Good afternoon, ladies and gentlemen. Welcome to the Power Integrations Q2 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode [Operator Instructions]. And now at this time, I would now like to turn things over to Joe Shiffler, Director of Investor Relations. Please go ahead, sir.

Thank you, Beau. Good afternoon, everyone. Thanks for joining us. With me on the call today are Balu Balakrishnan, Chairman and CEO of Power Integrations; and Sandeep Nayyar, our Chief Financial Officer. During this call, we will refer to financial measures not calculated according to GAAP. Non-GAAP measures 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 today's 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, forecast, estimate, anticipate and similar expressions that look toward future events or performance. Such statements are subject to risks and uncertainties that may cause actual results to different materially 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 12, 2024. 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 Balu.

Thank you, Joe, and good afternoon. As expected, Q2 marked the beginning of our recovery with revenues up 16% sequentially and another increase expected in the third quarter. Like many of our peers, our near term outlook reflects limited visibility and challenging macro conditions. Customers are behaving cautiously and our short lead times enable customers to order products only when needed. All these factors make the slope of recovery highly uncertain. Nevertheless, inventory related headwinds have lessened considerably, clearing the wave for a rebound off the bottom. We consider seven to eight weeks a desirable range for channel inventory. And while pockets of excess remain at few distributors, we ended June at 7.8 weeks overall, that's down a week from the prior quarter and well below the peak of 13.6 weeks in Q3 of 2022. The recovery is being led by our consumer category where revenues are up 70% over the past two quarters after falling all the way back to 2009 levels in Q4 of last year. Just as the supply chain had bulked up on inventory after the shortages of the prior year, demand for appliances fell sharply due to a confluence of factors, including the collapse of China real estate and more broadly higher interest rates, slower home sales and the hangover from the accelerated purchases during the covid times. The resulting correction had a outsized impact on Power Integrations with about a third of our revenue coming from the appliance market in 2022. As often happens, the supply chain overcorrected, drawing inventories down to unsustainable levels and then replenishing throughout the first half of the year. Looking ahead appliance demand remains soft and we expect seasonally lower air conditioning sales in the September quarter. However, we have continued to win market share and grow our dollar…

Thanks, Balu, and good afternoon. Our Q2 results are straightforward, so I will just quickly recap the numbers and the outlook, and then we will open it up for questions. As usual, I will focus my remarks on the non-GAAP results, which are reconciled to GAAP in our press release. Second quarter revenues were $106 million, just above the midpoint of our guidance while non-GAAP earnings were $0.28 per delivered share, above the level implied in our guidance as we came in slightly better on both gross margin and operating expenses. Revenues were up 16% compared to the prior quarter with increases in all four end market categories. Consumer, our largest category, was up high teens sequentially. We saw strength across the board in major and small appliances, as well as air conditioning, which typically reaches a seasonal peak in the June quarter. In the industrial category, channel inventory remained slightly elevated but continued its gradual improvement in Q2. Revenues were up mid-single digits sequentially, driven by improved inventories, as well as the design wins across a range of applications, including metering where we are seeing growth in India as Balu noted. The commuter category was up more than 40% sequentially, driven largely by tablets as a key end customer has worked through excess inventory. We also saw strength in aftermarket notebook chargers and in monitors. The communication category was up 10% sequentially, driven by the clearance of inventory at a key handset customer. Revenue mix for the quarter was 42% consumer, 33% industrial, 14% computer and 11% communication. As Balu noted, distribution inventory ended the quarter at 7.8 weeks, down a full week from the prior quarter as sell through once again exceeded sell in. In terms of dollar value, channel inventory reached its lowest level in three years.…

[Operator Instructions] We'll go first this afternoon to David Williams of Benchmark.

I guess, maybe the first question is maybe around how you're seeing things geographically, and China seems to be getting better in certain segments. Just curious how you're seeing that and just from some of your comments it doesn't sound like maybe you're seeing that same thing, but just kind of curious how you're seeing that geography today?

In China, our biggest exposure is appliances. And as we mentioned, we are not seeing a pickup in demand. The inventory situation has pretty much cleared out. So we are now seeing the current demand, which is actually much lower than what we would've expected. However, thanks to design wins and also our increase in ASP due to higher power levels, we are seeing a growth that is above demand. And I think that'll continue through the second half and next year. But I think the actual raw demand is essentially flat at this point, because of all the challenges China has in terms of the real estate market. Now the cell phone is a little bit different, because there they moved more to low end phones. Huawei is doing better on the high end. Obviously, we can't supply to Huawei. And they're taking share away from our customers on the higher end of the market. So that situation has not improved in China. But if you look at our overall performance, our cell phone has been down more than 50% this year. But the rest of the market, based on our projections, our internal modeling for this year, is we’re up more than 15%. So we are doing really well everywhere else. The cell phone market, for reasons I mentioned, has shifted in China. We are doing very well outside of China.

