Joe Shiffler - Director, IR Balu Balakrishnan - President & COO Sandeep Nayyar - CFO.

Steve Smigie - Raymond James Ross Seymore - Deutsche Bank Tore Svanberg - Stifel Gus Richard - Northland Christopher Longiaru - Sidoti & Company.

Good afternoon my name is Melissa and I would like to welcome everyone to the Power Integrations First Quarter 2015 results call. [Operator Instructions]. Thank you. Joe Shiffler, you may begin your conference..

Thank you. Good afternoon things for joining us to discuss Power Integrations' financial results for the first quarter of 2015. With me on the call are Balu Balakrishnan President and COO of Power Integrations and Sandeep Nayyar our Chief Financial Officer.

During today's call we will refer to financial measures not calculated according to generally accepted accounting principles. Please refer to today's press release available on our website at investors.power.com for an explanation of our reasons for using such non-GAAP measures as well as tables reconciling these measures to GAAP results.

Our discussion today including Q&A session will include forward-looking statements reflecting our forecast of certain aspects of the company's future business and financial results.

Such statements are denoted by words like will, would, believe, should, expect, outlook, estimate, plans, goal, anticipate, project, potential, forecast and similar expressions that look toward future events or performance. Forward-looking statements are based on current information that is dynamic and subject to abrupt changes.

Our forward-looking statements are subject to risks and uncertainties which may cause actual results to differ materially from those projected or implied in our statements. Such risks and uncertainties are discussed in today's press release and in part two of our most recent Form 10-K filed with the SEC on February 10th, 2015.

This conference call is the property of Power Integrations and any recording or rebroadcast is expressly prohibited without the written consent of Power Integrations. And now I'll turn the call over to Balu..

Thanks Joe and good afternoon. First quarter revenues declined 5% sequentially to $82.6 million in-line with our guidance but below the midpoint of the range primarily reflecting continued softness in the desktop PC market.

Revenues in the computing category which is dominated by desktops fell by nearly 20% sequentially and are up 35% in the past two quarters as the supply chain adjust to the slowdown in the PC sales.

Notwithstanding the toughness in PCs, and a somewhat mixed demand environment overall, we expect solid sequential revenue growth in the second quarter and we believe the drivers are in place to enable continued growth in the second half of the year.

Shipments increased nearly 10% in Q1 compared to Q4 in anticipation of stronger demand through the distribution channel in the June quarter. We also expect growth in key focus areas in Q2 such as our high power business which is rebounding after a soft first quarter and the mobile phone market, where rapid charging programs continue to ramp.

We have resolved the supply constraints that affected sales of our new InnoSwitch products in the first quarter even as demand for the products accelerates on the strength of new design wins.

InnoSwitch is an ideal match for the demands of rapid charging which pose a significant engineering challenges for our power supply designers in terms of size, efficiency and component count. These challenges give us an opportunity for differentiation in a market that had become increasingly commoditized in recent years.

These dynamics are driving a turnaround in our communications category which declined nearly 15% last year. In the first quarter of this year, communications revenues were up more than 15% from a year ago in spite of supply constraints. And we expect the growth rate to accelerate in the second quarter as rapid charging continues to ramp.

While our initial rollout has focused on mobile device charges, InnoSwitch has a broad addressable market comprising hundreds of millions of AC/DC power supply annually. Many of these power supplies will be subject to the new mandatory federal efficiency standards for external power supplies scheduled to take effect in early 2016.

The so-called DoE-6 standard will apply not only to mobile devices but also home networking equipment, cordless phones set-top boxes, LCD monitors and the countless other products that use external chargers and adapters. With InnoSwitch and our new LinkSwitch 4 product family we have a broad range of products to address the DoE-6 opportunity.

InnoSwitch is equally attractive for embedded power supplies and is showing strong design traction in the appliance market where top-tier OEM has already qualified the product for use in a broad range of major appliance applications.

Appliances have been successful for us thanks to tighter efficiency requirements, the increased use of electronic controls in both large and small appliances, and the reliable benefits of integration and increasingly important factor in big-ticket items like brand name appliances.

With the arrival of InnoSwitch which not only acts to our competitive advantage but also our dollar content we believe we can sustain strong growth in the appliance market in 2015 and beyond. We also expect the industrial market to be a significant contributor to our growth this year and beyond.

Led by our high-power IGBT driver products as expected high-powered sales in Q1 were affected by softness in energy exploration markets and currency headwinds. However, we expect double-digit sequential growth in high-power in the second quarter driven by expense in solar and wind energy applications.

Overall, our revenue outlook for the second quarter is for a sequential increase of 5% to 10%. While When projecting revenues beyond the current quarters always difficult, we believe that stage is set for a good second half.

