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

All right. Good afternoon, everybody. We're going to go ahead and get started with our next session. Joining me today, I've got on stage Sandeep Nayyar, the Vice President of Finance and Chief Financial Officer; and Joe Shiffler, the Director of IR and Corporate Communications. So before anything else, thanks so much for being here.

Thank you for having us.

For those of you in the audience, if you have any questions, there's QR codes on the table that you can scan with your phone and send any questions up to me. And if not, that's okay, too. I've got a full session worth of question. So to get started before we dive into the more specific questions. Could you just give us a high-level overview of Power Integrations and your strategy?

Yes. We are a high voltage power converged company. I mean, we are one of the most focused companies just focused on high power. We have, unlike other fabless company, we have our own process technology that we installed in our partner fabs. We have our own packaging technology. We've been focused traditionally on AC to DC, but we have expanded into EVs, high voltage. We are going into brushless DC motors and into renewables in the high-power applications. One of the things about this company has been expanding our SAM has been an integral part of our growth story. And our SAM, which was about $1.5 billion is now currently at $4 billion. And in the next 5 years, we believe we're going to expand that to about $8 billion. We are also a leader in GaN technology, which is over -- time replacing silicon and also will start making inroads into the silicon carbide space. So that's a little bit of a nutshell of who we are.

Okay. And thinking about end market exposure, how has your revenue split up among the end markets? And are you trying to emphasize parts of that and deemphasize other parts of the portfolio over time?

Yes. So one of the things that we said in our Analyst Day is that the cellphone business, which over the years has varied right from 30% to highest, and a 40-plus percent over 15-plus years. We have said that with the charges going out of the box, that will be coming down and it already has come down. So if you really look at it, the cellphone, which is part of the communication business is going to be about 12% of our business. The computer segment, which has got tablets and notebooks would be about 14%, 15%. But the biggest portion of our -- about 70-plus percent will be the consumer and the industrial and consumer for us is mainly appliances which many companies kind of put into industrial. While for us, we have it in this segment, and it's 80% of our major appliances, air conditioning and then in the Industrial segment, we have a lot of things. We've got about 1/3 of our business in the Industrial segment is basically the high power, renewable in big industrial motor drives. Another 1/3 is the traditional Industrial Controls and areas. But the 1/3 -- another 1/3 is what I call the new areas, metering, you've got e-bikes, you've got homebuilding automation tools. And also, we have entered into the EV space with our products. So basically, you will see that the industrial category will become over a period of time, the larger part of the segment. And that's how the transition, and that's why it will benefit us even from a margin standpoint.

So you reported earnings about a month ago today, and you guided 4Q to be down a little bit quarter-over-quarter, still seeing some broad-based demand weakness. So in the last month, has that basically -- things basically played out like you thought they would? Or have there been any surprises?

Yes, we just gave an earnings a few weeks ago. It's too early to talk about EV surprises. We obviously thought through what the implications are and one of the areas which caused the reason for the decline sequentially was in the consumer segment, where basically in the appliance area, the Chinese OEMs and other OEMs had built up some inventory in anticipation of demand, especially in China with the stimulus coming. And what happened in Q3 is our sell-in and sell-through, which we thought would be equal, the sell-in was higher and mainly in the consumer segment. So that's what has got impacted sequentially. And in fact, the decline in the fourth quarter is largely more in the appliance or the consumer segment. The industrial segment will be kind of flattish and the other 2 segments will be a little down. So I think that's the reason that what happened, why we have guided to the way we have guided from a segment standpoint.

Got it. Yes, I think that trying to break apart any weakness that we're seeing into panel dynamics versus real like core in-demand weakness has been like a huge topic of conversation this week so.

So for us, channel actually, if you look at it a little last couple of years, the channel actually had gone up for like 13, 14 weeks, but our normal is about 8. In Q3, it came down to 7.9. But I mean Q2 that it popped up a little bit more in Q3 to 8.6 because of the consumer discussion that I talked about. But overall, I think the channel inventory is at a reasonable level, historically, we have played at about 8 weeks. Now in Q4, I think the dollars will remain about the same. But I think the weeks could adjust because the revenue is a little bit down. But overall, I think the channel inventory now is at a reasonable level and sets us well up for 2025.

Do you think overall 2025 will be pretty neutral in terms of sell-in versus sell-through?

That's exactly what we think that sell-in and sell-through would kind of be -- have an equilibrium a little bit.

Now as you mentioned a minute ago, the white goods are like a pretty significant part of the business, and that's something that you guys call consumer, but other companies call industrial. Do you guys see what you would think of as the typical like consumer seasonality with our consumer business still with a really strong 4Q and a kind of weaker 1Q? Or is it not the same?

