© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the Power Integrations second quarter earnings call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Joe Shiffler, Director of Investor Relations. Please go ahead, sir.
Thanks, Ethan. Good afternoon. Thanks, everyone, for joining us. With me on the call today are Balu Balakrishnan, President and CEO of Power Integrations; and Sandeep Nayyar, our Chief Financial Officer.
Our discussion today, including the Q&A session, will include forward-looking statements denoted by words like will, would, believe, should, expect, outlook, forecast and similar expressions that look toward further events or performance. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected or implied. Such risks and uncertainties are discussed in today's press release and in our most recent Form 10-K filed with the SEC on February 7, 2020. During this call, we will refer to financial measures not calculated according to generally accepted accounting principles. 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 our press release.
Finally, 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 the call over to Balu.
Thanks, Joe, and good afternoon. Second quarter revenues were $106.8 million, in line with our guidance and up 4% year-over-year in spite of a challenging demand environment. The year-over-year growth was driven by Communications and Industrial categories. Industrial grew high single-digits year-over-year and was our largest revenue category in the quarter at 35% of sales. We saw a combination of the recovery in broad-based industrial applications as well as incremental growth across a diverse range of verticals where trends like home and building automation, electrification are creating opportunities for our products.
On the automation side, we are seeing growth in USB wall outlets, smart meters and other IoT applications such as network, thermostats and door locks, where high reliability, compact size, low standby power consumption are critical factors. Meanwhile electrification is creating opportunities in applications like lawn equipment, vacuum cleaners and personal transportation such as scooters and E-Bikes where rechargeable batteries are replacing traditional power sources. Growth in these areas was offset somewhat by lower revenues from high-power, due to softer demand in energy exploration and a slowdown in infrastructure projects due to the pandemic. However, high-power has its own attractive verticals with strong long-term growth prospects, including renewable energy, long-distance DC transmission and electric transportation. Our gate drivers are in use today in electric buses and locomotives and are in testing at several automotive OEMs and Tier 1 suppliers for drivetrain and charging applications in next-generation electric cars. Several of the scale high driver ICs are also automotive qualified, as we have discussed on prior conference calls.
We're also aggressively pursuing low-power opportunities in electric cars, which can contain as many as 10 power supplies to drive various subsystems from main high-voltage battery. Our InnoSwitch3 and LinkSwitch-TN2 ICs and our Qspeed diodes have been qualified for automotive use and we are building a pipeline of design opportunities that should begin to generate revenues in 2021.
Turning to the Communications category, revenues grew more than 20% year-over-year in Q2 driven by the continued adoption of fast chargers for mobile devices. We believe we are the leading supplier of power conversion ICs for smartphone chargers, as our InnoSwitch products continue to win a sizeable share of designs spanning a wide range of power levels, form factors and customers, including both inbox and aftermarket designs. We won more than a dozen new inbox designs in Q2 with power levels ranging from 15 to 50 watts. End users are becoming increasingly aware of differences in charging speed and the OEMs are steadily rolling out new higher-power charger models. We expect this trend to continue as 5G devices incorporate larger batteries to support increased consumption of video and other power-heavy functionality.
While inbox OEM chargers account for the vast majority of the market today, aftermarket brands are proliferating rapidly, thanks to USB PB technology. These new designs commonly feature power levels as high as 65 watts and are capable of powering nearly any mobile device, including notebooks. Many aftermarket chargers also include 2 or even 3 USB out ports to enable charging of multiple devices. Such designs dramatically increase our dollar content, since we typically sell one chip for each USB port.
Our GaN-based InnoSwitch devices are proving successful in aftermarket chargers, thanks to their exceptional efficiency, which is crucial to achieving small form factors. Our GaN technology is also being adopted in fixed USB wall outlets installed alongside AC outlet. Because space behind the wall in limited, these power supplies are extremely compact. Limited space also allows for very little hit dissipation, making efficiency a critical factor. Standby consumption is also crucial since these devices have continuously connected to the AC main and would otherwise a significant waste of electricity. Clearly the charging ecosystem for mobile devices is changing rapidly and gaining in strategic importance thanks to emerging technologies, such as USB PD, GaN and 5G, and Power Integrations is extremely well positioned to benefit from and drive the continued evolution of the market.