We expect continued momentum in the appliance and the high-power markets while InnoSwitch is poised to become a material revenue contributor as the year progresses particularly with the rapid charging and the new DoE standards becoming significant drivers. Now with that I'll turn it over to Sandeep for a review of the financials..

Thank you and good afternoon. I will quickly cover the Q1 financials and touch on the outlook before we open it up for Q&A. As usual I will focus my remarks primarily on the non-GAAP numbers which are reconciled to the corresponding GAAP numbers in the tables accompanying our press release.

First quarter revenues decreased 5% sequentially to $82.6 million. As Balu noted the computer market was the biggest driver of the decline, falling nearly 20% sequentially on week desktop demand and a consequent inventory adjustments in the supply chain.

Communications revenue were down mid- single-digit on seasonal softness at a large network equipment of customers industrial revenues were also down mid-single digits as expected on lower revenue from high-power products. Consumer revenues decreased slightly as growth in appliances was offset by seasonal softness in consumer electronics.

Revenue mix for the quarter was 38% consumer, 33% industrial, 21% communication, and 8% computer. Non-GAAP gross margin for the quarter was 53.1% down from the prior quarter as expected primarily resulting from application and product mix most notably higher revenues from cell phone chargers and lower revenues from industrial.

Non-GAAP operating expenses for the quarter were well below our forecast, coming in at $29.7 million an increase of just to $600,000 from the prior quarter despite the addition of Cambridge Semiconductor which we acquired in early January.

Excluding the acquisition, non-GAAP expenses decreased sequentially in spite of seasonally higher FICA taxes and the comparative Effect of the December shutdown. The decrease is due partly to the timing of certain expenses that were pushed into Q2 but also reflects expense controls implemented in response to the weaker demand environment.

Continuing down the income statement, other income for the first quarter was negative $223,000 driven by unfavorable currency fluctuations. Including this item which reduced earnings by $0.01 per share, non-GAAP earnings were $0.43 or diluted share. Cash flow from operations was $17.7 million and the utilized $3.3 million for capital expenditures.

The utilized $15.4 million for the CamSemi acquisition as the net purchase price of $22.1 million was netted against the short-term loan issued to CamSemi in December. Other uses of cash included $3.5 million in dividend payments and just under $1 million for share repurchases.

We ended the quarter with $173 million in cash and short-term securities down about $2 million from the prior quarter. Internal inventory picked up slightly rising by $1 million during the quarter while channel inventories expanded to about 7.5 weeks ahead of stronger Q2 demand.

Internal inventory should remain at roughly the same level on a cash basis through the June quarter and then trend down in the second half of the year. We have minimal risk in our product portfolio and are content to adjust inventory levels gradually as we have done throughout our history.

Turning to the outlook for the second quarter, we expect revenues to be up 5% to 10% sequentially led by the communication and the industrial categories as well as a modest rebound in the PC market.

We expect non-GAAP gross margin to be in the range of 52.5% to 53% down slightly from the first quarter driven by the continued ramp of new products and less favorable end market mix.

However, we expect gross margin to rise modestly in the September quarter as we begin to see the flow-through of lower cost wafers reflecting the more favorable dollar/yen exchange rate. We expect Non-GAAP OpEx to be between $31.5 million and $32 million in the second quarter.

The sequential increase reflects annual merit increases which were effective April 1 and expenses associated with our worldwide sales conference which also took place in April. I do anticipate lower expenses in the September quarter as the impact of the sales conference rolls off and the FICA expenses begin to trend down.

Lastly, I expect the non-GAAP taxes for the second quarter and for the balance of the are to be approximately 7%. With that, I will turn it back over to Joe..

Thanks Sandeep. We will go ahead and open the call up to Q&A now.

Operator would you please give instructions for Q&A session?.

[Operator Instructions]. Your first question comes from the line of Steve Smigie with Raymond James. Your line is open..

So I just want to follow-up on a couple comments, the first one was you mentioned some strength into the back half of the year. You guys do typically have some seasonal strength in September.

And I know that's one quarter but since you mentioned the back half, could September potentially be a double digits?.

It's a little too early to say what the third quarter would be. However, with the number of drivers helping us, we think it will be a good growth quarter. Specifically we expect to see a growth in high-power and also InnoSwitch based revenues that should grow really nicely throughout the year..

Okay. And then just on the ramp of fast chargers, you mentioned some capacity constraints there.

Did those change what your initial assumptions would have been for fast chargers revenue this year or was that kind of already factored in and so things are going as you might have expected at this point?.

I don't think it will affect the overall revenue for 2015 in rapid chargers. It did affect our revenue a little bit in Q1, but we are already caught up and we shipped whatever was necessary in April. So I don't think it will have an impact and we expect the revenues to grow throughout this year..

Okay. And Sandeep, you mentioned the benefits going on the gross margin I think on currency there and modestly into September.

