Prepared remarks
Hello, everyone. Thank you for joining us, and welcome to the Power Integrations' Q1 Earnings Call. I will now hand the call over to Joe Shiffler, Senior Director of Investor Relations.
Thanks, Alexandra. Good afternoon. Thanks, everyone, for joining us. With me on the call are Jen Lloyd, our CEO; and our CFO, Nancy Erba. After Jen and Nancy's prepared remarks, we'll open it up for questions. Our discussion today will include forward-looking statements denoted by words like will, expect, should, outlook, forecast and similar expressions that look toward future events or performance. Such statements are subject to risks that may cause actual results to differ from those projected or implied. Such risks are discussed in today's press release, in our most recent annual report on Form 10-K and in subsequent quarterly reports on Form 10-Q, including the one being filed this afternoon with the SEC. During this call, we will refer to financial measures not calculated according to GAAP. Non-GAAP income statement measures in the first quarter exclude stock-based compensation expenses, amortization of acquisition-related intangible assets, restructuring charges and the tax effects of these items. A reconciliation of non-GAAP measures to our GAAP results is included in today's press release and in the accompanying slides, both of which can be found on our investor website at investors.power.com. 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 it over to Jen.
Thanks, Joe, and thank you, everyone, for joining us today. I'm pleased with how we started the year with Q1 revenue of $108 million and non-GAAP earnings of $0.25 per diluted share. Industrial was the main driver of revenue growth again this quarter, up 23% year-over-year. Consumer revenue was down compared to the first quarter of 2025, which had been unusually strong due to tariff-related pull-ins in appliances. However, we saw a 17% sequential increase in Q1 as that inventory build appears to have cleared. Looking ahead, while visibility is somewhat hampered by the ongoing macro uncertainty, we've seen an increase in order activity since our last earnings call, and we're forecasting seasonally higher revenue in the second quarter, along with higher gross margin. Just as importantly, we're making good progress on our strategic focus areas: customer centricity, streamlining our product pipeline for time to market and operational and organizational efficiency. Firstly, we are improving alignment between our commercial and engineering teams to bring the customer's voice closer to our product development process. Reinforcing this customer commitment, earlier this week, we announced the addition of Mike Balow to our leadership team as SVP of Worldwide Sales. Mike is a veteran sales leader with deep experience in power, having led the sales organizations at onsemi, Infineon, and Cypress. I'm excited to have him on the team, and I'm confident that he will both strengthen our existing relationships and help us expand our customer reach in markets like data center and automotive. Secondly, we're streamlining our product pipeline to accelerate time to market on the projects most tightly aligned with our target markets and long-term strategy. And finally, we are implementing organizational changes to drive operational effectiveness and redirect resources, both functionally and geographically, to the opportunities most critical to our long-term growth. Although it will take time for these changes to be reflected in our results, I'm encouraged by our progress. And over time, you will see product releases with quicker time to revenue based on earlier customer engagement and improved alignment between our products and customer needs. For example, our new TinySwitch-5 is off to a strong start with a wide range of designs set to ramp in the second half of the year. And we also expect a nice ramp with TOPSwitchGaN, which we introduced at the APEC Show in March. The TinySwitch and TOPSwitch names are well known in the power supply industry with billions of units shipped and an embedded base of designers accustomed to using these proven architectures. Even as we pivot towards the AI data center, industrial and automotive markets, we're refreshing these existing product families to sustain and grow core markets like appliances, where reliability and efficiency are highly valued and dollar content is rising along with the appliance power levels. The addition of a PowiGaN Switch more than doubles the power capability of the TOPSwitch architecture to 440 watts, so designers can now use this classic flyback topology for a wider range of designs than ever before. The flyback topology offers a variety of benefits, including smaller board footprint, faster design cycles, high standby efficiency and lower component count. In fact, the flyback power supply can save up to 30% on both component count and BOM cost compared to the more complex topologies typically used above 200 watts. TOPGaN is already opening doors for us at new customers designing high-power chargers for industrial applications, drones and e-bikes where flybacks now have access to sockets that have historically been off limits. We are also seeing strong engagements at appliance customers, many of whom have been using TOPSwitch for years and are excited to realize the efficiency benefits of GaN in their designs. In automotive, we're currently in production or in design engagements with 17 of the top 20 EV manufacturers, and we're on track to double our automotive revenue this year. In the first quarter, we won a new emergency power supply design with China's second largest EV OEM. And as mentioned on last quarter's call, we also began production in Q1 at a major German carmaker using a platform developed as part of its joint venture with a U.S. EV OEM. As we continue to accumulate wins for inverter emergency power supplies, we are also expanding engagements with customers for