POWI

Hello, everyone. Thank you for joining us and welcome to the Power Integrations Q1 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. I will now hand the call over to Joe Shiffler, Senior Director of Investor Relations. Please go ahead.

Thanks, Alexandra. Good afternoon. Thanks everyone for joining us. With me on the call are Jen Lloyd, our CEO, and our CFO, Nancy Erba. After Jen and Nancy's prepared remarks, we'll open it up for questions. Our discussion today will include forward-looking statements denoted by words like will, expect, should, outlook, forecast, and similar expressions that look toward future events or performance. Such statements are subject to risks that may cause actual results to differ from those projected or implied. Such risks are discussed in today's press release, in our most recent annual report on Form 10-K, and in subsequent quarterly reports on Form 10-Q, including the one being filed this afternoon with the SEC. During this call, we will refer to financial measures not calculated according to GAAP.

Non-GAAP income statement measures in the first quarter excludes stock-based compensation expenses, amortization of acquisitions related intangible assets, restructuring charges, and the tax effects of these items. A reconciliation of non-GAAP measures to our GAAP results is included in today's press release and in the accompanying slides, both of which can be found on our investor website at investors.power.com. This call is the property of Power Integrations and any recording or rebroadcast is expressly prohibited without the written consent of Power Integrations. I'll turn it over to Jen.

Thanks, Joe. Thank you everyone for joining us today. I'm pleased with how we've started the year with Q1 revenue of $108 million and non-GAAP earnings of $0.25 per diluted share. Industrial was the main driver of revenue growth again this quarter, up 23% year-over-year. Consumer revenue was down compared to the first quarter of 2025, which had been unusually strong due to tariff-related pull-ins in appliances. We saw a 17% sequential increase in Q1 as that inventory build appears to have cleared. Looking ahead, while visibility is somewhat hampered by the ongoing macro uncertainty, we've seen an increase in order activity since our last earnings call, and we're forecasting seasonally higher revenue in the second quarter, along with higher gross margin.

Just as importantly, we're making good progress on our strategic focus areas: customer centricity, streamlining our product pipeline for time to market, and operational and organizational efficiency. Firstly, we are improving alignment between our commercial and engineering teams to bring the customer's voice closer to our product development process. Reinforcing this customer commitment, earlier this week we announced the addition of Mike Balow to our leadership team as SVP of Worldwide Sales. Mike is a veteran sales leader with deep experience in Power, having led the sales organizations at onsemi, Infineon and Cypress. I'm excited to have him on the team, and I'm confident that he will both strengthen our existing relationships and help us expand our customer reach in markets like data center and automotive.

Secondly, we're streamlining our product pipeline to accelerate time to market on the projects most tightly aligned with our target markets and long-term strategy. Finally, we are implementing organizational changes to drive operational effectiveness and redirect resources, both functionally and geographically, to the opportunities most critical to our long-term growth. Although it will take time for these changes to be reflected in our results, I'm encouraged by our progress, and over time you will see product releases with quicker time to revenue based on earlier customer engagement and improved alignment between our products and customer needs. For example, our new TinySwitch-5 is off to a strong start with a wide range of designs set to ramp in the second half of the year. We also expect a nice ramp with TOPSwitchGaN, which we introduced at the APEC show in March.

The TinySwitch and TOPSwitch names are well known in the power supply industry, with billions of units shipped and an embedded base of designers accustomed to using these proven architectures. Even as we pivot towards the AI data center, industrial and automotive markets, we're refreshing these existing product families to sustain and grow core markets like appliances, where reliability and efficiency are highly valued and dollar content is rising along with appliance power levels. The addition of a PowiGaN switch more than doubles the power capability of the TOPSwitch architecture to 440 watts. Designers can now use these classic flyback topology for a wider range of designs than ever before. The flyback topology offers a variety of benefits, including smaller board footprint, faster design cycles, high standby efficiency, and lower component count.

In fact, a flyback power supply can save up to 30% on both component count and BOM cost compared to the more complex topologies typically used above 200 W. TOPSwitchGaN is already opening doors for us at new customers designing high-power chargers for industrial applications, drones, and e-bikes, where flybacks now have access to sockets that have historically been off-limits. We are also seeing strong engagements at appliance customers, many of whom have been using TOPSwitch for years and are excited to realize the efficiency benefits of GaN in their designs. In automotive, we're currently in production or in design engagements with 17 of the top 20 EV manufacturers, and we're on track to double our automotive revenue this year. In the first quarter, we won a new emergency power supply design with China's second-largest EV OEM.

