Good afternoon. My name is Emily and I will be your conference operator today. At this time, I would like to welcome everyone to the Power Integrations First Quarter Earnings Call. [Operator Instructions] Thank you. Joe Shiffler, Director of Investor Relations, please go ahead.

Thanks you, Emily. 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 the 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 result 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 13, 2019. 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, our first quarter results reflected the slowdown that is being felt across the industry. Revenues were $89.2 million, down 4% from the prior quarter and 13% year-over-year. All four end market categories declined year-over-year, reflecting the breadth of the slowdown. While the timing and shape of a cyclical recovery is uncertain and trade issues continue engender caution in the supply chain, recent trends have been encouraging. Bookings improved significantly in Q1 compared to the depressed level of the prior quarter and distributor sell-through exceeded sell-in by several million dollars in the first quarter. In the Consumer category, which comprises nearly 40% of our sales, revenues grew high single digits sequentially in Q1. While the increase was driven largely by seasonal strength in air conditioning, we are encouraged that seasonal patterns prevailed after the steep decline we experienced over the prior 2 quarters. Revenues from major and small appliances also increased slightly in Q1 after falling sharply in the second half of last year. While these are hopeful signs, we await further evidence of a broader upturn before pronouncing an end to the current cyclical slowdown. Nevertheless, we are forecasting strong sequential revenue growth in the second quarter driven largely by the ramp of several new rapid charger designs for the smartphone market. Specifically we are projecting second quarter revenues of $100 million, plus or minus $3 million, which would be up 12% sequentially at the midpoint. We expect healthy sequential growth again in the third quarter, and we continue to believe that double-digit year-over-year growth is within reach for the second half of the year. The most significant factor in our growth over the next several quarters will be accelerated adoption of faster chargers for mobile devices, particularly smartphones. After a burst of…

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. First quarter revenues were $89.2 million, down 4% from the prior quarter. The Communication category was a primary driver of the decline, down mid-teens sequentially, reflecting softness in the smartphone market. Industrial revenues declined high single digits sequentially, driven mainly by the seasonal softness in the High-Power business, while the Computer category declined roughly 20%, driven by seasonal weakness in PCs and tablets. Partially offsetting these declines was the recovery in the Consumer category, with sequential growth in the high single digits driven by the seasonal strength in air conditioning, as Balu noted. Revenue mix for the quarter was 39% Consumer, 38% Industrial, 18% Communication and 5% Computer. This was a slightly more favorable end market mix than we had anticipated in our gross margin guidance, resulting in a modest upside to our gross margin forecast. Non-GAAP gross margin was 52.2%, down just 50 basis points from the prior quarter, as the more favorable mix helped offset the impact of higher cost wafers flowing through our inventory. Non-GAAP operating expenses were $34.8 million, slightly below our forecasted range. Expenses rose by about $400,000 from the prior quarter due mainly to seasonal factors, including FICA taxes and the comparative effects of holiday shutdown in the prior quarter. The non-GAAP effective tax rate for the quarter was 6.5%, bringing our non-GAAP earnings to $12.1 million or $0.41 per diluted share. Weighted average share count for the quarter was 29.4 million, down about 200,000 shares from the prior quarter, reflecting further buyback activity, particularly in the early part of the quarter. We repurchased 121,000 shares during the quarter for approximately $7.3 million,…

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

[Operator Instructions] And our first question comes from the line of Tore Svanberg from Stifel. Your line is open.

A few questions, first of all, as we look at the Q2 revenue growth of 12%, obviously you mentioned Communications being a big part of that. But I think you also mentioned Industrial is still growing. What about some of the other markets, especially Consumer? Will that continue to recover or will it be more flattish for the June quarter?

Right now we are assuming it to be flat. We are not quite sure whether it's recovering or we just saw a seasonal increase in Q1. Only time will tell what will happen there. But in terms of growth, we will see the most growth in Communications, followed by Industrial, and then hopefully some in Computer, which was again seasonally low in Q1, plus we saw a significant weakness in PC that is desktops and monitors.

Very good, and Balu, I was hoping you could elaborate a little bit more on USB PB, especially now that we seem to be at a bigger inflection point. What do you think the mix is going to be in this market? You talked about some design wins. I believe you said one was for a 45-watt charger, another one for 24. But as we kind of look at this inflection point, how do you think the mix is going play out again by tower levels?

Well, we see the center of gravity currently is around 18 to 20 watts, if you look at all the major OEMs. But we are definitely seeing a move toward higher power levels in the future. The ones we mentioned are 18, 27 and 45 watts. So the future ones seem to be focused more on 27 and 45. And if you think about those power levels, it is a dramatic increase from the 5 watts, which has been pretty popular for the last 10 years, which means that you'll be able to charge your phone not only extremely fast, your also will be able to handle larger batteries which are needed for the larger phones and especially the 5G phones. The 5G phones require much larger batteries. The other advantage of 45 watts would be that the same charger can be used for your laptop, which currently usually uses either 30 watts or 45 watts. It used to be 65 watts. But thanks efficiency of these notebooks and tablets that you no longer need such high power. The 45 watts I think will become the center of gravity going forward.

And Tore, this plays really to our strength, considering the reliability and the form factor, where people want to go to high and don't want much. So with our integrated solution and higher reliability and having products with no heatsinks, we should be -- we are very well-positioned and as a result have the best products to support this trend.

