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Power Integrations, inc (NASDAQ:POWI)
Q2 2021 Earnings Call
Jul 29, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Power Integrations' Second Quarter Earnings Call. At this time all participants lines are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] And please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Joe Shiffler. Sir, please go ahead.

Joe Shiffler -- Director of Investor Relations

Thank you, Mel. and good afternoon everyone and 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 GAAP. Non-GAAP measures exclude stock-based compensation expenses, amortization of acquisition-related intangible assets and the tax effects of these items.

A reconciliation of non-GAAP measures to our GAAP results is included in our press release. Our discussion today, including the Q&A session, will include forward-looking statements denoted by words like will, would, believe, should, expect, outlook, forecast, anticipate and similar expressions that look toward future events or performance. Such statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected or implied. Such risks and uncertainties are discussed in today's press release and in our Form 10-K filed with the SEC on February 5, 2021. 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.

Balu Balakrishnan -- President & Chief Executive Officer

Thanks, Joe, and good afternoon everybody. This was another record quarter for Power Integrations with revenues of $180 million, up 69% from a year ago. Demonstrating the leverage in our model, our non-GAAP operating margin surpassed 30% for the quarter and increased our non-GAAP EPS by more than 2.5 times year-over-year. For the first half of 2021, the revenues grew 63% from the prior year. We are growing well above the growth rate of the analog industry, thanks to broad market share gains and secular trends that we'll endure even as demand normalizes over the coming quarters. One such trend is energy efficiency which has been a key part of our story since the introduction of our EcoSmart technology over two decades ago.

Energy efficiency has provided a tailwind ever since, driving OEMs to redesign their products in response to regulatory standards and consumer demand. At times, these tailwinds have been boosted by highly impactful standards like the 2007 California Regulations on external power supplies, which quickly drove linear power supplies out of that market. Power Integrations, what an outsized share of that opportunity, because our LinkSwitch ICs were an ideal replacement for linears. If similar transition has now taken place in the air conditioning market due to China's mandatory standards for room AC units, which will announce late 2019 and have been phased in over the past year. China's updated minimum efficiency performance standards essentially rule out fixed frequency AC units which accounted for nearly half of China's production before the China look at that.

In the response to the standards, manufacturers have transitioned most of their production to variable speed brushless DC motors and have also converted from linear to switching mode power supplies to drive the electronics. Power Integrations is a market leader in switched more power supplies for air conditioners, and our incumbent position has allowed us to capture most of the volume transitioning away from linears. It has also created opportunities for our BridgeSwitch motor driver chips, which drive brushless DC motors, such as those used in variable speed AC units. In fact, we won one of our largest BridgeSwitch designs to date in Q2 at a major customer in the air conditioning market.

We are also gaining share in major appliances where we are already the leader in AC to DC power supplies, thanks to the efficiency and reliability benefits of our products. Our share gains have accelerated as competitive with the capacity constraints, have prioritized other products ahead of the power supply chips. And other competitors have deemphasized or exited the power supply market altogether. These gains are compounding the revenue benefit of rising dollar content in appliances driven by tighter efficiency standards and the increasing penetration of electronic features such as network connectivity, electronically controlled motors and LED lighting. We also expect meaningful revenues from motor drive applications next year as BridgeSwitch begins to ramp in earnest.

Other important secular trend in the power supply market is the adoption of advanced chargers for mobile devices, which continues to drive strong growth in our communications and computer categories. Combined revenues from these categories more than doubled year-over-year in Q2, reflecting the market shares we have gained in OEM branded chargers for smartphones, tablets and notebooks, as well as multi-purpose chargers from a wide range of aftermarket brands.

We have made it a priority to win share in this market today, knowing the revenue stream will be stickier, less volatile and more profitable than the commodity cellphone charger business of the past. Charger designs have always had longer lifecycles than the mobile devices themselves, which are refreshed every year. But while simplistic low power chargers could easily be redesigned just to shed a few pennies of the born cost, today's highly sophisticated chargers are more like appliances with a greater focus on features and performance and longer design lifecycles. In short, we expect many of the designs in our pipeline to be in production for the long time and we are pressing our advantage to lock in these designs today.

