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 are QR codes on the table that you can scan with your phone and send any questions up to me, and if not, that's OK, too. I've got a full session worth of questions, 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?
Yeah. We are a high-voltage power conversion company. I mean, we are one of the most focused companies just focused on high power. We have, unlike other fabless companies, we have our own process technology that we install 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 five years, we believe we're going to expand that to about $8 billion. We are also a leader in GaN technology, which is, over a period of time, replacing silicon.
Also, we'll start making inroads into the silicon carbide space. That's a little bit of a nutshell of who we are.
OK. And thinking about end market exposure, how is your revenue split up among the end markets? And are you trying to emphasize parts of that and de-emphasize other parts of the portfolio over time?
Yeah. So one of the things that we said in our analyst day is that the cell phone business, which over the years has varied right from 30% to as high as 40+% over 15+ years, we have said that with the chargers going out of the box, that will be coming down. And it already has come down. So if you really look at it, the cell phone, 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, will be about 14%, 15%. But the biggest portion of our about 70+% will be the consumer and the industrial. And consumer for us is mainly appliances, which many companies kind of put into industrial.
Right.
While, as 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 a third of our business in the industrial segment is basically the high-powered renewable and big industrial motor drives. Another third is the traditional industrial controls and areas. But another third is what I call the new areas, metering. You've got e-bikes. You've got home building 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 that part of the segment. And that's how the transition. And that's why it'll benefit us even from a margin standpoint.
So you reported earnings about a month ago today. And you guided 4 Q to be down a little bit, quarter-over-quarter, still seeing some broad-based demand weakness. So in the last month, have things basically played out like you thought they would? Or have there been any surprises?
Yeah. You just gave an earnings a few weeks ago, so it's too early to talk about any 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 two 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. Yeah. I think that trying to break apart any weakness that we're seeing into channel dynamics versus real core in-demand weakness has been like a huge topic of conversation this week.
So for us, the channel, actually, if you look at it over the last couple of years, the channel actually had gone up to like 13 weeks, 14 weeks. But our normal is about 8 weeks. In Q3, it came down to 7.9 weeks. But I mean, in Q2, it popped up a little bit more in Q3 to 8.6 weeks 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 eight 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.
So 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 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 we would think of as the typical consumer seasonality with your 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 these macroeconomic changes, but for us, traditionally, the cyclical piece in the consumer or the appliance area is in Q3, where air conditioning, which is a reasonable piece of our business, comes down, and typically, it restarts and gets 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 the high-powered 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 fear, especially for power semiconductors specifically. So what is your exposure to China? And would you say what kind of competitive environment are you seeing? 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?
If you look at it, we ship 40%-50% of our revenue into China. That's mainly because where manufacturing is, even though few adjustments are happening where products are being manufactured. What we ship in that stays in China is about 20%.
OK.
One of the things is, yes, sure, there is competition, and 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, the areas the discrete solutions get away with on low cost, with little low margin, are things like cell phone or small appliances. But when it comes down to 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 innovated way ahead.
We have some very revolutionary products over the years that have outpaced what can come from there from a competition standpoint. Yes, there is competition, but it's more on the lower end. That will always remain. We have seen competition not only from China but from bigger players in the analog space. The only way we have managed to 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?
Yeah. As I said earlier, we had grown our SAM from $1 billion up 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 up with products that address new markets. For example, we are addressing with our existing products by making it automotive qualified and have got into the EV. We were never a player in the traditional car, but now with high voltage, we are able to get into and 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, we're working on the next generation GaN, where we're going to higher 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 making strides, and we have drivers in that area, and that is providing a big growth. In addition, in high power, we are coming 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 five years to expand and support growth and grow our SAM to about $8 billion.
OK, 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?
Yeah. So for us, we already have products today with silicon, with silicon carbide, and with 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 to 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, higher power charger, when you want size to be more compact, you want more efficiency in appliance or industrial applications, you get to use GaN. Now, we are already in GaN cost-effective compared to silicon carbide, up to 100 W. And there's a saying, you GaN when you can and silicon carbide when you must. Silicon carbide is very, very expensive.