And David, one more thing. Even in the high power business in China, the infrastructure grid, projects have been delayed a bit. So that has also impacted, which is reflection of what Balu is saying what is happening in China.

And I would add that having said that next year should be a very good growth for us, because all of this will be out of the picture. The cell phone situation in China, I think, has stabilized at this point and we should see a nice growth next year in all of the areas.

So I guess secondly, just if you're thinking about how you are viewing the second half, obviously, it seems like things are a bit more tempered now than maybe last quarter where we were thinking about a stronger second half recovery. What do you think is different today than 90 days ago? Is it simply the macro deteriorating or are there other maybe push and pulls that are kind of coming in here? Is it really just about the macro?

Actually, if you go back to our last call, what we said was that the inventory situation will come back to normal by the middle of this year, and that has pretty much happened. And we also said that we will grow in the second half but we didn't know the slope of the growth, because we don't -- we couldn't see the demand picture. The visibility is very poor. So you are correct. I think the growth in the second half is less than I would've anticipated, but that was not visible to us in the last quarter. Even now the visibility for Q4 is very, very low. People are ordering at the last minute, because they can. We have lot of inventory. They are skittish about holding inventory after what has happened in the last couple of years. So they order when they need the parts. So that makes it very difficult to look into the rest of Q3 and Q4. So I would say your observation is correct.

[Operator Instructions] We go next now to Matt Ramsay at TD Cowen.

A couple things I wanted to hit on, I guess, my first question. Balu, you guys mentioned in your prepared script, lots of things about the movements of the end markets in the short term. But I think what caught my attention a little bit was your commentary about an inflection potentially for GaN across your end markets in 2025 and beyond. So maybe you could unpack that a little bit like what you're seeing with design wins that gives you that confidence? And then the second part, I guess, is what percentage of the business today is GaN? And if you look out two, three years, like where do you think that can get based on what you're seeing?

So we have mentioned multiple times that most of our new products will be using GaN and they have been using GaN. And we got the best -- the first traction on cell phones, because that has much shorter design cycles. What we are seeing now is the proliferation of GaN into all of the other markets, and it's driven by our new products like InnoMux-2, GaN higher voltage inner switches with GaN. All of this are -- will be going into production over time and we see an inflection point starting in 2025. So just to give you a rough idea, next year our GaN revenue could grow as much as 50% and we see the growth rate, the slope of the growth rate, shifting starting in 2025. And it's pretty much expected and it is nice to see that it is happening right now. As far as exact revenues, I would rather focus on what we have going for the future. And we think by 2028 GaN could be -- GaN revenue could be $100 million in that range.

I guess my follow up question, Sandeep, was a little bit of a historic last 72 hours with the end. Maybe you could just give us a few comments about sort of variability there and how it affects the model, remind us of the sort of rule of thumb? And if there is currency fluctuations is something that hits sort of the manufacturing part of the business in the current quarter? And how long would that take to show up in the P&L, if there were sustained moves? Is that a quarter out, is that two quarter out? Just trying to get a sense given when things manufacture versus when they sell.

So Matt, as we have said before, typically in the past the yen impact, a 10% change in the yen would affect us about 120 basis points, give and take. And it would tradition -- flow up within six months into our P&L. But things have changed with the level of inventory we are carrying. And so if you look at what we are carrying today is significantly larger. As a result, it takes about three to four quarters for it before it flows into the P&L. So I think the big change that you saw recently, if it holds for a while, because in our -- it's not on a daily basis that we adjust, it's over a period of time we have the yen, what we call a yen sharing arrangement with our manufacturing partners. So my take is with the level of inventory we are seeing, if this change that happened recently holds, it'll probably impact us a little bit in the fourth quarter or maybe in Q1 of ‘26. So pretty much for next year, because of the level of inventory we have, the benefit of the yen will flow. In fact, we still see, because the yen had depreciated all this while, from this year to next year, we will still have a little more benefit from yen in the P&L, but we'll have headwinds from input costs that we saw increasing this way. But we'll also get favorability into next year from mix if the cell phone -- the growth comes from non-cell phone areas. So if you remember what we said on the Analyst Day, we had kept our model, WHAT we had said is even when even yen normalizes, which for us means it goes back to 120. we had said that the mix will go favorable, the yen could become a headwind going ahead, but yet -- and the mix would go favorable, but we would still stay in the higher end of the model. And it's kind of playing out pretty much to what we said earlier. Now the input cost continue to be a challenge and at least from what we have got this year as higher costs will impact the P&L next year. But having said all that, we still feel good even for next year that our margin will be at the higher end of the model.

[Operator Instructions] Well, it looks like we have no further questions, shy group today I guess. So we'll leave it there. Thanks everybody for dialing in today. And there will be a replay of this call available on our investor Web site, which is investors.power.com. Thanks again, and good afternoon.

Thank you, Mr. Shiffler. Ladies and gentlemen, again, that will conclude today's Power Integrations second quarter earnings conference. Again, thanks so much for joining us, everyone. And we wish you all a great remainder of your day. Goodbye.