For us, I'll talk about this and generally what's cyclical a little bit, which is sometimes hard to do with all this macroeconomic changes. But for us, traditionally, the cyclical piece in the consumer or the appliance areas in Q3 were air conditioning, which is a reasonable piece of our business, comes down. And typically, it restarts and get strength in Q1 and Q2. This is where split ACs in homes where in Asia and other places, there are multiple units that are being put. The other cyclical piece in our business is a little bit is the high-power business, which tends to be a little lower in Q1 because funding for large infrastructure projects and all are being kind of decided. But apart from that, I think we all know what happens in cell phone business, which is typically strong in Q2 and Q3.

Right. So I wanted to dig in on China a little bit more. I think this is like a huge area of investor for your -- especially for power semiconductors specifically. So what is your exposure to China? And would you say, what kind of competitive environment are you seeing? Like do you agree with the general perception that this is like one of the most challenged areas of analog as a whole? Or are things not so bad for you?

Well, if you look at it, we ship in 40% to 50% of our revenue into China, and that's mainly because where manufacturing is even though a few adjustments are happening where products are being manufactured. But what we ship in that stays in China is about 20%. One of the things is, yes, sure, there is competition that we have had it. But the competition is more on the lower end where people are trying to squeeze the last dollar and basically, we provide an integrated solution, which has half the component count. Of course, we capture the value of the components we eliminate. But what happens is on the areas the discrete solutions get away with our low cost with little low margin or things like cellphone or small appliances. But when it comes down to a reliable, higher product, which are meant for export, whether it's major appliances, they want more reliable products. And obviously, they're concerned with the IP and other going out to other areas. And we have very innovative products. So one of the things that we have done is always way ahead. And we have some very revolutionary products over the years that had outpaced what can come from there from a competition standpoint. So yes, there is competition but it's more on the lower end and that will always remain. And we have seen competition not only from China, but from bigger players in the analog space. But the only way we have managed to get stay ahead is through innovation.

Got it. So shifting to the company's long-term financial model. I think you guys have said you expect an over $8 billion SAM by 2027. So can you talk about the underlying assumptions that go into that $8 billion? Like what are the kind of segment by segment drivers that give you confidence that you've got this really sizable expansion?

Yes. As I said earlier, we had grown our SAM from $1.5 billion to $4 billion, and from $4 billion to this $8 billion that we are talking about, it's not that markets are growing, but we come out with products that address new markets. For example, we are addressing with our existing products by making it automotive club qualified and I've got into the EV, we were never a player in the traditional car. But now with high-voltage, we are able to get into a play. Right now, we are in what I would call the auxiliary and the emergency power supply. But tomorrow, where the SAM expansion is coming, we're going to get into the onboard charger. And down the road with -- we are working on the next-generation GaN where we're going to hire current, we could even make inroads into the inverter, which we don't have. The same product that we are looking at for the onboard charger can also go into the data center, which is another big area of growth. And in the appliance area, the brushless DC motors are taking place stride, and we have drivers in that area, and that is providing a big growth. In addition, in high power, we are becoming out with more products where we can address the drivers for IGBT, which are generally made captive today. So all these items that I've just highlighted are going to enable us over the next 5 years to expand and support growth and grow our SAM to about $8 billion.

Okay. And can you break down the path from silicon to GaN to possibly silicon carbide, like when each is the appropriate choice and how you plan to move along that transition to these higher voltage, higher band gap products?

Yes. So for us, we address -- we have products today with silicon with silicon carbide and the GaN. Of course, the silicon carbide is not our own. Silicon is the cheapest today and for lower cost I mean, more competitive, low-priced products, obviously. But as you move the higher power level, GaN plays a big role. And we have one of the most cost-effective GaN. We made this investment a decade ago. And as you go into higher power level -- high power driver, when you want size to be more compact, you want more efficiency in appliance or industrial applications, we get to use GaN. Now we are already in GaN cost-effective compared to silicon carbide up to 100 watts. And there's a saying, you GaN when you can and silicon carbide when you must and silicon carbide is very, very expensive. But we don't have the GaN technology to take it into, say, the inverter in the drivetrain. But tomorrow, we will have it. So I think the investments that we are making are enabling us to first substitute the silicon because we're going to -- our GaN will be cost-effective in by the next year with silicon. So we are able to address that. And then we are making investments to start encroaching into the silicon carbide space, so we can expand our SAM. So the beauty is not only we cover this side of we can go into the higher area and address products in the future, which will replace silicon carbide. GaN is very, very cost effective compared to silicon carbide. If you just look at the capital investments that are being made for silicon carbide, the electricity cost, the consumable. Compare that to what we do in GaN, it uses most of the traditional equipment in silicon, but also has some unique equipment. We're spending 5% to 6% of our revenue on capital. So we're not spending a lot and we have a lot of GaN capacity. Now yes, as I said, we have to have some technology breakthroughs, which will enable us to get the high current to address some of the silicon carbide. But today, we are addressing, as I said, the auxiliary power supply, the emergency parts. We also have products that we are working on to get on address the onboard charger in the future. So we have multiple things in the pipeline that will address this journey that we are talking about.

