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Edited Transcript of POWI earnings conference call or presentation 7-Feb-19 9:30pm GMT

Q4 2018 Power Integrations Inc Earnings Call

SAN JOSE Feb 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Power Integrations Inc earnings conference call or presentation Thursday, February 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Balu Balakrishnan

Power Integrations, Inc. - President, CEO & Director

* Joe Shiffler

Power Integrations, Inc. - Director of IR & Corporate Communications

* Sandeep Nayyar

Power Integrations, Inc. - CFO, VP of Finance & CAO

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Conference Call Participants

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* Cody Grant Acree

Loop Capital Markets LLC, Research Division - MD

* David Wayne Haberle

Susquehanna Financial Group, LLLP, Research Division - Associate

* Edgar Burling Roesch

Sidoti & Company, LLC - Research Analyst

* Ross Clark Seymore

Deutsche Bank AG, Research Division - MD

* Tore Egil Svanberg

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

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Presentation

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Operator [1]

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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. (Operator Instructions)

Joe Shiffler, Director of Investor Relations, you may begin your conference.

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Joe Shiffler, Power Integrations, Inc. - Director of IR & Corporate Communications [2]

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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.

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [3]

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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 4 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 account 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 generally weak handsets demand but also by slower adoption of fast chargers 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 dispute, which have driven up the cost of appliances for U.S. 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 revenue 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 a rebound, we are confident that we will also be among the first companies to benefit from the recovery, as has been the case in the past cycles. And while we hesitate to make predictions based on a single month of data, particularly the month of January ahead of the lunar new year holiday, we are encouraged by recent trends.

January was our strongest month of bookings since May of last year. And while sell-in revenues were affected by elevated channel inventories, we did see a substantial drawdown in distributor inventories in January, with sell-through exceeding sell-in by a wide margin for the month.

The second factor that gives us confidence for the year ahead is that while the smartphone market has a headwind -- was a headwind in 2018, we expect it to be a growth driver in 2019 even if the end market demand remains relatively subdued.

After much delay, the rollout of USB PD charging technology is now underway, and we are entering the next phase of growth in rapid charging. We got a taste of this in the second half of 2018 with the ramp of a new USB PD tablet charger, which drove strong growth in our Computer category. We won several high-volume fast charger designs in Q4, and we expect an uptick in revenues in the June quarter, with much more substantial growth to come in the second half of the year.

Third, we expect continued strength in our industrial category, a bright spot for us in 2018 with the growth of about 7%. Our High-Power business, which makes up more than 1/3 of the Industrial category, grew double digits for the second straight year, driven by strength in renewable energy, electric locomotives and energy exploration. We are seeing healthy demand for our high-power products in China where spending on infrastructure, such as rail and power grid projects, is likely being used to offset weaker consumer demand.

Our Industrial category is also benefiting from the transition to battery power in lawn equipment, vacuum cleaners and personal transportation as well as the proliferation of home and building automation products that are continuously connected to the grid and, therefore, benefit from our ultralow standby power technologies.

Fourth, we believe that secular trends that have driven our growth in appliance market over the past several years remain intact. We expect improvement in our Consumer category in 2019.

Even after a down year in 2018, our appliance revenues have grown at double-digit CAGR over the past 8 years. This growth has been driven by a variety of factors, including market share gains, higher dollar content and growing middle-class in emerging markets where products like air conditioning and dishwashers are now widely affordable than ever before.

We expect all of these trends to continue for years to come. We see even greater opportunity in the appliance market following the November launch of our BridgeSwitch motor drive products, which add about $0.5 billion to our addressable market. BridgeSwitch is a highly integrated motor drive IC, addressing brushless DC motors up to about 300 watts. Such applications include air conditioning, ceiling fans and a wide range of appliance applications, including refrigerator compressors, water pumps, water -- dishwashers and washing machines, and fans and blowers used in clothes dryers, air purifiers and range hoods.

BridgeSwitch ICs offer substantial improvements in efficiency compared to existing solutions, eliminating the need for heat sinks and giving designers flexibility to add features such as IoT connectivity while remaining in compliance with energy efficiency regulations.

Because our AC-DC products are already used by virtually every major appliance manufacturer in the world, we are entering this market from a position of strength, and we expect our reputation for quality and innovation to be a major asset for us. We have design activity underway at several Tier 1 appliance OEMs, and we expect revenue from BridgeSwitch products to begin ramping in 2020.

In conclusion, while the trajectory of the macro recovery is difficult to predict and trade remains a wildcard, we do expect the March quarter to be the trough of the current downturn for Power Integrations. And we are particularly excited about the opportunity for accelerated growth in the second half of the year. More importantly, we are confident in our ability to outgrow the industry over time, and our confidence is reflected in the fact that we are -- we have invested heavily in our own shares over the past year. We used more than $100 million for repurchases during the year, buying back roughly 5% of our shares and had $51 million remaining of our authorization at the quarter-end.

