Good afternoon. My name is Cathy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Power Integrations First Quarter Earnings Conference 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. And Joe Shiffler, you may begin your conference.

Thanks, Cathy. 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, 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, which are discussed in today’s press release and in our Form 10-K filed with the SEC on February 07, 2022. This call is the property of Power Integrations, and any recording or rebroadcast is expressly prohibited without the written consent of Power Integrations. And one additional note before I turn it over to Balu; we plan to host an Investor Day on September 8 in New York. More details will be coming soon, but please do save the date again; that's September 8 in New York. Now, I’ll turn the call over to Balu.

Thanks, Joe, and good afternoon. 2022 is off to a great start for Power Integrations, with another quarter of record sales, strong earnings growth, and healthy cash flow. Our growth continues to be fueled by share gains and increasing dollar content across a broad range of applications, including appliances, advanced chargers for smartphones and notebooks, and a diverse set of industrial applications, including utility meters, battery-powered tools, and home automation. New growth vectors, like our highly integrated GaN ICs and our BridgeSwitch motor drive products, will make a significant contribution to our top line this year, and we are making good progress on our automotive initiative, a key piece of our roadmap to doubling our addressable market over the next five years. While market share gains are mainly attributable to the strength of our product portfolio and the impact of secular trends like energy efficiency and advanced charging, we also continue to capitalize on industry-wide supply challenges in multiple ways. First, competing products require far more external components than our IC. Integration has always been the core of our value proposition, bringing reliability, ease of use, and time to market. In today's supply environment, integration has the added benefit of eliminating components that are difficult or more expensive to obtain. Second, our ability to deliver parts in a timely fashion has enabled us to win against competitors that have struggled to deliver or have chosen to allocate capacity to other applications. Our superior delivery performance is enabled by our unique fund remodel, recent capacity additions, and our efforts to shift to true demand. We even sustained our delivery performance despite disruptions at some foundry locations following recent earthquakes in Japan, thanks to our strong inventory position and our practice of sourcing most products from multiple locations. Our operations team has also successfully navigated a variety of logistical challenges arising from China's lockdowns. Our ability to supply parts has been especially impactful in the appliance market where we have expanded our share of AC to DC power supplies, and our entry into motor drives has been aided by the scarcity of incumbent solutions like integrated power modules. Last year's new efficiency standards for air conditioning in China are providing an additional tailwind for our motor drive products, as is a new incentive program in India designed to accelerate the transition to brushless DC motors in ceiling fans. We expect our brushless IPs to be in mass production this year with at least 10 customers, and we have a strong pipeline of designs that will enable us to grow this new revenue stream in 2023 and beyond. Another important growth vector is our proprietary GaN technology, which is tightly integrated into our power conversion ICs and utilized in complement products like Minicab and Clamp Zero, which reduce the size of input capacitors and transformers, the bulkier components in the power supply. We were the clear market leader in high-voltage GaN products last year, and Q1 was another strong quarter in terms of shipments and design wins. Wins included multiple designs for notebook pieces and several multipurpose aftermarket and OEM branded chargers, including dual-port USB PD chargers for a major cell phone and notebook OEM. We also won a range of industrial and appliance designs demonstrating the expanding use cases for GaN beyond mobile devices. We expect GaN to replace silicon across a broad range of power supply markets in the years ahead, and the technology features prominently in our roadmap as we look to double our addressable market over the next five years. Our newest GaN product is HiperPFS-5, the fifth generation of a highly integrated power factor correction ICs and the industry's first power factor IC to incorporate a GaN switch. Power Factor Correction or PFC is required in most power supplies about 75 watts and is implemented as a separate stage of power supply prior to the main power conversion stage. Thanks to the efficiency of GaN switches, HiperPFS-5 implements PFC without a heat sink in applications up to 240 watts, including game consoles, e-bikes, power tools, and high-power adapters for PCs and mobile devices. The new IC can be paired with any through the DC ICs for the power conversion space, including GaN-based InnoSwitch 4 ICs or the new HiperLCS-2 for the more efficient resonant mode conversion needed at higher power levels. Introduced last month alongside the new power factor chip, HiperLCS-2 illustrates an important difference between Power Integrations and competitors offering a single technology in the form of discrete transistors. We are the only company focused on complete system solutions for the power conversion market, and we have developed a portfolio of switches and controller technologies, system topologies, isolated communication techniques, and proprietary IC packages, all designed to work together to enable customers to build the world's best power converters. As we develop products for different segments of the market, we can integrate these elements in whatever combination works best. For example, we designed our HiperLCS-2 product with a proprietary cost-effective silicon switch known as Threat to achieve the optimum balance of efficiency and cost in resonant topologies. This follows our recent introduction of a 1700-volt version of our InnoSwitch products incorporating a silicon carbide cell system, making it ideal for EV power supplies in 800-volt systems. We now offer InnoSwitch products with silicon, GaN, and silicon carbide options, giving customers a level of flexibility that no one else can provide. The ability to mix and match technologies in this way is unique to Power Integrations and provides us a significant competitive advantage. A couple of final notes before I turn it over to Sandeep; first, we recently published our 2021 sustainability data, including our estimated energy savings generated by our EcoSMART technology, which drastically reduces energy consumption from electronic products in standby or idle mode. This includes products like appliances, computers, and TVs when they're not in use, or adapters left plugged into the wall outlet after charging a device. This technology has been included in all of our power conversion ICs since 1998, and we have shipped more than 18 billion ICs with EcoSMART technology over that time. This proprietary technology saves power without any effort on the part of the end user, and it helps our customers meet a broad range of regulatory requirements around the world. Last year alone, we estimate that our customer technology saved roughly 15 terawatt hours of electricity, impacting almost two million homes for the entire year. And this is just one way our products contribute to a lower carbon future. Our GaN technology offers a dramatic increase in active mode efficiency over silicon markets, and our gate drivers are widely used in carbon-saving applications like solar and wind power, high-voltage DC transmission lines, and electric locomotives. We also have a huge opportunity ahead of us in EV drive trains, and we'll hit another milestone in that effort next month when we introduce a new line of gate drivers specifically targeting the EV market. Finally, I'd like to acknowledge an important figure in the history of our company, Steve Sharp, who will step down from our board of directors at our Annual Meeting next month. Steve is a co-founder of Power Integrations, and we would not be here today had he not recognized the potential of the innovative process technology that served as the foundation of the company. In fact, Steve was such a believer in the technology that he left his venture capital role to help start the company, serving as an interim CEO in its earliest days. He figured prominently in the glory days of the Silicon Valley semiconductor industry, helping start several other prominent chip companies, including Track, where he served as a CEO for more than a decade. We thank Steve for his enormous contributions to our company and to our industry, and we wish him the best as he retires from the board.