But we don't have the GaN technology to take it into, say, the inverter and the drive train. But tomorrow, we will have it. So I think the investments that we are making are enabling us to first substitute the silicon because our GaN will be cost-effective 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 will 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 and silicon but also has some unique equipment. We're spending 5%-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 power. We also have products that we are working on to get and 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.
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 split of responsibilities and CapEx and what sort of margin sharing there is in that arrangement? I think that's really interesting.
Yeah. That's the beauty of fabless IDM, as we call it, and the beauty is we get the benefit because we're only providing them with some specific capital equipment but using the 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 absorbing some of the cost. 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 for certain equipment. We have to invest more in the back end, in assembly and test because of high voltage.
And there, we spend a lot of capital on. So these are partnerships with captive foundry partners that have gone on for the last 20+ years. And it's a real what I truly call most of them are in Japan. And it's a real, really good partnership.
What sort of operating leverage do you see then? Do you have 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 four, five years, we're going to grow greater than 10%. Next year, we are talking about growing mid-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 had to continue to buy wafers. And we're 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 with the Japanese partners, where we keep trying to make sure the economics work for both sides, is a real partnership. And it's really worked well for us for the last 25 years-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 of obsolescence. And it's well worth 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.
I think the markets are kind of trying to quickly digest what could be really significant changes in policy and government spending. 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?
Yeah. 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 are certain impacts where EVs kind of slow down a bit here, but they're 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 traction is going to be very positive for. So it'll go. Now, from a tariff standpoint, we haven't been impacted directly. 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 a, what I would say, direct impact, but we have more of an indirect impact.
So I think even though people talk about geopolitical renewal, I think renewables and different alternative forms of energy are going to continue. And I think the investments in Asia and other places on solar with DC transmission lines are going to continue. And we are seeing that.
I think that some of your peers the last two days have said that they feel pretty good about how they're situated directly in response to things, but 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 cross currents right now. Are you seeing 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 two 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 next year.
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.
Kind of the last major topic, I think, financially is capital deployment. Can you talk through how you make capital allocation decisions for the company? Over the next year, 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 four-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 four 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 are looking for alternatives 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 a year where our stock is. And we are opportunistic about it. When markets are irrational, behave irrationally at times, 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 prong of capital allocation is dividends, which we actually had instituted during our downturn in 2008. And if you look, we have continuously increased our dividend. And we did so also last quarter. So these four prongs have been there, even though we don't have a formula for payout ratio. But if you really look at it over a period of time, it's been in the 20s%. So I believe these four prongs will continue.
Now, which prong gets more emphasis in a year or two 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 forward towards 2025. So when we're on the stage a year from now at UBS Tech Conference 2025, what do you think you're going to be proud of from 2025? Or as you sit here today, what are you most excited for in the year to come?
I think we are most excited to get back to a good growth here. It's been a tough three years. Quite frankly, that's what I'm looking for. 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. I think we're going to look back from here and say, we had a productive year. We grew in all four segments next year of our business. I'm looking forward to the growth. That's what I'm saying back again.
Yeah. 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 three segments outside of the cell phone 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 a neutral to slight growth. But the growth of the company can be carried forward by the other three segments. Great. I'll be excited to check in on that in the year to go.
Yeah. 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?
I think in the past, a little past, it was always more people thought us to be more on a cell phone kind of a company because that's easier to figure out. We were always much more broad-based. In a way, this downturn in cell phone, I think, is going to bring a lot more clarity because the focus is going to be on what area. 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. 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. Meanwhile, GaN has largely been kind of the province of smaller companies, some startups, 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. GaN is expanding, 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. Got it. Well, that's all for the session. Thanks so much for being here. I really appreciate it.
Very much for your time.
Can't wait to ask you about all of this stuff in a year.
Thank you very much.
Thank you.