Good afternoon. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Power Integrations' Fourth Quarter Earnings Conference 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. [Operator Instructions] Thank you. Joe Shiffler, Director of Investor Relations, you may begin your conference.

Thanks, Christina. Good afternoon, everyone. 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, which may be denoted by words like will, would, believe, should, expect, outlook, forecast, confident, 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. As expected, fourth quarter revenues declined as a result of the downturn currently being felt across the semiconductor industry. Reflecting the broad-based nature of the slowdown, all four revenue categories declined by double-digit percentages in the fourth quarter compared to Q3. As many of our peers have noted, the downturn appears to be cyclical in nature, though it has been amplified by trade tensions and weaker domestic demand in China. These additional factors have hit especially hard in the appliance and smartphone markets which accounts for roughly half of our total sales. Our Communications category, which is dominated by smartphone chargers, and skews heavily towards Chinese OEMs, declined nearly 20% for the full year. The decline was driven not only by general weak handset demand, but also by slower adoption of fast charges ahead of the upcoming transition to USB PD technology. Our Consumer category, which is dominated by appliances, fell 6% for the year, reflecting weaker consumer demand in China as well as the impact of tariffs and broader trade disputes which have driven up the cost of appliances, for US consumers, while making customers and distributors more cautious about holding inventory. As a result, despite solid growth in our Industrial and Computer categories, our total revenues for the full year fell by 4%. While disappointed in these results, we feel good about our prospects for 2019 for a number of reasons. First, we were among the earliest companies to feel the effects of the downturn and thus experienced a greater impact to our 2018 performance than broader industry. While we can't predict the exact pace or timing of the rebound we are confident that we will also be among the first companies to benefit from the recovery as has been the case in…

Thanks, Balu, and good afternoon. As usual I will focus my remarks primarily on our non-GAAP numbers, which are reconciled to the GAAP figures in the tables accompanying our press release. The one item of note in our GAAP results is the tax benefit from new IRS regulations clarifying the transition tax in the 2017 tax law. We recalculate this tax following the regulations and reversed a portion of the charge that we accrued in 2017. This resulted in a negative GAAP rate - tax rate for the fourth quarter of 2018. We have excluded this benefit from our non-GAAP results, as shown in the reconciliation tables. Our revenues for the fourth quarter were $93.3 million, down 14% from the fourth quarter of 2017. Communications revenues were down 30% year-over-year in Q4, reflecting weakness in smartphones, while consumer revenues fell 20% driven mainly by weak demand and associated inventory adjustments in the appliance market. Industrial revenues grew low-single digits year-over-year in Q4, led by high-power applications as well as chargers for battery operated tools, lawn equipment and e-bikes. Revenues in the computer category increased about 10% year-over-year driven by USB PD tablet business that began ramping in the third quarter. On a sequential basis, revenues were down 15% with all four categories declining double digits, reflecting the breadth of the current slowdown. Revenue mix for the quarter was 40%, Industrial; 34%, Consumer; 24% - 20%, Communication; and 6%, Computer. Non-GAAP gross margin was flat compared to the third quarter of 52.7%, beating our forecast due to favorable end-market mix and lower-than-expected consumption of higher cost wafers from our inventory. Non-GAAP operating expenses were $34.4 million, more than a $1 million below our guidance. We have held expenses flat for three consecutive quarters and are managing spending carefully in light of…

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

[Operator Instructions] Your first question comes from Ross Seymore from Deutsche Bank. Your line is open.

Hey, guys, thanks for letting me ask the question. A couple ones here on the revenue side and linearity of demand; Balu, you mentioned that I think January bookings were the strongest since last May. Any color about where they're coming from, end markets, is it any refilling channel inventory any sort of qualitative or quantitative detail on that would be helpful.

It is broad-based and a significant part of it is also coming from appliance market where it looks like they have run out of inventory. And I also want to point out that the sell-through revenue was much stronger than sell-in in January, which is good. That means that the demand is improving.

And I guess, as far as the second half goes, relative to last quarter, and the same earnings call, you basically said the same thing about the second half and the competence et cetera. Has anything changed as you look into the back half, not only in the USB PD business, first and foremost, but around any of the other company-specific metrics and design wins that you planned at that time, at least to have ramped in the second half?

No, it's actually playing out exactly as we planned. We won a number of designs, particularly in the USB PD. And so we expect a strong second half and we also think Q2 will have a growth - it will be a growth quarter, but second half will be much stronger.

The second quarter as Balu is indicating is we are talking on a sequential basis from the first quarter.

