All right, good afternoon, everybody. I think there'll be a few more people coming down from the meeting rooms and joining us. But my name's Matt Ramsey from the Semiconductor Research team at TD Cowen, and thank you all for spending the last couple of days with us. It's the 52nd annual version of this TMT conference, and new shiny venue this year, so it's been fun. But really pleased to have a conversation here with the team from Power Integrations. Sandeep and Joe, thank you, guys, for spending a day with us, and I look forward to chatting about the business. So, maybe Sandeep, you can start for us and just kinda set the...
It's been an interesting last 24 months, all the way around. Some ups, some downs. The market is cyclical, and sometimes customers are not as responsible as they should be, let's say. But, if you could just kinda give us a status report of where we are right now, and we'll go into the different sorta segments as we walk through the business.
Yeah, as you saw over the last few years, you know, during the COVID period with the pull in demand, we saw the acceleration. We actually were one of the companies that we were, even though during the period of shortages, were able to supply, and as a result, got disproportionate share, especially in the communication segment, which we had talked about not being sustainable in the long run. But because of our ability, we got a lot of market share and a lot of gains, and obviously, as Matt said, resulted in, you know, the inventory levels going up in a lot of places, and we've gone through the inventory digestion. We are at a pretty healthy state now, and as we have said earlier, we are at a point where each of the quarters we are expecting growth sequentially.
Apart from the communication segment, which, you know, the whole market is changing there, we are expecting growth in all other three segments. So hopefully, as you said, we are moving. Demand visibility is still, you know, poor for the second half, but we still feel good that directionally, we will grow sequentially for the rest of the year for each quarter.
Got it. That, that's helpful. I, I guess, big picture first, and then we'll go into the, the segments, but, the relationships and the communication between your company and your customers, has it changed at all over through this cycle? I think we, I don't know, 10, 12 years ago, in all of my investor meetings, it was: "Where are we in the cycle?" And then there was this very blissful period where no one asked me about where we were in the cycle. And then we've gone over the last couple of years back to exactly that, "Where are we in the cycle? Were we over shipping, under shipping?" And my experience is that most of the companies that I work with had very good visibility into distribution inventory, but very little visibility into the customer inventory behind distribution.
and so I, I guess what I'm trying to understand is, has that, over the last 36 months, has that visibility changed? Are customers willing to give you more visibility at- on the back end of the channel, or is it still the same as it was?
It's, it's in certain customers, you are getting some more information. And I think what has really happened is, apart from the customer information, during this period, when there were a period of shortages, people actually had increased their inventory levels. If they were, say, 60 days, they wanted to keep... They had gone up to 100 to 120 days, and the money was cheaper. It's kind of reverted right now, where demand is uncertain, and people are not willing to carry as much, in fact, are trying to carry less. So I, I feel it's like a double whammy to the demand picture. But for us, it's even harder because, you know, even the OEMs don't make the power supplies themselves. They use ODMs. So we've got another layer.
But the only good thing is we tend to see the cycles a little earlier because power supplies tend to be made earlier than the main product. But even for us, we find right now that there's uncertainty on the demand side. But the only good part that we are seeing is the orders have really strengthened over the last four or five months, and the channel inventory has come down quite a bit. And even in the OEMs, where we have the limited visibility, we are seeing, like in certain customer and appliance, who had stopped taking product because they had so much, are back to ordering, and so we are seeing signs of demand are coming back.
Also in China, with the movement in the housing, with what the government is doing and some incentives that are being talked about, we are more optimistic on our consumer segment.
Got it. That makes sense. So it sounds like a maybe a little bit better visibility to customer inventory levels behind the channel, but nothing dramatically different.
Correct. That would be correct.
All right, that makes sense. Maybe we could start to explore like just big picture first on, not before we go end market by end market, but coming out of this whole cyclicality, the up and the down, and now coming back out, any commentary on pricing, just broadly? Because I think what we've observed is we're gonna get back to some industry norm of maybe low to mid-single digit declines but from a much, much higher base than we were going into-
Mm-hmm
... the pandemic. And are you seeing that? A, is that true, and B, is it relatively uniform across the business, or is it segment by segment?
So we, unlike a lot of people, you know, we wouldn't go across and just raise. What we do is we do value pricing. So as you know, our main competition is discretes. When they increase prices, we get an opportunity to value price and get the benefit of that. And as you saw, compared to most of the kind, our gross margin did expand, but not to the level as others did. So we completely agree with what you're saying, and we actually had called it out that pricing would normalize to the low single digits. Yes, in certain segments where the volumes are larger, you see, you know, a little more intensity. But I think we have come back to the period of normal, what I would say, price declines.
