Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Power Integrations Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you.

Thank you, Emma. Good afternoon, everyone. Thanks 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. During this call, we will refer to financial measures not calculated according to GAAP. 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. Our discussion today, including the Q&A session, will include forward-looking statements denoted by words like will, would, believe, should, expect, outlook, forecast, anticipate, prospects, and similar expressions that look toward future events or performance. Such 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 Form 10-K filed with the SEC on February 5, 2021. 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. We concluded an outstanding year with another quarter of strong revenue growth, profitability, and cash flow. Revenues for the fourth quarter were $173 million, up 15% compared to the strong fourth quarter of 2020. Gross margins approached the high end of our model, and our non-GAAP EPS grew 38% from a year ago. For the full year, non-GAAP EPS grew 92% on revenue growth of 44%, which is well above the revenue growth rate of the analog semiconductor industry, which was on track to grow about 30%. Over the past three years, we have averaged 19% top line growth, almost three times the rate of the analog sector. The revenue growth in 2021 was broad-based and diversified, with all four revenue categories growing at least 35%. We gained share across a broad range of end markets, including appliances, smartphone chargers, notebooks, and a range of verticals in the industrial category. We have strong momentum coming out of 2021, and we could not be more excited about the opportunities ahead of us in 2022 and beyond. The secular trends underpinning our growth last year remain in full effect, including energy efficiency, electrification, smartphones and appliances, and advanced chargers for mobile devices. GaN was a significant contributor to our growth in 2021, with revenues tripling from the prior year, and we expect strong growth again in 2022. GaN-based InnoSwitch products and complementary products like minicab are driving a revolution in chargers, and we have a wide range of impressive smartphone and notebook designs coming to market in the months ahead. We also have new revenue streams coming online this year from motorized BridgeSwitch products as they ramp up with appliance customers and from automotive with multiple EV design wins going into production later in the year. Our unique foundry model and timely investments in capacity, which enabled us to win market share in 2021, will help us again in 2022 as lead times remain stretched across the industry. Our team executed beautifully last year under challenging conditions, assessing genuine customer needs, building the right mix of parts, and keeping customer lines running while guarding against inventory bills and excess ordering. Our inventories are near laid back to our target level, and we are in a great position to support strong demand in 2022. We will also introduce new products this year that will extend our lead over the competition while expanding our addressable market. We have a pipeline of products incorporating industry leading technologies such as our proprietary GaN switches, FluxLink isolation technology, the BridgeSwitch architecture for motorized, and our scale gate driver technology for high power. In all, we expect to double our addressable market to more than $8 billion over the next five years, with the expansion primarily coming from the appliance, industrial, and automotive markets. We announced one such product earlier this week, a new member of our InnoSwitch three family devices qualified for automotive use. Our InnoSwitch products are rapidly gaining acceptance in EV power supplies, thanks to their efficiency and their high level of integration, which saves precious board space while enhancing reliability. This latest InnoSwitch device designed for next-generation 800-volt EV platforms incorporates 1700-volt silicon carbide MOSFET. The challenges of high-voltage are new to the automotive market, and customers are eager to tap our expertise. We have multiple automotive design wins going into production later this year, including an emergency power supply for a Tier 1 automotive supplier. We have additional designs scheduled for production in 2023 and 2024, and a strong pipeline of design activity involving seven of the world's top level automakers. While revenues will ramp gradually given the length of automotive design cycles, we are excited about our progress and we are investing in products, people, and facilities to make automotive a significant part of our business in the coming years. Another new revenue stream for 2022 is motor drives. Our BridgeSwitch products drive brushless DC motors, which are being adopted by appliance makers to keep pace with the efficiency requirements, such as China's new standards for air conditioning as well as recent updates to European efficiency standards. BridgeSwitch ICs offer higher efficiency than incumbent solutions, compounding the energy-saving benefits of brushless motors. They also enable faster time to market by reducing component count and integrating safety features that are normally implemented in the system software. This feature alone can save months of delay by avoiding the need for a new safety certification after any software updates. Our leadership in appliance power supplies and our strong relationships with appliance makers around the world puts us in an excellent position to sell BridgeSwitch and expand our content in appliances. While we're excited about these two new revenue streams, which will be an important part of our growth story in the years ahead, we are equally excited about the continued growth in our core markets. We grew our consumer revenues 40% last year, through a combination of share gains and expanding dollar content in appliances. China's new efficiency standards for air conditioners are a key contributor, and we will see a full year's impact of those standards in 2022. Our delivery performance also continues to be a key advantage in appliances, as competitors allocate scarce capacity to other end markets. Industrial revenue grew 35% in 2021, driven by a diverse set of applications, including metering, home automation, lighting, battery-powered tools, and broad-based industrial products. Our growth in industrial markets reflects not only the attractiveness of our products, but also our success in reaching smaller customers with online design resources and other efforts to drive higher productivity in our distribution channel. Revenues from the communications category grew more than 45% in 2021, driven by advanced chargers for smartphones, while computer revenues nearly doubled, driven by GaN-based notebook adapters and high power aftermarket chargers, such as Anker’s nano II products. Back in May, we announced that Anker was the exclusive launch partner for our GaN-based InnoSwitch for chipsets. Last month, Anker’s CEO revealed that his company had shipped more than 10 million units of nano products in 2021 and offered a strong endorsement of our products and customer support. We expect strong growth from advanced chargers again in 2022, as the market continues to move away from commoditized low-tech designs in favor of faster, smaller, and more versatile designs that require advanced semiconductor technologies. We have several high-volume designs scheduled to go into production over the next few months, including a high power GaN-based inbox charger for a major Chinese smartphone OEM as well as new compact notebook adapters for multiple customers in the PC market. Later this quarter, we will introduce new products targeting ultrafast chargers with power levels in excess of 100 watts, as well as a range of other mid-power applications like desktop PCs, power tools, and E-bikes. Since ultrafast chargers typically feature multiple charging ports and require a separate power factor stage, they offer substantially increased dollar content and require high levels of both integration and efficiency. To summarize, 2021 was an outstanding year for Power Integrations, and we are confident in our prospects for 2022 and beyond. GaN represents one of the most important opportunities ever in power semiconductors, and we are the clear market leader. Smartphone and notebook chargers are transforming from throwaway accessories to high-tech appliances that help our customers differentiate their products. Transportation and tools are going electric, and appliances are adding more electronic features while needing to use less power. IoT and smartphone devices need power supplies that are reliable and compact with minimal standby power consumption. And with governments and private sectors pushing for lower carbon emissions, our products have a critical role to play in the generation, transmission, and efficient consumption of power. Each year, our EcoSmart technology saves enough energy to power more than a million and a half homes, and we have been doing this for over 20 years. Our GaN technology will save even more power as it replaces silicon, and our gate drivers are using solar and wind power as well as high-voltage transmission lines that deliver clean energy to the grid. Having surpassed the $500 million, $600 million, and $700 million revenue milestones all in the same year, we are looking ahead to the $1 billion mark. Our addressable market is large and growing, and we are investing in the R&D resources, sales reach, and capacity to become a $1 billion business. And as Sandeep will explain in a moment, we are also underscoring our confidence in the future by investing heavily in our own shares.

