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

So good morning, everybody, and thank you for joining us today in the UBS conference. And today, we have with us Power Integrations, and we have Radu, VP of technology and we have Sandeep, the CFO of the company. So thank you very much, and welcome here.

Thank you.

Thank you.

Good. So Power Integrations is -- it's an analog company, but it will be good if you guys can maybe introduce which products do you have and which markets do you serve? How this company fits in the analog landscape?

So we're part of the semiconductor sector and within that part of the analog semiconductor group. And within that, we are a specialist in power conversion semiconductors. We make the chips that power your laptops, that charge your cell phones, make the washing machine run, make also wind turbines operate and locomotives in railway. What is important to understand is that we are at our product support all 3 components of decarbonization. The first being renewable energies. second and most important, in my opinion, the elimination of waste through better efficiency and also transmission of electricity from the point of generation to the point of use in high-voltage DC transmission lines, for example. How we do that is by having developed over 30 years significant expertise in high-voltage semiconductors. When our peers talk about high voltage in the analog sector, they talk about 20 volts, 40 volts. For us, high-voltage starts at 600 volts and goes to 1 kilovolt, 1.7 kilovolts and so on. So that is our expertise. The reason we can contribute significantly to decarbonization is because as the International Energy Association has published in order to reach the Paris Agreement target by 2050, 2/3 of that decarbonization need are due to energy waste, which can be mitigated by better efficiency and to the use of renewables. And we -- our products support both of them.

Okay. Thank you very much. Pretty comprehensive overview. Thank you. So just coming a bit more to what's going on now in the markets. You reported Q3 results a few weeks ago and guided a significant sequential decline for Q4. Can you recap for us and talk about how do you see this Q4 quarter and also, have you seen a bit more beyond what's happening?

Yes. So I think what happened was a little unusual and we've been talking about the turnaround coming by the fourth quarter, and we were getting some good orders earlier in the year. But what happened in the third quarter is we had a large cancellation last minute from an OEM, which also had an impact in the fourth quarter. Now it was not just that, but things like the Consumer and Industrial segment has also weakened quite a bit. Now this gyration is not unique to us because we see these downturns and upturns earlier. And also because we make power supplies for OEM, we are a little further away from the end and there's an extra layer of inventory. And that's why that caused us a little bit. We are also exposed to appliances, which, as you know, with the whole housing market in China, the higher interest rates, all have had a little bit of exposure. If you look in the semi space, the companies that have really held up pretty well is in automotive, even though they are now seeing a little bit of an adjustment. We are just in the initial stages of getting into automotive because the main play for us is in the EV, it's not in the traditional car because as Radu mentioned, we are in high-voltage applications.

Good, good. Yes. Definitely, consumer, it's been softer demand on the market for analog, so makes sense. So you also thought that Q1 for 2023 will be the bottom, but we are seeing another lag now. What did you see over the course of the year, on top of what you just mentioned that changed your outlook? And maybe if you can help us also trying to understand how 2024 will shape up in the -- more in the maybe long-term perspective?

We actually did think that Q1 was, and in fact, we thought we'll have sequential increase all throughout the year, and we did in the first 2 quarters. And this was further substantiated that the orders that we were starting to see in the March, April, May were very strong. But a few quarters -- a few months later, it was like things just fell off the cliff. And again, we saw the slowness in demand in Industrial as well as in Consumer that has impacted us quite a bit. As far as 2024, it's a little hard because it's not clear. We have announced a fairly low quarter in Q4. And I think it'll take a quarter or so to come back one of the things about POWI is we see this stuff happening a little earlier than others. And the reason is the power supplies are made earlier than the final product. Nobody wants to wait. As I said, when the things were great, I said that's not sustainable. When we were having during the COVID time, very steep increases, I also say this is not sustainable because this level of normal down cycles are like 4 quarters. Now we are looking like 6 or 7 quarters. But I think we're going to come out of it and we're going to come out of it strong. If you look at even in the area like our appliance area, we are this year going to be below 2019 level. So we have looked at the different gyrations and say, if the COVID didn't happen and if this thing have, what's our normal run rate would be. And it should be around $150 million a quarter. Now I don't believe we will get that in 2024, but we'll definitely get into '25. But I think during 2024, we should gradually go back to about $135 million. I really think the channel inventory is going to get adjusted. The demand has been pushed down and hopefully, if the interest rates normalize a bit, that'll help for the housing market. And the best guess we have is on the second half that we should see a better second half of 2024.

