Good afternoon. My name is Joanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Power Integrations Second 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. Now I'll turn it over to Joe Shiffler.

Thanks, Joanne. 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. Before we get started, I'd like to remind everyone that we will be hosting an Analyst Day on September 8 in New York. Details on a registration link for either in-person or remote attendance can be found on our Investor website, which is investors.power.com. I'll also mention that 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, net other operating expenses of $1.1 million related to a patent litigation settlement and an offsetting recovery from the liquidation of SemiSouth Laboratories 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 7, 2022. Finally, this call is the property of Power Integrations. And any recording or rebroadcast is expressly prohibited without the written consent of Power Integrations. Now I'll turn it over to Balu.

Thanks, Joe, and good afternoon. Our second quarter revenues were up 2% year-over-year to $184 million, which was slightly below our guidance range. Nevertheless, our non-GAAP earnings per share grew 24% year-over-year to $1.03 driven by a significant expansion in our gross margin. On last quarter's call, we acknowledged the emerging concerns regarding the near-term demand environment. And we noted that we had begun to see cancellations and lower forecasts from smartphone customers negatively impacted by COVID lockdowns and the conflict in Eastern Europe. The weakness in the smartphone market has been confirmed by many of our peers this earnings season and had a greater-than-expected impact on our Q2 results. Revenues from our communications category were 30% lower sequentially and driven entirely by Chinese handset customers. Revenues from other smartphone OEMs were up slightly from the prior quarter. Softness in the computer category was also evident but was cushioned by recent share gains in notebooks, resulting in a modest decrease of about 5%. Industrial revenues increased about 20% sequentially, while consumer revenues are up high single digits though distribution sell-through lags sell-in across both categories. Chinese appliance customers were a particular source of weaker sell-through in the consumer category. While domestic demand in China is reportedly seeing an uptick following the easing of lockdowns, our third quarter revenue outlook calls for a 10% sequential decline at the midpoint, reflecting inventory builds at customers and distributors. Our outlook also reflects macro headwinds affecting the broader demand environment as evidenced by the broad-based slowdown in distribution sell-through. Those who have followed us for a while know that changes in demand conditions typically affect us earlier than most of our industry peers. You also know that we have historically been among the first to come out of the downturn and that we manage our inventory and supply chain to maintain foundry capacity and to be prepared for the eventual upturn. As in past downturns, we will maintain our focus on long-term growth, continuing to invest in products and people rather than managing to short-term operating metrics. We remain as excited as ever about our future, thanks to the expanding portfolio of leading-edge products we are bringing to the market and the broad secular trends enabling us to expand our SAM. These include the electrification of tools and transportation, home and building automation, renewable energy, advanced mobile device charging, and the conversion of brushless DC motors in appliances. We are attacking the latter opportunity with a comprehensive solution, including our BridgeSwitch motor ICs and our Motor-Expert software suite. Motor-Expert includes not only design tools but also control software to drive both single and three-phase motors to optimize motor performance and minimize system cost. Integration is no longer strictly a function of hardware, but a combination of hardware and software to provide comprehensive protection and preventive maintenance features. The simplicity of BridgeSwitch architecture, combined with our Motor-Expert software, enables rapid design cycles, a capability that has been especially powerful in recent months with many customers forced into sudden redesigns due to competitor supply shortages and changes in efficiency regulations. Our current BridgeSwitch product range addresses motors up to 400 watts, a market opportunity of $0.5 billion, encompassing applications such as refrigerator compressors, water pumps, range hood fans, air conditioning fans, high-speed hair dryers, and ceiling fans. New efficiency regulations in India are having a significant impact on ceiling fans, which is a sizable market in that country. We recently received our largest BridgeSwitch order to date from a customer providing motors and electronic control solutions to ceiling fan OEMs serving the Indian market. We're also seeing strong traction at a broad range of major appliance customers where we already have deep relationships, thanks to our leading market position in AC to DC power supplies. In all, we expect to have about a dozen customers in production this year with BridgeSwitch, and that number is set to expand dramatically in 2023. We are equally excited about our progress in the electric vehicle market, where the need for high-voltage semiconductors is creating significant opportunities for Power Integrations. Our automotive-qualified InnoSwitch products are rapidly gaining acceptance from customers in the U.S., Europe, Korea, Japan, and China, particularly the new 1,700-volt version with a silicon carbide switch designed for use in next-generation 800-volt vehicles. Our strategy in automotive is to land and expand. Our power supply products establish a presence at customers and are quickly being adopted as platform solutions, enabling us to then gain access to higher value opportunities such as gate drivers and drivetrain inverters. We are targeting not just passenger vehicles but also commercial and industrial vehicles such as buses, trucks, mining, and construction equipment, where the available dollar content per vehicle is in the hundreds of dollars. In May, we launched our SCALE EV board-level gate drivers targeting heavy vehicles. SCALE EV drivers are rated at 1,200 volts to address both 400- and 800-volt systems and are capable of driving IGBTs as well as silicon carbide MOSFET modules. Automotive is shaping up to be our largest addressable market opportunity as the EV market continues to grow and we expand our portfolio of automotive-qualified products. While long design cycles will result in a gradual revenue ramp over the next few years, we expect to be in production this year with several customers, and we are rapidly expanding the funnel of design opportunities. Finally, we continue to make great progress penetrating the market with our highly integrated GaN products, including InnoSwitch, MinE-CAP, and ClampZero, as well as the recently introduced power factor chip HiperPFS-5. We won a wide range of GaN designs in Q2, including a 65-watt multipurpose USB PD charger for a Chinese handset and notebook OEM and aftermarket designs spanning from 33 to 120 watts. We also noted the introduction of a compact dual-port GaN charger offered as a multipurpose accessory and an inbox notebook charger by a leading personal electronics OEM. In summary, while the near-term demand environment is challenging and uncertain, we have a playbook that has served us well in past economic cyclical downturns. We intend to follow it again here, focusing on winning market share and bringing innovative products to market so we can come out stronger at the other end. Sandeep?

