Good afternoon. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to Power Integrations' Third Quarter 2017 Earnings Call. [Operator Instructions] Thank you. It is now my pleasure to turn the call over to your host Joe Shiffler, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon. 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. Our third quarter results are calculated using the sell-in method of revenue recognition on sales to distributors, reflecting our adoption of ASC 606 effective January 1 of this year. On today's call and then our press release comparison to prior year result to make use of recap financial information calculated as if the new accounting standard have been in effect for the prior periods. Recap data for 2015 and 2016 can be found in the historical financial tables posted on our investor website, Investors.power.com. Also during the call today, we, we will refer to financial measures not calculated according to Generally Accepted Accounting Principles. Please refer to today's press release which is posted on our investor website for an explanation of our reasons for using such non-GAAP measures as well as tables reconciling these measures to our GAAP results. Our discussion today, including the Q&A session, will include forward-looking statements denoted by words like will, would, believe, should, expect, outlook, forecast and similar expressions that look toward future events or performance. Forward-looking statements are subject to risks and uncertainties, that 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 our most recent Form 10-K filed with the SEC on February 8, 2017. 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 the call over to Balu.

Thanks, Joe, and good afternoon. Third quarter revenues were a record $111.3 million up 9% year-over-year. Non-GAAP earnings per share grew faster than revenues increasing 16% from a year ago and we generated just under $25 million in cash flow from operations in the quarter. Our growth in Q3 was once again driven by the industrial and consumer categories which grew at a combined rate of 20% year-over-year. The industrial category saw broad-based growth across a wide range of applications led by other high-power products which are on track to grow more than 20% this year driven by design wins in renewable energy and DC transmission applications. As we have discussed on prior calls, China is embarking on a multi-year effort install a massive DC transmission grid, which will be capable of transporting power far more efficiently over long distances than traditional AC transmission infrastructure. Unlike AC transmission, which uses magnetic transformers, DC transmission facilities require highly sophisticated power conversion electronics, including high voltage IGBT modules each paired with a gate driver whose sole role is to ensure safe and reliable operations. With the voltages running as high as 1 million volts and with many millions of utility customers dependent on this infrastructure reliability and safety are the utmost importance in this application. The fact that our SCALE - 2 drivers have been chosen for his application is a testament to the strength of our gate drive technology and we expect this project to continue generating significant revenues in the years ahead. The low power component of the industrial category also contributed strong growth in the third quarter driven by a variety of articles including smart meters, battery powered lawn equipment, e-bikes LED lighting and home automation applications such as USB wall sockets and power strips. In all industrial revenue,…

Thanks, Balu and good afternoon. Our Q3 results are fairly straightforward. So, I will just quickly touch on our few financial highlights and then we will open it up for the Q&A session. This quarter revenues were $111.3 million up 3% compared to the prior quarter. The sequential growth was led by our double-digit increase in the industrial category. Driven by the high-power business as well as any bikes, tools and metering applications. Communication revenues were up high-single digit sequentially recovering from the softness we saw in Q2, while the computer segment grew mid-single digit sequentially. Consumer revenues declined mid-single digits from the prior quarter reflecting the expected seasonal slowdown in the air conditioning market. Revenue mix for the quarter was 37% consumer, 35% industrial, 23% communication and 5% computer. Non-GAAP gross margin rose by 40 basis points sequentially to 51.3%. The increase was driven mainly by the post-election rise in the dollar versus the Yen which had a beneficial impact on the cost of wafers from our Japanese foundries. Non-GAAP operating expenses were $33 million for the quarter up $300,000 from the prior quarter and exactly in line with our forecast. Non-GAAP operating margin reached its highest level in three years coming in at 21.6% up 110 basis points from the prior quarter. Other income for the quarter was about $900,000 up more than $400,000 from the prior quarter. The increase partially reflects higher interest rates and a higher cash balance but also an impact of roughly $250,000 from foreign currency fluctuations. Non-GAAP net income was $0.78 cents per diluted share for the quarter up from $0.69 in the prior quarter. Cash flow from operations was $24.6 million for the quarter white capital expenditures totaled $6.7 million. We also utilized $6.7 million for share repurchases, buying back approximately 96,000…

Thanks Sandeep. We'll open up now for the Q&A session. Emily would you please repeat the instructions for the Q&A.

And your first question comes from the line of Ross Seymour with Deutsche Bank. Your line is open. Please go ahead.

