Good day, ladies and gentlemen, and welcome to the Power Integrations Fourth Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Joe Shiffler, Director of Investor Relations.

Good afternoon, and thanks for joining us to discuss Power Integrations financial results for the fourth quarter of 2011. With me on the call are Balu Balakrishnan, President and CEO 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.powerint.com for an explanation of our reasons for using such non-GAAP measures, as well as tables reconciling these measures to our GAAP results. Also our discussion today, including the Q&A session, will include forward-looking statements reflecting management’s current forecasts to certain aspects of the company’s future business. Forward-looking statements are denoted by such words as will, would, believe, should, expect, outlook, estimate, plan, goal, anticipate, project, potential, schedule, forecast and similar expressions that look towards future events or performance. Forward-looking statements are based on current information that is, by its nature, dynamic and subject to rapid and even 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 under the caption Item 1-A Risk Factors in Part 2 of our most recent Form 10-Q filed with the Securities and Exchange Commission on November 7, 2011. This conference call is a property of Power Integrations, and any recording or rebroadcast of this conference call 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, everyone. Our fourth quarter results reflect the difficult business conditions felt across the semiconductor industry in recent months with revenues down 11% compared to the third quarter. However, after an extended period of soft bookings throughout the summer and into the fall, we saw a meaningful uptick in orders around the middle of the fourth quarter, resulting in a book-to-bill ratio of approximately 1 for the fourth quarter. While it is difficult to predict the trajectory of the recovery, it appears that the business conditions have stabilized and perhaps began to improve. Based on these trends, we currently expect first quarter revenues of between $64 million and $70 million, a slight increase at the midpoint compared to the fourth quarter. Despite challenging business conditions, we generated record operating cash flow in 2011, and we are well-positioned to grow our top and bottom lines as cyclical headwinds abate, thanks to the progress we made last year winning designs, ramping new products, growing our customer base and reducing our manufacturing cost. We also strengthened our position as the leading enabler of energy-efficient electronics and lighting, 2 of the most secular [ph] growth opportunities for the analog semiconductor industry. Last month, the California Energy Commission enacted mandatory efficiency standards for battery chargers like those used in power tools, electric toothbrushes, hair trimmers, uninterruptible power supplies and even electric golf carts. More than 170 million battery chargers are currently in service in the State of California alone, and the CEC estimates that the new standards will eventually save enough energy to power about 350,000 homes. Effective February 2013, new devices will be required to meet the standards, which regulate both charging efficiency and power consumption during maintenance mode when the battery is fully charged. These standards apply to many…

Thanks, Balu, and good afternoon. I will briefly review the details of the fourth quarter results and the first quarter outlook, and then we will move to Q&A. Revenues for the fourth quarter were $66.7 million, down 11% sequentially and slightly above the midpoint of our projections. The Industrial market was the greatest source of weakness with revenues declining approximately 20% sequentially. Consumer revenues were down a little more than 10% with softness in both appliance and consumer electronic applications. Communication revenues decreased mid single-digits with weakness in networking applications more than offsetting a sequential increase in revenues from cellphone chargers. Computer revenues, which are driven mainly by the desktop market were also down mid single-digits sequentially. Distributors accounted for 73% of sales during the quarter, while direct customer made up 27%. Average selling price for the quarter was $0.28, unchanged from the prior quarter. Gross margins increased sequentially with GAAP and non-GAAP gross margin each rising 60 basis points to 47.3% and 47.8% respectively. That's a bit less than the 100 basis point improvement we had expected, reflecting the end market mix, particularly the relative strength of cellphone chargers, one of the few applications to show sequential growth during the quarter. Setting aside mix, our cost reduction efforts are on track and are now beginning to offset some of the recent margin pressures from the dollar-yen exchange rate and higher gold prices. GAAP operating expenses were $23.8 million, down approximately $700,000 sequentially. Non-GAAP operating expenses, which excludes stock-based compensation, as well as amortization of acquisition-related intangibles were $21.5 million, down about $1.5 million from the prior quarter as a result of the expense control measures we implemented during the quarter, in response to the weak demand environment. Our GAAP and non-GAAP tax rates for the quarter were 23% and…

Thanks, Sandeep. We'll move to the Q&A session now. [Operator Instructions] Operator, would you please give the instructions for the Q&A session?