That's fairly uniform across?
Different. And I just said it is elevated in some areas with larger volume because they have more purchasing power, but it's definitely across.
Got it. So it's more dictated by-
The market
... customer size rather than-
Yes
... segment.
Yes.
Got it. So one of the—I wanted to go into starting to hit segment by segment through the business and just kind of see where we are and what the drivers are. One of the areas that we've... that was more consumer-focused, at least in end markets, and you guys segment it differently, but there's a phenomenon happening in both the notebook market and in the smartphone market of transitioning over to GaN-Based Power. And, I mean, I have a couple of your devices that have traveled the world with me, and I use on a daily basis from fast charging of iPhones and iPads and that kind of thing. And I know there was a big push to get rid of the external brick inside the laptop, do the power.
I mean, where are we along those progressions? There's been some changes of which OEMs wanna put power supplies in the box, which ones make people buy third party. There was a lot of moving parts at the same time in that, in both the notebook and the smartphone market, so if you could give us a broad picture update on where we are.
Yeah, and, and definitely in the notebook area, you know, this was an area where we didn't have much share, and we had gained a lot of share in tablet. But in the notebook area, with our GaN technology going to higher power level, with higher level of efficiency and more compactness required in a charger, we have got started to gain a lot of share there. What's happening actually in the cell phone space is, people are going more out of the box, and as a result, even though they're going to higher power level, basically, the number of chargers is reducing. And but you have multi-port chargers which require more content, we can sell multiple chips in it.
Now, one of the things that happened for us is, during the period of shortages, we got disproportionate share, and we had, like, 70%-80% share in some of the OEMs. And that was because the other competitors were moving their resources to higher margin, and so we got the opportunity because we were able to supply, they were not able to supply everything. And we knew that would not last, and that's why we are seeing. Added to that, there's a lot of pricing pressures. Instead of going to higher power level than the Chinese, they are actually going to more lower power, cheaper chargers in the box. The big OEMs in Korea and the US have already gone out of the box. And then Huawei also want some share from all these guys, which did, and we don't supply to Huawei.
So one of the things we had said in our Analyst Day is, over a period of time, the revenue from the communication segment would decline for us, even though the content share was going up, because the number of chargers would be coming down. And we had said, "If you look out four to five years, as a percentage of revenue, that'll decline, but the other segments would grow." And that is the transition that we are seeing at this point. So this year, in 2024, we will see a decline in our communication segment, but all the other three segments would grow.
I guess we'll jump into the next segment. Maybe we'll... I'd like to hear a little bit about the appliance market. It's, I think a market that, in my experience, semiconductor investors have no idea how to follow. Myself included. No, no disparaging remarks here. If you could just spend a few minutes, like, what the concentration of the revenue at your company, how is that business similar or dissimilar from some of the other segments that the folks in the room and on the webcast probably follow more closely, or at least with more precision? 'Cause it's a bit of a, it's a tough one for me, admittedly, to follow and get right 'cause it's driven by factors that are very, very different than what drives some of the other end markets.
Yeah, it's difficult, you know, because there are different components. We have major appliances, small appliances, air conditioning units. You know, here in the U.S., we are all used to central air conditioning, but Asia and other places, they're all split ACs. And if you look how the world is changing, previously, you know, in these Asian countries, there were fans. Today, every home has three or four split ACs. A great business opportunity for us, and we have actually got a very good share in this business. In fact, in the whole appliance area, we have a very good share. Now, what we have also done is come up with product for motor control in this area, and that's an area where we do not have as big a share.
Last year, during COVID, there was a lot of home improvements, so there was a lot of pull-in or demand that happened, which obviously has had an impact in the prior year, in 2023. In fact, our revenue in 2023 was even lower than 2019, and so that is starting to come back. In fact, what we are seeing now that the channel inventory in this space is even below the normal level of eight weeks that we have here. You know, places like India and other, it's very hot, so there's great demand for air conditioning. And with the whole situation in China now getting settled out a little bit with the new direction in housing, which they have given to the state, we are hoping that opens up the demand in that area.
This year, the consumer segment will be our largest growth driver compared to the other three segments.
... And what really makes that market attractive from our perspective, and it really is a bread-and-butter market for us, it is about a third of our revenue, is the customers in that market, especially in the major appliance and air conditioning spaces, really value the benefits of integration, which are reliability and efficiency. And, you know, they're selling big-ticket items. They want, you know, they have warranties. They don't. The last thing they want is a $3 auxiliary power supply to fail and cause a warranty issue. So the benefits of integration, which are lower component count, primarily, are highly valued there. And of course, energy efficiency standards are quite stringent in the appliance business.