Clear. You mentioned our channel inventory. How do you see that evolving? And are you under shipping channel? Are you -- do you have a sense for what's going on?

So we were -- even during the whole COVID period, there was people trying to get as much inventory to -- for shortages as you know, we tried to restrict how much we could ship, but people were trying to get as much as they can. And as you know what people did during this time is, if their normal inventory levels was 60, they started changing it to 90 and 100 days to catch them. We tried to arbitrate, but it was very hard. We tried not to overship. Right now, we are sitting at about 11.5 weeks of inventory, which is above our normal of 8 weeks. We believe this should get normalized in the next 2 quarters. We prefer to keep the inventory at our level because we keep it in wafer form and we are able to ship with the customers. And we've had such a good relationship with our foundry partners that in '21, when we had a 44% uptick, we were able to supply at a very short time.

Yes, good. Thank you. So now shifting gears to a bit of a more long-term perspective of the company. During your Analyst Day, you announced plans to double your service level market from $4 billion to $8 billion over the next several years. Obviously, we have this bump on the road. But can you maybe explain to us which are those markets? Which are those products, more or less what's the plan to increase the SAM?

The growth of the company over the next period that you mentioned, will focus primarily on new high growth in higher power areas. Automotive is definitely a focus for us that will add significant SAM. Data centers and all these markets will be supported by products that are already in design. Other areas are high power. And by the way, our high-power business is -- has never gone down during this downturn. It's the one component of our business that continue to grow steadily. And that's the business that supports the renewable energy markets, the windmill applications, the solar utility grid, solar systems and so on. So high power continues to be another strong growth area that will add significant SAM. We're also expanding in additional products that use new materials and new technologies. We do not separately quote numbers and business growth in terms of technologies, but gallium nitride, as an example, will continue to be a very significant component of the growth that will add significant SAM, given the higher power levels it can reach.

So one thing that I'd like to add is SAM expansion is an integral part of Paris strategy to grow its business low double digit. We were $1.5 billion went to $4 billion. And as Radu indicated, we're going to take this to [ $8 billion ] coming from automotive another big area is motor control, the high-power area and GaN. And this is -- and that's why you'll see the stream of announcements we have been doing in GaN. And the announcements that are being made in motor control, and we have a lot more products coming out there but the key part for our company, the SAM expansion is an integral part of our growth story.

Clear. You both guys spoke about gallium nitride and that's a very hot topic now in semi. So can you maybe mention -- because you have been doing gallium nitride for quite a long time that there's some recent announcements. What is the portfolio of gallium nitride now, the road map, can you elaborate on that?

Thank you. First, I'd like to explain the fact that all our technologies are proprietary. We are a fabless company, but we do not use foundry processes. And the reason is in high-voltage technologies, you need to control end-to-end your process technology. Even more importantly, in our devices, the design of the device and the process that's used to make that device are 100% intertwined. And you can simply not afford to use a black box technology that a foundry provides unlike an integrated circuit, which can be designed without knowing what the process is. So all our technologies are proprietary, where we don't own any fabs. So from that standpoint, we're fabless, but we have full end-to-end control of our proprietary technologies, and we have them run in partner fabs, mostly in Japan that run these processes for us. Silicon technology is still the vast majority of what we make today, both in terms of integrated circuits, controller, very advanced power management and power conversion controllers but also power devices. Our motor control product line uses our vertical proprietary silicon, MOSFET, which is extremely well suited for motor control applications. In the same vein, we continued with the development of the next-generation technology, which is gallium nitride. We also looked at silicon carbide a few years ago, but we decided against silicon carbide at the time, and we can talk more about how they compare. And gallium nitride that we have developed is superior in many ways to other gallium nitride technologies that are available today. And one specific area where it shines is the ability to go to higher and higher voltages. And we recently announced 1,250 volt GaN technology and product. Product line that uses this technology is -- has just started. The first product is -- will be released soon and more high power devices at this voltage level are planned for the next couple of years. So you'll hear more about that as we go forward. This is just the next step in our evolution of our GaN technology towards higher voltages. At 750 volts, 900 volts and 1,250 volts, we are already competing favorably with silicon carbide. As we move forward to even higher voltages that overlap will increase and GaN will always win whenever it can overlap with silicon carbide and serve the same market, the same segment, GaN will win because of better performance and most importantly, much lower costs. The holy grail will be when GaN will be able to achieve both the very high voltages and the high powers that today are the domain of silicon carbide. For example, in electric vehicle drive trains. That is a little bit further away because it requires breakthroughs in the GaN technology, but we think it's feasible, and we will be looking at that.

