Power Integrations, Inc. (POWI) Earnings Call Transcript & Summary

Got you. So let's talk about the proper industrial side or the traditional would be a better word. High power within that took a little bit of a pause during some of the early stages of the pandemic, but it's come roaring back. Talk a little bit about how big a percentage of sales that is industrial just to rightsize people is about 35% or so of sales and growing nicely this year. How much of that is high power? And what are the drivers unintended of growth in that?

So the high-power business is about 6% to 7% of our total revenue. It's a little less than 1/3 of our industrial segment. Basically, it goes into solar, wind, DC transmission, big industrial motor drive. During the pandemic, we got impacted because of the projects getting delayed. But this year, we are seeing the strength in solar and wind. And with the whole thrust and renewables, that's an area that is really going to help us. Added to that, the biggest competition there is the captive guys who have their own drivers. We are going to be talking about, again, at our Analyst Day, what we are coming out with new products, which are going to be so convincing that we have a strategy how to penetrate even the capital markets. Even though the CAGR of growth in this segment is 7%, we believe we can grow double-digit because of the opportunities ahead of us.

Is that industrial or high power and...

High power specifically, as I talked about.

And thanks for the little tidbits ahead of the analyst meeting next week. I like it. What about the automotive side of things? You've talked on, I don't know, for the last year about some of the aspirations there. Everybody knows it's a very long design cycle. But talk a little bit about what POWI can do in that market first and then when we would start to see some traction from a financial perspective?

It's another example of a vertical because of our innovative products opening the door for us. So with our InnoSwitch product, our LinkSwitch product, our diode products, we already have products that we go into. We were not there in traditional cars because there was no high voltage applications. Now with EVs, we have a big opportunity. And instead of the 12 vault battery, they're going to try to drive a lot of stuff through the 400 vault battery. And there'll be a ton of power supplies. So we are actually already getting designed or have got designed in and into -- things for InnoSwitch and LinkSwitch already today. And we talked about getting single million dollars of revenue in the near future. Now we can get into the drivetrain that is what we talk about the next 4, 5-year opportunity. So this is where the combination of the acquisition of concept with our InnoSwitch technology, which we can now provide these opportunities. The dollar content that we could potentially have in our car is tens of dollars in a car and going into heavy vehicles, like trucks and others, it could be hundreds of dollars. But again, we want to be very realistic and that's very POWI like. We believe and we have pointed out that we are going to have single-digit millions over the next 4 or 5 years. And I think I've been pretty explicit that 2025 to 2035 will be the decade for POWI in EVs. It's a very exciting area. It is going to be one of our largest, apart from the motor control. And we able to talk about that where our SAM is going from $4 billion to $8 billion in these 2 areas and EVs being one is a big area of growth for us.

Got you. Yes. I would imagine it will be a little tricky. You have to put the duration of the SAM far enough out to get the automotive wins without making it look like it's just kind of a pie in the sky number.

And that's why we are saying today our SAM is only $4 billion going to $8 billion because we've been very realistic of even telling you where our SAM of $8 billion will be is 4 to 5 years from now.

So we have the high-power applications, some of the alternative energy stuff. Longer term, you have the automotive side. What else is going on in industrial because that's your biggest segment. And like you said, if you're going -- comms go down to mid-teens or low teens percentage of sales, people are going to want to try to figure out what's the drivers beyond that?

I told you the high power business is going to be a growth driver. We've got homebuilding automation, metering, tools. Those are great applications. And then as I said in the consumer area, the variable motor -- motors as a big opportunity, we really don't have that much of revenue today there, and we have opened up a new SAM. And again, we're going to be coming out with more products because the current products goes to a certain power level, but we have products in pipeline that is going to take to much higher power levels for us to expand the SAM.

And then what -- the last end market question I have or end market segment question I have is on the computing side. Like we said earlier, that end market is weak, but you guys have still grown in that business. It looks like it's going to be up a little bit this year despite the fact that the broader market is down 10%, 15%, depending upon who you're talking to. Shouldn't that be a good growth driver going forward? I'm not sure you want that kind of shorter-duration product cycles to compound the comm side. But couldn't you have the same sort of compelling share gain story in computing, whether it's tablets or notebooks, et cetera, as you already had in the comm side?

Absolutely. In fact, in tablets, we have a very high share. On the notebook side, we just started. And as we have demonstrated in these -- we know all the players in this space, we work with them. So we have demonstrated that over a period of time for us to get the 20%, 25% market share is very possible. And so I truly believe in the next 3 or 4 years, computer will be a good growth segment for us.