Thanks, Balu, and good afternoon. While our Q2 revenues were below the range, reflecting the downturn in demand, we nevertheless had an excellent quarter from an EPS and cash flow standpoint driven by a strong gross margin and lower-than-expected operating expenses. We expect gross margin to remain above the high end of our target range for the next several quarters, thanks to favorable mix and manufacturing efficiencies and the strength of the dollar versus the yen. As in past downturns, we are tightening our belt on spending, but we'll continue to invest in the people and products we need to sustain our long-term growth. I will now quickly run through the key numbers for the June quarter and touch on the outlook before we begin the Q&A. Revenues for the quarter were up 2% year-over-year to $184 million. Revenues from the communication category fell nearly 50% from a year ago, reflecting the recent weakness in smartphones but also the unusually strong demand in the first half of 2021. Computer revenues were up 15% year-over-year driven mainly by notebooks. Consumer revenues were up mid-20s driven by appliances, while industrial revenues increased nearly 40% year-over-year, with strength in a number of verticals, including home and building automation, metering, high-power, and broad-based industrial. As Balu noted, however, sell-through did lag sell-in across all end market categories. Revenue mix for the second quarter was 38% consumer, 35% industrial, 18% communication, and 9% computer. The higher-margin industrial and consumer categories accounted for 9 percentage points more than in the prior quarter, driving non-GAAP gross margin up to 58.5%. Non-GAAP operating expenses for the quarter were $42.1 million, below our forecast, reflecting a smaller-than-expected increase in headcount. Non-GAAP operating margin for the quarter was 35.6%, and non-GAAP earnings were $1.03 per diluted share, up 24% from a year ago. Weighted average diluted share count for the quarter was 58.3 million, down 1.8 million shares from the prior quarter. We repurchased 1.9 million shares during the June quarter for $158 million. In total, we bought back about 6% of our shares since November, taking advantage of market volatility as well as the dislocation caused by our promotion to the S&P MidCap Index late last year. Cash flow from operations in Q2 was $67 million. In addition to the buyback, other uses of cash were $13 million CapEx and $10 million for dividends. Cash and investments on the balance sheet fell by $116 million during the quarter to $328 million. Inventory in the distribution channel rose to 11.6 weeks at the end of the June quarter, reflecting the weaker sell-through. Internal inventories rose to 132 days, up 17 days from the prior quarter. As we have said many times before, we are comfortable allowing inventories to rise well above our target level during a downturn as we did in the earlier months of the pandemic when we went as high as 178 days. We can do this because we have virtually no obsolescence risk with the vast majority of our products, thanks to the long life cycles and fungibility across customers and applications. Building wafers during periods of slack demand ensures continued access to foundry capacity, which gave us a tremendous competitive advantage throughout the period of supply and demand imbalance over the past 1.5 years. Looking ahead, we expect revenues for the September quarter to be $165 million, plus or minus 5%. We currently have backlog coverage within this range. I expect non-GAAP gross margin for Q3 to tick down slightly to about 58%, reflecting the seasonal slowdown in air conditioning, which will result in a slightly less favorable mix. Non-GAAP operating expenses for the third quarter should be approximately $42.5 million, essentially flat compared to the June quarter. In light of the weaker demand environment, we have trimmed the expense budget for the second half of the year and now expect full-year non-GAAP expenses of around $170 million rather than the prior expectation of about $177 million. The non-GAAP effective tax rate for the third quarter should be approximately 10%, and I expect diluted share count for Q3 to fall by about 0.5 million shares. And now, operator, let's begin the Q&A.