And I think at the beginning, you were talking about being a fabless company but some involvement in the process technology at the foundry partners. Can you talk a little bit about what specifically you do and what they do and kind of the sort of responsibilities and CapEx and what sort of like margin sharing there is in that arrangement. I think that's really interesting.

Yes, that's the beauty of fabless IDM, as we call it. And the beauty is we get the benefit because we are not -- we're only providing them with some specific capital equipment, but using rest of their fab but putting our processes in, as a result of this, we don't have the burden of owning a large fab. But on the same hand, we are not going to these merchant foundries. We're going to captive foundries. And what we do is enable and provide them consistent volume. So they are observing -- because. So it's a great partnership. We get a benefit of being fabless, but yet get the benefit and not have the burden of a fab and don't have to invest that heavily except certain equipment. We have to invest more in the back end in assembly and test because of high voltage. And there, we spent a lot of capital on. So these are partnership with captive foundry partners that have gone on for the last 20-plus years. And it's a real -- what I truly call more of them are in Japan, and it's a really, really good partnership.

And what sort of operating leverage do you see then? Do you have like volume commitments and things that mean that you have a little bit of the operating leverage that an IDM would have? Or is it more like the fabless where it's sort of purely variable?

So obviously, we have to buy certain capacity to keep them economical. But if you look at our overall model, we have a model that can enable at least in the next 4, 5 years, we're going to grow greater than 10%. Next year, we are talking about growing teens to high teens. And our expense structure is generally going to be 50% of that operating. So we have a lot of leverage in our model. But obviously, in case of foundry partners, even though we don't have dedicated commitments on volume, but of specific, you have to keep them at a certain what I call a reasonable level. And that's part of the reason, as our revenues came down, we continue to buy wafers and we are carrying inventory at a much higher level than we normally would. But that's the partnership. But carrying this inventory is not bad because most of our inventory is kept in wafers, which has a longer shelf life. In fact, we did the same thing pre-COVID. And we had like 180 days plus of inventory. And when shortages came, we were among the only suppliers who were able to supply most of the product. So this partnership of -- with the Japanese partners where we keep try to make sure the economics work for both sides is a real partnership, and that's really worked well for us for the last 25, 30 years.

To add to that, not only do our wafers have a long shelf life, but the products themselves have very long life cycles. So we have a chart in our investor deck that shows from a couple of years ago that about half of our revenues come from product families that were introduced over 20 years ago. So we know we can make these products. If we keep them in wafer form, we'll be able to sell them eventually. So there's very little risk for us about obsolescence, and it's well worth the tying up a little bit of capital in the short term to keep these foundry relationships healthy.

It's an even numbered year, and that means that geopolitical concerns are also very front of mind at this conference this week. And I think the markets are kind of trying to quickly digest what could be really significant changes in policy and government spending. So can you speak to any of your view on impacts on renewable electricity, vehicle electrification, trade war? Anything that you're kind of planning for with potential policies?

Yes. So as we talked about, we have a good business in the high power and renewables and then we are getting into EVs. Now if there is certain impacts where EVs kind of slowed down a bit here, but they are going pretty well in places, in China and other Europe. So I think -- but in the U.S. We have industrial motor drive products, which tracking is going to be pretty positive for us. So it will go. Now from a tariff standpoint, we haven't been impacted direct. There's no direct impact because U.S. sales are very limited for us. Now there's obviously indirect impact because if tariffs are imposed and products become more expensive, the demand could get impacted. So I don't think we have what I would say, a direct impact, but we have more of an indirect impact. So I think even though people talk about geopolitics renewal, I think renewables and different alternative forms a group of energy are going to continue. And I think the investments in Asia and other places on solar, wind, DC transmission live are going to continue, and we are seeing that.

I think that some of your peers in the last 2 days have said that they feel pretty good about how they're situated directly with response to things that the uncertainty is maybe causing customers to just take a pause and say, let's talk in a little while. We've got kind of too many crosscurrents. Are you seeing like a little bit of paralysis from that or not so much?