Thanks, Balu, and good afternoon. Our Q1 results featured solid revenue growth against a difficult comparison, strong earnings growth driven by continued margin expansion, and very healthy cash flow. We have also taken advantage of market volatility and the turbulence caused by our promotion to the S&P midcap index to buy back a substantial amount of stock, which will provide meaningful EPS accretion in the coming quarters. On a year-over-year basis, total revenues for the March quarter were up 5% to $182 million. Consumer, industrial, and computer revenues each grew in the mid-twenties, reflecting broad-based market share gains. While communication was down nearly 30%, reflecting last year's strong first quarter. As you may recall, cell phone OEMs bought aggressively in the early part of 2021, as they sought to take advantage of Huawei's supply chain challenges, resulting in an inventory overhang that lasted through the duration of the year. The improved inventory situation is reflected in the sequential growth numbers for the March quarter, with the communication category rising nearly 20% from the prior quarter, driven by new design wins. The computer category also increased sequentially, growing high single digits, driven by monitors, notebooks, and server standby power. Consumer revenues increased mid-single digits sequentially on continued strength in appliances and air conditioning, while industrial revenues ticked down modestly. Total revenues were up 5% on a sequential basis. Revenue mix for the first quarter was 35% consumer, 29% industrial, 26% communication, and 10% computer. While the strong sequential growth in communication resulted in a less favorable mix, non-GAAP gross margin, nevertheless expanded for the fourth straight quarter, rising 120 basis points to 55.7%. The primary driver of increase was manufacturing efficiencies, including improved test times and yields, as well as the supportive pricing environment. Non-GAAP operating expenses for the quarter were $40.8 million, in line with our forecast and up $2 million from the prior quarter, reflecting increased headcount, the resumption of FICA, and the impact of holiday shutdown in the prior quarter. Non-GAAP operating margin for the quarter was 33%, and non-GAAP earnings were $0.93 per diluted share, up 22% from a year ago. Weighted average diluted share count for the quarter was $60.1 million, down 1.3 million shares from the prior quarter. We repurchased 1.6 million shares during the March quarter for $135 million. We have bought back an additional 900,000 shares thus far in April, utilizing most of the $83 million that remained on our authorization at quarter-end. In total, we have bought back nearly three million shares since November, offsetting most of the roughly four million shares dislodged from index holders on our promotion to the S&P 400 in December. Our board has allocated an additional $75 million to the buyback, reflecting continued confidence in our growth prospects and cash flow generation. Cash flow from operations in Q1 was very strong at $75 million. In addition to the buyback, other uses of cash included $15 million for CapEx and $11 million for dividends, following the 20% dividend increase in the March quarter. Cash and investments on the balance sheet fell by $86 million during the quarter to $444 million. Internal inventory ticked up by one day to 115 days, inching closer to our desired level of 125 days and enabling us to continue leveraging our delivery performance to win market share. Inventory in the distribution channel rose to 7.1 weeks from 6.3 weeks in the prior quarter. Looking ahead, we expect revenues for the June quarter to be $190 million plus or minus $5 million. We currently have backlog coverage to the midpoint of this range. I expect non-GAAP gross margin to improve again in Q2, driven by a more favorable end-market mix, reflecting weaker demand in the smartphone market relative to appliances and industrial. Also contributing to the higher margin in Q2 is the stronger dollar versus the Japanese yen, which favorably affects costs. Specifically, I expect Q2 non-GAAP gross margin to be between 56% and 56.5%. I do expect higher wafer prices and other cost pressures to flow into the P&L as the year progresses, resulting in a tapering down of gross margin in the second half. However, a near-term outlook for gross margin has clearly improved, thanks to a combination of factors, including manufacturing efficiencies, the stronger dollar, the pricing environment, and a richer mix. Non-GAAP operating expenses should be $44 million plus or minus $0.5 million. The sequential increase reflects annual Medicare increases, our accelerated investments in R&D, as well as the expansion of our sales force to capitalize on our momentum in the market. The non-GAAP effective tax rate for the second quarter and the year should be between 9% and 10%, and I expect diluted share count for Q2 to fall by about 1.5 million shares compared to March. And now, operator, let's begin the Q&A session.