Your first question comes from the line of Christopher Rolland with Susquehanna. Your line is open.

Hey guys, thanks for the question. I guess maybe for Sandeep. You seem to have a great macro crystal ball. And you guys have talked about going in and seeing some of the weakness earlier in some of these semi cycles and seeing them earlier on the way out as well. I guess can you talk about maybe where the weakness is, obviously mobile, but where are the parts that have gone into weakness? Where are the parts that are still stable? Would you expect them to go in? And then it's probably too early to be calling anything coming out, but maybe your best guess at this point as well?

Chris, I think as you heard from our script that the China handsets is really where we really saw quite a bit. But the other area that we are watching, and we have talked about in the past, that with the housing issue that is happening, the inflation factor, and all that has a big thing. And obviously, the war has also had an impact. So I think we've been calling this for a bit, and we're seeing it now. The good part for us, however, as we have said in the past, is we've had tremendous share gains. And we typically see this about a quarter or so earlier than others, but we also come out of it much stronger, as we have done in the past. How long the cycle lasts is very difficult to tell because the number of factors that are very different this time is not only the macro situation, but inflation factors and the war, which are adding more complexity. Cycles in the past, and you've heard other people talk about this, I had another company which I read talked about that they'll see the inventory adjustment take two to three quarters. It's hard to predict. This is the reason we had cautioned about the sell-through in our last call, and that caution seems to have come through. The part I think I'd like to leave with is, irrespective of this, we've had tremendous share gains. We feel very good, and we've got some very great products coming out. We feel we're going to come out of this much stronger.

Fantastic. And then also, gross margins held up pretty well through all this. I think some of that was a function of mix, maybe some currency on the yen side that you guys were helped by. But any other factors in there? And then lastly, if you could maybe force rank strength or weakness to that 10% for your verticals next quarter if there's some standout verticals there? Thank you.

I believe margins have been positively influenced by our product mix. However, I expect margins to remain strong due to the ongoing slowdown. Inventory levels have increased, and the cost rises I mentioned for the second half of the year, particularly in Q4, are likely to be deferred to next year. Consequently, we anticipate similar margins for Q3 and Q4. Looking ahead to next quarter's revenue, we may see a decline in communications and consumer sectors, while the computer segment should perform slightly better. The industrial sector is also expected to see a modest decrease. Overall, all three categories will likely experience a decline, with consumer being affected more significantly due to reduced air conditioning demand and the general macroeconomic situation, especially the impact from China.