So one of the things about our business is a little different than everybody else. We tend to see things a little earlier in a different way. And the reason is people tend to make power supplies a quarter or 2 earlier. So as you saw, we saw upside in appliances in Q1 and Q2, but then it got slowed down in Q3 because the stimulus didn't come in. But you heard some other people talk about they had a good quarter in appliances. And we saw a little slow. So the good part for us is we've been seeing this and have been guiding and talking about in that. Our channel inventory is in very good shape. We believe we have multiple drivers of growth mix here. And that's why unless it's a big macro issue, we kind of feel comfortable with what we are guiding for next year right now.

And kind of last major topic I think, financially is capital deployment. So can you just talk through like how you make capital allocation decisions for the company and over the next year, like should investors kind of expect a status quo type of deployment? Or is there an appetite for any changes to that?

We have had a 4-pronged approach on capital allocation, and this has been very consistent. We don't have a formula of how much to do for what. But the 4 prongs have been first internal investments, which is into R&D. And as you saw, we've been making significant investment in working capital with inventory because of the partnerships. Our second prong is M&A. And we have not done many, but we've done off and on, and we recently made an acquisition which was going to enable us to accelerate our development of the high current GaN, which we are working on. And that was the Odyssey acquisition. So we consistently and all the time looking for alternatives which are -- or other M&A opportunities, which are close to our core so that we can expand either our IP or our market. Our third area of capital allocation is buybacks. If you look at the last 15 years, we probably spent $1 billion at an average price of about $28 and you where our stock is. And we are opportunistic about it. It's when markets are irrational, behave rationally at time, we take advantage of that. And that's how we have the price. We have just announced another $50 million buyback in the last quarter. And the last front of capital allocation as dividends, which we actually had instituted during a downturn in 2008. And if you look, we have continuously increased our dividend and we did also last quarter. So these 4 prongs have been there, even though we don't have a formula for payout ratio, but if you really look at it over a time, it's been in the 20s. So I believe these 4 prongs will continue. Now which prong gets more emphasis in a year or 2, just depends on the situation and the opportunity is the right way to put it.

Got it. So this is the end of 2024. We've got a lot of people looking at towards 2025. So when we're on this stage a year from now at UBS Tech Conference 2025. What do you think you're going to be proud of from 2025 or like you sit here today, what are you most excited for in the year to come?

Well, I think we are more excited to get back to a good growth here. It's been a tough 3 years, and quite frankly, that's what I'm looking for. And I believe we have the drivers. I think the growth in our auto business is going to be a positive. We're going to get more opportunity in industrial high-power and metering opportunities in India. So I think we're going to look back from here and say, get a productive year and we grew in all 4 segments next year of our business. So I'm looking forward to the growth is what I'm saying back again.

Yes, I think if you look at this year, it will be a modest down year in terms of revenue. But if you really look at the segments, the 3 segments outside of the cellphone space, which we call communications, consumer, computer, industrial will have grown mid-teens for the full year. And so next year, cell phone will not be the headwind that it was this year. And so that growth, we think that kind of momentum can continue on through 2025 in the other segments with cell phone being kind of neutral to slight growth. But the growth of the company can be carried forward by the other 3 segments.

Great. I'll be excited to check in on that.

Sure.

I guess to close out last question for me. What would you say is most misunderstood either by me and my peers on the sell side or the investor community as a whole?

Well, I think in the past, a little past, it was always more people thought us to be more of a cellphone kind of a company because that's easier to figure out. But we were always much more broad-based. So in a way, this downturn in cellphone, I think it's going to bring a lot more clarity because the focus is going to be on what area. So I think the opportunities that we have, I don't think it's misunderstood, but we are entering into new areas where we haven't had a presence like auto. But we believe, we have the products and the technology that we believe will enable us to make inroads into that space.

I would add one more thing to that, too, which is I think the opportunity for GaN maybe hasn't been fully appreciated yet. There's been so much focus on silicon carbide. Obviously, a lot of very big players investing a lot of money in silicon carbide seeing traction in EVs and so forth. I think there's an increase and well, meanwhile, GaN has largely been kind of the province of smaller companies, some start-ups so forth. I think there's an increasing recognition now, though that GaN is going to be a much bigger player in the power space over time than people may have realized before. Silicon carbide has some economic challenges in terms of the cost that we talked about earlier and GaN is expanding its -- and we're driving this. We're expanding the range of applications, power levels, voltages that GaN can address. So I think the opportunity for GaN may be coming more into focus now than it has been in the last couple of years.

Well, that's all for the session. Thanks so much for being here. I really appreciate your thought and I can't wait to ask you about all of the stuff here. Thank you

Thank you very much.

Thank you.