As mentioned on last quarter's call, we also began production in Q1 at a major German carmaker using a platform developed as part of its joint venture with a U.S. EV OEM. As we continue to accumulate wins for inverter emergency power supplies, we are also expanding engagements with customers for next-gen EVs, featuring micro DC-DC converters. These power supplies will bypass the 12-volt batteries used in today's EVs, instead powering subsystems directly from the main high-voltage battery. We are also developing products for higher power sockets, such as onboard charging, using our 1,250 volt GaN technology. As we expand our automotive product portfolio to address evolving EV architectures, we see addressable dollar content rising from single-digit dollars today to tens of dollars in the near term and approaching $100 per vehicle over the next several years.

Our high-power business, which sits in the industrial category, continues to grow at a healthy pace, driven by a diverse set of verticals, including electric rail, renewables, oil and gas, and power grid applications, including DC transmission and power quality. Key design wins in Q1 included a design for 6-megawatt wind turbines at a European customer and at STATCOM power conditioning design for an Indian customer. Lastly, turning to everybody's favorite topic, data center, we continue to pursue multiple paths to growth with our unique PowiGaN technology. Our ongoing collaboration with NVIDIA includes a variety of sockets utilizing our 1,250 and 1,700 volt GaN technologies in the forthcoming 800 volt DC architectures. We continue to gain share in aux power supplies for today's data centers, winning 2 new designs in Q1 at Taiwan customers serving U.S. equipment makers.

We also have ongoing customer engagements on upcoming higher power GaN products for rack-level AC to DC conversion. The data center rack is one of the most attractive opportunities in power semiconductors today. We believe our differentiated GaN technology gives us a significant competitive advantage, and customers are looking to us as they develop long-term roadmaps calling for higher voltages and improving power density. Our opportunity in data center goes beyond the rack. The demands that data centers are placing on the power grid are just as important and challenging, and we are well-positioned to respond with our high-power products. Power grids are rapidly evolving to support the estimated 200 GW of power needed for data centers by 2030. Renewable energy, including dedicated installations for data centers, is certain to become a bigger part of the energy mix, accompanied by battery storage to ensure consistent availability.

High-voltage transmission lines will deliver renewable energy to the grid or directly to the data center, and solid-state transformers will convert power at the front end of the data center to be delivered to the rack. The value of our gate driver products is proven in renewable energy, battery storage, and high-voltage transmission, which together accounted for about 40% of our high-power revenue in the first quarter. We have a strong offering for solid-state transformers as well, with a differentiated driver solution for silicon carbide modules. We have a variety of data center-related customer engagements underway in high power, and we anticipate that opportunities related to the data center build-out will add $hundreds of millions to our SAM for gate driver products in the years ahead. Altogether, we estimate that our data center SAM, including rack and grid applications, will exceed $1 billion by 2030.

In closing, the opportunities ahead of us grow more attractive by the day as markets demand more of the technology and system expertise that PI has developed over many years. We are a pure play high-voltage company with foundational technologies like PowiGaN and SCALE gate drivers backed by deep system expertise, and we are building an organization capable of turning our foundational advantages into long-term value for our customers and shareholders. Now I'll turn it over to Nancy for a review of the financial highlights.

Thanks, Jen. Good afternoon. Before I cover our results, I'd like to direct you to the supplemental information shared with our press release this afternoon. There, you will find many of the financial details we normally share in our prepared remarks, in addition to a GAAP to non-GAAP reconciliation. We had a very solid start to the year, with Q1 delivering revenue growth with key financial metrics at or better than our outlook. We also improved our balance sheet as we generated $18 million of free cash flow and reduced inventory, both on the balance sheet and in the channel. Revenue was $108.3 million, up 3% from a year ago and 5% versus Q4 of last year. Our industrial business continues to perform well, with sequential growth of 15% in Q1.

The communications and computer categories were seasonally down, while consumer revenues were up 17% sequentially with the recovery in appliances. Turning to gross margin, non-GAAP gross margin was 53.5% for the quarter, right at the midpoint of our outlook range, and up 20 basis points sequentially. While end market mix was favorable, we saw less benefit from the yen-dollar exchange rate in Q1 due to the stronger yen in the early part of 2025. As a reminder, there is currently about a 1-year lag between fluctuations in the yen and the resulting impact on our P&L. Non-GAAP operating expenses were $45.3 million, coming in below our outlook range of $45.5 million-$46.5 million. This resulted in non-GAAP operating margin of 11.7%, up 200 basis points from the prior quarter.