next-gen EVs featuring micro DC to DC converters. These power supplies will bypass the 12-volt batteries used in today's EVs, instead powering subsystems directly from the main high-voltage battery. We are also developing products for higher power sockets such as onboard charging using our 1,250-volt GaN technology. As we expand our automotive product portfolio to address evolving EV architectures, we see addressable dollar content rising from single-digit dollars today to tens of dollars in the near term and approaching $100 per vehicle over the next several years. Our high-power business, which sits in the industrial category, continues to grow at a healthy pace, driven by a diverse set of verticals, including electric rail, renewables, oil and gas and power grid applications, including DC transmission and power quality. Key design wins in Q1 included a design for 6-megawatt wind turbines at a European customer and a STATCOM power conditioning design for an Indian customer. Lastly, turning to data center. We continue to pursue multiple paths to growth with our unique PowiGaN technology. Our ongoing collaboration with NVIDIA includes a variety of sockets utilizing our 1,250 and 1,700-volt GaN technologies in the forthcoming 800-volt DC architectures. We continue to gain share in aux power supplies for today's data centers, winning two new designs in Q1 at Taiwan customers serving U.S. equipment makers. We also have ongoing customer engagements on upcoming higher-power GaN products for rack-level AC to DC conversion. The data center rack is one of the most attractive opportunities in power semiconductors today. We believe our differentiated GaN technology gives us a significant competitive advantage and customers are looking to us as they develop long-term road maps calling for higher voltages and improving power density. But our opportunity in data center goes beyond the rack. The demands that data centers are placing on the power grid are just as important and challenging, and we are well positioned to respond with our high-power products. Power grids are rapidly evolving to support the estimated 200 gigawatts of power needed for data centers by 2030. Renewable energy, including dedicated installations for data centers, is certain to become a bigger part of the energy mix accompanied by battery storage to ensure consistent availability. High-voltage transmission lines will deliver renewable energy to the grid or directly to the data center and solid-state transformers will convert power at the front end of the data center to be delivered to the rack. The value of our gate driver product is proven in renewable energy, battery storage, and high-voltage transmission, which together accounted for about 40% of our high-power revenue in the first quarter. We have a strong offering for solid-state transformers as well with a differentiated driver solution for silicon carbide modules. We have a variety of data center-related customer engagements underway in high power, and we anticipate that opportunities related to the data center build-out will add hundreds of millions of dollars to our SAM for gate driver products in the years ahead. Altogether, we estimate that our data center SAM, including rack and grid applications, will exceed $1 billion by 2030. In closing, the opportunities ahead of us grow more attractive by the day as markets demand more of the technology and system expertise that PI has developed over many years. We are a pure-play high-voltage company with foundational technologies like PowiGaN and SCALE gate drivers backed by deep system expertise, and we are building an organization capable of turning our foundational advantages into long-term value for our customers and shareholders. Now I'll turn it over to Nancy for a review of the financial highlights.
Thanks, Jen, and good afternoon. Before I cover our results, I'd like to direct you to the supplemental information shared with our press release this afternoon. There, you will find many of the financial details we normally share in our prepared remarks in addition to a GAAP to non-GAAP reconciliation. We had a very solid start to the year with Q1 delivering revenue growth with key financial metrics at or better than our outlook. We also improved our balance sheet as we generated $18 million of free cash flow and reduced inventory, both on the balance sheet and in the channel. Revenue was $108.3 million, up 3% from a year ago and 5% versus Q4 of last year. Our Industrial business continues to perform well with sequential growth of 15% in Q1. The communications and computer categories were seasonally down, while consumer revenues were up 17% sequentially with the recovery in appliances. Turning to gross margin. Non-GAAP gross margin was 53.5% for the quarter, right at the midpoint of our outlook range and up 20 basis points sequentially. While end market mix was favorable, we saw less benefit from the yen-dollar exchange rate in Q1 due to the stronger yen in the early part of 2025. As a reminder, there is currently about a 1-year lag between fluctuations in the yen and the resulting impact on our P&L. Non-GAAP operating expenses were $45.3 million, coming in below our outlook range of $45.5 million to $46.5 million. This resulted in non-GAAP operating margin of 11.7%, up 200 basis points from the prior quarter. Expanding our operating margin is an important priority for us. We are tightly managing the investment decisions that drive our customer-focused technology development and product road map, addressing the highest growth markets. During our Q1 restructuring activities, we evaluated our engineering resources across the organization and determined that in order to better drive the road map requirements of our customers, certain engineers previously accounted for in our marketing organization would be more fully dedicated to the development work and moved into R&D. These changes were effective at the time of the