And our first question will come from Christopher Rolland of Susquehanna.

Hey guys. Thanks for the question and congrats on the quarter. I guess my first question is any thoughts on how the end markets kind of progressed from here or even kind of force rank the various segments into next quarter as well? Just any thoughts there would be great.

Well, we all know that there are a lot of things going on around the world. We have the war in Europe, lockdowns in China, and, of course, higher fuel prices and overall inflation. But for Q2, as we mentioned, we have backlog to the midpoint of our guidance already. And so we really have to wait till the end of Q2 to see what the sell-through is like, and that will tell us how things would turn out in Q3 and Q4. We have had some cancellations in the cell phone area for all the reasons people know. The cell phone market has been weak as a whole, and so as a result, the orders have moderated and we've had some cancellations, but that's all taken into account in our guidance for Q2. What we don't know in the second half is whether there will be an overall demand reduction due to macroeconomic issues. We just have to wait and see how that turns out. So, the cell phone outlook is well understood to us. What we don't understand is the impact of any slowdown fueled by the war in Europe, lockdowns, and inflation.

Great, thanks for that. And then secondly, you guys talked about this tight market and how you guys are beneficiaries of integration, for example, but also just having capacity. If we were to see a slowdown in the second half, do you think these share gains that you've taken, like, for example, in motor controllers or something like that, do you think that's going to be sticky or do you think you’ll give some back to competitors that are maybe more aggressive on pricing or something like that?

That's an excellent question. I believe that our products are so attractive that we would have gained our share over time anyway. What has happened is thanks to the supply issues with our competitors, the share transfer or share gains are happening at a very accelerated pace. But once we achieve those share gains, we really don't believe they'll go back because the attractiveness of integration, efficiency, and lack of heat sink are reasons why current customers will remain with us. So, we are feeling very good about these being permanent share gains.

Awesome. Thanks, guys.

Our next question will come from Matt Ramsay of Cowan and Company. Mr. Ramsay, your line is open. And hearing no response, we'll move to our next question from David Williams of The Benchmark Company.

Hey, good afternoon, and congrats on another really solid quarter.

Thanks, David.