Your next question comes from the line of Tore Svanberg with Stifel. Your line is open.

Yes, thank you. First question is on channel inventory. Looks like we've gone from six weeks to 12 weeks in about two quarters, a pretty steep increase. So obviously, sell-through has weakened quite significantly. I was just wondering if you're starting to see any signs of stabilization. That was a weird question, right? Because obviously, you're guiding down for Q3. But since you tend to see these things early on, I'm just wondering if you have an opinion about when you expect to start to see some stabilization in the channel?

Yes. Firstly, I believe the increase in channel inventory is due to the abrupt decline in demand. Both our customers and the industry were unprepared for this change. They ensured they had sufficient inventory in case of a quick recovery post-lockdowns, which ultimately did not occur. Another factor is that if sell-through is low, it reduces the denominator, making it appear as though the number of weeks of inventory is greater for the same revenue or inventory levels. Therefore, interpreting the number of weeks becomes challenging under these circumstances. Regarding demand, we now recognize that there is inventory at both our customers and distributors, and it will take time for this stock to deplete. We are noticing some positive signs in Chinese cell phone demand, but we won’t see the benefits until the inventory is fully cleared. The duration of this inventory depends on the demand, and we believe there’s a good chance it may be depleted by the end of this year. Depending on when orders resume, we could see an early pull-in from Q1 due to the earlier Lunar New Year this time around. It’s difficult to predict exactly when demand will return, but I don’t expect it to bounce back in Q3. A small recovery may happen in Q4, based on inventory levels. Overall demand will depend on macroeconomic factors, and there are clear global challenges related to inflation, as well as specific issues in China due to slowing GDP growth and the impact of lockdowns on demand, which we anticipated would rebound but has not yet done so. However, there is a possibility for a recovery in Q3 or Q4, though we remain cautious about the macro demand trend slowing down.

That makes a lot of sense. And a question on gross margin, and I understand the drivers near term. But I'm just thinking a little bit longer term. I know you have a target of 50 to 55. You're obviously quite a bit above that. And I know the mix is going to change around from year to year, but Sandeep or Balu, I mean, is there a chance that your gross margin will stay at least at the higher end of the range for the intermediate term as we go through this period of weak yen and mix benefit and so on and so forth?

It's a good question, Tore. I think if you're talking near term at next year, obviously, the mix is the wild card. And you know how that can change. But I still believe that with the new products like BridgeSwitch and others, the mix will still lean more towards our richer margins. Now with the macro, obviously, since we do value pricing, I don't know what the macro environment will be there, and that can have an impact. But obviously, the increase in wafer costs coming in next year would be a headwind, but the yen is definitely a tailwind. Putting all this together, if I have to take a gut feeling, I believe we will still be slightly above the high end of the range for next year.

Great. And just one last question. The communications business has been correcting for a while now. And it's obviously gotten to much lower levels than what it was perhaps. I think the peak was Q2 of last year. And I know that in this segment, you do have some offset. You're starting to see some more share gains, you're starting to see higher ASP products. So I'm just wondering at what point do you start to benefit from those higher ASPs even though the units could perhaps be flat to down?

We are already benefiting from that in spite of the fact that there is softness in terms of units, on a relative basis, the dollar value is higher for us even though units are lower. And also remember that the softness is almost entirely in the Chinese side of the business as cell phones. Outside of China, our business is actually doing well. It's actually increasing. So it's a share change, if you will, between major companies. We do have significant exposure in China because China has been very aggressive in adopting faster charging. And we have significant shares in two of the largest companies in China. Overall, worldwide, we have a very high share of the top four OEMs out of five. But again, the most of the challenge is in China. We are actually benefiting from the non-China customers growing.

Sounds good. Thanks again and really appreciate all the candid comments. Thank you so much.

You're welcome, Tore.

