Good day, everyone and welcome to today’s Power Integrations Q3 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode [Operator Instructions]. Please note this call is being recorded and I will be standing by should you need assistance. It is my pleasure to turn today’s program over to Joe Shiffler, Director of Investor Relations.

Thank you, Britney. 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. Now I'll turn it over to Balu.

Thank you, Joe, and good afternoon. Our third quarter results were on target with revenues up 9% sequentially to $116 million, non-GAAP gross margin of 55.1% percent and non-GAAP earnings of $0.40 per share. Our revenue outlook for the fourth quarter is $105 million plus or minus $5 million. The decrease from Q3 reflects a soft demand environment called out this quarter by many of our analog peers and by some of our key customers in the appliance market. Appliances account for the bulk of our consumer category, which comprises nearly 40% of our sales. Further tempering the outlook in consumer is a buildup of appliance inventory at Chinese OEMs ahead of the China government's long waited consumer stimulus program, which thus far appears to be having a limited impact. Overall, while the recovery is proceeding in fits and starts, we are pleased to be returning to year-over-year growth with the midpoint of our Q4 forecast up 17% compared to last year. We also expect to remain at the high end of our gross margin model through at least next year, thanks to the dollar gain exchange rate and a favorable end-market mix. While all four of our end-markets should grow in 2025, we expect the strongest growth from Industrial, which has the highest margins of our four categories. We expect growth in multiple subsegments of Industrial led by high power with particular strength in high voltage DC transmission projects, long distance DC transmission lines deliver renewable energy efficiently to the grid and are also a key part of efforts to modernize power infrastructure to enhance energy security and meet the increasing power needs of AI data centers. In Q3, we won high voltage DC designs with expected annual revenue value of more than $5 million including our second multimillion…

Thanks, Balu, and good afternoon. As usual, I will focus my remarks on the non-GAAP results, which are reconciled to GAAP in our press release. Third quarter revenues were $116 million just over the midpoint of our guidance, while our non-GAAP earnings were $0.40 per diluted share, above the level implied in our guidance as we came in slightly better on gross margin and operating expenses. While we expect sequential lower revenues in Q4, we are returning to year-over-year growth, as Balu noted, and believe we are poised for strong growth in 2025. Reflecting confidence in our outlook as well as our healthy balance sheet, our Board has declared a 5% dividend increase and authorized $50 million for share repurchases commencing in the coming days subject to price-volume thresholds prescribed by the Board. Returning to the quarterly results, revenues were up 9% compared to the prior quarter. Industrial revenues grew mid-teens sequentially, driven by high power, home and building automation and metering applications. Broad-based industrial also showed sequential improvement as distribution inventories declined further in Q3 and are now at historically normal levels. The communication category was up 20% sequentially, driven mainly by the ramp of our 5G fixed wireless business in India as well as seasonal growth in smartphone chargers. Revenue from the computer category was up 10% sequentially on strength in OEM and aftermarket notebook chargers. Consumer was flat sequentially as seasonal softness in air conditioning was offset by strength in major appliance and gaming. Distribution sell through for consumer was less than sell-in, reflecting the trends Balu mentioned and resulting in higher channel inventory for consumer compared to the prior quarter. Overall, channel inventory increased to 8.6 weeks, up from 7.8 weeks at the end of June, with the increase driven entirely by consumer. Channel inventory for…

Thank you. [Operator Instructions]. We'll take our first question from David Williams with Benchmark. Your line is now open.

Hey, good afternoon, everyone. Thanks for taking my question. And forgive me, I missed a little bit of the call here, I had some issues, but lots of things, lots of moving pieces here but one thing I did want to ask was just around the 1700 volt GaN announcement that you had recently. Can you talk maybe just a little bit about that, how you see demand developing? And maybe just where that fits in? Is it industrial, automotive? And given what would seem like large markets, how you think that ramps?

Yes. The 1700 volt is required to operate from 800 volt and 1000 volt battery systems in automotive applications. The cars are moving from 400 volt to 800 volt and the larger vehicles like trucks and heavy vehicles are moving to 1,000 volts. And so this is a perfect fit for that market and also in 3-phase industrial applications, they prefer to have a pretty high voltage rating, because these meters sit directly on very low impedance lines next to the transformer, for example. As a result, they can get significant transients from lightning and so on. So they prefer the 1700 volts. Currently, this market is served by silicon carbide. We believe GaN is a much better solution, both in terms of efficiency and cost.