With that, I'll turn it over to Sandeep for the review of the financials.

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Sandeep Nayyar, Power Integrations, Inc. - CFO, VP of Finance & CAO [4]

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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 recalculated the 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 adjustment 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 4 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 $1 million below our guidance. We have held expenses flat for 3 consecutive quarters and are managing spending carefully in light of the weaker demand environment. Though, in the year ahead, we will continue to invest in our product pipeline and in key growth opportunities, such as USB PD as well as the motor drive and automotive markets.

The non-GAAP effective tax rate for the quarter was just under 1%, bringing our full year rate to 5.6%, a bit below the expected range, due mainly to the effect of the downturn on the geographic distribution of our income.

Including a $0.03 benefit from lower-than-expected tax rate, fourth quarter non-GAAP earnings were $0.54 per diluted share.

Weighted average share count was 29.7 million for the quarter, down more than 300,000 shares from the prior quarter.

As we have done consistently, over the years, we have deployed our balance sheet to take advantage of pullbacks in the market. We utilized $29 million for share repurchases in the fourth quarter, buying back 488,000 shares at an average price of about $59 per share. Over the course of the year, we utilized $103 million for repurchases, buying back roughly 5% of our outstanding shares.

Including dividends, we returned $122 million to stockholders in 2018. Even after this substantial return of cash, our balance sheet remains strong with cash and investments totaling $229 million at quarter-end.

We generated $84 million in cash from operations during the year, up slightly from the prior year in spite of significant increase in inventories, which consumed about $24 million in cash. We believe this demonstrate the cash-generation capacity of our business, which should be more fully reflected as our inventory levels begin to normalize later in the year.

Based on the strength of our balance sheet and expectation of continued strong cash flow, our board has increased our quarterly dividend to $0.17 per share. As Balu noted, we also had $51 million remaining on our repurchase authorization at the beginning of the current quarter, and we continue to employ our price-sensitive approach to buying back stock.

At quarter-end, internal inventory stood at 163 days, up 35 days from the prior quarter. We expect to remain at a fairly elevated level of inventory for the next couple of quarters, and then to reduce inventories in the second half as we ramp new USB PD charger design for the smartphone market.

I would reiterate that we are comfortable carrying a higher-than-normal level of inventory during a downturn, knowing that most of our products are not customer- or application-specific and carry minimal obsolescence risk. We are maintaining a higher percentage of our inventory in die bank, which further mitigates our risk and positions us well to respond in event of a sudden recovery in demand.

Looking ahead, we expect first quarter revenues to be in the range of $90 million, plus or minus $3 million.

As noted earlier, we expect non-GAAP gross margin to decline as higher-cost wafers flow through our inventory. Specifically, we are forecasting non-GAAP gross margin to be around 52%.

Non-GAAP operating expenses for the March quarter should tick up modestly due to seasonal factors, such as FICA taxes and the comparative effects of the year-end shutdown that took place in December.

Specifically, I expect non-GAAP OpEx to be in the range of $35 million to $35.5 million. Lastly, I expect the non-GAAP tax rate for the quarter and the year to be approximately 7%.

And with that, I'll turn it back over to Joe.

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Joe Shiffler, Power Integrations, Inc. - Director of IR & Corporate Communications [5]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Ross Seymore from Deutsche Bank.

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [2]

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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 finally refilling channel inventory? Any sort of qualitative or quantitative detail on that would be helpful.

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [3]

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It is broad-based, and a significant part of it is also coming from appliance market where it looks like they have ran 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.

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [4]

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And, I guess, as far as the second half goes, relative to last quarter on the same earnings call, you basically said the same thing about the second half and the confidence, et cetera. Has anything changed as you look into the back half, not only in 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?

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [5]

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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.

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Sandeep Nayyar, Power Integrations, Inc. - CFO, VP of Finance & CAO [6]

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

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [7]

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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 Comms and in the phone ramp, is that still the case? And then I think you also said OpEx would be up about 6% or 7% year-over-year. Does that change, given the lower level at which you actually did last year? And then I'll go away.

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Sandeep Nayyar, Power Integrations, Inc. - CFO, VP of Finance & CAO [8]

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Yes, just your question is for the year, I'm presuming, for 2019, right?

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [9]

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Correct.

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Sandeep Nayyar, Power Integrations, Inc. - CFO, VP of Finance & CAO [10]

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Yes, 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 year-over-year.

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Operator [11]

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Your next question comes from Cody Acree from Loop Capital.

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Cody Grant Acree, Loop Capital Markets LLC, Research Division - MD [12]

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Maybe just following up on Ross' question. As you look into the USB PD ramp, can you just maybe give us any details on where you're seeing your design wins?

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [13]

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We have actually won designs with multiple OEMs, and we expect the production to start -- preproduction 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.