You've got Energy Star, you've got equivalent programs in other parts of the world, and one of the things we're best known for is energy efficiency, both in standby mode and also in active mode, and that story is only getting stronger with GaN as that begins to penetrate more of the appliance market.
Yeah, that definitely makes sense. By the way, for folks in the audience, if you guys have questions, please get my attention. I don't want—I've listened to myself talk in the last two days, more than enough, I assure you. I wanted to spend a little bit of time on automotive, 'cause I think it's over the next decade, a really interesting opportunity. We're all watching the autonomy spectrum and the electrification spectrum happen, and at different rates with different sentiment with investors, that's for sure. But your company has a number of different opportunities there.
It seems like in the electrification space, there's so much focus on the big, shiny object of the main inverter and not very much focus on other parts of the car that run off of different voltage levels, the air conditioner, for example, and, and others. So and then there is a long-term potential for you maybe to get into the main inverter, so-
Mm-hmm
... I mean, just start from the beginning of, like, a status report of where we are today and where your R&D dollars are going in the automotive space.
So this is a great area of opportunity with the move to the EV. We were not in a traditional car. Now, you have the 400-volt or the 800-volt battery, and as Matt talked about, the different auxiliary power supply, the opportunity in emergency power supply or the air conditioning. We have very unique products, and are actually getting pulled from the automotive OEMs for our products. We also have announced twelve forty, twelve fifty volt GaN technology, which enables us to get into the onboard charger in the future. We already have the technology, but in the next two, three years, we'll come up with the product.
In addition to this, the big talk about the inverter, now, we do not have a technology that addresses it, which is addressed by silicon carbide, but we were already working on this technology, and we have actually augmented that, and we're gonna accelerate that by our acquisition of Odyssey. And we're hoping in the next three to five years, if we get the breakthroughs that we require in this vertical GaN technology, we should be able to address the drivetrain and the inverter. And that's. We have invested the last 10 years in GaN, which has brought us here, and with this additional investment dollars that we are making, it is setting the stage for us very well for the next decade. GaN is far cheaper than silicon carbide, which is very, you know, very expensive material set, requires a lot of electricity.
But obviously we don't have that technology today for the drivetrain, but those are the R&D investments we are making today for the future, for this decade.
Yeah, and I just talked a moment ago about why we've been so successful in appliances. It's very much the same story we think is going to be the same story in automotive. Reliability and efficiency are of paramount importance, obviously, in that business. So it magnifies the benefits of integration, magnifies the benefits of efficiency, and so far, that's the experience we're having in the market. It's still very early. We've just started the penetration of the market. We'll have a few million dollars of revenue this year, a few million more next year, and we ultimately think, or by 2028, this could be a $100 million business for us. Takes time to build that, just with the long design cycles, but the customer response so far has been extremely positive.
Now, thank you guys both for that. I think just stepping back, and we've had a bunch of these conversations over the last six , nine months, there was a period of time where you guys were overshipping consumption, and then there's obviously a period of time where you're way undershipping consumption, and we're trying to get ourselves back on an equilibrium to build the company from going forward. Any idea where that equilibrium is?
So, it's hard to be, you know, precise, as to what it is. As we have said, we are gonna continue to grow sequentially. And when you talk about this point, I know we have addressed saying, you know, pre-COVID or no COVID, what would be the base? It's somewhere in the $150 million run rate for the quarter, give and take, I would call that. But it'll take a little while to get back to there. But there are puts and takes, as we talked about in the communication segment, things are going... The is a headwind for us, but we have tremendous tailwind coming in the computer, automotive, high power, and the consumer segment.
So, I think on an earnings call, I'm trying to remember back to when this was, last November, I think, you guys had given a sort of a range of revenue and earnings that felt like steady state. Is that—has anything in that view changed at all in the last six months, or is it still relatively similar?
Well, it's, there's puts and takes, as we talked about. You know, the timing related to the communication headwind versus the timing related to the tailwind from automotive and motor control. So the timing could vary a bit, and that's why, you know, when we use the word $150 million a quarter, it was a give and take. It's not a precision, but directionally, we still feel those are the puts and takes that'll get us to that steady level.
Got it. And then every semiconductor company gets questions on gross margin, so you have a couple of additional variables with currency. So, I don't know, Sandeep, like, if you look forward over the next, I don't know, four, five, six quarters, like just puts and takes on margins, some of it'll be mix dependent between your segments-
Mm-hmm.
Some of it'll be mix dependent on large versus small customers. There's the yen.
Mm-hmm.
If you could just kind of level set us of what your expectations are and what those variables look like.