Great. Thanks so much. I really appreciate the color. They're very helpful. And then just lastly, I wanted to ask maybe broader, but just thinking of the last night election, are there areas of your business you think will benefit or maybe be impacted by the new administration and specifically thinking about renewables and solar applications, but also just some of the energy efficiency regulations and any other color on that would be helpful? Thank you.

That's a good question. I haven't thought through all of that. But I would say that the train has left the station when it comes to electric cars and renewables and so on. The renewables are now less expensive than coal plants. So most countries are installing additional capacity in renewables for that exact reason. Of course, there is also the environmental benefit, which I think the entire world now recognizes is critical, given all the climate disasters we have had over the last few years. So I am not at all concerned that it will in any way slow down either electric cars or renewables or high voltage DC transmission systems. And let me talk a little bit more about high voltage DC transmissions. The high voltage DC transmitter is much more efficient than AC transmission, and it is really quite integral to any new power station, whether it's renewable or nuclear. If you have a power station and you have to transmit that to a load, let's say AI data center, for example, you have to have a very efficient way to do that and the DC transmission does exactly that. And then if you have offshore wind forms, the only way to get the power onshore underground is through DC transmission. AC would be way too lossy in terms of the cables. So, I don't think the trend has any impact on our business. In fact, I would say in terms of generating more oil, it will have a positive impact on our high-power business, because we sell into applications like fracking, where you need large motors to pump liquids into the ground. And that's a huge market for us in terms of our high-power board level business.

Thank you. And we'll take our next question from Tore Svanberg with Stifel Nicolaus. Your line is now open.

Thank you. This is Jeremy calling for Tore. Yes, let me add my congrats on that 1700 volts product that we've been waiting for that and it's very nice to see. Just a follow-up on that point, I guess, can you talk about maybe how much of a lead you have in high-power GaN? And you talked about the price -- almost price parity with silicon. Can you talk about maybe how it compares to silicon carbide, how much of a I guess advantage you have in that space? Thank you.

Thanks, Jeremy. Excellent question. Let me start with the 750 volt GaN, which primarily competes with the MOSFETs. And there, we think we're getting very close to being parity with even the high-end MOSFETs within the next year or so. And at 750 volts, we are also very cost competitive with silicon or silicon carbide. Of course, if you're cost competitive with silicon, you are dramatically cost competitive with silicon carbide. And these applications include AI data centers. It includes onboard charges for electric vehicles. It also includes telecom infrastructure. All of these are in the, I would say, 1 kilowatt to 20 kilowatt range, and we already have products in development. These products will be ready sometime in 2026, and that opens up a huge market for us. So with our existing 750 volt technology, we can be very competitive with silicon and, of course, much more competitive than silicon carbide all the way up to tens of kilowatts. Now when you go to higher voltages like 1250 volts and 1700 volts, the real competition is silicon carbide and we are very competitive with silicon carbide up to about 100 plus watts. Our products currently we've introduced are in the just under 100 watts and we are very competitive there. Now if you want to go to much higher power levels like 100 of kilowatts, that's where we need new technology. We are working on that for some time now and with the acquisition of Odyssey Semiconductor, we will be able to speed up the technology, because it comes with the fab, it also comes with people with the knowledge of the device and we have made a lot of progress on that. We have a few more breakthroughs to get there. And we are now beginning to feel that we can get there in the next to three to five years and when we get there, we'll have a very competitive offering compared to silicon carbide. It'll not only be lower cost than silicon carbide at those power levels, but it will also be much higher performance than silicon carbide and as you all know, silicon carbide requires lot of capital investment, whereas GaN does not and GaN inherently is going to be cost effective long term, because of the temperatures at which they are manufactured, which is similar to silicon and therefore, it doesn't require anywhere near the amount of energy consumption that silicon carbide requires. Silicon carbide, as many of you know, requires manufacturing at 2,000 degrees, which is about half the temperature of the sun by the way and it takes a lot of money, a lot of energy and lot of capital investment to do that and that is not the case for silicon for GaN. So we really think GaN would be the most attractive alternative to silicon carbide all the way up to several 100 kilowatts once we have this new technology up and running.

Thank you for that. That's very, very helpful. And then maybe as a follow-up, you mentioned, migrating in some of your legacy products to GaN. Can you give us a sense of, how much of your portfolio is consisting of GaN now and how much maybe you intend to convert? I know you also targeted 10% of revenue for GaN, I think it was next year. As you look it might be kind of further out, but three to five years out, how much revenue do you expect to drive from GaN?