Very good, just one last sort of long-term question. You talked about the new high-power products based on silicon carbide. Should we think about these products being very similar to what you've always done as far as level of integration? And also could you comment a little bit on sort of your supply chain here? Is there sufficient foundry partners for you to launch this business in a more material manner? Thank you.

To answer your first question, the silicon carbide driver product is very similar to our IGBT driver product that we introduced 2 or 3 year ago. It was called the iDriver. We call this one the silicon carbide driver and it uses the FluxLink technology. The main difference between those two drivers is silicon carbide is a lot faster. So there are things we have to do to protect the silicon carbide device that has to be done differently. Secondly, the silicon carbide requires different voltage drive, both positive and negative. So this has essentially a programmable voltage drive. And the other thing about silicon carbide is every silicon carbide device you have seen so far has different drive requirements, unlike the IGBT product line, where the voltages are identical between all of them. So just to be clear, we drive silicon carbide MOSFETs, but we don't actually have silicon carbide in the driver.

Very helpful, thank you very much, Balu. Go ahead.

There was another question. I'm trying to remember what that was.

Yes, I was just trying to understand the supply chain here, if you have the partnerships in place already.

Yes, the good news is we actually invested quite a bit in expanding our capacity. So we're in very, very good shape. I mean we can handle even the most optimistic projections our marketing people can come up with for the foreseeable future.

Our next question comes from the line of Christopher Rolland from Susquehanna. Your Line is open.

Hey guys, it's David Haberle on behalf of Chris Rolland. Thanks for taking our question. I guess starting with the USB PD, last quarter you guys talked about preproduction revenue that would be happening in June. But you mentioned tonight in your prepared remarks that you had several new wins coming in 2Q. Are these wins happening just faster than expected and the launch is being pulled forward and that's why we're seeing kind of the multimillion-dollar bump here? Or is this exactly what you expected when you talked last quarter?

It's pretty much exactly what we expected. The starting days move back and forth. Some have moved forward. Some of them moved a little bit further. But overall, I would say this is what we expected. And you are correct that Q2, a lot of them may be preproduction stage and we'll see the full production in Q3. And that's why we are saying we'll see a significant jump again in Q3. We think that we can still achieve a double-digit growth when you look at the entire second half of this year versus second half of last year. And even it's very possible, in fact I think very likely that Q3 will be a year-over-year growth, which means that by definition it has to be a double-digit growth from Q2.

Thanks for the additional color there at the end. That was great. Also on the USB PD, as we think about changing from 18 watts to 27 watts to 45 watts, I get there is incremental kind of ASP benefits for you guys over regular charging. You've talked a lot about that in the past. But as we think about the BOM for the OEMs that are making the phones, how much is this adding to their BOM and is this just like a premium play at this point in time? And when does it work into kind of the mid-tier phones?

That's a good question. Let me see whether I can give you, without giving you specific numbers, at least an idea of how the BOM ranges. So roughly I would say going from 20 watts to 45 watts would be roughly a 2x cost to the cellphone or tablet manufacturer.

Got it, and then just a final one here and I'm changing gears a little bit on that silicon carbide opportunity you guys were talking about; will this begin to ramp in 2019 or is this opportunity kind of further out? And then secondly there, would there be a significant ASP difference between the silicon carbide MOSFETs and the regular iDriver product?

There will be a higher ASP for actually a different reason. The silicon carbide, the first adoption of the technology is going to be in automotive, where the benefit of silicon carbide is so significant in terms of size, weight and efficiency. And efficiency directly translates to the range for a given battery size. They are willing to pay the additional cost of going from IGBT to silicon carbide, where the silicon carbide is quite a bit more expensive than IGBT. And so the adoption in other markets will take much longer. So this is really driven by the automotive market. We have had a lot of requests and interest in our product. There specifically we had a number of automotive companies come to us and say, could you please do a version of the iDriver for silicon carbide. And that's how this product came about. But given that it is an automotive market, it will be a few years before we actually see any significant revenue.

[Operator Instructions] And our next question comes from the line of Ross Seymore from Deutsche Bank. Your line is open.

Hi guys, this is Melissa on the line for Ross. I was just wondering if you could give us any detail by geography on the trends that you've been seeing excluding the smartphone chargers.

Well, so if you really look at it, obviously the bulk of our production of the product happens in Asia. So especially you're seeing the strength that we saw was in air conditioning. And that is primarily toward Asia. But obviously Europe has a bit of it, but the dominance is more in Asia, because that's where the production is.

Okay, thanks. And then similarly in those broad-based businesses, do you have any other data points you could give us that could provide sort of a shape of their recovery that they might see in the second half?

So the way I think we would guide I think is more in the directional sense, where you would see that the Communication segment would be the largest growth driver, driven by the USB PD, followed by growth in Industrial, where we have a lot of success in high power in solar and HVDC and others, along with as we talked in home business, automation, metering, and then even in the Computer segment as we had talked about for the whole year. We should see a benefit, because last year we only had half a year. The one that we have talked about that we have seen optimistic directional positiveness was in Q1 was appliances. But there, as we guided that we'd see it sequentially flat, and since we are not very certain how the macro and the trade stuff (ph), it's a little harder to predict how the whole year will shape out there.

And there are no further questions at this time. I will turn the call back over to the presenters.

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

And this concludes today's conference call. You may now disconnect.