Yeah, just wanted to maybe dig in a bit on the industrial side. It was off a little bit sequentially, just kind of curious if there was anything in particular from the industrial perspective that might be either shifting around or moving a bit.

Not really. If you look at it year-over-year, it grew something like 25%, 26%. So that shows how well it has done. There are some cyclical issues where industrial is usually weaker in Q1, but we are actually growing our share very nicely in many areas like IoT, power tools, and so on. So there is nothing to be concerned about industrial. I think it'll grow very nicely this year along with computer and consumer segments. The only one that is not clear is the cell phones, because it's down across the board. Although some of our OEMs are doing better than they projected, while others are performing much worse than anticipated.

And then maybe just from the ongoing China and the COVID lockdown. I know you talked about this a bit on the call already, but is there anything that you're seeing there maybe from a supply or a demand side that you think is going to be impactful in the second quarter, maybe even the third quarter? Just, how do you think about China in general here, just given the volatility and the lockdowns?

The lockdowns, surprisingly, didn't affect our ability to sell to our customers. We don't have any major customers in the Shanghai area. The Shenzhen lockdown was relatively short-lived, and other areas have not impacted us. What it did do was complicate our logistics. When Shanghai airport shut down, we had to find ways to get our products to our assembly plans through other channels. In some cases, we have to track it to the next available airport. But those were all very well-managed by the company. Our team did a fantastic job. It had really no impact on our ability to supply products to our customers. Now, as far as we know, our Chinese customers are not directly impacted by these shutdowns regarding reduction in activities. What we don't know is the secondary effects of this shutdown, and only time will tell what happens. If people have to stay at home for so long, they are not going to buy anything, certainly not cell phones or appliances. On the other hand, if there is a reduction in demand, it might be temporary, because they just have to navigate the situation the country is in right now. Once the lockdowns are lifted, demand should come back. At least that's our thinking.

Excellent. Thanks so much. And one last one, if I can real quick. From a compute standpoint and the volumes, there's a lot of discussion there about what the volumes could be this year, but we're hearing of a better mix into the enterprise and maybe pro-consumer type applications. Are you seeing something similar? And then, is there any way to kind of parse out your potential dollar content as we think about the higher-end versus the mid or lower-end units?

Just to clarify, when you say computer, you're talking about the computer market. The good news for us in the computer market is we have such a low share of the notebook market. It almost doesn't matter what the overall market is doing because we have a lot of room to grow, and we expect computer to be a very strong growth segment this year for us. We have already won a number of notebook designs going into production as we speak, and we are a fantastic fit for notebooks. Our dollar content is very high because many of them must use GaN, and many of them are multi-port, which also means multiple devices. It's not just our InnoSwitch power conversion device. We can also sell Minicab to reduce capacitor size and Clamp Zero to decrease transformer size. So, if they use all of these products, you’re talking multiple dollars of content. It's quite an attractive market for us, and it's a very good fit for our technology and products.

Thanks again. Certainly appreciate the help.

You're welcome, David.

Our next question will come from an analyst at Deutsche Bank.

Hi, this is Gunjan asking on behalf of Ross Seymour. My first question is you had a great upside to gross margin, both in the print and the guide. Could you talk about what were the drivers here? How much was pricing versus manufacturing efficiencies, and then I'll ask my follow-up.

Manufacturing efficiencies have significantly contributed to our performance. While I can't quantify every aspect, our pricing strategy focuses on value pricing, especially as we eliminate various discretes. The increase in our Q2 margin is partly due to a yen benefit. However, it's important to note that there is a timing difference between this benefit and the rising input costs. We have already experienced some cost increases, and further impacts are anticipated in Q3 and Q4. The market is quite dynamic, but the positive aspect is that our efficiencies have been beneficial, allowing us to avoid price declines typically necessary to counteract cost rises. As Balu mentioned earlier, the mix in the cell phone market is evolving from what we expected at the year's onset. Looking ahead, it is more challenging to predict, but we anticipate that growth in the cell phone segment will be more difficult, while we expect the other three areas to drive growth and yield better margins.

Thanks. And to follow up on that, you have been now at the high end of your long-term gross margin range. Given that and what you're modeling, do you expect one, your prior target of a 53% to 54% range for the full year to be increased, and is this going to be the new baseline going forward, long term?