Thanks, Balu, and good afternoon. We had another excellent quarter from a financial perspective, with revenues above the midpoint of our guidance, gross margin near the high end of our model, healthy cash flows, and a significant return of cash to stockholders. Our capital allocation decisions reflect our strong balance sheet, our expectation of continued cash flow growth, and the recent divergence between our share price and our financial results. Specifically, we took advantage of market volatility, including the turbulence around our promotion to the S&P midcap index, to buy back 2% of our outstanding shares between November and January. In January, our board allocated an additional $100 million to the buyback and has also increased our dividend for the second straight quarter, bumping it by 20% to $0.18 per quarter. Looking now at the Q4 results, revenues were $172.7 million, down 2% sequentially. The communication category was down by high single digits driven by year-end inventory reduction in the distribution channel. Sell-through for the communication category was up more than 15% sequentially, indicating that the end customers' inventories have returned to healthy levels following the overbuild that took place early last year. Computer revenues were down by mid-teens driven by softness in PCs, while consumer and industrial revenues each increased slightly from the prior quarter. On a year-over-year basis, total revenues were up 15% compared to last year’s very strong Q4. The industrial category was the fastest grower, up more than 14%, driven by metering, home automation, and broad-based industrial applications. Consumer revenues were up 30% on continued strength in appliances, driven by share gains, content increases, and end market demand. Communication revenues are down mid-20s compared to a very strong quarter a year ago when OEMs began building aggressively in an effort to capitalize on the Huawei sanctions. Revenue mix for the fourth quarter was 35% consumer, 32% industrial, 23% communication, and 10% computer. The higher margin industrial and consumer markets accounted for a greater-than-expected 67% of our mix in Q4, helping drive non-GAAP gross margin to the higher end of our model at 54.5%. Also contributing to the increase in margin were our manufacturing efficiency improvements, including improved yield and test types. Non-GAAP operating expenses for the quarter were $38.8 million, up $1.8 million from the prior quarter, reflecting increased headcount. Non-GAAP operating margin for the quarter was 32%, while the non-GAAP effective tax rate was 8%. Non-GAAP earnings for Q4 were $0.83 per diluted share, up 38% from a year ago on revenue growth of 15%. Cash flow from operations for the quarter was $47.2 million. Diluted share count for the quarter was $61.4 million flat compared to the prior quarter. We repurchased $423,000 shares during the fourth quarter for $38 million. Repurchases were heavily weighted towards the end of the quarter, so the impact on share count will be seen primarily in the March quarter. As noted earlier, repurchase activity continued after the end of the quarter at an accelerated pace, reflecting our price-sensitive approach. In fact, within the month of January, we exhausted the $67 million remaining on the plan, buying back an additional 820,000 shares. As noted in our press release, our board has allocated an additional $100 million for repurchases, which we would begin to deploy next week should the stock price remain in the range of our price volume matrix. Other uses of cash during the fourth quarter included $17 million for capital expenditures and $9 million for dividends. Cash and investments on the balance sheet totaled $530 million at quarter end, down $19 million from the prior quarter. For all of 2021, we returned nearly 60% of our free cash flows to stockholders, including $74 million in the form of buybacks and $33 million in dividends. Looking now at inventories, as Balu noted, we are pressing our advantage on product availability and delivery performance. Our unique foundry model and our investments in backend capacity have enabled us to build inventories back to 114 days at year end, up 15 days from the prior quarter, and within sight of our target level of 125 days. Channel inventories fell to 6.3 weeks, down from 6.7 weeks in the prior quarter, reflecting sequentially higher distribution sell-through, mainly in the communication category, as well as our preference for keeping inventories in-house to be responsive to customer order patterns. Turning now to the outlook, we expect revenues for the March quarter to be $180 million, plus or minus $5 million. The implied year-over-year increase of 4% at midpoint reflects the exceptionally strong quarter we had a year ago when revenues grew 15% sequentially. I expect non-GAAP gross margin for the first quarter to be similar to the fourth quarter level of 54.5%. End market mix should be less favorable, with the communication category showing relative strength. Though we expect offsetting benefits from manufacturing efficiencies and higher volumes. Non-GAAP operating expenses are expected to be $41 million in Q1, plus or minus $0.5 million. The sequential increase reflects headcount growth as well as seasonal factors such as FICA taxes and the year-end shutdown that lowered expenses in Q4. The non-GAAP effective tax rate for the quarter and the year should be 8% to 9%. Finally, I expect diluted share count for Q1 to fall by at least a million shares compared to December as a result of our buyback. And now operator, let's begin the Q&A session.