restructuring in early February and resulted in approximately $3 million of R&D expense in Q1 that would previously have been included in SG&A. All investments in SG&A are evaluated with the same rigor. Continuing down the income statement, non-GAAP net income was $13.9 million or $0.25 per diluted share. Our GAAP results include $6.6 million of restructuring charges, primarily consisting of severance payments related to the restructuring activity we announced in February. $6.2 million was in GAAP OpEx with the remainder in cost of goods sold. Turning to the balance sheet and cash flow. Cash flow from operations was $20 million for the quarter, while CapEx was $2 million. Our 2026 plan still calls for CapEx of 5% to 6% of revenue for the year. We are applying the same ROI-based discipline to capital decisions that we are to operating expenses and expect to see CapEx more heavily weighted to the second half of the year. Inventory decreased by $4 million during the quarter, while days on hand fell by 21 days to 292 days at quarter end. Our target is to bring days on hand below 200. Channel inventory also declined during the quarter, falling by 0.5 week to 8.9 weeks and nearing our target of 8 weeks. I expect further improvement in both metrics throughout the year. I'll now review the second quarter outlook. We expect revenue to be between $115 million and $120 million, which would be up 8.5% sequentially at the midpoint. Communications and computer should have the largest increases in percentage terms coming off the seasonal lows in Q1, with industrial also up sequentially. We expect a sub-seasonal quarter from consumer with positive air conditioning seasonality offset by the ongoing demand headwinds in major appliances. I expect non-GAAP gross margin to improve sequentially with a range of 54% to 55%. At the midpoint, that would be an improvement of 100 basis points from Q1, primarily due to manufacturing efficiencies and volume-related benefits of the higher revenue as well as the dollar-yen exchange rate. Non-GAAP operating expenses will be sequentially higher in Q2 with a range of $47 million, plus or minus $0.5 million. The increase from Q1 mainly reflects annual merit increases, which took effect in April. I anticipate that OpEx in the second half will remain roughly flat with the Q2 run rate, putting us on track for low single-digit growth in 2026. Our intent is for OpEx to grow at a rate of less than half of revenue growth over time. Finally, I expect non-GAAP operating margin to be between 13.5% and 15.5%. In closing, I'm encouraged by the demand we are experiencing in the first half of the year and that the markets we compete in appear largely healthy. We are excited by the opportunities in front of the company and focused on executing to the long-term growth drivers in data center, automotive and industrial. And importantly, we are continuing to stay agile, cognizant of the macro and geopolitical uncertainty we operate within, and we'll continue to manage the business accordingly. After a full quarter in the CFO role, I'm confident in the direction we're heading as a company and our ability to achieve faster growth, improved profitability, and increased shareholder value. I'd like to thank the POWI team for their continued commitment to innovation, customer success and execution excellence and to our partners, customers and shareholders for their continued cooperation and support. And now, Alexandra, let's open for Q&A.
Questions and answers
Your first question comes from the line of Christopher Rolland with Susquehanna.
Starting out, compute and comms has been disappointing for quite some time, but particularly in March. I know there's some seasonality there. How are you thinking about these markets going forward? They are obviously kind of subscale at this point. Maybe you can talk about what your strategic plan is for these moving forward? Are you deemphasizing these markets? How should we think about them and perhaps the mix of end markets moving forward for you?
Thank you, Chris, for the question. In terms of compute and comms in Q1, we do expect that to be seasonally a low quarter. So we're expecting those to be seasonally up in Q2. You're correct that they are two of the smaller of our market areas. In terms of the strategic plan and whether we are deemphasizing those areas, we're not deemphasizing them. We continue to look at those as having opportunity. I talked in the prepared remarks about TOPGaN and TinySwitch-5; those are serving applications across the spectrum of our market segments. So we continue to nurture those areas. When you look at them for the year, they are not the biggest growth drivers, but they are also not the largest part of our business.
On AI, you had some great detail on aux power and solid-state transformers. Could you talk about GaN and maybe silicon opportunities, but mostly GaN? How are engagements going on the main power? As we think about powertrain applications, are we talking about interest in power delivery boards or IBCs or power supplies? Where are you getting the most interest? Are there any applications I left out that you might be engaged in for your GaN portfolio?
Thanks for asking about AI. Engagements are going well. I want to emphasize that the aux and SST opportunities are shorter-term opportunities for us, but we also have ongoing engagements for higher-power GaN. We are seeing real pull for our high-voltage GaN technology for high-voltage architectures, particularly 800-volt architectures. Our GaN works natively at 800, 1,200, 1,250 and 1,700 volts and offers a simpler design. In discussions with NVIDIA, we are learning about additional sockets where our technology is a great fit. We're engaging across the whole data center ecosystem—hyperscalers, server OEMs, rack providers and power supply providers—and finding opportunities across all of those.
Your next question comes from the line of Ross Seymore with Deutsche Bank.