We want a wide assortment of advanced charger designs in Q2, including a 33 watt inbox charger that will significantly increase our penetration at a top tier handset OEM. Another OEM recently plays, the largest single order to date for our GaN-based InnoSwitch products which they have selected for the new 67 mark inbox cellphone chargers for use with high volume four models. We also won a 13o watt design for a leading supplier of gaming notebooks, featuring four charging ports and using three GaN-based InnoSwitches. As announced in May, we have also been designed into Anker's next generation Nano II chargers which comes in 30, 45 and 65-watt versions. Notably the 65-watt version is approximately the same size as the 30-watt chargers from the first generation of Nano chargers. This improved power density is enabled by our latest product InnoSwitch4 which will be produced exclusively with GaN. GaN-enabled InnoSwitch4 to operate at higher frequency, resulting in a significant reduction in the size of the power supply transformer.

We pay the InnoSwitch4 device with our new plan chip which implements active clamp technology to recover losses associated with the higher switching frequency enabling a truly exceptional level of efficiency. And when combined with our MinE-CAP product, which uses GaN to enable the use of a much smaller input capacitor, we can deliver power density far superior to any solution available in the market today. The synergy between these products demonstrates the value of our comprehensive approach to power supply technology including proprietary process technologies, high voltage transistor technologies, highly integrated controllers, proprietary packaging and system level, know how. This has always been our approach and we have continued with our GaN technology, which we have seamlessly folded into our product offerings.

In fact a GaN InnoSwitch works exactly like a silicon-based InnoSwitch such that the customer doesn't have to know anything about GaN in order to realize its performance benefits. Other GaN devices offered in the market, including some marketed as ICs are essentially discrete switches that require dozens of Exo components and many times even a separate circuit board, which are incorporated into a power supply using an external controller chip, sourced from a third party. Entities must learn the idiosyncrasies of GaN to the design and looking power supply and even when successful, they end up with a design containing two to three times as many components and multiple circuit boards. This greatly complicates manufacturing and brings compromises on reliability, times to market, cost and form factor. While the transition to GaN is a secular trend that will lit many gorse, the benefit of integration are in its capable and we believe our projects proving superior in the GaN will just as it has with silicon over the past three decades. In fact, based on the recent design wins, we are accelerating our capacity additions for GaN to accommodate a substantially higher level of growth than previously expected.

Looking ahead, we have been anticipating significantly lower revenues in the second half, reflecting reduced demand for cellphone customers after aggressive handset builds meant to capitalize on the Huawei sanctions. We now believe that a significant portion of this adjustment took place in Q2 as evidenced by a sharp reduction in sell through as customers have rapidly adjusted their charge inventories. With this connection largely behind us and taking into account our continuing market share gains and new design wins, we expect a more moderate reduction in the second half revenues compared to our prior expectations. For Q3, we expect a 3% sequential decline in revenues, plus or minus 5% and we believe we are on track for a full year revenue growth in excess of 40% compared to a projected growth rate of about 20% for the analog semiconductor industry according to WSTS.

With that, I'll turn it over to Sandeep.

Sandeep Nayyar -- Chief Financial Officer

Thanks, Balu, and good afternoon. As usual, I will focus my remarks, primarily on the non-GAAP results, which are reconciled to GAAP in our press release tables. Revenues for the June quarter were $180 million, up 4% sequentially and above the midpoint of our guidance. Consumer revenues were up about 10% sequentially driven by broad-based growth in appliances and consumer electronics.

Industrial revenues were also up about 10% sequentially driven by a range of verticals including home and building automation, lighting application and broad-based industrial applications. Computer revenues increased mid-single digits, driven by share gains in notebooks chargers which offset broader softness, likely reflecting less demand related to work from home. Communications revenues were down mid-single digits reflecting the lower demand from cellphone customer offset partially by channel replenishment. Revenue mix for the quarter was 35% communication, 31% consumer, 26% industrial and 8% computer.

We stated last quarter that March would be the low watermark for gross margin and that is proving to be the case. Non-GAAP gross margin rose to 51.4% in the June quarter, up 400 basis points sequentially, driven primarily by a more favorable end market mix and manufacturing efficiencies. Non-GAAP operating expenses were $37.6 million for the quarter, up $1.4 million from the prior quarter driven by annual salary increases and higher R&D investment, but slightly below our expectations, reflecting the base of our headcount additions. Non-GAAP operating margin for the quarter was 30.5%. While I expect operating margin to settle back into the high '20s over the next couple of quarters, crossing the 30% threshold in the June quarter clearly demonstrates the leverage in our financial model. This leverage can also be seen in our EPS growth. Non-GAAP earnings were $50.8 million in the June quarter or $0.83 per diluted share. That's an increase of more than 150% from the second quarter of 2020 on a revenue growth of 69%.