This Jerry on for Ross. Thank you for taking the questions. So, you talked about this in your prepared remarks just hoping for a little bit more detail. We understand you guys were in the probably a month ago in the conference. You talked a little about some of these design wins I guess and we understand the process was to have a little bit of a broader appeal in terms of end market mix on the smartphone. Could you talk a little bit about -- notable assignments that you have --?

Yes, sure. One of the design wins is in monitors to improve the overall efficiency of the monitor. There is this new requirement called total energy consumption which basically limits the amount of power you can consume over the period of one year. And so, people are looking for a very high efficiency power supplies to be able to do that and we got designed into that actually well before our launch and we've been shipping in volumes to this customer, the Korean customer who is very large in the monitors. The other one was a set top box also for a consumer application and that has been in production for some time now. In terms of new designs, we have won a design with in a smartphone charger, rapid charger this is for a Chinese customer, this originally used to be an American company. And then there was also an appliance design for a European customer that and I'm trying to remove what is that thing, I believe is the vacuum machine if I remember correctly. And so those are some of the examples.

Alright. That's really helpful sounds like it will be definitely get more.

Yes.

So, to follow-up just help me understand you guys don't provide specific guidance so I was just hoping you could speak any notable differences in the quarter from the -- perspective versus your [indiscernible]?

Yes. So basically, that is part of the reason if you look at it our guidance for the margin versus where we came out was favorable because we were expecting more of communications and industrial the industrial did happen but the communications which would have tended to keep the lower grew but not to the extent we expected it and that's why we got more favorable margin. And typically, in the third quarter as you know air conditioning does come down and that impacts the consumer segment.

That makes sense and so just in the profit to gross margins and little bit of a longer-term question here. What will it take to get your gross margins to midpoint of your -- long term how does InnoSwitch battery [indiscernible]?

So, as we have indicated earlier that in the near term especially if you are looking a year ahead even though it's a little early, we expect our margin to be in the lower end, this year we're going to probably average some around 50.5% 50.6% and next year it's going to hover around that. As we come up with more higher generation higher ASP products that's going to help us improve over a period of time. Historically, if you would looked at it we have averaged somewhere in the 51% to 52% rate. As I've indicated earlier for us it is more important to get the operating margin because of the leverage in our model then getting the gross margins because we're trying to leverage and increase our revenue and try to get our operating margin moving more towards the mid-twenties and as you can see we are back into the twenties this year and that's something that we want to inch our way up towards mid-twenties.

Thank you so much.

You're welcome.

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

Yes, thank you. My first question is for Balu. Balu you mentioned that you expect USB PD to materialize more in the second half of 2018, I'm just wondering what are some of the recent developments that gives you that conviction?

Well, you know I think I've talked about this before USB PD gives you lot of flexibility in adjusting the amount of power that you deliver to Mobile phone, the mobile phone or any mobile device for that matter whether its tablet even a notebook can talk to USB PD enabled charger and ask for any voltage or current. So, this standard actually was almost final last year but there was some resistance for this standard to be accepted by all the cellphone companies. Each cellphone company had a slightly different requirement especially the Chinese guys had thought that they had a better way to charge batteries, and so they wanted some additional features and that actually delayed the USB PD, that's kind of the bad news. The good news is, the changes they have made to USB PD makes it lot more inclusive of all the cellphone companies. We truly believe now almost all of the cellphone companies will switch to USB PD. It now has enough folks to do everything everybody wants. So basically, at a fundamental level, the USB PD allows you to adjust the voltage in very small steps like in 10, 20 mili volts steps and current in the 50 mili amp steps all the way from say about 5 volts to 20 volts which makes it a very flexible power supply to be used with any mobile device. So because of that we feel pretty strongly that now that it is complete, it actually completed believe or not just a few weeks ago. It got voted in. So, we feel now pretty confident that by second half of next year we would start generating revenue and that will continue to grow well into 2019 and beyond. And we know that most of the cellphone companies have made the decision to adopt USB PD and so that's what gives us confidence that we will get a fair share of this market and Inno 3 is perfectly suited for this application because of the power levels, it is a much higher power levels and so it requires highly efficiency and a smaller component count also makes a huge difference to make this products much smaller and the efficiency also makes the power supply much lighter not only smaller but much lighter.