Well, yes, that's -- it's going to be difficult technically, because gallium-nitride, it's a horizontal device, right? It requires more die, more material for transporting the same amount of current. Therefore, you have less die per wafer. There's some cost associated with that. Can you maybe help us understand how gallium-nitride can overtake silicon carbide -- a bit of background there.

Well, like I said, in the applications where the lateral GaN can compete favorably with silicon carbide that's already a done deal at 1,250 volts and all the voltage is below as well at 1,700 volts at a certain power level probably at the -- on the order of 10 kilowatts or less. Current GaN technology, which is lateral as you mentioned, can compete favorably with silicon carbide. Obviously, the answer to your question lies -- is within the question that you have to change that in order to be able to really compete with silicon carbide at very high power level.

And that's a challenge.

It's a challenge, and it will require some breakthroughs, yes.

Very interesting. So how do you see the competitive landscape for gallium nitride currently with so many companies trying to play in the field?

Well, indeed, the field has got more crowded. Five years ago, we were the first company that commercially shipped GaN-based products. We've been developing the technology for about 12 years. The difference between us and others that sell GaN today is, first and foremost, we have full end-to-end control of our technology. We have developed it from the basic substrate, through the processing, and the special steps that are needed for gallium-nitride power fabs and we have qualified it and qualified at the system level because we're Power Integrations. We are not selling discrete devices. We're selling system in a package. So a lot of the expertise in the company is in system level, at the system level. That's very important for a new generation of materials technologies such as GaN because we do not have to let the customer find the problems, the reliability problems that need to be solved or system level, short circuit withstand capability and so on. We do that in the company. We have a very advanced system-level applications group, both for new product qualification as well as field helping our customers with the system level design of our products. And they are the customer 0 for us. And we never release a product and certainly not a new technology platform without running it at the system level for a long period of time to all the tests that go beyond [ JEDEC ] and so on inside the company. So that's us apart from a vendor that only does GaN. The other important difference, again, due to the fact that we have our business technology is proprietary, we do not use a foundry, and we have our own GaN. And as I mentioned earlier, it's very critical for power devices to have full control of both the process technology and the design -- device design in order to fully harvest the benefits of the new material. Clear?

Thank you. So we asked the question of the cycle. Now it's the second question that comes, have been every session here. It's all China. And I think it's around 60% of the revenues last quarter that came from China for you guys, but China is investing large amounts of money in new capacity, in semiconductors, both in foundry, fabless, IDM. And gallium-nitride is one of the fields and power semiconductor is one of the fields they're investing, for instance, we have the example of Innoscience success that they came up with an 8-inch gallium nitride wafer when everybody was betting against that. And it happened, right? So how do you see that competition coming from there? Do you think they may take some of this market share that you have in China?

Well, there's definitely very strong competition coming from China. Innoscience to their credit, have done a fantastic job in investing in enormous capacities and they have a technology that works, and they are definitely a competitor, especially in China as being a Chinese company. The difference is that a lot of the products that are made in China are made for China, domestic consumption as well as for export. Typically, what we see is that our business in China for export, I should say the customers -- our customers in China that build for export prefer to use Power Integrations because of the brand name, the history of reliability and quality, service and so on. The other point is that we don't really have GaN competitors. We are not selling yet. We are selling system in a package products that are integrated as our company name indicates, and yes, certain components of our product can be made by other companies, GaN, Innoscience and so on. Controllers can be made by On-Bright or BYD or other Chinese companies. But when it comes to high reliability, highest performance, usually people, including in China, prefer Power Integrations.

I mean the component count from our product versus theirs, there's a big difference. And that's why the reliability is absolutely at a different level. And that's why even there for exports as Radu indicated, they prefer to use our product. We've been in this business a long time. Now Innoscience is well funded, but many Chinese company, what happens is come and go. They get government funding, they do cost plus. And that model is not a sustainable model. And that's something we have seen a lot of companies come over the last decade and try to come after what I would call the low end of it. Now we compete, but we don't compete for the last dollar. And what we try to do is make sure we are playing so that we can keep them in bay. But yet, we are able to service what I call the high-value market.