Cash flow was also strong with $67 million generated from operations, while CapEx was just over $8 million. We paid out just under $8 million in dividends and utilized $26 million for share repurchases, buying back 335,000 shares or roughly 0.5% of offload at an average price of less than $79 per share. Buyback activity has been ongoing since the end of the quarter and will continue to be driven by a preset price volume metrics. Cash and investments on the balance sheet grew by $24 million from the prior quarter and stood at $513 million at quarter end. Internal inventories held steady at 92 days, while channel inventories recovered from the unsustainably low levels reached last quarter, ending June at 5.2 weeks, still below our expected steady state levels of our six weeks to seven weeks.

Looking ahead, we expect third quarter revenues to be down 3% sequentially, plus or minus 5%. At the midpoint of the range, that would be an increase of 44% year-over-year. While it is too early to project revenues for the fourth quarter, we believe we are on track for revenue growth in excess of 40% for 2021 and we believe we are very well positioned for growth in 2022 based on the market share gains and the secular drivers that Balu outlined in his remarks. Our gross margin outlook for the year has improved, reflecting our expectation for end market mix and the impact on manufacturing efficiency. I expect non-GAAP gross margin for the third quarter to be approximately 51.5% and around 51% for the full year. Operating expenses will continue to rise gradually as we add headcount in both R&D and sales and work to bring more products to market with our industry-leading technologies such as FluxLink and GaN.

For the September quarter, non-GAAP OpEx should be between $38.5 million and $39 million. For the full year expenses should grow about 9% to 10% coming off of flat year in 2020. Other income for Q3 should be in the range of $300,000 to $400,000 while the non-GAAP effective tax rate should remain at approximately 8%.

And now, operator, let's begin the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] We have our first question comes from the line of Ross Seymore from Deutsche Bank. Your line is now open. You may ask your question.

Ross Seymore -- Deutsche Bank -- Analyst

Hi guys, thanks for taking the question. Congrats on the solid results. I wanted to talk about the channel first and foremost, and really what it means to your second half expectations being higher or less bad than you said a quarter ago. The channel looks like it got back closer to normal. Is that going to be a tailwind and get back to normal in your second half expectations? Or do you think that the sell-through is going to be strong enough that recently the channel is going to take a little bit longer?

Balu Balakrishnan -- President & Chief Executive Officer

So as we said, our normal levels are six to seven weeks. And here we are at five. I think but the predominant growth in the channel came from the cellphone area. And we believe because of the share gains that we have had in the secular drivers, we are going to have a better second half that we had previously anticipated. So in terms of the channel, we expect it to be relatively flat for Q3. There is a possibility it could go a little bit higher in Q4. You mentioned it go to our normal, but that's our best guess at this point.

Ross Seymore -- Deutsche Bank -- Analyst

Got it. Thanks for the color on that. I guess as my follow-up. Nice performance on the gross margin side of things. Sandeep, you talked about the two reasons mix. I think we can see a little bit of that mix and why that would happen? But the manufacturing side, a little bit more of a surprise to you that you usually pretty accurate on that. It's always good to be surprise to the upside more than the downside. But I just wanted to get a little bit more color on the drivers, especially on the manufacturing side, what happened there and how sustainable it is?

Sandeep Nayyar -- Chief Financial Officer

Well, the volumes are going up and we've had the yields improvements, debt time reduction and also as the mix in communication moves to aftermarket chargers, that helps our margin also because the volumes are lower and it has a favorable contribution. And with the environment where we are, you know where thoughts have gone up, we do value pricing. And as a result of that, when we are competing against discrete and you're doing value pricing, that also helps a bit.

Balu Balakrishnan -- President & Chief Executive Officer

Yes utilization and also test cost improvements and probably the biggest manufacturing cost improvements and in the past we have migrated to a new test platform, which is a more cost effective and that happened over the last 12 months or so. So that has helped us. But as Sandeep said, even in communications, we are seeing improving gross margins for the reasons you mentioned like the aftermarket and the fact that everybody is going to very high end chargers.

Ross Seymore -- Deutsche Bank -- Analyst

Got it. Congrats, again. Thanks, guys.

Balu Balakrishnan -- President & Chief Executive Officer

Thanks, Ross.

Operator

Thank you. The next question we have the line of Christopher Rolland from SFG. Your line is now open. You may ask your question.

