Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Power Integrations Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Joe Shiffler, Director of Investor Relations, you may begin your conference.

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. During the call today, 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 our press release and in our most recent Form 10-K filed with the SEC on February 14, 2018. 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. On last quarter's call, we stated that we had seen indications of customers and distributors taking a more cautious approach to stocking components due to the uncertainty of the global trade situation. We also called out a handful of push-outs from distributors serving the appliance market which has been affected by tariffs on finished products as well as steel and aluminum. Although our Q3 outlook anticipated that these conditions would persist to some degree, bookings slowed down abruptly in September and turns orders for the third quarter were less than expected. Q3 revenues came in slightly below our guidance at $110 million and with the order activity remaining subdued in October, we are forecasting Q4 revenues of $97 million plus or minus $3 million. The slowdown appears broad-based with customers and distributors across end markets and geographies telling us they intend to reduce inventories in Q4. The consumer appliance market, which accounts for about a third of our sales, has been especially soft as trade concerns have been magnified by weaker domestic demand in China. The softness in appliances is evident in our third quarter results with revenues from consumer category declining more than 10% sequentially. Revenues grew sequentially in each of the other end market categories. Communications revenues increased by a high-single digit percentage driven by the continued recovery in handset charges, while revenues from the computer category increased more than 20% sequentially driven by the ramp of a new USB PD tablet charger. Industrial revenues were up high-single digits driven by strength in metering, industrial controls and high-power applications. High power revenues are on track for a second straight year of double-digit growth, driven by renewable energy applications, electric locomotives and the recovery in energy markets, where our gate drivers are used in…

Thanks, Balu and good afternoon. As usual, I will focus my remarks on our non-GAAP numbers which are reconciled with the GAAP figures in the tables accompanying our press release. Third quarter revenues were $110.1 million, up 1% sequentially and down 1% from a year ago. Consumer revenues declined nearly 10% year-over-year, reflecting the factors Balu covered in his remarks. Communications revenues were down mid-single digits year-over-year mainly reflecting lower revenues from residential networking applications which we have de-emphasized in recent quarters. Revenues from cellphone applications also showed a slight year-over-year decline, reflecting the delayed adoption of USB PD technology as well as saturation in the overall handset market. Industrial revenues grew mid-single digits year-over-year driven by high-power applications, home and building automation, and industrial controls. Finally, the computer category grew better than 25% year-over-year, driven by the tablet charger design that Balu mentioned earlier. Revenue mix for the quarter was 37% industrial, 35% consumer, 22% communication and 6% computing. Non-GAAP gross margin ticked up by 30 basis points from the prior quarter to 52.7% as cost reduction offset a slightly less favorable end market mix. As we indicated on last quarter's call, we do expect a lower gross margin in the fourth quarter as we begin to feel the effect of higher cost starting wafers. Non-GAAP operating expenses were $34.4 million, essentially flat compared to the prior quarter and well below our guidance as we delayed certain expenses in light of the weakening revenue outlook. Non-GAAP operating margin was 21.5% for the quarter, up 50 basis points from the prior quarter. The non-GAAP effective tax rate for the quarter was 6.5%, while other income ticked up to $1.1 million reflecting higher yield on short-term investments. Non-GAAP earnings were $0.77 per diluted share, up from $0.74 in the prior quarter.…

Thanks, Sandeep. We'll open it up now for the Q&A session. Christine, would you please give the instructions for the Q&A?

Your first question comes from the line of Cody Acree from Loop Capital. Your line is open.

Thank you, guys, for taking my questions. Balu, as you look at the fourth quarter outlook, is there a way to give us a bit of color as to what you think is the mix of the guide down between inventory adjustment into slower demand?

That's a very good question. It's really hard to distinguish between the two. So what I would say is that we see a very broad slowdown, which means all of our markets will be affected by it. So we expect our consumer, industrial and communications markets to decline in Q4. The computer market to the best we can estimate is likely to be flat, primarily because of our USB PD design win. Hopefully, that gives you some color.

It does. Thank you. And the broad slowdown that you're seeing though, are you seeing that because it is so broad, are you seeing that primarily in inventories? You pointed specifically to appliances in China as softer unit demand. Are you able to call out any other areas that you're seeing weakness in unit demand or order push-outs in specific verticals?

