnoSwitch for tablets and notebooks, which will also allow us to grow the computer market. But what happened in Q1 is really multiple; one is of course Q1 is the weakest quarter for computing; but on top of that, the desktop business seems to have gone down more than the rest of the business, that's where we have had most of our revenue; and thirdly, the revenue in computing historically has been in stand-by power supplies, and because of the reduction in power consumption of PCs, the power levels have come down to the point where you no longer need these stand-by power supply. They can do -- they can meet the stand-by requirements without having an additional power supply. So there has been a more accelerated decline in the stand-by. Having said all of that, we believe we can start re-growing the computer business as we get into monitors and notebooks, tablets and printers.

And I guess two quick follow-ups for Sandeep. On the gross margin side of things, it's good to see that it's heading back in the right direction. Is the trajectory into the back-half of the year changed from the steady climb to 50% that you prior had, given that the starting point is higher in 2Q?

So basically what really happened is when we had guided earlier, we had said that the second quarter would be similar to the first. But what really changed with the level of inventory coming down, the benefit as -- if you remember, the yen last year around the beginning of the year was at 105 and then went back to close to 115, 116. So in Q1, we had the unfavorable effect and we had thought we would get when the yen weakens we would get the benefit in Q3. What's really happening is with the lower inventory, a portion of that benefit is coming in Q2. So I think considering we’ve got the earlier benefits from Q3 for the rest of the year, I would expect that we would remain slightly above the 50% level. And as a result for the year, we would be averaging at the best estimate we can do around 50% for the year.

And I guess as my last question, on the OpEx side of things, hopeful that you took the slight decline in OpEx in the September quarter. Is it still can be growing at 60% of revenues as your long-term target? And I know quarter-to-quarter there’ll be some perturbation. But just want to make sure as we look longer-term that there is no changes?

So our long-term model, if you look at as we’ve talk a long-term just to reemphasize the whole model is that that our margin will -- top-line growing on an average of low double digit margin and 50% to 55%, and then OpEx at 60%. But that’s on an average. If you look last year, even though we grew 13%, our expenses last year grew 4%. So this year, if you remember I had mentioned because of the investments that we are making with the new opportunity, the OpEx would be higher than there. But if you average it out, that’s where our model at a 60% plus. So you can't take it quarter-to-quarter or year, but I think you have to take a multiyear perspective on the model.

And your next question comes from the line of David Williams with Drexel Hamilton. Your line is open.

I guess my first question is really about the health of the channel. And it sounds it compares pretty favorably with what you’re seeing last year. But are you seeing I guess in general, any lengthening of older terms or are you seeing anything, I guess, that would give you any concern with the lead times over the last few weeks?

Our lead times on a few of our products, has gone out primarily because of extremely high demand on those products; that’s relatively temporary, by Q3 that will come back to normal. But most of our products are under normal lead times, which is typically four to six weeks.

I guess can you talk a little bit about what you're seeing in China. Are you seeing slow down there? Is there any I guess pockets of strength or weakness that you’re seeing coming through now that you -- may be you're keeping an eye on?

We have heard and seen a little bit of slow down in the cell phone handset numbers. But in spite of that, I think, we’re going to do really well this year because of the share growth we are getting in handset with fast charging. But definitely there is some slight slowdown in that prospect. However, that could change in the second half. It all depends upon how the new phone introductions happen in the second half. It’s generally a relatively volatile market, but we have enough customers now that I think overall it will be not so volatile for us. And in terms of positive, we are increased investment in infrastructure projects in China, specifically high voltage DC transmission systems. China has come up with a master plan to connect entire nation with a grid using DC transmission, which requires converters on both sides that we can sell IGBT drivers to. And we have won a large portion of that business and that would start benefiting us in Q4 onwards. We’re also seeing a significant drive to convert all the public transportation and scooters and bicycles to electrified vehicles, if you will, especially in large cities like Shanghai, Shenzhen and Beijing. So we're seeing a lot of opportunities there where we have been designing to electric buses, e-bike chargers and scooters and so on. So that’s another area of significant growth for us in China.

And can you give us may be a round number on your design win today on that InnoSwitch 3 line. I know you’ve got a strong pipeline there. But can you give us an idea of maybe on how many designs you’re working on today?

It's a large number, but I don’t have an exact number. I would say in the order of 50 designs ongoing and out of which, we have about three or four of them actually in volume production as we speak. This is relating to display devices like monitors and also set-top boxes. But we expect to start contributing revenue in the second half of this year.

And your next question comes from the line of Tore Svanberg with Stifel. Your line is open.

First question is on communications. So Balu, you mentioned five different OEMs that you’re working on for fast charge. Are all those on QC3 for now?

No, there’s actually a mix set of protocols. First of all, all of those are in China. As you know, we pretty much have everybody every OEM who actually uses fast charge, uses InnoSwitch at this point. So these five designs are from the Chinese cell phone OEMs. And they use a combination of protocols, each one uses a different protocol at the moment and none of them have started using USB-PD yet. But they are certainly seriously thinking about using USB-PD in the future. But as you know, we won what we think is the first USB-PD design for cell-phone chargers and that's the pixel charger.

And on that topic on USB-PD you now have their references design with Cypress and now also with Weltrend in Asia. Is that how we should expect this markets to materialize for you with these reference designs, with digital interface companies? Or are you actually working on designs irrespective of the actual reference?