Got you. Then one last one if I could sneak it in on the margin front for you, Sandeep. I think on the last quarterly call, you talked about, the gross margin might be a little weaker year-over-year. Given the confidence in the comps, in the phone ramp, is that still the case. And then I think you also said OpEx to be up about 6% or 7% year-over-year. Has that changed given the lower level at which you exited last year. Then I'll go away. Thanks.

Yeah, I guess your question is for the year, I'm presuming, for 2019, right?

Correct.

Yeah. So I think the gross margin for the year, as I had indicated earlier, will be around 51.5%. I expect it to be for the year roughly in that range, and the expense growth as you indicated, will be in the 5% to 6% range.

Got it. Thank you.

Year-over-year.

Thanks, Ross.

Your next question comes from Cody Acree from Loop Capital. Your line is open.

Thank you, guys for taking my questions and congrats on the progress. Maybe just following up on Ross' question, as you look into the US PD ramp, can you just maybe give us any details on where you're seeing your design wins?

We have actually one design with multiple OEMs and we expect the production to start - pre-production to start in Q2 and that's why we think that we will have a sequential growth in Q2, followed by a much stronger second half where a number of these will go into full production.

And what, I guess, I was trying to define what this could be as a percentage of revenue. What are - why are you thinking this could become in 2019, 2020, I guess.

It's hard to be precise, but I think directionally what I'd like to give you an answer is from an end market mix, I think the highest growth we would probably get is from the communication segment, which is probably driven by the cell phone. And I would say that all other three segments will also grow give and take roughly around equally. But I think the cell phone would be disproportionately higher in end-market mix this year.

Okay, great. And then lastly, just the turn you've seen in order demand has that been, you said it's been broad-based, but I know the appliances have been one of your more problematic segment. So are you seeing it's more geographically based or are you seeing it's broad based globally and across all your end markets.

Yeah, I want to warn that it's just one month of information and January is usually a strong bookings month anyway, because of Lunar New Year. Before the holidays, people tend to book a lot. But assuming that is an indicator, we feel pretty good that, all other markets, of course communications will do really well this year that we believe, but even the other markets are likely to grow this year. So but I guess the biggest positive is the drawdown of inventory at the distributors in January. If you compare that to Q4, Q4, the sell-in and sell-through are roughly equal. We were expecting sell-through to be stronger in Q4, but it wasn't, whereas in January the sell-through was much stronger than sell-in. And that to me is a very positive indication. And if that is true, we should do well in appliances, which has not done well last year.

Great. Thank you, guys.

You're welcome.

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

Yes. Thank you and I apologize if I'm making some very specific questions here. But when do you expect to be back to year-over-year growth. I assume that will happen sometime in the second half?

Yeah. In fact, the second half, we should get back to double-digit growth on a year-over-year basis.

Excellent, very good. And with that...

That's for the entire second half, Tore - that's for the entire second half, not necessarily any particular quarter.

Got it, understood. And if we then look at your inventory days now standing at 167, with that type of growth you should probably be back down to 110 or so in the second half?

I think we will be back in our model somewhere, our model is always 110 plus or minus 15, and I think we should get into our model in the 120 range, somewhere, by the third quarter.

Okay. Very good.

The first half will be elevated. Q1 could be slightly above even Q4. But I think it will get normalized by the third quarter.

Very good. And Balu, now that the USB PD market has finally taken off, is it worth asking questions about what type of power levels, are you seeing out there, because I guess the higher the power levels are the faster the charging, maybe the higher the confidence is for you. So what type of power level should we start to see here into 2019?

For USB PD, we are seeing power levels, all the way from '18 watts up to 60 watts, for cell phones, but obviously the higher power ones like 40 watts and 60 watts tend to be relatively low volume, because of the higher end. Most of the volume is on the lower end, which is 18 watts, 27 watts, 25 watts and so on.

Very good. And then just one last question on BridgeSwitch, which is your latest market. You mentioned 2020 revenue contribution, should we assume that this business will be very gradual as a lot of your other new markets or could revenue be a little bit more substantial?

It will be gradual, simply because the appliance market not only has longer design cycles, but it also has a slow ramp. Usually they'll design into one or two models and then migrate it to other models. So our expectation is in 2020, it should be in the few million dollars of kind of thing, I mean, single-digit millions.

Very good, thank you very much.

You're welcome.

Your next question comes from Ed Roesch from Sidoti & Company. Your line is open.

Yeah. Hi, congrats on managing through that environment pretty nicely there. Wanted to look at parts of the communications, other than smartphones to begin with. I know you historically had some router business in there but then also looking at base station deployment starting perhaps for 5G in the coming year, are those end markets showing any signs of life for you at this time?