Turning to the Consumer category, revenues declined at a double-digit rate year-over-year in Q2, offsetting much of the growth in Communications and Industrial categories. Appliance sales have been severely impacted by the pandemic and this effect was magnified in Q2 by an inventory correction following strong shipments in the prior quarter. This is especially true in air conditioning, where sales fell more than half sequentially in what is typically a peak quarter for this application.
We expect consumer revenues to be roughly flat sequentially in Q3 with the inventory situation improving, but demand still affected by the pandemic, as well seasonality in air conditioning. Longer term, we expect healthy growth from consumer market, driven by growing electronic content in appliances increasing the energy efficiency requirements, demand from the expanding middle class in emerging markets and the adoption of our BridgeSwitch motor drivers in appliances using brushless DC motors.
We also expect GaN to play a significant role in consumer end market and have a number of designs in progress for TVs and appliances as well as notebook chargers and monitors and server standby power supplies in the Computing category. Overall we remain cautious on the demand environment in light of the economic impact of the pandemic, but we are maintaining an elevated level of inventory to be prepared in the event of a sudden recovery in demand. Considering the long shelf lives of our products and the fact that most of our products can be used in a variety of applications, particularly when kept in wafer form, we believe this is a prudent approach to the current situation.
In Q3, we expect revenues to increase sequentially, driven by continued growth in fast charging. At the midpoint of our revenue range, we would be up slightly on a year-over-year basis in Q3 and up about 8% for the first 9 months of the year, which would put us on track to outperform the broad analog industry by a significant margin for the full year.
And now I'll turn it over to Sandeep.
Thanks, Balu, and good afternoon. As usual, I will focus my remarks primarily on the non-GAAP results, which are reconciled to GAAP in our press release tables. Our Q2 results were on target with revenues of $106.8 million, down 3% sequentially. Consumer revenues were down more than 25% sequentially, with air conditioning and major appliances, both down sharply, reflecting weaker demand and an inventory correction, as Balu noted. All other revenue categories increased sequentially.
Communications revenues were up more than 25% on strength in smartphone chargers as well as residential networking driven by work-from-home. The Computer category also benefited from work from home in addition to normal June quarter seasonality, increasing more than 25% sequentially with strength in desktops and monitors. Industrial revenues were up low single digits sequentially, with increases coming from broad-based industrial applications as well as high-power, battery-operated tools and home automation, which includes IoT connected devices as well as USB charging receptacles.
Revenue mix for the quarter was 35% Industrial, 31% Consumer, 28% Communication and 6% Computer. That's a decrease of 10 percentage points in Consumer from the prior quarter and an increase of 6 percentage points for communication. This shift resulted in lower gross margins, with non-GAAP gross margin falling 150 basis points sequentially to 51.1%, in line with our guidance.
Non-GAAP operating expenses were $34.7 million, roughly flat on a sequential basis. Expenses were moderately below our expectation, driven partly by unanticipated credits and employment incentives in Asia related to the pandemic. Other income for the quarter was $1.5 million, down from prior quarter due to the lower interest rate environment, which reduced income on cash and investments. The non-GAAP effective tax rate for the quarter was just under 7%, resulting in non-GAAP earnings of $0.66 per diluted share.
Cash and investments on the balance sheet increased by about $23 million during the quarter, driven by operating cash flow of $36.7 million. The strong Q2 cash flow was driven in part by a decline in accounts receivable due largely to the timing of collections. Capital expenditures for the quarter were $10 million. We paid out $6.3 million in dividends following the dividend increase we announced last quarter and used about $600,000 for share repurchases. The average price per share on the repurchases during the quarter was $82 and change.