Very good and you talked a little bit more about appliances and connectivity at this time than I've heard you talk of before and I think you mentioned you are actually seeing ASP appreciation because of appliances being more and more connected. I was hoping you could elaborate a little bit on that. I mean obviously being connected means it needs more power but is there any reason why you are emphasizing this a little bit more now?

The reason is we are seeing a lot of the appliance designs that incorporate what does some people call IOT features, some people call it automation features and so on. And an example of that would be a refrigerator having the screen in front where you can order food based on your requirements and it will be delivered to your house. Another example is a washing machine where if the motor is about to fail that is detected by the vibration and a signal is sent to the manufacturer, so before the motor fails they can send somebody out to replace the motor. There are also application where your washing machine will wash your clothes when the electricity is the cheapest and you don't have to worry about it, just load it and forget about it and it will automatically turn on and wash your machine. So there are a lot of these kinds of features that are being introduced into these products and we see more and more designs that require higher power because of that. The other aspect that's also increasing our ASP is energy efficiency. Most of the appliances are now going to what is known as electronically controlled brushless DC motors which are significantly more efficient but it requires a separate control and a separate power supply in most cases. So now you are talking about more than one power supply in many of these appliances. Added to this LED lighting is becoming of course very common and in many of its obligations the places that are lit are used and touchable and therefore it needs an isolated LED driver and probably the best example is the refrigerator. The LED lighting is not only very efficient it also produces less heat. So, most refrigerators are now gone to LED lighting and many of them have a separate power supply for that. So, all of this increases our content. One last thing I would add is that in spite of all these additional features they still have to meet a very low standby consumption spec of 500 mili watts and the only way you can do that is by adding some additional functionality like our CAPZero chip. The CAPZero is becoming very popular for appliance applications. And the overriding factor of course is reliability, so we have had such a strong record in appliances that we are sitting in a very good position to take advantage of all this development that will increase our ASP.

That's very helpful. Just one last question and I'm just trying to understand the potential return on this recent CapEx increase. Is the CapEx increase kind of just catching up from maybe not spending a lot the last few years or are you actually starting to see some new markets, new programs that you really want to go after? And I'm especially thinking about it in relation to what you said about the sand growing to more than $4 billion by the end of next year?

It really comes from two factors, one is that we see a demand growth coming that we want to be prepared for. Number two, the capacity worldwide for six and eight-inch wafers is relatively tight. So, to increase the capacity we have to do some investments because sometimes the -- may not have all the equipment we need to implement our technologies, so we will have to spend some of the -- spend for some of the equipment to expand the capacity. If there was a lot of excess capacity of course there is lot more incentive for our vendors to offer that capacity at no cost to us, but when there is a tightness we at least have to put in our fair share to get the capacity. So that's really the two reasons, it is the growth that we see coming and also the fact that the capacity is tight. The good news is we do we have acquired more than sufficient capacity to fuel our growth for the foreseeable future.

Very helpful. Thank you.

You're welcome.

Your next question comes from the line of David Williams from Drexel Hamilton. Your line is open. Please go ahead.

Hi, thanks for taking my question. Balu, I guess this first one is for you. If I'm thinking about the health of the channel inventory and after the correction that you saw last quarter in the communication segment, can you talk a little bit about how you are seeing the health of the channel inventory and if you are seeing anything specific today that gives you any concern heading into the back half of the year?

Well, if you talk about our distribution inventory, it's pretty much where we expect it to be. So, you know seven weeks plus or minus is where it should be at least for Q3 - Q2 and Q3. Q4 tends to be lower. At the end of Q4, most distributors try to reduce their inventory at the year end and then at the end of Q1, it tends to be higher because they are preparing for growth in Q2. As far as our customer inventories go, our visibility is not that great, because not all customers buy directly from us. A lot of them buy from distributors. However, having said that, we believe this China slowdown and the resulting inventory build is for - to the extent we can tell is pretty much gone. So, we should see the demand as it happens going forward.

Right. And then in that the Communications segment if we kind of think about business switch to USB PD that you had mentioned. Do you expect that maybe ahead of that you will see a slowdown in the Communications segment, and execute it the first part of next year before that picks up?

Yeah. Just to be clear, we actually grew in cellphone chargers. The reason our Communication segment was down year-over-year was more to do with networking business which is down. This is primarily WiFi business. So, the consumer is growing this year. It will grow this year, but it will grow much more significantly the second half of next year. And since everybody is switching over to USB PD, you can imagine that they are not going to do redesigns of existing devises or switch smartphones from existing chargers to fast chargers. So, you could argue that the growth will be limited until USB PD comes on board, but it's still growing.