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

Hi guys, thanks, let me ask you a question. I just had a question about the consumer and the industrial areas. I think everybody knew that the communications business and China handset specifically were weak. So while it was weaker than we expected, it wasn't necessarily directionally surprising. But the consumer and industrial areas are two areas, probably in that order, that people are increasingly concerned about having somewhat of a similar impact over the next couple of quarters as macro weighs on those just a little bit later. So I know you talked about the AC market in China impacting consumer a little bit more than the down 10% for the average of the total company in 3Q. But just talk about any concerns you have on later-stage weakness in those areas, anything beyond the HVAC weakness in China, et cetera?

So until now, I would say China is the only one that has been impacted. But on the longer run, we are concerned about the overall inflation and the potential impact on GDP across the world. But I would say the significant concern right now is in China for multiple reasons. One is their real estate market is incredibly weak. As you know, the government is against any speculative purchase of real estate. In China, until you actually buy the house, you don't put the appliances in. To that extent, there are headwinds in terms of appliance demand in China. Now I must say that not all the stuff we shipped into China actually gets used in China. A large portion of it comes out of China. Until now, the demand in other geographies has been very, very stable, I should say. But we are cautious about longer-term impact across all geographies.

Ross, this could obviously impact the shorter term, but the market share gains that we have gotten over these last 1.5 years with the ability to supply the innovative products that we have, I believe when this thing turns, we will still come back very strong in this segment.

Got it. And what about the industrial side? Most of that China side, I assume you were referring to the consumer aspect. What about industrial for you guys? Same general question.

In the industrial sector, we have performed exceptionally well. Year-over-year for Q2, our sell-through grew by approximately 25%. We experienced even more growth on a sell-in basis. However, our inventories increased in Q2 across all markets, including industrial. Overall, we are doing quite well in industrial. The health and beauty segment is thriving, and high-power products are showing a strong comeback after being relatively flat. We are witnessing significant growth in high power, utility meters are performing well, and power tools are also seeing great success. While industrial is doing well on a relative basis, we remain somewhat cautious about the overall macroeconomic environment across all markets.

Got it. And then my second question or maybe my third, sorry for that, is back on the disti channel side of things. Is the predominance of that in the communications area? And how should we think about your expectations for that channel inventory underneath the guidance that you gave in 3Q? Are you expecting to take it down in a decent step and the size of the guide down maybe $20 million sequentially as we look into the fourth quarter, if you think the inventory burn is going to last until then, is that kind of the same sort of bogey that we should think about as you try to normalize the channel inventory by the exit of the year?

As I mentioned, the sell-through across all categories was weak, and none particularly stood out in Q2. Regarding inventory levels, I don't expect them to decrease much in Q3, but I anticipate a reduction in Q4. This is partly because our end customers also hold inventory that they need to clear before replenishing from distributors. This is especially true for cell phones, as they tend to have chargers in stock before the phones arrive. Consequently, they consistently have some charger inventory and were caught off guard by the rapid decline in demand. For instance, in April, a cell phone company executive urged us to increase shipments, but by May, the same company realized they had excess inventory and anticipated a recession, opting to cut inventory by half. This sudden shift means we won't see business for a while. I recall how aggressively they were pushing us for more shipments, while we were trying to balance demand. It's important that they retain some inventory because they need chargers to complement the more expensive phones. The speed of this change was astonishing, particularly because they had anticipated a strong demand rebound post-lockdown, only to find it didn't materialize. This situation is specific to China, just to clarify.

And Ross, the other thing is that the Chinese New Year is much earlier. So there's a possibility there. And that's the hypothesis is that they would like to keep a little more elevated just in case there is more demand, and they don't want to again be out of inventory in Q4. So that's why I think it may be a little more dragged out. Obviously, the sell-through in communication was so low. So yes, the weeks in the channel related to communication is much higher than the others, though everything grew, but it is much more in communication.

Got it. Thanks guys.

Thanks, Ross.

Joanne, do we have another question?

Your next question comes from the line of Matt Ramsay with Cowen and Company. Your line is open.