Internal inventories rose by about $7 million during the quarter, and we had 178 days of inventory on hand at quarter end. We continue to err on the side of higher than normal inventories given the long shelf lives of our products and the uncertainty of supply and demand environment in light of the pandemic. We also prefer to maintain a minimum level of activity at each of our foundries to help maintain capacity, though we have slowed wafer starts in light of the weaker demand environment. I expect inventories to gradually begin declining, trending down in Q3 and to return to our target range by second half of 2021.
Channel inventories fell slightly during the quarter ending June at 7.3 weeks compared to 7.6 weeks in the prior quarter. Looking ahead to the third quarter, we expect revenues to be in the range of $115 million, plus or minus $5 million, with a sequential increase driven mainly by the Communication category, reflecting both seasonality and the ramp of new cell phone designs. While Communications should increase meaningfully as a percentage of revenue, the resulting gross margin pressure will be largely offset by cost improvements. As a result, I expect just a slight reduction in non-GAAP gross margin into a range of 50.5% to 51%.
Non-GAAP operating expenses should tick up after lower-than-expected results in Q2. Specifically, I expect non-GAAP OpEx of around $36 million for the September quarter. Thanks to reduced litigation spending and belt-tightening measures such as a reduced pace of hiring and savings on travel and events, we are on track for growth of roughly 2% this year in our non-GAAP OpEx. That is in spite of the fact we gave normal salary increases in April and have not reduced headcount in response to the pandemic.
Other income, which is driven mainly by interest income will continue to trend down, as higher learning securities roll over into lower rate instruments. Specifically, I expect other income to be around $1 million in Q3. The non-GAAP effective tax rate should remain around 7%. Finally, as noted in our press release, our Board has approved a 2 for 1 stock split in the form of a stock dividend with 1 share of common stock to be issued for each outstanding share. The additional shares will be distributed on August 18 to stockholders of record as of August 14. Our quarterly cash dividend, which was $0.21 per share pre-split, will now be $0.11 per share, equaling to $0.22 on a pre-split basis. At this new level, our quarterly payout will have risen by almost 30% over the past 3 quarters. Operator, please open up for questions.
[Operator Instructions] Your first question comes from the line of Tore Svanberg of Stifel.
First question for Balu. Balu, you talked a little bit more about automotive. And it does sound like the automotive revenue is going to come in a little bit earlier. Because I think in the past, you've talked about it being more 2022, but it sounds like you expect to get some revenues already next year.
Well, we will get a little bit of revenue from the low-power products, starting, I would say, next year. We will get a tiny revenue this year because we introduced the Q3 diodes a couple of years ago, and we'll get a fraction of a million this year. But next year onwards, what we will see is a gradual increase, but the real revenue, significant revenue, won't happen until 2023 or 2024, when we get into the second-generation drivetrains and chargers and onboard DC converters and so on. So yes, we will get some revenue, but it won't be significant in the next couple of years.
Very good. And moving on to Communications. You mentioned about a dozen new inbox design wins for fast charging. And I think you said the range was about 15 to 50 watt. Could you elaborate on the mix there? I mean, is it towards one range or the other? And are most of these phones, 5G phones?
Well, it's a combination. I would say that the center of the range, center of gravity of the power is -- used to be around 20 watts. But some of them are going as high as 25 to 30 watts. It's kind of moving up. And on top of that, the fast chargers are not only offered with the high-end phones, including the 5G phones, but they're also using them in medium and low-end phones, especially in China. In China, they are really pushing towards the faster charging, higher power level. And they're also expanding fast charging to medium-level and low-level phones.
Very good. Just one last question on the industrial. You mentioned high-power taking a bit of a breather here. Do you have any visibility as to when that business could potentially start growing again?