Your first question today comes from Karl Ackerman with Cowan and Company. Your line is now open.

Yes. Good afternoon, gentlemen. Two questions, if I may. First on the guidance here, your guidance is particularly strong, both in terms of revenue and gross margins. There's nothing normal about this environment, but you are growing well above what is typical seasonal for March. My question is, is the growth mainly coming in March from non-communication markets? And as you address that question, are you seeing channel inventory now balanced there? Or are orders still well ahead of your ability to supply?

In terms of relative mix, the communications will be relatively stronger as we just mentioned in Q1. But I would say because of our share gains and content increases and our ability to supply, we are seeing significant growth across all four markets. That's one of the reasons why we are growing sequentially in Q1, whereas historically, Q1 has been a slightly down quarter. We had expected communication to start coming stronger after Q4. The sell-through was great, but they managed the year-end inventory. The sell-through in communication was even stronger sequentially in Q4, but as Balu indicated, I think what we are seeing as a positive sign for the full year is the share gains that we have gotten and our ability to supply products to our customers has been a real positive and I think that trend will continue into 2022.

That's helpful, I appreciate that dovetails into my second question, which is share gains. On the topic of share gains, how large of a revenue opportunity do you see BridgeSwitch being over the next few years? I asked because I was under the impression this is one of the products that is allowing you to gain share from two competitors that have deemphasized that market. Thank you.

The addressable market for our current product that we have introduced is about $0.5 billion. As we mentioned earlier, we plan to introduce higher power versions of the BridgeSwitch, which will allow us to expand that addressable market significantly. It’s a pretty large addressable market and we are very well-positioned in that market. Not only because our products are more efficient, but also they have many safety features built-in hardware, which is very useful in monitoring the health of the motor, which a lot of customers want. More importantly is that we have eliminated heatsinks altogether. The incumbent technology users what's called an IPM, Integrated Power Module, typically has a significantly large heatsink on it. With our solution, we are so efficient that we don't need any heatsink at all up to 400 watts with the current solution, and we plan to extend that power level without heatsink significantly in the future.