Great. And then how, if you can talk a little bit maybe about your scale IGBT drivers and how that's faring recently. Apple TV said you were expecting begin shipping that this quarter. Can you talk a little bit about that ramp and how it's faring to what your expectations were?

The answer to the last question is yes. The iDriver goes into very high reliability type applications like electric buses and commercial air conditioning, commercial solar installations and also UPS power supplies. So, the design cycle is very long. We will have some revenue this year, but very small, but next year we expect to have - we start seeing revenue significance and then that will continue to grow for many years to come.

[Operator Instructions]. Your next question comes from the line of Edgar Roesch with Sidoti and Company. Your line is open. Please go ahead.

Balu, what kind of a major retail is right now, seems like there was a number of laptops powered through a USB Type C connector. Could you just comment on the development of that market, whether it's seeing a bridge to win USB PDs adopted or what stage we're really witnessing so far?

Thanks Ed for the question. Most of the laptops actually use very -- what you call unique connectors for each one of the manufacturers. The first laptop that was introduced with USB PD was by -- it is the Apple Mac Air Book -- what do they call that? You know what I'm talking about. Anyways, so that…

MacBook Pro, I think.

Yes. But the first cellphone using USB was introduced by Google which is the Pixel phone and we are in it as I think we have mentioned that before. So, it's just in very early stages, we expect all of the mobile devices whether it is cellphones or laptops or tablets will eventually move to USBPD for really multiple reasons. One is the connector which is a -- what's called the C connector is very small and capable. It can handle up to 100 watts, yet it is very small and it's reversible just like the lightening connector on Apple phones. So, it's a very convenient connector, but it can only be used with USBPD and PD part of the USB standard which is a USB 3 standard, our third generation USB standard, the PD stands for power delivery, and that's a protocol that has been modified to make it much more flexible to provide different voltages and currents. And that got only approved recently. So, the USBPD will -- we believe will take off, but because of the design cycles it will be the second half of next year when we'll start seeing significant revenue.

Okay, thanks. And then on these industrial wins like the Chinese electric transmission program and you mentioning getting qualified for electric vehicle content. Are those type of wins arriving through existing customer relationships, maybe some larger European industrial companies. Could you speak a little bit whether you've had to cultivate a whole new set of relationships to win those?

Excellent question. It comes from the relationships we have already had. We have had very good relationships with the large industrial customers in Europe and also in China, in China specifically, the Chinese railways and also the Chinese electrical goods guys. And they have been experimenting with DC transmission for quite some time now using not only our product, but also competitor's product. And what they found was that the competitor's product quality was not very good. They blew up a whole bunch of them, which is a huge problem for DC transmission and so far, we have had a perfect record of no failures on our products. So, they have chosen us for the real implementation, which is the actual implementation of that high-voltage DC transmission. Now high voltage DC transmission is not new. We already have some installations in the U.S. and several in Europe. I think the first one was installed between U.K. and France. But what is new, is a grid. Usually DC transmission was used for point-to-point links like for example we have one from Portland to California -- Southern California which is a DC transmission. But what China is doing now is using that in a grid fashion. And to do that, you need quite sophisticated electronics on each end of that transmission, which you have obviously many different ends if you have multiple grids, multiple transmission lines connected in a grid. And they have been working it for quite some time now, many years, but now they are ready to deploy it and we believe this will be - this will propagate to other countries like Europe and U.S. So, this is not a short-term thing. This will happen first in China, because they are in the process of installing a huge grid, but it will eventually propagate to other countries, because DC is more efficient, significantly more efficient than AC transmission.

Just as a contractor that could conceivably be going to other regions and doing similar projects?

Not necessarily. Absolutely, the guys who actually build the power conversion units, and typically they are large industrial companies like ABB, General Electric, Siemens, Schneider and those guys. And once they have that product available, it's relatively straightforward for other people to implement.

Great. And then one last question for you guys. If I remember correctly, last year I think the Company declined to take a normal year end shut down of any period. Is that going to be the same thing this year?

Well, last year we didn't take it because we were very tight on getting all the products out, but I think we're in better shape now, so we will take a few days off between Christmas and New Year.

I'm showing no further audio questions at this time. I will now turn the call back to Joe Shiffler.

Okay. Thanks everyone for listening. There will be a replay of this call available on our website investors.power.com. Thanks again and good afternoon.