In the Q3 quarter, most of what we saw was an inventory reduction at our end customers primarily in Asia, China specifically, but also outside of China because they also manufacture in China. But what we are seeing in Q4 or what we are hearing from our distributors in Q4 is that across the world, not only limited to Asia, the distributors are planning apparently to reduce inventory, and that's going to affect us broadly. They have concerns about trade. They have concerns about demand. So, there is a broad interest in reducing the inventory they have, and that's why we think it's going to affect most of our markets.

Well, I guess my question though is that it sounds like this is all on concerns of changes and future changes in demand. But you were able to point out specifically increased costs and prices in appliances. Are you seeing any absolute increases in costs or changes in demand at any other verticals?

Well, in appliances, we have heard that many people have delayed purchases in the U.S. because of the higher prices on most of the appliances, including air conditioning for example. And in China and in fact all over Southeast Asia, the demand for air conditioning has been very soft for multiple reasons. One is, of course, there is a significant inventory, build of inventory of air conditioners. Secondly, the summer has been relatively mild in the most of Southeast Asia, so that has also reduced the demand. Beyond that, we don't have any specific color of other markets other than that our bookings have dropped quite significantly in September, and October looks no different than September. It looks very similar to September and that's what tells us that the demand slowdown is broader.

Okay. And lastly, do you have a sense for where inventories are sitting today in the distribution channel and how much – if we don't see a dramatic shift down in broad demand and this is just more of an inventory risk re-assignment to the chip companies, how much is there left to work through?

So, if you look at it, we've been hovering around about eight weeks in the distribution inventory at our distributor. As Balu indicated in the last quarter, we saw the demand getting in -- starting to affect because we saw the end customers reducing the demand because they were having more inventory of finished goods. In the fourth quarter, as we factory in, we are expecting the distributors as they're indicating to lower their, because they didn't lower as much in Q3, they'll lower that in the fourth quarter. So, we expect that to come down. Our normal weeks in the channel are anywhere between six weeks and seven weeks, and we're sitting at about eight weeks. So, we're hoping that it should come down from the eight weeks towards the seven weeks at least.

Okay. Great. Thank you, guys.

You're welcome.

Your next question comes from the line of Tore Svanberg from Stifel. Your line is open. Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc.: Yes, thank you. Just to follow-up on that last question. So Sandeep, if normal is six weeks to seven weeks, Q4, maybe you can get down to seven weeks. Does that mean there's probably going to be a little bit more work done in Q1 or is it too early to say at this point?

So, it's a little early to say about how Q1 is going to turn out based on the uncertainty. What I think the best modeling that we are seeing for next year, and I know you're trying to get to see what it is, is that year-over-year growth for us in the first half is not going to be – you're not going to see much growth. But because of the design wins that we have for USB PD, we believe we are going to get a disproportionate growth year-over-year in the second half. And that's why we are comfortable that we will actually do pretty well for the whole year and go towards our low double digit because of the disproportionate growth in the second half. Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc.: That's very helpful. And a question for Balu and this new $500 million SAM you're targeting in motor drives. So I get the efficiencies and things like that. But, is there anything else that you can share with us from a sort of competitive advantage perspective as Power Integrations ventures into this market?

Absolutely. There are multiple advantages. The efficiency being the number one and that has a multiple facet to it. One is we eliminate the heat sink which is usually a big reliability problem in appliances. They tend to fall off during transportation and so on. But a bigger issue is – the motor drive circuitry tends to be built into the motor. So there's a huge heat problem. And to reduce the heat, they have a choice of using a more expensive higher efficiency motor or they have a more efficient drive, so that the temperature doesn't go too high. So there's a significant cost savings there. But beyond that, we have some features, safety features which are implemented in hardware. Most of the existing solutions, in fact all of these existing solutions use software-based safety features. For example, if there is a stall in the motor or a short circuit in the motor, the only way to detect it is through software, and that means that the software has to be approved by safety agencies like UL and VDE and so on, which is a very painful process. We have that built into our product. And so, the software becomes independent of all the safety requirements. So that's a huge advantage to our customers, and to add to all of that, the current shortage of MOSFETs and IPMs, IPM stands for integrated power modules. These are modules that have multiple discrete components in them. Both of them are in severe shortage. And so, there is a strong pull for our product simply because we have no constraints on our capacity. We have plenty of capacity. So, the customers are very pleasantly surprised that they can get as many as they want. So in the short run, that has become another major driver. Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc.: That's very helpful, Balu. And last question for Sandeep. So with the OpEx guidance for Q4, is that going to kind of be the new range going forward or will you take some other actions to sort of navigate through this softer period?