Well, we have been working on designs even before we had the reference designs available. For example, the pixel charger uses the Weltrend chip, which is used in the reference design and that one is already in production. And that is as a combination of InnoSwitch and Weltrend’s chip. Generally, what happens is that the high volume customers we start working with them even before pre-launch, we are working with the probably 40-50 customers with InnoSwitch and accelerating InnoSwitch. And so we do that ahead of time and then for the general market, we would use the reference design. The whole idea is to put the protocol portion of it, which is purely digital in a separate microcontroller which is what Weltrend and Cypress are good at doing. And we do all of the power conversion and all of the difficult analog functions required for USB-PD in our product.

And moving on to the industrial side, you mentioned a DC transmission program in China ramping later this year. Could you just add a little bit more color on that as, I mean, just trying to understand the opportunity and how that ramps over time; it can be a slow steady ramp or when we actually start to see some pretty material revenues already in the second half.

Relative to the high power revenue, it will be material in the second half of -- mostly in the Q4 time frame. But it does span several quarters or may be couple of years. Basically, what China has done is come up with a plan of grids that go north, south and East, West and all of these are based on the latest technology, which is the DC transmission line. And typically these are running at 600,000 to 800,000 volts and about 1 to 2 gigawatts of power in each transmission line in terms of capability. And it requires something like 10,000 drivers on each side, if you can imagine that. These are huge towers with the IGBT modules with our drivers on top of it. And so we have won a significant portion of that business, and we expect to start shipping in Q4; they will probably start buying some in Q3; they will certainly place orders in Q3. And so that should help us grow high power, not just this year but over the next couple of years.

And then on the patent litigation with Fairchild, so you mentioned this final judgment in March, and I guess now being the next step is going to be the actual appeal process. Any sense for how long that will take?

I believe the deadline for the Fairchild and on guide to file the appeal is end of May. And it typically takes one to two years before you get the response from the circuit court. So we are hopeful sometime next year, we will get the good news and we’ll get the money that we deserve.

One last question for Sandeep. Sandeep you mentioned getting back to your target inventory days by the September quarter. So I mean does that simply mean that you're trying to build inventory but demand in Q2 remains pretty strong, so it will probably just take you another quarter to sort of catch up?

Actually, it’s going to take longer. What I was trying to say is that even in the next quarter, we won't be able -- that it’ll be not much change from the levels. I think in the second half of this year, we will probably get up to those, say from the 86 days to about 95, 96. But I think it will take getting into the next year first half to be at the time we get back to our levels. So the demand is pretty strong for us and its going to take a little while to get the inventory build-up.

[Operator Instructions] And your next question comes from the line of Ed Roesch with Sidoti and Company. Your line is open.

Wanted to, coupled with Sandeep about gross margin. Did you mention that favorable mix would be a benefit to gross margins?

That is correct. What happens in the second quarter is where we generally have most trends in the air-conditioning area, which falls in our consumer segment. So that is typically a very strong quarter, and I think what I would say the improvement that you're seeing of about 100 basis points from Q1 to Q2, half of it is coming roughly from the yen benefit with the weakening of the yen that happened in December, and the other half 50 basis points that’s coming more from mix.

And then I have one quick question here. I'm not sure how you manage high demand situation here. But are you on allocation with any of your products currently or are you in recent quarters?

Yes, on a few specific products, we are seeing such a significant demand, we are on allocation at the time being. However, we will be increasing our capacity and by Q3 we will be out of that. And those products of course the lead times have gone up as I mentioned earlier.

And then just on a broader question, what percentage of the product portfolio do you think the InnoSwitch or any type of chip, incorporating Flex Link, what percentage of the product portfolio could that represent?

In the future do you mean?

Yes, looking at how many years you have to comment on.

Well, first of all, our products never really die. I mean we are still shipping TOPSwitches and TinySwitches and LinkSwitches. In fact, our latest TOPSwitch product, which does introduced in 2010, which is TOP JX, is still ramping really nicely. In fact, there is one of the fast growers this year. And the tiny switch is also ramping in revenue. So the way to think about it is overlapping ramps. So the InnoSwitch will continue to ramp for probably next 10 years and that InnoSwitch and its derivatives before we see in next generation taking over. So it is kind of an overlapping ramp, and typically our products never die and we still sell the original TOPSwitch we introduced in 96, if you can believe it. So it is, in some markets, they just don’t want to change the device, especially in industrial and appliance type markets.

So there is not a lot of substitution going?

In some cases, there is. So for example, if you’re in cell-phones, the product lifecycle is shorter it’s typically more like three to five years. There the substitution happens faster; however, if you get designed into some of the industrial applications, the product lifetime could be – our appliances for that matter, lifetime could be 10 to 20 years. And that's the beauty of it, I mean we keep selling the same product for long periods of time. And the older products tend to have better margins for us because they’re into these types of markets, which are more fragmented than the much longer product lifecycle.

[Operator Instructions] And I see no further questions over the phone, at this time. I'll turn the call back over to Joe Shiffler.

All right I guess, we’ll end it there. Thanks every one for listening. A replay of this call will be available on our investor Web site, which is investors.power.com. Thanks again for listening and good afternoon.

And this concludes today's conference call. You may now disconnect.