Correct. For the year, this year we had talked about, you know... And actually, we started this discussion at the analyst day, where we had talked about that our margin, our mix will move away from the communication segment, but more towards the richer. We get the highest margins in the industrial segment, followed by the consumer segment, followed by computer, and the lowest are in the communication. And with the mix changing, we had talked about that. But we had also talked about saying that we're getting a tailwind right now from yen, you know. Historically, yen has been around 125, ±10, and, you know, right now we have seen it move to the 130- 40 to the 150, and we are benefiting from that.
Yeah, and basically, it takes normally about 6 months for it to flow in the P&L, but with the level of inventory, it takes about 12 months. And every 10% change in yen, you know, impacts us about 120-150 basis points in margin. So the yen is a tailwind, but eventually, you know, when the interest rates make, it'll go the other way, and I know the discussion we had about gross margin on the analyst day. One of the things that I had said is the input costs are going up. The yen, right now a tailwind, could become a headwind. And so overall, we will still be in the 50%-55% non-GAAP for gross margin.
But I think for this year and next year, and looking, foreseeable future, we'll be on the higher end of our model. Right now for this year, the volumes have been a headwind because our revenue is so low, because we provide a lot of capital to our back-end guys, which are not utilized, and as the volumes go up, that'll become a tailwind. The mix will become a tail... Input costs will be a headwind right now with, you know, cost of electricity and labor and others, and yen could become a headwind in the future.
No, that all makes sense. I mean, your gross margin model must look like some of my models. I think the other thing I wanted to ask about, and when you go through these different cyclical periods, different management teams have different philosophies on what to do with OpEx.
Mm-hmm.
Some people pare it back all the way to preserve-
Mm
... op margin at the cost of whatever. Others, like, invest through the cycle. You guys have always been in the latter camp.
Mm-hmm.
But anything different this time? And if you are really, really investing through the cycle, what's the list of priorities? Which one of your GMs is beating down your door for funding, and in what order?
Your point is right on. We are actually a very different team. We actually run our business on a three to five- year horizon and really value our people, our suppliers, in a very long-term perspective. We do not do, you know, cut salaries or lay off people. In fact, during the period of COVID, we actually gave people normal raises, did selective hiring, and that's the thing we've always done, and it has really helped us in our retention rates. Our suppliers, like, we, you know, we don't want to short-change them and basically cut down dramatic levels of production for them. So we kind of balance, and we invest in working capital like we are doing with the carrying of the inventory.
So this year you're seeing, in spite of the growth not being that high, we, we said we will still spend about 7% higher over last year. But what we tend to do is always tighten our belt during a difficult time, but we continue to invest. We did this in 2011 when we had lost Nokia and RIM as our big customers, and our operating margin had gone down to 16%-17% in R&D. We're continuing to do that. We're making tremendous investments in automotive, in motor control. We are also looking to make investments in India, which is a great opportunity for us in the future. So we are always look three to five years from a potential. Just look at what we have done with GaN.
We had made a bet in Silicon Carbide a decade ago and decided it was too expensive and made a bet in GaN and doubled down on GaN. We have made tremendous progress there, and now making the R&D investment in the next generation, along with the Odyssey acquisition. That is, again, looking far ahead and seeing what all these investments will do for us in the next 5-10 years.
It's also interesting to see how companies, like, control working capital and capital returns and things like that when the P&L moves dramatically in both directions. And so I'd just be curious on how you're thinking about those items. Do you have opportunities to do something a little more creative and buy back stock, given what the stock has done? Do you... Is the M&A funnel still fairly active, and you're looking there? Just big picture thoughts on how you're prioritizing things and given some of the volatility we've seen.
We've had a 4-prong approach on capital allocations, and as you can see, right now we are investing in not only in working capital, but in R&D and other areas. If you look back, we've been selective in our acquisitions over the period. We have done four or five , not very big, but the largest being Concept. But again, we have done something which is core to us, which is either brings us technology or brings us an opportunity to expand our SAM in the markets that we know best. We've done a tremendous amount of buybacks, very opportunistically. If you go back and look over the last 10, 12 years, we've spent over $900 million in buyback at an average price of, like, $28 bucks, if you look from that period.
Even in the last three or four years, we have bought back, you know, utilized significant portion of our free cash flow to buy back stock and obviously give dividends. Dividends is another important part of our capital allocation as a way of returning value to our shareholders, and we have consistently, over the years, increased our dividend as a way to return value to our shareholders. It's been the four-prong approach that we have used very consistently, and I think we could plan to continue to do the same in the foreseeable future.
All right. Well, our shot clock's up in the back there. This has been a great discussion. I really really appreciate your time and everybody's attention, and all the best as we come out the back of this cycle, 'cause there's exciting things ahead. Thank you.