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Cody Grant Acree, Loop Capital Markets LLC, Research Division - MD [14]

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And what -- I guess, we're trying to define what used to be -- as a percentage of revenue, what are you thinking this could become in 2019, 2020, I guess?

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Sandeep Nayyar, Power Integrations, Inc. - CFO, VP of Finance & CAO [15]

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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 Communications segment, which is probably driven by the cell phone. And I would say that all other 3 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.

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Cody Grant Acree, Loop Capital Markets LLC, Research Division - MD [16]

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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 segments. So are you seeing it more geographically based? Or are you seeing it broad-based globally and across all your end markets?

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [17]

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Yes, I want to warn that it's just 1 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 the -- all other markets -- of course, Communications will do really well this year, I -- 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 were 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 done -- not done well last year.

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Operator [18]

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Your next question comes from Tore Svanberg from Stifel.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [19]

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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.

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [20]

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

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [21]

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Excellent, very good. And with that type of growth...

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Joe Shiffler, Power Integrations, Inc. - Director of IR & Corporate Communications [22]

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

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [23]

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Got it. 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.

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Sandeep Nayyar, Power Integrations, Inc. - CFO, VP of Finance & CAO [24]

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

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [25]

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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 you're seeing out there? Because I guess, the higher the power levels or the faster the charging, maybe the higher the content is for you. So what type of power levels should we start to see here into 2019?

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [26]

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Well, the 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 and 60 watts, tend to be relatively low volume because they're in the higher end. Most of the volume is on the lower end, which is the 18 watts, 27 watts, 25 watts and so on.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [27]

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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?

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [28]

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It'll 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 1 or 2 models and then migrate it to other models. So our expectation is, in 2020, it should be in the few million dollars kind of thing. I mean, single-digit millions.

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Operator [29]

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Your next question comes from Ed Roesch from Sidoti & Company.

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Edgar Burling Roesch, Sidoti & Company, LLC - Research Analyst [30]

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Congrats on managing through that environment pretty nicely there. I 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?

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [31]

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Well, the router market is basically an external adapter market, so it's on the low end of the scale, and we have defocused 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 everything we know in 2019. We certainly are watching that market to see whether we could -- it could help us grow our Communications revenue outside of cell phones.

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Edgar Burling Roesch, Sidoti & Company, LLC - Research Analyst [32]

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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 costs does that add to the bundle that the consumer is getting?

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [33]

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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 a increase in cost. In fact, I think it is very small compared to the cost of the cell phone.

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Edgar Burling Roesch, Sidoti & Company, LLC - Research Analyst [34]

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

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Sandeep Nayyar, Power Integrations, Inc. - CFO, VP of Finance & CAO [35]

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

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Operator [36]

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(Operator Instructions) Your next question comes from Christopher Rolland from Susquehanna International Group.

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David Wayne Haberle, Susquehanna Financial Group, LLLP, Research Division - Associate [37]

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It's David Haberle on behalf of Chris Rolland. Just to start off. The tensions -- Hello? Can you hear me?

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [38]

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I heard you. I just said welcome.

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David Wayne Haberle, Susquehanna Financial Group, LLLP, Research Division - Associate [39]

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Sorry. 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 the bounce back to be fairly quickly in your business? Or would there need to be a period of time for business to pick back up?

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [40]

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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.

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David Wayne Haberle, Susquehanna Financial Group, LLLP, Research Division - Associate [41]

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Got it. And then second one on the distributor inventory levels. I believe they were at about 8 weeks last quarter. Can you talk about what you're seeing in distribution inventory levels?

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Sandeep Nayyar, Power Integrations, Inc. - CFO, VP of Finance & CAO [42]

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Well, they are a little elevated 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.

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David Wayne Haberle, Susquehanna Financial Group, LLLP, Research Division - Associate [43]

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Got it. And then the 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?

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Balu Balakrishnan, Power Integrations, Inc. - President, CEO & Director [44]

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Well, in Industrial, roughly about 1/3 of it is High-Power business, which is closely tied to a 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 2 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 2/3, is very fragmented. We talked about a 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.

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Operator [45]

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Your next question comes from Ross Seymore from Deutsche Bank.

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [46]

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I know you have typically a difficult time in a single quarter knowing which segments are going to move which direction. But I think on last quarterly call, you kind of gave us some hints on what you thought for the fourth quarter by segment. Any similar hints 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?

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Sandeep Nayyar, Power Integrations, Inc. - CFO, VP of Finance & CAO [47]

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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 High-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 costs. And that's why I think the gross margin guide I gave of about 52% for the first quarter.

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [48]

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

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Sandeep Nayyar, Power Integrations, Inc. - CFO, VP of Finance & CAO [49]

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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.

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Operator [50]

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

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Joe Shiffler, Power Integrations, Inc. - Director of IR & Corporate Communications [51]

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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.

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Operator [52]

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