Clear. Okay. Thank you. Just as a reminder, you guys can post questions through the app. We still have 5 minutes so -- but there's also -- you mentioned automotive a couple of times as one of the new big markets that you're going after. What are you going -- what are you doing as company in the outer space? And what's the road map to service those...

I mean it's an early stage, and I'm going to let Radu tell you the different areas. But as we had talked about analysis, we were not in the traditional car. But with high voltage, we have a tremendous application. And in fact, we have announced product in the emergency power supply where we are winning a lot. And the recent GaN announcement will allow us to get in the future in onboard charging and other areas. Radu, you like to add to that?

Yes. So when people talk about the electric cars, the primarily thought goes to the powertrain, the motor drive. There's a multitude of other power conversion applications inside an electric car today. There's an emergency power supply. There's on-board chargers. There's the need to eliminate the acid lead battery. And power everything, including the cockpit appliances from the high-voltage battery. So those present a plurality of opportunities for us because we're specialists in high-voltage power conversion. So we have -- our first products in automotive address those lower power applications within electric cars, emergency power supplies. We have cars today running on roads that use our product in emergency power supplies. The on-board charger products are in design. In order to address the very high power motor drive application, that will require different technology, which will require some breakthroughs as we discussed. Today, that is served primarily by silicon with silicon carbide making some inroads because of better efficiency. But the Holy Grail will be something that will meet the silicon carbide performance at a much lower cost because we remain convinced that silicon carbide is -- it has some fundamental limitations in terms of ability to reduce cost. You mentioned 8-inch for Innoscience and there's a lot of companies that invested in 8-inch capacity for silicon carbide. What is, however, important to note that there's a fundamental difference between wide bandgap material technologies and silicon technologies. In silicon in CMOS, bigger wafers is always better because all the process steps are made on the same wafer in batches that are -- that can take advantage of the larger number of die per wafer. In wide bandgap materials, the epitaxial step and the substrate itself are a huge part of the cost and these, unfortunately, do not scale with the size of the wafer. The cost per square inch of GaN, epi or silicon carbide epi is the same whether you populate a reactor platter with 5, 8-inch wafers or 14, 6-inch wafers. Actually, it's cheaper if you use smaller wafers because you can cover a circle with more efficiently with smaller circles. Yes, the part of the process that follows in the fab can benefit from higher -- bigger wafers because it's CMOS like. But overall, the cost reduction that bigger wafers bring about is not comparable to what's -- what has been traditional the case in CMOS.

That brings the question because we have so many big players investing large amounts of money. I think probably most of the money invested in power semiconductors now is going to wide bandgap and probably the largest part of that went to silicon carbide, new fabs, people were integrating like the case of on [indiscernible]. So that counters a bit with the perspective that they have like a floor for the cost, they will not be able to break that gallium nitride can break through and just become more affordable.

Yes. That is, like I said, the Holy Grail. So just like the Holy Grail, people are still searching for it. So we'll see what the future brings.

Okay. So another question. Europe recently passed some rules regarding the electronic products sold without chargers. Any insight on that. This is, by the way, the last question.

Yes. It does -- the negative side is it does reduce the number of chargers. But what it happens is now the consumer has a choice, gone out of the box in a couple of cases, the consumer has the choice. They want higher power level, they want multiport. So as a result of which the value proposition goes up, so even though the number of charges come down, the consumer who wants to use it, wants to get a better charger than a cheaper charger. I've always said this, do you ever share your charger with your spouse? The answer is, no. So everybody will run their own charger. And they'll want a value. So it becomes like an appliance, not like a throwaway piece. So I think for us, it's going to be a positive. But overall, in our business, if you look forward and even in our Analyst Day, we talked about this communication revenue as a percentage of revenue will come down. But we will increase in the other areas like Radu talked about automotive, motor control, data center. But I think the value of what we sell in communication will be at a higher level.

Clear. Thank you very much, and we know, we are running out of the time, but it was a great conversation. And, yes...

Thank you for taking the time.

Thank you very much.

Thank you.