[Operator Instructions] Our first question comes from Vernon Essi with Needham & Company.

I was wondering if you could just dive in a little bit into your guidance and specifically, if I look at your turns component and kind of look over the past couple of years, it's definitely going up as a percent. It seems like on a sequential basis, your backlog is sort of flattish, and I'm wondering what gives you the confidence that things are sort of turning? I mean, obviously, things are very lean out there but do you have specific indications from some end markets that things are going to improve as the quarter progresses? I mean, any color you could give us would be appreciated.

Well, I guess the biggest indication is that our bookings increased significantly in November, and have stayed relatively flat except for these holidays that caused a little bit of aberration in December and January. And the other indication is that we have significant turns business in January that bodes well for the quarter. But having said that, we had 1:1 book-to-bill ratio in Q4, which indicates that it is stable, not necessarily an upturn yet. So we're still waiting to see whether there'll be an upturn in the near future. It sounds like we're at the bottom and just about to climb gradually up.

Well, on a relative basis, your guidance is strong relative to your peers. So -- I mean, obviously, hats off to you on that front. Okay. And then my follow-on question and just in your prepared comments, you made interesting point about sort of, I guess, closing this 3-chip solution with an appliance manufacturer, and I was wondering if you could discuss sort of how that sales process works and how that would differ from things from the past. I mean, I guess in the past, I got the impression at times, you were sort of more of a -- almost a catalog part to a certain extent. This seems to be more of perhaps a direct sell approach. Is there any changes going on behind the scenes that would facilitate more action like this? And is this going to be a more commonplace scenario to have this cross-sell across the different products?

I think the biggest difference is that in the high-power Applications, we have multiple chips that can go into each power supply. In the past, we used to sell only a standby power supply because that's all we could address in an appliance, on a TV or a PC for that matter, any high-power application. Now we can not only sell into that standby socket, we can also sell into the main power supply, which in itself, could be 2 separate chips, one for PFC and one for the main converter. But in addition to that, we can sell a CAPZero, we can sell a SENZero and also, a Qspeed diode. So we have many different pieces of silicon that we can sell, which significantly increases our ASP in these markets. But as far as the selling process itself, it's not that different. I mean, even in an appliance when we're selling standby, we do have to get involved with the design, even though in many cases, the logistics will be done through distribution.

Okay. So just to, I guess, ask the obvious question, you are seeing the PI brand show its effectiveness in sort of cross-selling these other products without incremental investment in the OpEx line?

Yes. Because once we get design into a major manufacturer, whether it is an appliance or PC or TV manufacturer, the other people feel a lot more comfortable that it's a product that is endorsed already. And so the design cycle is much shorter, and plus, we also learn over time, the various applications, so we are able to guide the customer to the optimum solution quickly.

Okay. And then just another detail on this. Is it possible, and maybe you don't have to do this on this call, but to somehow provide the investment community with maybe a tracking number as to sort of how this dollar content may improve over time and percentage of maybe multi-cells that you have or multi-chips within your overall customer base? I mean, obviously, it's just starting out, but I would tend to think this might track pretty quickly I guess over time?

Well, certainly, the dollar content on the High-Power is significantly higher for 2 reasons. One is, as you said, the multichip solutions. But also, as the power increases, you have more silicon in the power conversion devices. We have a lot bigger silicon and therefore, you have higher silicon content. So in the high-power application, the content can be 5 or 10x more than just a standby chip.

Our next question comes from Tore Svanberg with Stifel, Nicolaus.

First question, coming back to turns, I think you mentioned 40% at the beginning of the quarter. You're now one month in, so can you give us a rough idea where you stand right now?

I prefer not to, and the reason for that is it can be very misleading. We have done that once in the past. It was very misleading, and the reason for that is exactly what we explained, is that what we ship and what gets shipped out are 2 separate things. So it's a very not exact measure in the first place.