Your next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Hi, guys, thanks so much for the question. Congrats on the strong results and the guidance. You talked a lot about the share gain side of things and the additional supply allowing you to be much more aggressive than your peers. I guess if I thought about 2022 as a whole, will that actually allow you to grow your communications business, just given it started really strong last year but ended down mid-20s year-over-year? How do you expect that to trend for 2022 as a whole?

I think we will grow in all four categories. Previously, as you know, we had guided we thought the communication and computer categories would grow faster. But considering the share gains we have had in consumer and also the sense we are seeing in industrial, it clearly appears to us that the mix for us next year is going to be more favorable than what was in 2021. But having said that, I think all four categories will grow.

And I guess a cyclical question for you. There are concerns about behavioral changes, with supply catching up to demand. The fact that you guys have shorter lead times than most because of your proactive inventory management gives you a more real-time look at what's happening on the demand side. Earlier in the year in ’21, you were cautious because of that, and then you got more optimistic as the year progressed. What’s the update as of tonight as far as the cyclical views?

We are more optimistic now because the level of share gains we received in all of the markets is very well diversified, which is the best part. In terms of cyclicality, I would say Q1 is obviously stronger than normal cyclicality. Our expectation right now is a little bit early, but we think we will return to the normal cyclicality from Q2 onwards, which means that we will see some increase in revenue in Q2 and Q3, and then probably a slight reduction in Q4. That’s our best guess at this point.

Hey, good afternoon, and congrats on the quarter. Lots to unpack here. But I guess the first question is really on the automotive side: it seems like that has been pulled forward and I know it's been an area of opportunity for you all. But I think in the past, you’ve kind of looked out and said this will be a little time out. It sounds like you’ve made a lot of progress. Can you give some color around the automotive space in particular?

What really surprised us is the level of interest in our automotive products that we've recently introduced over the last year or two. Normally, automotive takes a long time to get designed in, especially if you're not an automotive supplier, as people make you go through a lot of steps to even get qualified. However, over the last year or so, our products are so compelling. For example, InnoSwitch is used for an emergency power supply. If you're not familiar with what that means, electric cars have an emergency power supply that ensures that if one of the batteries—whether it's a 12-volt battery that supplies the control systems or the main 400-volt or 800-volt battery—gets damaged or disconnected, they require that the car be maneuverable and can be brought to a safe stop. Our InnoSwitch is perfectly suited for that. Implementing this any other way requires so many external components. It's such a complex solution that when they look at InnoSwitch, they say this is the perfect solution for that. It takes far less space, typically like one half to one third of the space on the PC board, which is expensive in automotive terms. Many customers have actually shortened the design cycle, especially in commercial vehicles and also non-core applications where the design cycle can be completely compressed. We are very impressed that we are going to have several designs going into production this year. And the same is true for our LinkSwitch products, which are being used for auxiliary power supplies for many subsystems like heating and air conditioning compressors. What you're finding is our product is so well-suited that people are now trying to power many of the subsystems directly from the main battery rather than from the 12-volt battery. This trend is very exciting to us. We think that non-core business will start growing from this year onwards, with a small amount of revenue this year, gradually growing over the next several years. The car manufacturers will really jump in around 2025, where we will see a much bigger increase in revenue driven not only by InnoSwitch and LinkSwitch but also by our gate driver products, which go into the drivetrain and therefore take longer to qualify. The new revenue stream from motor controllers comes from existing customers who are appliance manufacturers. We have very good relationships with them and with the air conditioning manufacturers, so that is a relatively easy market because we know the customers and they know us. But automotive is entirely new for us. This InnoSwitch product is really opening doors for us, especially the latest one we announced, which is a 1700-volt silicon carbide-based InnoSwitch that allows operation from 800-volt batteries, which is a trend in the marketplace as the cars transition from 400 volts to 800 volts. This change complicates things, but we have the expertise in high voltage to provide a simple and elegant solution that is reliable, takes minimal space, and is very attractive. They especially care about standby efficiency, which we have very low—an important advantage for ensuring the batteries do not discharge on their own. Therefore, automotive revenue is completely new to us, and we are very impressed that customers are coming to us. They're very open-minded about using our products.

Okay. Thanks so much. One more for Sandeep, if you don't mind real quick. On the gross margin, is there any component to the pricing or anything that we should be thinking about that may come out later? Is this purely driven by the shift in mix?