So in terms of the infrastructure type projects, like renewables and DC transmission lines and wind turbines and so on. By the way, wind is actually doing well. It's the solar that's a little bit weak now. And the DC transmission lines is just delayed. There is no -- the programs are still on, but they just seem to be delayed. So I think they will come back, hopefully, in the next few months. So in the long run then nothing changes. High-power market is a very, very long-term market. The products last many years. So we are not concerned about it. It's just a short-term pandemic-driven softness.
Your next question comes from the line of Ross Seymore of Deutsche Bank.
I just want to follow-up on the industrial side. For the third quarter guide, you gave the color for the Coms would be up strongly. The Consumer is flat. What are you thinking about Industrial from a sequential point of view? And if you said it in there, and I missed it, I apologize.
Well, Industrial will be basically flat. We don't see any significant change in Industrial in Q3.
And then as I look at the business, how are you thinking of the percentage of your inbox versus kind of accessories sold separately and the charger market will unfold over the next 6 to 12 months? And does it really matter to you either way? Is there a difference in profitability or price because those 2 channels can be different in some ways?
Yes. Right now, I would say that the aftermarket type products are probably in the mid-single-digit percentage relative to the total inbox. So inbox basically dominates. But that is changing rapidly. We are seeing a lot more aftermarket design wins, and the revenues are growing very quickly in that space. As far as the OEMs deciding to move the charger out of the box, I think it really varies a lot from OEM to OEM. For example, the OEMs in China are really using faster charging as a major selling point. And so they like to put it in inbox, because each generation has a significantly higher power and capability. But it's very possible that in the long run, some of them, some of the OEMs may choose to not sell the charger with the box. In which case, the consumer has to either have a charger from their past generation phone or they have to buy a new one. In the short term, they have to buy a new one because the older ones are not USB PD compatible or they don't have the fast charging -- they can't charge fast. So we are optimistic that even if they go out of box, the attach rate will be reasonably good. And so there are pluses and minuses. The number of units will come down, obviously, if you go out of a box. On the other hand, we will have exposure to the entire product line. For example, right now, our attach rate is very small because they are only on the high end, the faster charges are on the high end phones. If the consumer has to make the decision, even the consumer who buys a low-end phone, can buy a faster charger or a higher power charger for multiple reasons. Most of the low-end phones can handle faster charging. They just don't come with it inbox because of cost reasons. So we think the attachment rates could be significant. Obviously, not 100%, but it is in the tens of percent range, maybe 30%, 40%, but it applies to the entire product line, not just the high end. So that's the plus of it. The minus, of course, is that the overall unit volume is lower. So it's not clear to us exactly how it's going to impact us because these higher power chargers are higher ASP. And also some of them are multiport, which means you get 2 or 3x the ASP. So it's -- I think there are pluses and minuses. But this is something we've known for a long time. We have talked about it in the past. And so this is not a surprise to us. And it's not clear how many will actually follow that path.
Thanks for the detailed answer there, Balu. One, I hope, relatively quick one for Sandeep. On the gross margin side, incredibly impressive that the third quarter gross margin is not really going to change sequentially despite the mix. I know you said you're doing some cost cuts, some efficiency gains, et cetera. Any sort of color on are those news sustainable? That's like, just a little more color on how you're pulling that off on the gross margin would be great.
Yes, it's going to be slightly down, right, as I guided to 50.5% to 51%. It's slightly down because the impact of the self -- the Communication sector is largely being offset. And even in Q4, I think the mix will kind of be similar to what is in Q3. So I think the 50.5% to 51% non-GAAP would continue into Q4. And for the year, I've been talking nearly for about 3 or 4 quarters at approximately 51%, and it's pretty much aligned to what I've been saying for a while. And the cost reductions come from assembly and test area.
Your next question comes from the line of Christopher Rolland of SIG.