Thank you very much. Good afternoon everyone. I appreciate the chance to ask my questions. The first one is about the rapidly changing end markets, as you have already discussed in this call. It's a two-part question. First, in this environment where you are taking steps to position your company for when the inventory clears and demand increases, are you observing your competitors acting rationally and perhaps making similar prudent decisions? Second, related to that, have you noticed any changes in the pricing environment as you entered this period of rising inventory and potential decreases in sell-through? Thank you.

Historically, we have been more balanced during downturns, meaning we avoid making drastic changes and continue hiring. In fact, downturns are the best time to find skilled people since other companies are laying off staff. Additionally, we maintain our inventory to keep our foundry operational and to sustain our capacity. We can do this due to our unique business model, which has minimal obsolescence risk for most of our products, allowing us to build considerable inventory without concerns about obsolescence. This positions us well for when demand eventually returns, as it typically does. The semiconductor cycles are consistent over the long term, and while we do tighten our spending a bit, we don’t sacrifice the company's long-term growth. We continue to invest in hiring, research and development, and sales, which are crucial for our future growth. We focus on design wins to gain market share. Historically, we have gained significant market share during past downturns, viewing these periods as opportunities rather than challenges, and we pursue more designs during these times. I believe this is an excellent chance to capture more share and emerge stronger. While I can't speak to competitors’ current strategies, I can say that we typically navigate downturns effectively. For example, in 2008 and 2009, not only did we grow during that downturn, but we also experienced a 40% growth in 2010. Sandeep can address your question about pricing.

Yes. Yes, pricing thing, the way I told you, we do value pricing. So obviously, there are some pockets where you're seeing a little bit of that. That's why when I had the question of Tore, I said, I want to see what the macro dynamics is. But you are seeing some pockets where the value pricing is seeing some impact, but it's a little too early to tell.

Thank you for the detailed information. As a quick follow-up, someone earlier mentioned the increase in gross margin, and you addressed some of the general trends. However, I would like to know if you could quantify the differences in gross margins across various end markets. If you have any insights on that, it would be greatly appreciated. Thank you.

That's one thing. As you know, we have always ranged that we get the highest margin in industrial, followed by consumer, followed by computer, and communication is the lowest. The best way to attribute it is to look at how the margin changed between what we guided to, what we came out in Q3, and that gives you a relative measure of what happens when you have tremendous success in the higher margin business.

Got it. Thank you very much.

Thanks, Matt.

Your next question comes from the line of David Williams with The Benchmark Company. Your line is open.

Hey guys, thanks for your time, and certainly appreciate you. Let me ask a question here. I guess, Balu, you had talked about the significant executive that had the demand in April and then slowed in May. Was that just across the cell phones? Or did you see that across maybe other categories as well, which is appliances or any of the other business units you may be in?

I think the suddenness was probably really most significant in China cellphone customers. But I must say we are seeing, to a lesser extent, a similar reaction in appliances because the demand has come down in China appliances as well. They have kept some inventory. As you know, for the last two years, they have been struggling with getting enough supply. As a result, they have built some inventory. This reduction in demand is affecting our pull-through from our distributors. So it's not just cell phones, but cell phones are worse than appliances. We are seeing it in both areas in China.

Okay, perfect. Thanks for the color there. And then maybe just kind of thinking about the guidance and where the macro is today. I know you said that you're booked for the guidance midpoint. How comfortable do you feel there? Do you think there's any downside risk to this? Or do you think there's more maybe an upside opportunity here?

Yes. What we did is we guided to the range, and there's always the risks. You get some turns business, but you also get some cancellations. So we are watching this very closely. It's the best estimate that we can make. The only thing that is, I think, comforting to us is that, yes, with the Chinese New Year being early, people have realized in the past that if they cut it too thin, they don't have inventory. I think that gives us a little bit of comfort. Again, we're in very different times right now in a very short period of time. But we've tried our level best to manage the inventory. Even in spite of that, the channel inventory has gone up quite a bit. It's just the balancing of the two quarters and where the Chinese New Year is. That's why we feel we are okay. But again, the macro conditions are changing at a pretty rapid pace.