Thank you. GaN is going to replace silicon as a high voltage switch in pretty much all of our products. Everything we are designing now is using GaN, except at very low power levels, which is really not our focus at this point. We are focusing on higher and higher power levels. For example, the AI data center product or onboard charger product, those are all GaN products. That's the only way to get the performance you need. It's the only way to get the power levels you need. The silicon just won't cut it at those power levels, 10-15 kilowatts, even though silicon is predominantly used today. That's only because GaN technology is not high enough reliability, at least from a customer's point of view, are not easy to use. That's where our technology will shine. We have much higher reliability than anybody else's GaN technology and we also have easier to use product because we don't sell them as discrete, we sell them as system level products. So the customers don't have to deal with all the idiosyncrasies of GaN, not only in terms of protecting the GaN, but also getting the most performance out of the GaN. So I think that the future of our company is going to be GaN and if you were to ask me where we would be in terms of revenue, I wouldn't be surprised if we cross $100 million by 2028 in GaN products, but that's only because in some areas, it takes longer for the GaN to be -- the new products to be adopted. But we are seeing GaN growth in all four of our markets. We actually grew GaN revenue in all markets except cell phones, where as you know, people are going out of the box and therefore there was a little bit of a drag in that market. But if you take out cell phones, we grew very nicely this year and of course we're going to grow very nicely next year and onwards.

Yeah, Jeremy, in the next few years, GaN is going to be really growing quite a bit and I can see it being about 20% of our revenue in the next two to three years.

Great. Thank you very much. Appreciate that.

Thank you. [Operator Instructions]. We'll take our next question from Christopher Rolland with Susquehanna. Your line is open.

Hey guys, thanks for the question. I guess, first of all, if you guys could help us kind of force rank the segments for your outlook next quarter, I guess, maybe versus the I think it was down 9 sequential, what would be better? What would be worse? And I know it's probably a bit early for March, but we track that seasonally as flat. I wonder if you had early expectation there for growth. Thank you.

So I think for the next quarter, as we indicated, the industrial segment from a dollar standpoint will be kind of flattish, because the revenue is lower, will be higher as a percentage of revenue, and the other three segments will be down. So that's the directional answer we can give you at this point of time for the Q4. In Q1, it's a little early, but I think in historical terms, in Q1, typically you see the high-power business, which is in the industrial segment tends to be a little lower and cell phones are a little lower and AC, which is in air conditioning, starts ramping up. So that's the directional idea that I can give you for Q1, but it's a little too early.

Yes. Thank you, Sandeep. And then I would like to understand the inventory across these end markets, where it's still worse overall sell in versus sell through, how do you think that kind of finished across distribution for the quarter? And then lastly, tying all into this, the appliance market, I think what you were saying is finished white goods inventory was built ahead of this China stimulus, if I understand that correctly. And, yes, just putting all this together from inventory and then sell in, sell through would be great? Thank you.

Yes. As we said on our call that the major sell through, the sell in was higher than sell through and the reason was mainly in the area of consumer. If you look at the prior quarter, our consumer inventory was way below our eight weeks, but this quarter because of the Chinese inventory build, our sell in was greater than sell through. It was entirely in the consumer segment. So as a result, our consumer end inventory in the channel is slightly above the eight weeks, which is normal, while as all the other area, it has come back to the normal level.

Okay, understood. And sorry, did that would that include -- did I get the dynamic correct on the build ahead of white box and appliance inventory. Was that correct?

Yes, that's correct. In the first half, we had very strong consumer business, which was kind of a false positive. Our consumer customers, which is appliance customers, they thought second half will be very strong, especially in China because of the incentives they were expecting the government to provide for purchase of appliances. Now, first of all, it came very late, the incentives and also the incentives not uniform. They are different in different parts of China and it's not clear to us so far that there's any significant benefit or impact of those incentives on the demand. So the appliance customers who are expecting a strong demand in the second half, they didn't see that. The demand continues to be weak. So they ended up with a bunch of inventory. And you have to remember, they always build the power supply first before they build the end product, because they don't want the end product to wait for the power supply. So we had a very strong consumer business in the first half. And unfortunately, in the second half, it has slowed down significantly because of the finished goods inventory of the end product at our customers. Our distribution inventory is slightly above, it's not so bad, but it was significantly below as Sandeep pointed out last quarter. So it was a surprise to us that the sell through in consumer was slow. We expected a strong consumer in the second half based on what we saw in the first half.

Excellent. Thank you very much, guys.

Thank you. We have no further questions in the queue. I will turn the call back over to Joe Shiffler.

All right. Thanks everyone for listening. There will be a replay of this call available on our investor website, which is investors.power.com. Thanks again and good afternoon.

This does conclude today's program. Thank you for your participation. [Operator Closing Remarks].