A couple questions. First, on the consumer segment: you split air conditioning versus white goods, but the appliance market has sounded weak based on commentary from Whirlpool and others. When you say consumer is sub-seasonal in the second quarter, do you mean it will still be up, or will it be down? How do you think you address that market over time? If the market is weaker, do the inventory dynamics allow you to still grow, or is that something that will be a challenge for a bit longer?
I'll take that one. As I said in my comments, all of the markets will be up in Q2, although on the consumer front it will be very modestly up, so think flat to slightly up. That is a balance between some of the pressure on appliances you referenced and offsets within our portfolio. The other markets are growing faster in Q2 both in dollar and percentage terms. We're pleased with the demand we've seen thus far in the first half and the continued strength in Q2. Net-net, a good first half, and we're off and running through the year.
Following up on AI: how do you envision time to market for these different opportunities? What percentage of your business might they represent this year, next year and the year after, particularly aux and SST versus some of the bigger ones? How should we think about timing-wise?
The aux opportunities are nearer term and we continue to see a sequencing of wins and designs in that space. For high-voltage GaN, that is longer term for us—it's not next year, it's in a couple of years. What's encouraging is the continuous sequencing of wins. As 800-volt systems come online, we expect momentum to build from both existing and new systems, but it's a multi-year timeline.
To reiterate Jen's comments, we expect the total opportunity to be at least $1 billion by 2030. We're continuing to size it. As new sockets become available to us and conversations continue, we evaluate and update our sizing each quarter.
Your next question comes from the line of David Williams with Needham & Co.
Regarding the data center opportunity you pegged at about $1 billion SAM by 2030, how do you think about the GaN portion of that specifically? How are engagements going today? You have among the highest power capabilities in the market; are you leading those discussions? How has traction been for GaN and what does that look like from a sizing perspective?
We see a bulk of that opportunity being GaN. There's a split between inside the data center and outside. Outside the data center, gate drivers are important; inside the data center, our advantage is GaN. So we expect most of the data center SAM to be addressed by GaN.
On the automotive side, you're making nice progress. Previously leadership talked about a multiyear strategy; it feels like your strategy is driving penetration. How do you think automotive is developing and how should we think about revenues over the next 12 to 24 months from the auto segment?
We are making good progress and winning designs. The inverter emergency power supply wins are not huge revenue today, but they build credibility. We're expanding into other parts of the vehicle to increase BOM content. Revenue timing has been slower than we'd like and some programs have pushed out, so the revenue is expected to come later. We have a $100 million target for 2029, and we still feel we're making good progress toward that.
Your next question comes from the line of Tore Svanberg with Stifel.
Congrats on the progress. First, on the restructuring and moving some people from marketing to engineering: I assume these are more technical sales or marketing people. You talked about improving time to market by being closer to customers with R&D. Could you explain the changes?
Sure, Tore—those are technical resources. I'll let Nancy provide more detail.
As part of the restructuring, we went line by line evaluating resources to shift toward being more customer focused. The resources moved were application engineers previously in marketing. With Chris Jacobs emphasizing getting closer to customers and bringing that input in, we found those resources should be more focused on product development and moved them into R&D. The change was effective February 1 with the rest of the restructuring activity. We'll continue this work, prioritizing resources and products to the markets with the highest ROI. There's a lot of work behind the scenes to ensure the portfolio is tightly aligned with customer needs and what we need to deliver to market over the coming years.
Following up on inventory, both internal and channel: you're targeting below 200 days on hand and about 8 weeks in the channel. Demand will determine that, but are you doing anything else proactively to get to those targets, especially on the channel side? When could we expect POWI to be back to those numbers?
We're not doing anything unnatural in the channel. Demand in the first half is good and across the board. As revenue progresses in the second half, we would expect to exit at or potentially a little below that 8-week channel target, depending on demand. For inventory on our balance sheet, we're applying rigorous ROI discipline—inventory is cash. We now have an ongoing cadence reviewing inventory, and approvals for new inventory go through the same ROI rigor applied company-wide. The team has responded well, and we're seeing great execution. Expect inventory on our balance sheet to continue stepping down through the year.
There are no further questions at this time. I will now turn the call back to Jen Lloyd for closing remarks.
Thank you, everyone, for joining us today. I'm really optimistic about the opportunities ahead of us. Electrification, AI and the rapidly transforming power grid are set to drive demand for advanced high-voltage semiconductors for many years to come, and PI is well positioned to capitalize with a strong technology foundation and a deep well of expertise in high voltage. In just a matter of months, we've assembled a transformational leadership team capable of translating innovation into sustainable, profitable growth. I want to thank our investors, our customers, and suppliers for partnering with the PI team. Thank you, and good afternoon.
This concludes today's call. Thank you for attending. You may now disconnect.