David, just to add, we said for Q2, we were booked to the midpoint, and you noticed that we came below that. That tells you how unexpected this demand slowdown is. It may look like we are being conservative, but we are trying to do the best estimate we can because there could be pluses and minuses. It could go either way. That's why our range is a little bit wider this time.

I understand. You all consistently do a great job with the guidance, and I truly appreciate that. One last question, if I may. Regarding the PC market, you mentioned expecting a slight improvement next quarter, particularly with notebooks. I’m curious if you're observing any signs of improvement in the PC market, or if it's more about reduced supply leading to demand being pulled through. Any insights on that would be helpful. Thank you.

Yes, I don't think we see any signs of the PC business improving. It's just that we've won such significant share in that market. In spite of the weakness, we think we'll grow. In fact, if you look at Q2, we were only down 5%, whereas the market was down quite a bit more than that. That's because we are growing share, and that will amplify in Q3 because of some new design wins. Therefore, our forecast is that, that category will grow in Q3 even though the other categories will be weaker.

Thanks again.

You're welcome.

Your next question comes from the line of Gus Richard with Northland. Your line is open.

Yes, thanks for taking the question. Quick one. What's the normal turns in the quarter for you guys?

It's challenging to define what normal is anymore. Looking back three or four years, we typically had a significant amount of turns business within the quarter, often around 50% to 60%. However, the situation has changed dramatically over the past two years. For instance, last quarter we anticipated reaching the midpoint of our guidance but ended up at the lower end. The net turns business is quite minimal, as you can see.

Got it. That makes sense. Over the last couple of years, due to the semiconductor shortage, I don't think you have actually passed cost savings to your customers. Now that customers are either comfortable with their inventory or have a bit too much, are you planning to implement the usual 5% price reductions going forward?

As Sandeep said, we always price our products based on value. To the extent the discrete components supply becomes easier and the costs on those come down, yes, it will have some impact on our pricing, but it's all value-driven. It will not be driven by the dynamics of the market.

Got it. And then just in looking at the handsets and so to follow, I think China has been first to adopt rapid charge, and I think that's kind of close to a standard. I'm just wondering, is there any impact on the attach rate? In other words, I can use my charger from last year's phone, and I don't need to buy one, and people aren't putting them in the box anymore. Is that dynamic having any impact on that business? Or is this just a normal inventory cycle?

I believe it's the latter because in China, the chargers are shipped with the phone. They're in the box. They are constantly increasing the power level to charge the phone faster. I don't believe that has an impact, at least not in China.

Got it. And in that market, where do you think your market share is at this point?

That's a good question. I don't know whether I have that by geography. I would say overall market share for smartphones, we are probably approximately in the 40-plus percent range on a unit basis. In dollar terms, we are much higher because our ASP is much larger than our competitors, who sell portions of the solution.

Got it. That's all for me. Thank you so much.

Thanks, Gus.

And your next question comes from the line of Tore Svanberg with Stifel. Your line is open.

Yes, thank you. I just had two follow-ups. First of all, one of the few benefits of raising interest rates, of course, is the impact on your other income line. Sandeep, I know you have a lot of cash. You talked about buying back stock. But as we go through these next sort of choppy quarters, how should we think about your cash in relation to buying back stock or keeping it on the balance sheet with the higher interest rates?

It's a good question. As you know, we spent over $300 million in the last six months. In fact, the average price that we have bought it back is slightly below where we closed. We've just taken a little pause, but we are opportunistic. We've always been opportunistic, and we are going to be no different. We just want to see what the choppiness is. We're going to be, again, opportunistic, and buyback is one of the ways we return value, and that's not going to change.

Great. And my second question, and I think this is the first time in more than a year that there hasn't been an auto question on the POWI call. Balu, you talked about production this year but still a very gradual ramp. At what point will you start breaking out auto revenue? Will it have to reach 10%? As you do start to see some more production revenue, are you embedding that under what categories? Is that industrial?

