Power Integrations, Inc. (POWI) Earnings

Management highlights

### Core Financial and Operational Results * The company delivered strong Q2 results with sequential revenue growth across all four end markets. * Non-GAAP gross margin hit 55.1%, up 160 basis points sequentially, above the high end of prior guidance, driven by better product mix, higher volume, and favorable lagged yen-dollar exchange rate impacts. * Non-GAAP operating margin expanded 540 basis points sequentially to 17.1%, with non-GAAP operating expenses of $45.2 million, slightly below the prior quarter and below guidance, due to Q1 2026 restructuring and ongoing spending discipline. * The company generated $22 million in operating cash flow and $18 million in free cash flow, reduced total inventory by $5 million (lowering days on hand by 27 days to 265 days), and brought channel inventory down to 7.3 weeks, within the target 7-8 week healthy range. ### Strategic Technology Milestones * The company demonstrated its new 2200-volt PowiGAN technology, extending its high-voltage GaN roadmap into applications traditionally served by silicon carbide, while retaining GaN's efficiency and power density advantages. * PowiGAN uses a consistent, proven architecture across all existing voltage nodes (750V, 900V, 1250V, 1700V), providing documented reliability that competing high-voltage GaN offerings lack, and gives customers a clear long-term technology roadmap to avoid future design lock-in. ### Growth Market Progress * **Data Center**: The company is engaged with hyperscalers on 800V data center solutions, with a robust design pipeline for 1700V auxiliary power products, and recently launched two reference designs for NVIDIA 800V racks that deliver 30% space savings over discrete silicon carbide designs. The main power path to GPU opportunity (addressed by the company's 1250V GaN) makes up the largest share of the projected $1 billion 2030 data center serviceable addressable market. * **Energy Infrastructure & Battery Storage**: Deployments are expected to grow at a double-digit CAGR through 2035. The company's advanced gate drivers are already shipping for utility-scale battery storage systems, and the company won a new utility-scale design with a top battery supplier in Q2, including engagements for AI data center battery storage. * **Appliance & Low-Power Industrial**: These markets will remain the core near-term revenue and cash flow driver while the company pivots to higher growth. New products like Top Switch GAN (strong design pipeline) and Tiny Switch 5 (in production, expected to contribute meaningful revenue in H2 2026) maintain competitive position with low incremental investment. Industrial revenue is up 16% year-to-date on broad-based growth across segments. * **Automotive**: Automotive revenue (included in the industrial segment) is on track to double in 2026, with a long-term target of $100 million by 2029-2030. The company won a new design for a GaN-based micro DC-DC converter at a major tier 1 supplier, scheduled for production in 2027, expanding BOM content beyond the company's existing emergency power supply position aligned with the industry shift to distributed high-voltage EV architectures.

Guidance

* Q3 2026 revenue is expected to be between $122 million and $130 million, representing a 6% sequential increase at the midpoint. Consumer revenue will decline due to normal seasonality, while communications, computer, and industrial revenue are projected to continue growing. * Non-GAAP gross margin is expected to be between 54% and 55%, remaining near the top end of the company's target range. The yen-dollar exchange rate will become a slight headwind in Q3 after being a tailwind in Q2, followed by another modest benefit in Q4. * Non-GAAP operating expenses are projected to be between $45 million and $46 million. The company now expects full-year 2026 non-GAAP operating expenses to see a low single-digit decrease (up from prior guidance of low single-digit growth), even with continued strategic investment in key growth markets. * Non-GAAP operating margin for Q3 is expected to be between 17% and 19%, roughly flat to slightly up from Q2's 17.1%. * The company expects further reductions in inventory days in the second half of 2026, and plans to keep channel inventory within the healthy 7-8 week target range.

Segment performance

Power Integrations reports total Q2 2026 revenue of $118.9 million, representing 3% year-over-year growth and 10% sequential growth from Q1 2026: 1. Industrial: This is the company's largest end market, with 14% quarter-over-quarter growth. It makes up 43% of total Q2 revenue, and has 16% year-over-year growth for the first half of 2026, following 15% full-year growth in 2025. Growth is driven by home and building automation, power tools, and broad-based industrial applications. 2. Consumer: Revenue increased 5% sequentially. Seasonal strength in air conditioning offset continued softness in major appliance demand. 3. Communications: Revenue grew 16% sequentially, recovering from Q1 seasonal lows. 4. Computer: Revenue grew 5% sequentially, recovering from Q1 seasonal lows.

Risks & headwinds

The company noted that all forward-looking statements are subject to inherent risks that could cause actual results to differ materially from projected outcomes, with additional risks detailed in the company's recent Form 10-K, quarterly Form 10-Q filings, and Q2 earnings release. No additional material risks or operational failures were explicitly discussed during the call.

Analyst Q&A

• Q: The company demonstrated 2200-volt GaN technology; when will it launch commercially and generate meaningful revenue?

  A: 2200-volt GaN is currently only a technology demonstration, not a commercial product. Meaningful revenue from 2200-volt products is not expected for several years, rather than the next few quarters. The primary near-term value of the announcement is demonstrating the long-term roadmap for customers across data center, automotive, and other high-voltage markets.

• Q: Now that channel inventory has returned to the healthy 7-8 week target range, what is the outlook for channel fill and order velocity as demand improves?

  A: After starting the year with channel inventory above 9 weeks, inventory has now worked off to healthy levels, with the overall channel and individual product/regional positions all looking strong. With continued demand growth expected in Q3, there will likely be some modest channel sell-in, but the company will aim to keep channel inventory within the 7-8 week healthy target range.

• Q: Is the prior timeline for data center and automotive revenue still on track, and what is the 2027 outlook for automotive?

  A: Automotive remains on track to hit the $100 million revenue target by 2029-2030, with revenue doubling in 2026, driven by BOM expansion from emergency power supplies to new micro DC-DC converter designs. For data centers, auxiliary power designs using existing products are on track to start generating material revenue in 2028; main power path to GPU opportunities remain at an earlier stage of development, with timing dependent on broader 800V data center system adoption.

• Q: How does the company's supply chain position compare to competitors, and is it creating share gain opportunities?

  A: The company has a unique supply chain structure that allows it to maintain competitive lead times and reliable supply. The company recently heard directly from a hyperscale customer that competitors are facing supply challenges, creating a clear opportunity to gain share. The company will continue to leverage its supply chain competitiveness alongside its technology roadmap to win new designs.