One of our meetings this afternoon, the investor, we were talking about notebooks and he showed us a brand-new notebook that he had just gotten very pricey notebook. And then he showed us the charger, which was the size of a brick. And we're all familiar with the notebook brick that we all hate carrying around. Those don't have to be that way. You can now get 65 watts, which is really the standard power level for a notebook adapter. You can get that in the form factor of a cell phone charger. We already sell into lots of designs. Cell phone charger designs at that kind of power level, and they're very small. So it's just a matter of time before the notebook market completely gets on board with this idea. The notebook guys have always been fairly resistant to change, and they're very cost sensitive, obviously. But we're already seeing -- we've won a number of designs in the market. Samsung, a couple of years ago when they were promoting a new fleet notebook. They actually showed the combined weight of the charger and the notebook, it happened to be a charger with our GaN in it. And it was actually a design that originally was a cellphone charger, and they just decided to use it on the notebook side. So we expect to see a lot of that in the years ahead.

Like all of our shoulders...

We're all looking forward to it.

Thank you for that, for sure. What about the competitive landscape? You guys -- I've covered you for a long time. You used to fight against the discrete -- well, even like the copper guys, than the discrete guys, then some other integrated folks, you've knocked out a whole bunch of competitors. Now there's somewhat of a newer wave of aspiring entrants on the GaN side of things, some coming from the bottoms up, some coming from the top down. But in aggregate, between those you've knocked out and those that are aspiring new entrants, as the competitive landscape and some of -- has it intensified stayed the same or eased?

Well, I think what's happened in certain areas is that we have come out with some revolutionary products that have really distanced us from our competitors. And you've heard some competitors talk about walking away from the market and publicly stating that they're giving us a certain stage, even in areas like appliances, we've had people walk away from this space. Now on the lower end, you do have people in Asia playing. But on the higher end, I think we have really differentiated ourselves. They're always paranoid. Now on the GaN side, there's a lot more noise about it. But if you really look at the real volume designs, that's where we are winning. Yes, everybody will get some designs, but we have -- the big differentiator that we have even in GaN as we provide a system-level solution. While they have like a typical discrete, they're not providing the customer a full solution. Yes, it will take us a little more time to get to the power levels, but we are providing an ultimate solution, which has got half the component count that the competitors have. So if you are a consumer over a period of time, what are you going to use a much more reliable, much more robust. And as we have said, our GaN, we are not stopping where we are. We are in next-gen and the next-gen and next-gen all coming up in the next few years. So it will be much more cost effective. And I think what we're going to be able to provide competitively is again going to outpace everyone like we have done in the past.

You mentioned earlier about the pricing side of the equation and passing through cost increases and those sorts of things. And you guys are no different than many others in that regard. So you're not guilty of gouging. I'm not trying to imply that whatsoever. I don't get the sense that, that's really benefited your gross margin. There's other dynamics that have benefited your gross margin. You stopped it from going down, but it's not like you're doing your 58% gross margin because all of a sudden, your [ gem ] and people on price. But the revenue side of the equation does benefit when you have units times ASPs. Do you envision the ASP side of the equation in a weakening macro environment going the other direction? And if so, what does that do to the revenue side of the equation?

So one of the things that we have seen is, in the last couple of years is that you typically have price declines. And in this environment, there weren't any price declines, but you typically have price declines and you have manufacturing efficiencies, they offset each other. But the other thing we also benefited apart from not having those declines is value pricing. When -- the way we price our product is we capture the value of all the components we eliminate. So when the discrete prices go up, we are able to capture more value. Now obviously, not at the same rate as the discretes move up and down. So yes, we do benefit, have benefited from that. We've already started seeing a bit of pockets of pricing pressure, and we do expect as we talked about in our guidance for our [ product ] is that we will see next year, I would say, the regular levels of normal declines that we have seen in the past coming back. So we do expect to see that.

Got you. And is that -- some people are talking about the foundry prices still going up next year because of shortages. Do you just disagree with that because the shortages are obviously not persisting?

Well, if you look at different reports, we talked about reports about the PCs and so. But you're also hearing there are other companies that are hearing about cancellations or pushing out of orders in areas where people have shortages in automotive and others. So -- and plus, there's a lot of foundries coming up, which were planned because of that. So you never say never as to what will happen. But as the best I know, things seem to be easing on that side a bit. But again, it's a timing issue. But you're seeing significant movement in significant comments coming from a lot of different people about what's happening on the supply-demand segment.

And that's a front run next week too much. But given whatever CAGR you guys are going to talk about and target growth rates and those sorts of things, you guys are very selective in how you expand capacity and with whom you partner on the foundry side of things. Do you have sufficient supply to be able to hit the targets that you're going to talk about next week and I assume the answer is yes, but what sort of expense and cost does it take to get that supply all aligned, especially given that you're very selective in the regions in which you place it?