Expanding our operating margin is an important priority for us. We are tightly managing the investment decisions that drive our customer-focused technology development and product roadmap, addressing the highest growth markets. During our Q1 restructuring activities, we evaluated our engineering resources across the organization and determined that in order to better drive the roadmap requirements of our customers, certain engineers previously accounted for in our marketing organization would be more fully dedicated to the development work and moved into R&D. These changes were effective at the time of the restructuring in early February and resulted in approximately $3 million of R&D expense in Q1 that would previously have been included in SG&A. All investments in SG&A are evaluated with the same rigor. Continuing down the income statement, non-GAAP net income was $13.9 million or $0.25 per diluted share.

Our GAAP results include $6.6 million of restructuring charges, primarily consisting of severance payments related to the restructuring activity we announced in February. $6.2 million was in GAAP OpEx, with the remainder in cost of goods sold. Turning to the balance sheet and cash flow. Cash flow from operations was $20 million for the quarter, while CapEx was $2 million. Our 2026 plan still calls for CapEx of 5%-6% of revenue for the year. We are applying the same ROI-based discipline to capital decisions that we are to operating expenses and expect to see CapEx more heavily weighted to the second half of the year. Inventory decreased by $4 million during the quarter, while days on hand fell by 21 days to 292 days at quarter end.

Our target is to bring days on hand below 200. Channel inventory also declined during the quarter, falling by 0.5 week to 8.9 weeks and nearing our target of 8 weeks. I expect further improvement in both metrics throughout the year. I'll now review the second quarter outlook. We expect revenue to be between $115 million-$120 million, which would be up 8.5% sequentially at the midpoint. Communications and computers should have the largest increases in percentage terms coming off the seasonal lows in Q1, with industrial also up sequentially. We expect a sub-seasonal quarter from consumer, with positive air conditioning seasonality offset by the ongoing demands and headwinds in major appliances. I expect non-GAAP gross margin to improve sequentially with a range of 54%-55%.

At the midpoint, that would be an improvement of 100 basis points from Q1, primarily due to manufacturing efficiencies and volume-related benefits of the higher revenue, as well as the dollar-yen exchange rate. Non-GAAP operating expenses will be sequentially higher in Q2, with a range of $47 million ± half a million. The increase from Q1 mainly reflects annual merit increases, which took effect in April. I anticipate that OpEx in the second half will remain roughly flat with the Q2 run rate, putting us on track for low single-digit growth in 2026. Our intent is for OpEx to grow at a rate of less than half of revenue growth over time. I expect non-GAAP operating margin to be between 13.5% and 15.5%.

In closing, I'm encouraged by the demand we are experiencing in the first half of the year and that the markets we compete in appear largely healthy. We are excited by the opportunities in front of the company and focused on executing to the long-term growth drivers in data center, automotive, and industrial. Importantly, we are continuing to stay agile, cognizant of the macro and geopolitical uncertainty we operate within, and will continue to manage the business accordingly. After a full quarter in the CFO role, I'm confident in the direction we're heading as a company and our ability to achieve faster growth, improved profitability, and increased shareholder value. I'd like to thank the Ottawa team for their continued commitment to innovation, customer success, and execution excellence, and to our partners, customers, and shareholders for their continued cooperation and support. Now, Alexandra, let's open for Q&A.

We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Christopher Rolland with Susquehanna. Your line is now open. Please go ahead.

Thank you for the question. Appreciate it. I guess starting out, compute and comms.

Has been disappointing for quite some time, particularly in March. I know there's some seasonality there. I guess how are you thinking about these markets going forward? you know, they are obviously kind of sub-subscale, I think, probably at this point in time. maybe you can talk about what your strategic plan is for these moving forward. Are you de-emphasizing these markets? How should we think about them and maybe the mix of end markets moving forward for you guys?

Okay, great. Thank you, Chris, for the question. In terms of compute and comms in Q1, you know, we do expect that to be seasonally a low quarter. We're expecting those to be seasonally up in Q2. You're correct that they are two of the smaller of our market areas. In terms of the, you know, strategic plan and are we de-emphasizing, we're not de-emphasizing those areas. You know, we continue to look at those as, you know, there's opportunity there. I talked in the prepared remarks about the TOPSwitchGaN and TinySwitch. I mean, those are serving applications across the spectrum of our market segments. You know, we continue to nurture those areas.