It's David Haberle on behalf of Chris Rolland. I guess, first question, because nobody has touched on Consumer yet, maybe we can talk a bit about the Consumer seasonality for the back half of the year. As I think about the front half, I think you had a similar issue last year where there was an inventory correction, and you kept seeing sell-through kind of better than sell-in. And it sounds like you experienced that same phenomenon here in the second quarter. Maybe you can just talk about what you think for the back half of the year, is seasonality changing, given this is kind of the second year in a row where we're working through our inventory in the second quarter?
Well, the main reason for the inventory build is because in the first quarter, they were very concerned about supply chain disruptions. So they ended up buying a lot of products. So there's a little bit of a different reason for inventory build in the first quarter. Having said that, we think that other than the AC, air conditioning market, the rest of the market will actually recover a little bit in the second half. But because of the seasonality of AC in Q3, we think that it will be offset by the AC seasonality. And therefore, we are projecting roughly flat revenue in Consumer. Now in the long run, I think Consumer will do just fine. Right now, the pandemic is impacting the consumer market more than any other market. You can imagine, with so many people out of work around the world, GDP contracting. It's not surprising that people are not buying appliances and TVs and so on and so forth. So -- but once we are over this problem, there'll be a pent-up demand, and we think that in the long run, we'll do extremely well for multiple reasons. We have -- our share of dollar content is growing significantly in appliances. And on top of that, we have new products like BridgeSwitch that will go into motor control. And so we see a number of -- our #1 and #2 competitors are moving away from that market. So we are gaining share as we speak. It's just that in the short term, the pandemic is really pushing the demand down. But in the long run, we are not worried about it at all.
Understood. And then my follow-up on kind of the inventory side, your internal inventory levels are kind of hitting as high as you've seen in years. I don't know if they're all-time highs or not. But is this really concentrated? I think the color at the beginning was talking about inventory levels for consumer, and I know a lot of the products go across end markets. Or is this possibly kind of smartphones as you're shipping more direct to OEMs and need more inventory in front of that? Any additional color on the inventory would be great.
Well, so the inventories, the majority of it is in wafer form. So as you know, our products go across the board. So it's kind of spread very well. And as I mentioned on my script that you'll start seeing it come back. We have started adjusting the wafer purchases, but we have to do it gradually because we have very long-term partnerships and we kind of moderate it because we want to keep our capacity. But our plan, as I indicated, is that by the second half of 2021, we will get back into our model, which is the 110 to 125 days. But we have intentionally kept it a little higher. And bulk of it is in wafer form, so we can quickly convert it into the different products that we need.
Your next question comes from the line of David Williams of Loop Capital.
I wanted to see if maybe you could talk maybe a little bit about the 5G handsets and what you're seeing there in terms of maybe the power levels. And maybe if you could kind of maybe give us the split of what you're seeing in 5G in the Comms segment versus legacy or 4G handsets, that mix would be helpful.
Yes, I heard the cell phone. The other one is IOT? Oh 5G, okay. So we are somewhat, what you call orthogonal to 5G, meaning that the faster charging applies to both 5G phones and non-5G phones. But the 5G phones are more likely to use higher power, faster chargers, simply because they can run down the battery a lot faster than the 4G phones. The applications that they use on 5G are power-hungry applications. So 5G, for practical purposes, has to have a fast charge. Otherwise, you will have a hard time keeping the charge on the phone. You may have to charge it more than once a day. So that is the benefit of 5G driving the faster charging market. In terms of power levels, the center of gravity, I would say, if you would had asked me last year, I would have said, it's roughly around 20 watts is where most people are. But we are definitely seeing that power level move up to 25 to 30 watts now. Some of the high-volume designs in China are around 30 watts. Outside of China, it's between 20 and 25 watts. So that's kind of the power range. But in the real high end, there are people using 50 watts and even 65 watts. We talked about a 65-watt design about 6 months ago, that was a cellphone charger design. That's probably on the real high end. But we are, in general, seeing power levels increasing.
Okay. Great. And in terms of maybe design win traction, are you seeing more design wins around the 5G type handsets?