Does it continue to incrementally improve modestly since then or there are enough issues going on with mix and other stuff that we shouldn’t really be taking that margin up here?.

I think basically the mix is there so what I would do for modeling purposes is from the Q2 levels I think the currency being favorable and the mix a little unfavorable I think the benefit will be about 50 basis points or so in the third quarter and flatten out or little bit here and there from there..

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

I know Balu you talked about some capacity constraints in the rapid charge size. We've heard other companies talk glowingly about their wins in the space.

Can you give a little bit more color about the competitive landscape in this space? How you are differentiated and are you better positioned with big flagship wins or smaller customers but a multitude of them? Any sort of competitive color about how POWI is situated will be helpful..

I think InnoSwitch is by far the best solution for rapid charging. We do have a couple of competitors in this space. But I have to say that we are doing extremely well compared to the competition. So far we have six Tier 1 customers in production and two Tier 2 customers. And the feedback we have been getting has been very, very positive..

And then moving beyond that side of the equation, I know Balu or Sandeep you just talked about the gross margin and what the currency is going to do. When you start a new product like InnoSwitch we realized that the gross margins are lower and then they trend up over time.

When does that start to become an actual tailwind to gross margin? Or even just the headwind dissipate?.

One of the things we said new products are a challenge and typically what happens is our products go into different end markets. Right now what's happening is InnoSwitch is not only a new product but it's also focused on the communication.

And as you know, as we’re going to expand this into other markets it will take a little time and that's when you'll start getting some tailwinds as it starts going into the other market.

We continue to do the cross reductions which will star benefiting us as the year progresses, but just the mix is still quite a bit of a headwind compared to the benefits we are getting from here..

I guess my final question on the computing side of things, we hope that it would only be a one quarter issue where you went down substantially like it had been the last couple times.

This time clearly end market is part of the equation but when you look forward, why do you expect it only to be a mild increase if we look back historically any time you drop roughly 20% you have a pretty substantial snapback in the following quarter..

The honest answer is we don't know. So we thought Q1 would be flat, maybe even slightly up or slightly down. But we were surprised that it was down as far as it went down which is 20% two quarters in a row it went down 20%. I would have never expected that.

It is true, and the past we have had a very sharp snapback but there were no indications that this time that is going to happen, but I can't say for sure. Beyond modeling, PCs to increase slightly in Q2..

And there is no market share issues as far as that double dip of beyond 20?.

That is correct. Our biggest exposure is to the desktop market through PC standby and it's not a share issue in PC standby. And in fact in other areas like the main power supply we are actually gaining share. We’re also gaining share in monitors, where we have won a number of new designs..

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

I was hoping you could comment first a little bit on several order linearity, Power Integration tends to be a little bit different from all of the other companies out there on timing of orders and stuff.

So I was hoping you could talk about linearity both in Q1 and what you have seen so far at this quarter?.

So basically what we saw in the last quarter as Balu mentioned, we had a pretty strong shipment quarter but not a sell through quarter. We shipped 88 million but we recognized only 82.5 million.

We had a pretty strong January in terms of booking, February because of the Chinese New Year dip down and then March was lower than January and then April has continued to be like March.

So its hard to look at the terms and see what it will be because there is so much inventory in the channel and considering we have shipped pretty much more than we recognize revenue, that is what is also helping us think through as we look forward into the Q2 guidance..

And the question on InnoSwitch and Balu you mentioned obviously this technology applies for other areas outside of cell phones, are other any devices we should start thinking about right now is having an important contribution? Or will those should have just be dwarfed by the mobile phone particularly?.

In the short-term mobile phone would be the largest growth factor simply because it has a concentrated customer base and the design cycles are shorter. But the InnoSwitch is applicable to all other markets.

It's applicable to the PC market, it's applicable to the consumer market, both in terms of appliances and entertainment products whether it's set-top boxes and so on. It's also applicable to the industrial market.

It's just that they have longer design cycles and therefore it takes a little bit of time before we start to see revenue growth in those areas. The good news is the margins are higher, so that would help us in the long-term.

But just to clarify on the margins, we are making improvements and incremental improvements in cost of InnoSwitch, and will have a more significant improvement sometime next year related to next generation technology that we would use to reduce cost quite significantly.

We are very confident that InnoSwitch will come to margins consistent with all of other products we have..

Just one less question. You sound a little bit more upbeat on high-power for the second half of the year and I know there is a lot of moving parts. But I also know that China is a big percentage of that business and that's an area where we have heard about some potential weakness, especially on the industrial side.

So are there some new programs and new products ramping in the second half they gives you more confidence about that business?.

Yes. Specifically in solar and wind energy applications. We are seeing significant capacity being installed this year. and next year. So that's where we see the most significant growth.

Where we have seen a little bit of a drag is in infrastructure type projects like high-voltage PC transmission and so on but that's a relatively small portion of the business.