You know, when you look at, when you look at those for the year, yeah, they're not the biggest growth drivers, but they're also not the largest part of our business.

Great. Thank you. Perhaps, on your favorite and everyone's favorite topic, AI.

You know, you had some great detail on aux power and solid-state transformers, et cetera. Perhaps if you could talk about GaN and maybe even silicon opportunities, mostly GaN, like, how are engagements going on the main power? As we think about the powertrain applications, are we talking about interest in power delivery boards or IBCs or power supplies? Where are you getting the most interest, and are there any applications I left out that you might be engaged in for your GaN portfolio?

Yeah. I mean, thank you for asking a question about our favorite topic. You know, I think it's going great. You know, I do wanna emphasize that, you know, the aux and the SST opportunities, those are the shorter-term opportunities for us. But we do have ongoing engagements for those as well as on, you know, the opportunities for GaN. We are seeing there's a real pull for our high-voltage GaN technology for the high-voltage architectures, the 800 volt architecture in particular. You know, our GaN works natively at 800, 1,200, 1,250, 1,700, and offers a simpler design. You know, even in our discussions with NVIDIA a couple weeks ago, we are learning about additional sockets for where our technology is a great fit.

I think, you know, where there's the most interest across applications, we are engaging across the whole data center ecosystem. Hyperscalers, server OEMs, rack providers, power supply providers, and we're finding opportunities across all of those.

Great. Thank you, Jen.

You're welcome.

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

Hi.

Please go ahead.

Thanks for letting me ask a couple questions. I guess my first one in the near term on the consumer segment, I know you split the kind of the air conditioning versus the white goods side, but the appliance market, you know, doesn't sound so great, to put it mildly, if you listen to Whirlpool and others. When you say that's sub-seasonal in the second quarter, what do you mean? Is it still gonna be up, or will it be down? How do you think you guys address that market over time? If the market's weaker, do the inventory dynamics allow you to still grow, or is that something that's gonna be a challenge that's gonna last a little bit longer?

I'll take that one. Just, you know, as I said in my comments, all of the markets will be up, although on the consumer front it will be very modestly up, so think flattish. That is a balance, as we commented between some of the pressure on appliances that you referenced, but also there are some offsets within our portfolio. Net-net, flat to slightly up. Certainly the other markets.

And, and do you- Are growing faster in Q2 from the standpoint both of dollar and percentage. You know, we're really pleased with the demand that we've seen thus far in the first half and the continued strength we're seeing in Q2. Net-net, you know, a good first half and, you know, we're off and running through the year.

Great. I guess following up, I'll follow the same trend hit on the AI side. How do you envision the time to market for these different opportunities, whether it be, you know, the percentage of your business that you think it'll represent this year, next year, and the year after? If you wanna talk about the aux and the SST side versus some of the bigger ones. How should we think about how those fold in, just kind of timing-wise, not necessarily magnitude, even though I'll take that if you'll give it?

Thank you, Ross. I mean, the aux obviously, those are opportunities now, and we continue to see a sequencing of opportunities. You know, there's continuous new designs, I think, in this space for AUX and SST, and, you know, we talked about a couple of those wins that we're seeing. I think for the high voltage, you know, we know that that's longer term for us, right? That's not next year. That's in a couple years, basically. What is encouraging is that it's a continuous sequencing of wins. We're expecting, you know, that as those 800 volt systems come online, there's gonna be the momentum we already have and then some continued momentum from the new systems. It's a couple years out.

I think just to reiterate.

Thank you.

you know, Jen mentioned in her comments that, you know, we expect that to be at least $1 billion by 2030. We're continuing to size it. As new sockets become available to us and as conversations continue and we find new places where our technology can be a good fit, we continue to evaluate that and size it as we go quarter-to-quarter.

Thank you.

Your next question comes from the line of David Williams with Needham & Company. Your line is now open. Please go ahead.

Hey, good afternoon, everyone. Thanks for letting me ask a question here. I guess to continue on that data center topic there, you talked about it being maybe $1 billion in possible TAM for you all. How do you think about the GaN portion of that specifically? maybe if you can just kind of speak to that level of engagement you're having today. Clearly, you have one of the highest power capabilities in the market. I would presume that you're certainly leading those discussions. just curious how that traction's been going there specifically on the GaN and how you see that from a size perspective. Thanks.

Thanks, David. By the way, congrats on the move. In terms of the GaN, we really do see a bulk of that being the GaN. I think it's a split between inside the data center and outside the data center. The outside the data center would be our gate driver product family. The inside the data center where we really have the advantages is with GaN, so we see that as mostly GaN.