Currently, we categorize auto revenue under industrial. We haven't determined the right time to break it out, but if it reaches 10%, that would be a suitable point to do so. I anticipate that auto revenue will start becoming significant in 2024, primarily because the designs we are securing involve short design cycles that do not require extensive safety qualifications. This year, we expect to generate a small amount of revenue, likely in the low single-digit millions, which could increase significantly next year as we have numerous designs in progress. InnoSwitch has been a standout product; every customer who sees it wants to incorporate it, with some already in design or production stages. The product's integration level and performance have made it a key differentiator for us. Additionally, we have other products gaining traction. A major advancement will occur when our gate driver products are integrated into the inverter for the main motor, but that integration is not expected until 2024 due to the lengthy design process. We are also developing GaN-based products that will allow us to target higher power levels in vehicles. Overall, I believe that automotive will become our largest serviceable addressable market in the upcoming years.

Tore, I think what I've said before, 2025 to 2035, it will be the decade for POWI in automotive. You'll see all this effort we are talking about really come about meaningfully.

Appreciate, guys. Thank you.

Yes, I appreciate that the reaction from customers has been unexpectedly positive. We thought this would be a very hard market to get into, but the enthusiasm we see from customers based on how compelling our product is in the application is really heartening. I'm very optimistic about this market.

Very good. Thanks again.

Thanks, Tore.

Thanks, Tore.

And we have a follow-up question from Ross Seymore with Deutsche Bank. Your line is open.

Hi, guys. Thanks. So let me ask a couple more quickly here. I want to go back to the cash question that Tore just asked and maybe ask you differently and maybe clarify your answer to him, Sandeep. It looked like you bought back more in the second quarter, not less. When you said you were opportunistic and you're taking a pause because of what's going on in the end market, that's completely understandable. But I don't see the evidence of the pause. Was that a forward-looking statement? How much cash in general do you need to run the company? I know you have a ton of it, $328 million is a lot. Most other companies have slightly net debt, and you have a ton of cash per share. So it's not an issue, but I just wondered where your comfort level is there?

Yes. We are keeping some reserves as we mentioned before, following a four-pronged strategy that includes mergers and acquisitions, internal investments, inventory growth, and periodic dividend increases. In the past six to seven months, we've distributed over $300 million, and if we look back over the last 10 to 12 years, that total is around $800 million. We are not overlooking this aspect; we are just taking a temporary pause. Given the current uncertainties, this will remain one of our main strategies in the upcoming quarters.

Hey Ross, it's Joe. The pause refers to the fact that the buyback we did in Q2 exhausted the authorization we have, so we don't have an active authorization at the moment.

Thank you for that clarification, Joe. I have a housekeeping question for you. You have shown through every downturn that you invest and come out stronger, continuing to hire, and so on. While not everyone may care about stock-based compensation, it dropped by more than half this last quarter. This suggests that you didn't add many people. I understand that share price fluctuations can affect things a bit, but your share price hasn't changed much either. Is this indicative of a structural change, or how should we interpret that sequential growth?

No, no, no. This shows how our stock compensation is tied to our performance. To the extent Q3 and Q4 are lower than we originally expected, the stock comp goes down because we have to not only correct for the second half, but we also have to catch up correction for the first half. It's a good thing from an investor's part, but it's not good for us, obviously. A large portion of the stock comp is based on performance, financial performance.

Got it. Given the weaker performance in the second half, it will likely remain at this level, but if we optimistically return to solid growth...

I think I should clarify that we have performance stock for both the short-term and long-term, structured over a three-year period. This performance is tied not only to our results but also to the overall industry performance. When we evaluate this, a true-up adjustment occurs. The reduction we are seeing is primarily due to this true-up rather than ongoing costs. We have previously discussed our relative performance.

Got it. Thank you.

There are no further questions at this time. I'll now turn the call over to Joe Shiffler.

All right. Thanks, everyone, for listening. Once again, if you are interested in attending our Analyst Day on September 8 either in person or remotely, you can find a link to register on our website, investors.power.com. Thanks again for listening, and good afternoon.

This concludes today's conference call. You may now disconnect.