That's fair. And you talked about gross margin exiting the year quite a bit higher than current levels. I'm just trying to understand the trajectory of the improvement. I mean, should we sort of expect 50 basis points a quarter in the first half and then second half, it sort of accelerates. Just help us understand that trajectory, please?

I think, Tore, it will be a gradual increase and what our expectation is if all external conditions remain with our expectation, then there's nothing unusual there that for the year, we should probably end up at a 50% level. I'm sorry, in the fourth quarter of 2012, we should end up for the fourth quarter 2012, about 50%.

Very good. Just one last question. Can you talk a little bit about your LED lighting business, how big it was last year and what your expectations are for 2012.

Well, last year, we came pretty close to what we expected, a little bit under that, under the number we were thinking of. We were thinking about $20 million, we came a little bit under that. But 2012, it's a little early to say. Maybe as we go through the first and second quarter, we'll get a better feel for how fast the market is growing, and we can give you a better idea. But all indications are that the design activities are very, very strong. So I expect it to grow very nicely. I just don't know the exact number yet.

Our next question comes from Steve Smigie with Raymond James.

I was hoping you could talk a little bit about the operating expenses. I guess you mentioned there's some extra FICA costs, et cetera, in the March quarter. As I look out to subsequent quarters, would I expect to see a pretty meaningful drop in the operating expense as a percentage of revenue, and dollar-wise, is it may be bumped down even in June because you don't have the FICA cost anymore?

I think the best way to look at it is we'll probably average somewhere around $23 million a quarter on an average for the year. That's the best way to look at it.

I mean, that seems a little high relative to say, like, if I look at a normal, more normal year. I guess it's a good year but fiscal 2010, calendar 2010. I think your operating expenses on previous revenue were somewhat lower than it seems like they're going to end up based on your guidance here. Has something changed? Does it...

No, if you look at the year prior to this, we ended up somewhere on a non-GAAP basis, around $89 million for the year. So it seems to be in the range if you look at raises and stuff like that for the year.

In fact, we have reduced those [indiscernible] expenses. Otherwise, it would go up more. So year-over-year, it's only very incremental, very small increase from 89 to the low 90s.

Right. Okay. And then I guess my next question is what is the High-Power business, I'm sorry if I missed this, what's the High-Power as a percentage of revenue for 2011, and what do you think it will be for 2012?

Yes, for 2011, we have projected $5 million to $8 million. We came within that range. We came on the lower half of that range because of the softness at the end of the year. But we are doing very well in terms of getting -- in terms of design activity, and we expect it to continue to grow very nicely this year.

And how much of LED overlaps into High-Power, or are they totally separate categories?

There is a little bit of an overlap because the street lighting really falls into High-Power. It's typically between 50 and 150 watts. There are some applications goes up to 180 watts for street lighting. But I would say most of the LED volume is well below that power level. Typically, I would say the peak of the volume is around 10 watts. So -- and the range for light replacement is anywhere from a couple of watts to maybe 15, 20 watts. Only the streetlights are in the High-Power area.

Our next question comes from Ross Seymore with Deutsche Bank.

This is Mike Chu for Ross. I just wanted to get your thoughts about the relative strength of your end markets in Q1, and also, if you could comment on the growth rates you think, just from a relative point of view of those end markets for the year.

Well, for Q1, it's really hard for us to project because until the end of the quarter, we don't get the POS information for the whole quarter to determine approximately where our chips went through distribution. You have to remember, 73% of our revenue last quarter was from distribution, and so almost 3/4 of our revenues is from distribution. And the same chip that can go into an appliance can go into an LED lighting solution or into a cellphone. So it's hard for us to tell what application it goes into. So we have to wait to see what the mix would be. We are assuming the mix is going to be very similar to Q4 for financial calculations.

Okay, fair enough. And maybe if you could comment on which end markets you think will be faster-growing for you for the year. Just kind of your thoughts on that?