Well the router market is basically an external adapter market. So it's on the low end of the scale, and we have a deep focus, away from it over the last few years. But the base station market for 5G could be an interesting market. But as you know, the deployment will be relatively small from what everything we know in 2019. We certainly are watching that market to see whether it could help us grow our communications revenue outside of cellphones.

Okay, and then switching to USB PD, the news sounds pretty good there. It's very encouraging for incremental revenue coming from that, but would you say, Balu that the kind of the consumer value seeking that we've started to see in the smartphone market, could potentially narrow the scope for the adoption of that? What kind of cost does that add to the bundle that the consumer is getting?

The cost added is very small compared to the phone itself, phone is the biggest cost. There is an incremental cost, but the value, you get out of it, I think is something the customers highly desire. We have seen a lot of blogs where people really prefer fast-charging, because many times in the middle of the day they need to charge the phone, and they don't have the time to wait for hours. So we think that it is a value add that will attract people to buy next generation phones rather than just an increase in cost. In fact, I think, it is very small compared to the costs of the cell phone.

That makes sense. And then the last thing, I don't know, Sandeep, if you mentioned, but the capital spending outlook for 2019. Sorry for that.

That will be kind of similar to $18 million, around $25 million.

Okay. All right. Thanks very much.

Welcome.

Thanks, Ed.

[Operator Instructions] Your next question comes from Christopher Rolland from Susquehanna International Group. Your line is open.

Yeah. It is David Haberle on behalf of Chris Rolland. Thanks for taking my questions today. Just to start off...

You're welcome.

Hello. Can you hear me?

Yeah. I heard you. I said welcome.

Sorry. Thank you. The tensions between the United States and China seem to be dragging on your business more than some of your peers given your Chinese exposure. If a compromise were to be reached at some point in the next couple of months, would you expect to bounce back fairly quickly in your business or would there need to be a period of time for business to pick back up.

That's a very good question. I think, our gut feeling is, it will have a positive impact, not just on us, in the overall business for semiconductors. Whether we'll have a differential impact. I really don't know.

Got it. And then second one, on the distributor inventory levels, I believe they were at about eight weeks last quarter. Can you talk about what you're seeing in distribution inventory levels?

Well, they are a little elevated to where the revenue is, but we - if January is an indicator, we saw the sell-through coming much higher than sell-in. So we believe over the next couple of quarters they will get back to the normal levels.

Got it, and then last one for me, on the Industrial business, your seasonality is typically very strong in the first half of the year. But given the weaker macro picture, how should we think about linearity of industrial as we kind of move through the year. Is it going to be a different shape than it typically would be?

Well, in Industrial, roughly about one-third of it is the high-power business which is closely tied to lot of infrastructure type of investments, such as renewable energy, high-voltage DC transmission and electric locomotives and so on. And we are seeing a healthy growth. We actually had double-digit growth two years in a row, 2017 and 2018. We don't know how much we're going to grow this year, but we certainly expect to grow in high power. And interestingly, we are seeing more investment infrastructure from China, possibly because they want to spruce up the economy. And so that part I think will grow this year. And the remaining part, the other two-thirds, is very fragmented. We've talked about the couple of areas where we see very strong growth, like the home and building automation and power tools but there are also other areas that could grow nicely this year, which is like meters and motor control, and so on and so forth. So overall, we think the Industrial market will grow this year. We just don't know how much.

Got it. Thank you very much.

You're, welcome.

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

Hi, guys. I know you have a typically a difficult time in a single quarter knowing which segments are going to move, which direction, but I think on the last quarterly call, you kind of gave us some hints on what you thought for the fourth quarter by segment. Any similar hint, you could provide for the first quarter, especially important given the trajectory you have through the rest of the year to kind of get our starting point normalized.

So I think you should see improvement on the consumer segment. And that's why where we talked about favorability. And typically the industrial is slightly down and the reason for that is that the power business in the first quarter is typically a little lower. That's when the funding comes through. So I think the mix is going to get slightly favorable and that's what offsets the impact that we have of the higher wafer cost. And that's why I think, the gross margin guide, I gave of about 52% for the first quarter.

And the comp side of things, I know was down substantially last quarter, does that - seasonally, I know, it goes down.

Typically in the first quarter, comps is a little lower than normal. But I think you'll start seeing comps start picking up as Balu indicated with the USB PD designs win in the second quarter.

Got it. That was it from me. Thanks guys.

Welcome.

Thanks, Ross.

[Operator Instructions] And there are no further questions at this time. I turn the call back over to the presenters.

All right. Thank you, Christina. Thanks, everyone for listening. There will be a replay of this call available on our investor website, which is investors.power.com. Thanks again for listening and good afternoon.

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