The way to look at it is obviously the mix came in much more favorable than we expected, and our manufacturing efficiencies were better than we thought. If you're looking to what happened next year, it's hard to predict, but we expect the trend to be a gradual decline from the starting guidance we have given for Q1. The mix is going to be more favorable than what we had this year, but we continue to see input cost pressures, which I think will flow as the year goes by. The best guess for next year I can model is somewhere around 53.5% to 54%.

Yes. Thank you and congratulations on another great quarter. Maybe I can start on that last topic on gross margin. So Sandeep, 53.5% to 54%, that's still higher than what we were thinking before. Is that a function of newer products, or are you still expecting that contribution to be mainly driven by mix for the full year?

The mix is going to be favorable next year, which is helping us greatly. When we previously discussed, we thought communication and computer would overshadow the other categories. However, because of the share gains, we think the consumer market is going to perform well. We are seeing really good strength in the industrial side. We have also made good progress in manufacturing, and the volume growth will help. Initially, we thought we might face some headwinds due to capacity expansion, but that is going to be less because of our manufacturing efficiency and volume growth. Lastly, the pricing environment is favorable, and we do a value pricing. So I think that helps as part of this whole situation.

Just to clarify when you talked about the seven out of the top eleven automotive OEMs—are those design wins or are you actively working with them? We are working with them. It's not an assignment from all those companies.

Very good. And then the last question, you talked about ultra-fast charging and introducing a product with over 100 watts late this quarter. We've seen the market wanting to eventually move to 200 watts and beyond. So how far can you go with the GaN technology you have right now?

We can go to very high power levels. The products we are targeting right now will easily cover what has been anticipated. If you're following USB PD, they have an extended power version that can deliver up to 240 watts and we will be ready with that solution before it's needed.

Yes, thanks for taking my question and for pronouncing my name correctly. Just real quick, I want to talk a little bit about supply. Remind me how many foundries you work with these days?

Our biggest foundries are Epson and Lattice in Japan. We have a couple of smaller foundries in addition to that, but within each company, we are using multiple of their locations for foundries.

Do these foundries have spare capacity, or are they getting full as well?

They are all running full. Because we have contractual agreements, we have some dedicated capacity, and we have managed the capacity extremely well. We run it all the time. When there is a surplus in the market, we don't stop running wafers; we build wafers, build our inventory, and keep them mainly in wafer form. So it doesn't show up as too much in revenue in dollar terms. We did that in Q2 of last year, and it was very helpful. We are building inventory now, and we expect to reach our target inventory in the near future, which will be very helpful for us to handle any upside that might show up this year.

I was actually thinking more about the billion dollar target. Are these foundries going to have to add capacity, or are your existing partners sufficient to reach that goal?

We are doing all of that. We are trying to expand the capacity with existing partners, and we are in negotiations to secure more capacity. We are also adding new foundries, and we are discussing new additions. We are pretty confident we can build enough capacity to reach a billion dollars, wherever that happens. As for the automotive market, regarding your early designs for the emergency backup, what's your revenue content? With the first designs, and then once you get into powertrain, where do you see that growing when you reach 2025? With our products, excluding the powertrain, our dollar content will be in the tens of dollars per car. It just depends on how many power supplies are in a given car. That seems to be increasing all the time. When you get to the drivetrain, our content can be over $100 a car, maybe a couple of $100 a car. It's still in flux, as things are changing quickly in the EV market. I would say the higher the voltage as they go to 800 volts, the more content we will have compared to 400 volts. The good news is that most vehicles are going to 800 volts, leading to significant savings. Our products shine even better at 800 volts because we can handle high voltage better than anyone else. We are not primarily focused on internal combustion engine vehicles; rather, we are focusing on pure electric vehicles. When I say vehicles, I also mean all commercial vehicles, buses, trains, and other types of commercial vehicles used for transporting goods.

Given the strong guidance for the next quarter, I was wondering if you could provide maybe a little bit more color as to sequential changes or force rank the segments. How do you see them playing out?

As Balu indicated, the biggest driver will be the communication segment, while the other segments will be flat or slightly down. The communication segment will lead as we mentioned. The sell-through was very strong in Q4, and they managed to keep inventories low. That's why we feel we will have a good Q1 for communication. For the whole year, we think all four end markets will do very well growth-wise, and the mix will be more favorable on an annual basis than it was this year. For the whole year, we believe all four categories will grow. The mix will be more favorable than it was this past year. However, as I mentioned earlier, the year-on-year growth is expected to vary by category.

There are no further questions at this time. Joe Shiffler, I turn the call back to you.

Thanks everyone for listening. There will be a replay of this call available on our investor website, which is investors.power.com. Thanks again and good afternoon.

This concludes today's conference call. Thank you for attending. You may now disconnect.