As I said, we are kind of orthogonal to the 5G benefits as to the extent it does require a faster charger, but fast chargers that we sell, the same charges can go to 5G and 4G phone. But 5G will most likely demand a fast charger, that a 4G can do both fast and slow charging.
Sure. Okay. That makes good sense. And then maybe on the Qualcomm announcement, I guess, earlier, about the -- up to 100 watts for their quick charging 5.0. What do you think in terms of how that maybe drives the market maybe domestically more so than internationally. But do you think that this helps maybe drive the adoption rates any more quickly than maybe what you would have thought previously?
Absolutely. I mean, the higher the power, more ASP we have and more it drives the customer towards us. Because when you go to a 100-watt charger, the charger becomes huge unless you use our technology, the GaN technology, Poly-GaN technology. I think Poly-GaN will become much more attractive as the power levels go up. Even at 65 watts, the charge will be too big unless you use GaN technology. So we see that as a significant advantage to us, because we have the only commercially successful GaN technology to date. So we do have customers who are asking for 100 watts. We have customers who are asking for 65 watts for cell phones. So we are working on them as we speak.
Great. And then last one, if you can kind of frame up the magnitude of revenue that you're receiving from GaN-based products today, can you provide us with any color maybe directionally on how you expect that revenue to trend?
Last year, for example, we did in the mid-single-digit millions. This year, we think we we'll double that roughly. And then next year, it could be more than double based on the design wins that we are working on. Designs we are working on, next year could be even bigger jump.
[Operator Instructions] Your next question comes from the line of Gus Richard of Northland.
On the Consumer business, revenue in that product line or end market peaked in '17, and has been down '18, '19, and it looks like it's going to be flat to slightly down again. What -- over that arc of time, what's been happening to cause pressure in the growth?
Well, there are all different reasons each year. If you remember, there was a downturn in China in appliances, and then this year, of course, is the COVID that is impacting the demand for appliances, especially in places like China and India, where they're completely shut down. India, the demand for appliances and cell phones has come down dramatically. I think cell phones, you said, it's down about 50%. So having said that, if we look at the share gains, we are continuing to gain share. Our #1 competitor in that market has been losing share to us. And our #2 competitor, which is primarily the Japan market, has actually left the market. So I think that we will continue to gain share, which is what we normally do even in a downturn. And when we come out of it, we will be in very good shape. But you're right. For one reason or the other, the Consumer market has been down. But it's not because of share. We are not only gaining share, our dollar content is increasing.
Okay. Got it. And then on the cell phone market, I know you're not working with Huawei because they're banned, but they did announce a 65 watt charger, I think, this quarter. And I believe it's [ RidgeTech ] they're working with, I'm not absolutely sure. And I'm just wondering, is [ RidgeTech ] showing up at other accounts? Or is it just a function of Huawei is the only -- doesn't have access to your technology?
Well, they have certainly gone to a number of customers in China, but our solution is so much more superior that we have always won against them, primarily the component count. Their component count is more than 2x of our component count. It makes it very difficult to fit it into a small compact form factor. But in case of Huawei, they don't have a choice, so they have to go with that. But I think if there's a choice, people would choose our solution. In fact, there's really no other solution that has the advantage of component count, advantage of efficiency and size. We really have the best technology for the cell phone charger market.
And Balu, if Huawei kind of goes away or struggles to gain traction in the market, because I think they was the #1 phone company last quarter. If that starts to roll over, does that accelerate your communication business or an accelerant, and are you seeing that?
Well, it certainly will because the share will go to either the remaining Chinese companies or to non-Chinese competitors outside of China. So if they decline, we will see a positive impact on our revenue.
There are no further questions over the phone lines at this time. I turn the call back over to the presenters.
All right. We'll leave it there. Thanks, everyone, for listening. We'll have a replay of this call available on our investor website, which is investors.power.com. Thanks again for listening and good afternoon.
This concludes today's conference call. You may now disconnect.