Great. Thanks for the color there. It sounds like on the automotive side, you're making some really nice progress there as well. I know in the past, the prior leadership had talked about this being a multi-year kind of a strategy, but I feel like maybe your strategy is helping drive penetration, and you're certainly building product roadmaps towards your customers. I guess maybe how do you think about automotive and how that is developing for you? How should we think about that maybe revenues over the next 12-24 months from that auto segment? Thank you.

I mean, I think we are making good progress with that. We're winning designs. As you know, we've talked about winning designs in the inverter emergency power supply. That's not huge revenue, right? We are seeing, you know, engagement with that. What we're looking at is expanding into, you know, other parts of the automobile and expanding our BOM content. You know, it's been slow. I think the market's been slow, we've talked a little bit about a pushout. I think we've mentioned this in previous calls, that revenue for us is gonna push out. As we build up, you know, additional sockets, that will accelerate that growth.

you know, we put a $100 million target out there for 2029, and we still feel like we're making good progress towards that.

Great. Thanks for the color. Appreciate it.

A reminder, if you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. Your next question comes from the line of Tore Svanberg with Stifel. Your line is now open. Please go ahead.

Yes, thank you, and congrats on the progress. I guess my first question is on the restructuring and moving some people from marketing to engineering. I just want to understand that a little bit better, Jen, 'cause, you know, I assume these are probably more technical sales or marketing people. You know, you did obviously talk about, you know, you want to improve the time to market by actually being closer to customers with the R&D. Yeah, if you could just explain the changes, that'd be great.

Sure, Tore. Thanks for that question. Yes, those are technical resources, and I'm gonna let Nancy talk about it.

Yeah, sure. We talked about this in the last call, right? As part of the restructuring, we really are going line by line and evaluating our resources. You know, how do we shift to be more customer-focused? As part of that, there were certain, and these are application engineers that were previously sitting in marketing. When Chris Jacobs joined and is really emphasizing, you know, how do we get closer to the customer and bring that customer input in, we found that those resources really should be more prioritized and more focused toward the product development piece of their work. We, at the time of the restructuring, made that move. It was effective February first with the rest of the restructuring activity, and we'll continue that forward.

The other piece of that is that as we think about where those resources are focused, which products they're focused on, you know, making sure that we're prioritizing those dollars to the most important markets that we serve and to the products that are gonna give us the highest ROI. There's a lot of work behind the scenes that's happening to make sure that that portfolio is really tightly aligned to what we're hearing from our customers and what we need to deliver to the market over the coming years.

Very good. Then I'm gonna follow up, and on the inventory topic, both internal and the channel. Obviously, you know, you're trying to get it down to 2. Internally, you're trying to get it to 8 weeks, in the channel. Obviously, demand is what's gonna, you know, eventually get you there. Are you doing anything else proactively, you know, to perhaps get to those types of targets, I guess especially on the channel side? You know, when could we potentially, you know, think about Ottawa being back to those types of numbers?

We're not doing anything unnatural in the channel. I mean, the demand is good. The first half demand is, you know, we're very pleased to see it, and it's across the board, as we talked about. Nothing unnatural there. As we see revenue progress through the second half, we would expect to exit at that 8 week, potentially a little below there. It'll just depend upon the demand environment at the time. On the inventory that we hold on our balance sheet, we are putting a very concerted effort on that. You know, that is, that is cash, the way I look at it. We're making sure that we're reviewing that.

We have a, now an ongoing cadence looking at that inventory and the approval process to bring anything new in, right, goes through the same ROI rigor that we're putting across the company, whether that be in OpEx, inventory, CapEx. The team has really responded well, and we're seeing great execution there. Expect the inventory on our balance sheet to also continue to step down as we move through the year.

Great. Thank you.

There are no further questions at this time. I will now turn the call back to Jen Lloyd for closing remarks.

Thank you everyone for joining us today. I'm really optimistic about the opportunities ahead of us. Electrification, AI, and the rapidly transforming power grid are set to drive demand for advanced high voltage semiconductors for many years to come. PI is well-positioned to capitalize with a strong technology foundation and a deep well of expertise in high voltage. In just a matter of months, we've assembled a transformational leadership team capable of translating innovation into sustainable, profitable growth. I wanna thank our investors, our customers, and suppliers for partnering with the PI team. Thank you and good afternoon.

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