So one of the things as you know, we have always looked at our business on a long term. As we have indicated earlier and has been reflected with the introduction of the new product and entering a new market with the product that we are talking, announcing at Electronica, we have so many other things in pipeline. We will continue to moderate the expenses but we will continue to invest in R&D and in our sales function because that is critical for our growth. And these downturns are for a short period and we look at our business long-term. However, if you're looking for a modeling exercise for next year, what it appears is that we will probably increase our spending by 6% to 7% range from the current year level in 2019. Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc.: That's very helpful. Thank you very much.

Thank you, Tore.

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

Hi. This is Gee (26:19) for Ross. Thank you for letting me ask a question. For the gross margin, you mentioned that higher wafer start costs are expected to increase – impact margins in the fourth quarter. How should we think about going into 2019? Do those increased costs subside or should they continue?

So, they are going to continue because these are the starting wafers. What has happened is that, as we have said, anything impacting the cost of the wafers takes a while to get into the P&L. So the fourth quarter is where we're seeing the impact for the first time. And next year, we're going to get the full-year impact for all four quarters. If you're looking for – we haven't finished our plan but for modeling purposes, what I would say that our gross margin would be somewhere approximating 51% for 2019.

Okay. Thank you. And you mentioned some good comp, some better visibility and confidence for auto revenues longer term in the next four years to five years based on some early traction. Can you discuss a little bit more your confidence in that market?

Yes. When we introduced the iDriver for automotive, it was actually driven by the quest from multiple customers who saw our iDriver, wanted to use in automotive, and so they asked us to qualify it for automotive. So, it was customer driven. And once we got that to qualify, we got engaged with multiple customers. And one specific customer is a very large customer, and they're working very closely with us on the next-generation electric vehicle that will go into production sometime in 2023 or 2024, a pretty high-volume opportunity. And obviously, the product is applicable to all of the automotive customers. We are talking to many of them as we speak. The biggest advantage they see is replacing our optocoupler, that isolation in the driver. We use a FluxLink which is much more robust for automotive applications. It's not sensitive to temperature. It has no life – long life reliability issues like optocouplers do. Many of the OEMS have actually banned optocouplers for new designs, which gives us a huge push. On top of that, we have a number of features, safety features that are very important for automotive applications. So, we are very optimistic that we have a very good start with a very large auto OEM, and we are working directly with the OEM. And then we are also talking to others and we are very optimistic that we'll get engaged with multiple OEMs as time goes on.

Thank you.

Your next question comes from the line of Christopher Rolland from Susquehanna Internet (29:42). Your line is open.

David Haberle on behalf of Christopher Rolland, and thank you for taking our questions. I guess, first, your comments on the China high-voltage DC project wins. It sounds like that's getting back on track there. Did those contribute any revenue to 3Q or is that coming in 4Q or 2019, and then how material can those wins be for you guys?

It has actually been contributing for a couple of years now. And the revenue has been growing as we are getting into more projects in China. China has a very long-term plan to implement high-voltage DC transmission across the country, and they are still in the early stages right now. So, we expect this to be a long-term driver. It'll be somewhat lumpy because it's driven by specific projects. But, we are talking about a SAM of multiple tens of millions of dollars a year over the next 10 years or so. And we expect to get a significant share of that because we have a good start in this business.

Got it. Thank you for the color there. And then I guess on USB PD, it sounds like in hindsight that's now a second half 2019 opportunity. Are there opportunities there in the second half to do the Power Delivery 3.0 with programmable power supply or is this pretty basic USB PD stuff?

Well, the USB PD – all future designs will use our programmable power supply delivery. The existing ones used our InnoSwitch2 and InnoSwitch3 products, but we now have a new product called InnoSwitch Pro which makes it a lot simpler to provide a full-fledged USB PD 3.0 with programmable power supply. And so, all of the new designs use that. And I must remind you that we do already have USB PD design that contributed to revenue in Q3 and will contribute to Q4. This is for tablets. But next year, we expect a significant increase based on designs we've already won. Starting roughly in the middle of next year, we see a significant increase and that will contribute to, as Sandeep put it, a disproportionate growth in the second half. And that's why we feel comfortable that we can achieve low-double-digit growth next year, even though the first half is going to be, to the best we can estimate, relatively flat with the first half of this year.

Got that. Thank you for the color there. Appreciate it.

You're welcome.

There are no further questions at this time. Mr. Joe Shiffler, I turn the call back over to you.

All right. We'll end it 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.

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