Our number one high-power business is motor control, or what you call motor drives I should say and the number two is renewables and renewables is where we’re seeing significant growth in the next few quarters..

[Operator Instructions]. Your next question comes from Gus Richard with Northland. Your line is open..

Just a couple quick questions on the networking product, was that down in the quarter did you say? And do you expect that to recover or is that sort of in a state of decline going forward?.

We don't know if any change in terms of share so it is seasonally weak in Q1. And it also has a lot of variability quarter to quarter. Our expectation is that in Q2, that will come back relative to Q1..

Okay.

And then in terms of your overall cell phone business, rapid charge plus everything else, do you expect to see double-digit growth in overall cell phones or is there going to be a little bit less than that because of older products rolling off?.

Are you talking specifically about Q2 growth or generally for full year?.

Yes, Q2, I'm sorry..

Q2. Yes, it could very will be in double digits..

Just as an indicator you can see cell phones now as a percentage of the total communications business this last quarter was nearly 60%. It was typically about 50% so it's growing very nicely, weather rapid [ph] and everybody and everything else..

And then looking at -- you haven't mentioned LED in this quarter so just wondering what is going on with that market for you guys..

The LED revenues declined slightly compared to Q4 and that’s quite seasonal. We have seen every first quarter for the last three years decline in LED revenue and that was the same this quarter, I mean this Q1..

Got it.

And then on DoE-6 products and the design wins do expect that revenue to start to ramp in the back half of the year or is that a '15 type of phenomenon?.

It should start on the back half of the year because they have to get the designs done and get the production started. But we will see the full year only in 2016..

Okay, so it will aid in the second half of the year?.

Yes, it will ramp continuously through the second half and obviously it will ramp up to the full volume by the end of the year..

And last one for me I'm sorry for so many questions, you've given the slow start to the year, it looks really challenging to get flat on your PC business.

Is that a realistic expectation or do you think the snapbacks is going to be a little harder in the second half?.

As I said it's really hard to predict how PC market would do.

But the good news is it's not a shared issue we have a very significant share for standby market and we are growing share in the number of other areas like the main power supply and the LCD monitors, so those things bode well but it is very hard to project exactly what it will do for the whole year..

Your next question comes from Christopher Longiaru with Sidoti & Company. Your line is open..

Can you give us a little bit of color into how inventories kind of trended over the course of the quarter and how orders kind of trended and maybe how they have looked into April and how -- what kind of turns number do you need to hit your guide?.

Considering we shipped it last quarter as a indicated nearly 88 and we basically recognize only 82.5, so you can see the turns is going to be a little difficult because you could have more revenue than shipments this quarter but even taking that into consideration roughly we need high 40 turns like we had in Q1 to hit our number.

As far as the order pattern as I indicated earlier, January was where we had the peak in orders, February was down because of Chinese New Year, March came back but not as high as January and April has trended pretty close to March..

Just to clarify Christopher, when you say turns, it's only based on what we ship because we don't know how much gets shipped through until the end of the quarter. As in the first quarter, we shipped a lot more than we recognized in revenue, because the distributors bought quite a bit in March in preparation for Q2, which bodes well for Q2.

So we have to be careful and talk about terms, we can only talk about turns in terms of shipments but not in terms of revenue. Having said that, in terms of shipments the turns we need if they were equal to revenue plus what we have coming from Q1 shipments is roughly the same as Q1..

And then just in terms of you said that you expect a little bit of the September quarter operating expenses to come down.

Can you comment on any mass cost or anything along those lines that have happened recently and that you expect to happen over the course of the year that alters your GAAP expenses? Are there any big blips or is it pretty consistent?.

Well basically in terms of GAAP expenses I think as you know we have added as a results of the CamSemi acquisition. Now in Q1, we had the inventory write-up which was about $300,000 which I think goes way because the inventory is turned over. Apart from that, the rest of the amortization that was added should be pretty linear..

[Operator Instructions]. Your next question comes from Steve Smigie with Raymond James. Your line is open..

I was just hoping if you could comment a little bit on CT-Concept in terms of growth opportunity for this year, could that go somewhere like 20% this year?.

So basically as you know that the first quarter was much lower than the run rate if you look at it -- it was a decline and double digit that we only did close to about $8 million, so I think 20% is maybe a little optimistic. I think it would be high single digits, probably yes..

And then similar on consumer, can you talk a little bit about what kind of topline growth percentage you think you could get this year?.

It's hard to predict the whole year but I think we will continue to get good share gains in the appliance area with content increasing and historically last few years we have been doing mid to high single-digit growth there too..

And we should also gained share in the TV market, with our TV [indiscernible] product and we expect to gain share in the set-top boxes also..

There are no further questions in queue at this time. I will turn the call back over to Joe Shiffler for any closing comments..

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

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..