It's a good question. So for this year, again, it depends on what's going to happen in the second half, which Balu mentioned is hard to predict. Typically, what happens in Q3 is air conditioning also tends to taper off. So, along with the pricing pressures, you will see the mix also have a little impact. As a result, in the third and fourth quarters, as I mentioned in the script, margins will taper down from Q2. The best I can model right now for the year for non-GAAP is around 55%. Again, the mix can really change that, and the volumes can impact that. But my modeling tells me something around 55% for the year could be slightly higher. As far as our model, our model is going to remain in the 50% to 55% range, though I think we will be tapering more towards the higher end of that model in the near term. We have changed our operating margin model, which used to target low twenties, but we've adjusted that to 25% to 30% because of the inherent leverage we have in our model. So, I think you should think about our gross margins in the 50% to 55% range, although expect to see we’ll taper back as we look ahead towards 30%.

Thank you.

We will now go to Tore Svanberg of Stifel.

Yes. Good afternoon. This is Jeremy. A quick question on, in terms of the backlog coverage for the current quarter. Am I correct in understanding that you have its fully covered in backlog as of now?

Yes, that's correct to the midpoint.

To the midpoint, right? So if there are additional terms orders, is it possible to have some upside in that situation?

Yeah, that's a good question. Surprisingly, because of the supply situation, people are booking orders way ahead. So our turns business is relatively small. It's actually very small compared to what it used to be, and we also have to assume there could be some push-outs. In fact, we have seen that in every quarter, so looking at the turns business and considering possible push-outs, it just washes out. That's why we are saying $190 million at the midpoint, even though we are fully booked to that.

And as Balu indicated earlier, we also have a lot of uncertainty with the cell phone business and how some of our Chinese OEMs are exposed to the Russian market, which is impacting business. Therefore, we have to factor all of this, and based on that, we feel the pluses and minuses are reflected in the guide we've given.

And just to follow up on that, if there’s some shifting in terms of some people pushing out orders and others wanting to take orders to absorb those shifts, how fungible is the inventory whether it's cell phone manufacturers from one to another? Can you give us any color on that?

One of the things we have done very well, especially compared to other companies I’ve heard of, is that we are very careful to shift to real demand. We monitor distribution inventory; by the way, 75% of our revenue could go through distribution. So, we don't ship unless they are shipping through. We don't want to distribute our inventory everywhere. This way, the inventory is all in one place, with us, so we can serve all of our customers well, and we have also talked to the OEMs, the end customers, and discussed this with them; they have been very cooperative and want to ensure they have supply. So, they tell us they don’t have much inventory. Therefore, we are reasonably sure, especially in appliances, that there's very little inventory at our customers. Cell phones are a little more dynamic because their demand is changing as we speak. Some of them might have some inventory, but overall, I would say there is very little inventory at the end customer. There is reasonable inventory at the distributor, as you can see; they come within our range of seven to eight weeks, although they're on the low end of that range. So they can serve the market well as long as they're in the seven to eight-week range. We keep the remaining inventory and don't ship it to distributors unless we know it's going through.

Thank you. For my second question, could you provide more details about your new automotive-qualified switching IC that includes the integrated silicon carbide MOSFET? I'd like to gain a better understanding of that product, as it appears to be very interesting.

Yeah. This particular one is not our own technology. The volumes are not high enough for us to do it all, although we could do that sometime in the future, but for the foreseeable future, we just outsource that particular technology.

Great. And in terms of potential for seeing this in production, I understand automotive tends to have long development cycles, but EVs can sometimes see a little bit acceleration. Do you have a sense of how soon this could see market adoption?

Good question again. It depends on the application you're in. If you are a gate driver in an inverter for the main motor, that has a four- to five-year design cycle because it becomes a safety component. But this particular product goes into what's known as an emergency power supply, which has a shorter design cycle. In fact, we got a major OEM design win that has entered production. This uses our silicon-based InnoSwitch because it's a 400-nut bolt battery. As for this silicon carbide-based InnoSwitch, which is for 1700 volts, used with 800-volt battery, we are actually engaged with another major OEM, and the design is in process. It's very possible we could get that design in and into production in something more like a two-year timeframe rather than a four-year timeframe, simply because that item is less stringent from a safety point of view.

Very good. Thank you very much.

It seems there are no additional questions. I will now pass the conference back to our presenters for any final comments or closing thoughts.

All right. Thanks, Cathy. Thanks, everyone for joining us on a busy earnings afternoon. There'll be a replay of this call on our website, which is investors.power.com. Thanks again, and good afternoon.

And this does conclude today's conference call. You may now disconnect.