Well, certainly, the High-Power and LED markets will be faster-growing markets. LED market because the market inherently is fast-growing. The PC market is not a fast-growing market. In fact, it's somewhat of a declining market. However, we are penetrating that market with new products, and therefore, we can grow very nicely for many years to come as we grow into that market. The TV market is both growing, and we are penetrating into that market. So High-Power is all incremental revenue because of the new products we introduced in 2010 and 2011. So those are the 2 fastest growing markets I would say.

Okay, fair enough. And maybe just one quick follow-up. You indicated that the cellphone charging business is now only 20% roughly of your total revenues. Is that a segment or how should we think about that segment as far as the overall growth with total revenues? Is that going to grow at the same rate and stay at 20% or is it going to grow at a faster or slower rate and maybe become a smaller or larger percentage of your total revenues going forward?

Well, the cellphone market itself is relatively stable. It's somewhat saturating at this point, although it seems to be growing a little bit every year. And we have, from everything we can tell, the largest share of that market. And our strategy in this market is to sell the product to whoever is willing to pay for the value we bring into this marketplace. There are certain customers who will be willing to purchase a very low-quality product from, for example, let's say, Chinese manufacturer, which is not an apple-to-apple comparison. And if we feel that is not a good comparison, we walk away from that business because we can. So we don't have any intentions to get out of the Cellphone business. We think it is a very good business to have even though it's lower margin. But we pick and choose what business we want. And historically, what do I say, I should say the last few years, our share as a percentage, it has ranged 20% plus or minus a few percentage points. And I would say in the long term, as a percentage, it is likely to decline because the other areas will continue to grow. But as far as our share in the market, you will know it will fluctuate a lot because it's just a very volatile market. It's likely to stay relatively flat. Maybe it'll grow a little bit. It depends upon which businesses we decide to take.

[Operator Instructions] And next, a follow-up from Tore Svanberg with Stifel, Nicolaus.

Just a question on gross margin again. Could you give us a sense of how much of your wafer cost is still sort of subject to the yen-dollar exchange rate? Because I know you've started to do some more contracts in U.S. dollars. So just wanted to get a rough idea of the percentage?

Well, it's still a substantial percent of our business. However, the mix is changing as we speak. So in terms of the impact of exchange rate, it used to be, just a little while ago, about 150 basis point impact for every 10% change in yen. Now I think it's more like roughly 100 basis points for a JPY 10 change -- a 10% change. I'm sorry, thank you. For a 10% change in yen, we expect an impact of roughly 100 basis points to gross margin.

Okay. That's helpful. And your inventory days obviously came up because of the lower revenues. As we look at the March quarter, should we expect inventory days to come down? Sounds like you're probably going to run utilization a little bit lower?

Yes, I think the way to look at it as we said, our model is between 110, plus or minus 15. So I think we're going to be in the same range. You have to remember we are at the bottom of the cycle, and so it is not unusual for the number of days to be higher. If the business was stable, we will be within the range. But now that we are at the bottom of the cycle, we are very comfortable with the inventory we have. In fact, we think we need to keep this inventory to be ready to grow when the market comes back. If you cut it back too much, then we would have the same problem we had in 2008, where we had a hard time ramping up production.

That's fair. And you mentioned this inventory is now down to 4.4 weeks, and you said that's the lowest level in 4 years. Could you just remind us what happened last time it got this low? I mean, did business snap back very quickly or was it gradual or just help us understand some comparisons?

Well, I think the big difference is 2, 3 years ago, most of our products had a lead time of 4 weeks, and our distributors generally kept some of it in 4 to 4.5 weeks of inventory so that they can effectively serve the customers. But now, our lead times vary between 4 and 6 weeks, depending on the product. Mainly because we have a lot more products. And so we can't keep inventory of all products at the highest level, and so my expectation would be that the distributors will be somewhere in that range, 4 to 6 weeks. They're a little bit on the lower end of that range, but it's not really out of range. It could easily be 5 weeks would be my expectation for a steady-state scenario.

And at this time, I'm showing no further questions. Now I'd like to turn it over to our speakers for any closing remarks.

Okay. Thank you. Since there are no more questions, we'll end the call there. Thanks, everyone, for listening. There will be a replay of this call available on our website, which is investors.powerint.com. Thanks, everyone, for listening, and good afternoon.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.