So one of the things that we've always done, and this is typical -- we never do things start-stop. We always are always -- so it's not that we're just adding capacity now. We are constantly doing that with our partners. And these are partners we have worked for the last 20 years. Now have we added some partners along the way, Absolutely. We believe -- as you know, we are marching down the -- to get to the $1 billion mark over the next 5 years. And we believe we have the right partners and the capacity power to achieve our goals.

Got you. In the last couple of minutes, I want to switch over to some of the margin/expense side and then the balance sheet side of things, the cash flow. How should we think about OpEx? You guys have had rules of thumb about OpEx growth rate relative to revenues. And the challenge is the revenues are always either growing way faster or a bit slower than the half the rate ratio that you would otherwise anchor to. So how do we think about your OpEx prioritization going forward? And how does that adjust if you have a slower growth year next year for macro reasons, not even specific to [ POWI ]?

As -- Ross, I've always said to look at POWI, you got to look on a 3- to 5-year horizon. We don't do anything in quarters. We do only in years. Our thinking is long-term, even though we are focused, we execute, but we really do everything long-term. If you look at what we did in 2011 when Nokia and RIM, we doubled down and sacrificed our operating margin. Yes, we had a great year in '21, but our spending did increase and could catch up to your very point. But this year, you know the challenges we have, but we are still spending. In spite of the fact, we don't know exactly where the revenue is going to get fanout next year. I think I've been pretty open that next year, my non-GAAP spending would go up 9%. And this is a gain because we have such great ideas and the investment we need in R&D as well as in sales and marketing for our reach, that we are not going to sacrifice our future for short-term churns in the market because of macroeconomic reasons. In fact, one of the slides that I am going to present next week at my Analyst Day exactly to address your point, that if you look at us over the last, let's say, 15 years, you'll see our CAGR that we talk about low double-digit, top line is right in line. If you talk about the 50%, 55% non-GAAP right in line. And if you talk about the 60% of our revenue growth rate for expenses all a line, and that shows the leverage we have had in the model, which, if you really look at it over a period of time, we had a goal to get to the mid-20s. We've obviously blown past that. And now we're in the 25% to 30%, and in fact, exceeding that. And so some people will say, why aren't you changing your model? Well, we would like to walk our talk as we have always said. And that's why, I've always said in the near future, we're going to be on the higher end of our model.

I guess, wrapping things up if conceptually, and I'll let you give the punch line next week at your analyst meeting, but conceptually, if you're going to go to comms being kind of mid-teens-ish percentage of sales, given all the SAMs and TAMs and CAGRs that you're going to talk about. Wouldn't that be accretive to gross margin, all else being equal?

It should be and it will be. And that's why I talked about, we will be over the next few years on the higher end of our range.

Got you. And then lastly, you guys have been very diligent with what you've done with your cash and your balance sheet, various repurchasers of your stock. It didn't surprise me at all to see you guys repurchase aggressively in the last quarter or 2, but then you also seem like you're going to take a little bit of a pause. Now just talk about how you do cash returns and how -- what should we read into this pause?

So we have a 4-pronged approach. Internal investment, whether it was the R&D example I gave you or during the pandemic, when we wanted to make sure that we've partnered with our partners, we took our inventory to 100. We make capital investments strategically, whether it was the GaN investment. So we keep making internal investments, selective M&A, as we have done a few but has to be close to the core. Buybacks have been a perfect example. If you look from 2008, we have spent over $800 million at an average price of $27, looking where the stock is a pretty good return. You talked correctly about the last 6 months, we bought back nearly $300 million. Well, what happened is we got promoted to the mid-cap from the small, and we had 4 million shares that got dislocated. And we actually have bought back most of it. Now with the macro situation and everything, we look at all the capital allocation every quarter. But before I come to the buyback, why we paused, dividend is the fourth [ brand ] we have instituted in 2008, in fact, that during the financial crisis because of the conference, and we have consistently increased it. Now the reason we paused, we had done $300 million and spend early a sizable portion of our cash. And with the macro situation, we decided to take a pause to see how this was all playing out. And we know that every quarter, we look at it, so we can always come back and make that decision. And believe me, we'll do that. So it was just the case of looking at the whole macro. We had done a large portion, and we felt, looking at the situation ahead, let's take a little understand it, because we do not buy -- do buybacks on a consistent basis to off-trigger. We are very opportunistic, and I think the average price reflects it. And I think that's why I'm talking about we wanted to read the macro a little better, take a little pause and do, I would call smart [ buyers ].

Got it. Well, guys, we are actually a couple of minutes over, but thank you so much for sharing all the details, and I look forward to hearing even more details next week at your Analyst Meeting in New York, which I will be attending gentlemen. Thank you so much.

Thanks, Ross.

Thanks, everybody.

Thank you.