Christopher Rolland -- SFG -- Analyst

Thanks, guys, and congrats on the quarter. So I actually wanted to talk about the non-GAAP operating margin for a second here. I think your long-term model is 20% plus and I know -- you guys had a an outstanding quarter of plus 30% this quarter and I know you said it is going to go back into the high '20s. But I was wondering if you had any plans on updating that long term op margin target and where that might go overtime?

Balu Balakrishnan -- President & Chief Executive Officer

Our long-term model continues to grow our top-line low double digit for revenue growth with OpEx growing at about 60% and you know, we always talked about this could be over a three to five year period on an average. We have had a step function increase in the revenues that has caused our operating margin you move up and our goal has always been there to maximize our operating margin over a period of time and not in particularly given the year.

Christopher Rolland -- SFG -- Analyst

Yes. Would you say that 30% plus could be a stretch goal for you guys overtime?

Balu Balakrishnan -- President & Chief Executive Officer

Well, I really think if you remember, I talked about 20% and again you have to look over a three to five year period, could be -- we had talked about this big 20% goal. We're not ready to again stated. But I think being in the mid '20s plus seems to be definitely in the direction where we are and obviously our goal as we move forward, will be keep enhancing that toward the number that you indicated. But at this point, we want to do is, is talking in terms of three to five years. But I think we have achieved the mid '20s and hopefully can sustain that and start doing in the north direction from there.

Christopher Rolland -- SFG -- Analyst

Yes, OK, great. And then it does seem like there are one or two newer GaN companies out there looking to go public and -- maybe you can talk about that market. How you see share shaking out, and then ultimately pricing dynamics moving forward as we have some more newer entrants into the market?

Balu Balakrishnan -- President & Chief Executive Officer

Sure. Just to be clear, all other GaN companies often discrete devices. They don't provide a system level solution. But I think that's where we have a huge advantage. GaN is very difficult to use. It's a very fast device. Lot of customers struggle with it. There has been -- they use our product where GaN is embedded within our product. So we take it up all of the idiosyncrasies of the GaN, leading with that -- some of the customer's concern, they can't even tell the difference from a design point of view. Of course, they can tell the difference in terms of performance and that's how easy we've made GaN to our customers. As far as the other side of it is that the number of components required to implement our solution is far less. We typically have anywhere from one half to one third the number of components, which is really needed to make the power supply small. It's not just a question of using GaN, you have to be able to reduce the size of the power supply, for that you have reduce the component count.

We also have to implement features like current limit inside of our product in a loss less way, otherwise you end up having additional losses outside. So it's really negates the use of GaN. So talking about GaN as a device is not very useful. You have to look at the system, and that's why GaN has had the challenges for many, many years now and we are able to break through that. Lastly, I would say that in terms of the technology, we believe we have the most cost-effective technology in the world in GaN and that's because our structure is very different from everybody else's and is uniquely different because we want the most cost effective technology for our switch more power supplies and that's where we are now, I think we're in a fantastic position compared to any of the other competitors.

Christopher Rolland -- SFG -- Analyst

Awesome. Thanks, guys.

Operator

Thank you. We have the next question comes from the line of Tore Svanberg from Stifel. Your line is now open. You may ask your question.

Tore Svanberg -- Stifel -- Analyst

Yes, thank you and congratulations on a few records. I think it's revenue, operating margin and a free cash flow. So congratulations on that.

Balu Balakrishnan -- President & Chief Executive Officer

Thanks.

Tore Svanberg -- Stifel -- Analyst

First question is on the communications business. It was down sequentially this quarter. You said that the corrections seems to be behind you. I assume that business is still going to be down in Q3. Is that how we should read it?

Balu Balakrishnan -- President & Chief Executive Officer

We -- to the best we have -- we can model with slightly down in Q3, I think that the Huawei distribution has completed to the best we can estimate and that's why we saw a significant reduction offset by of course our channels replenishment. But in Q3 we think that will be the slightly down.

Tore Svanberg -- Stifel -- Analyst

Got it. So what takes the revenue down then, it be consumer business going to take a be there?

Balu Balakrishnan -- President & Chief Executive Officer

Well, the consumer business should be relatively flat from what we can tell. Even though it's usually seasonally down because of AC. AC is down in Q3, but we have so many new design wins that will -- we believe will offset that. So that's the reason, sorry, we have given the range as we do. It gets hard to get the size from where we have guided through to take the 3% decline, plus or minus. That's way to get, you know, there will be a let me know directionally communication is going to be slightly down. And typically air conditioning goes down in Q3, but we think because of share gains that sort of offset that and be flattish and industrial has so many moving parts, but it gets a little difficult to be very precise. So that's why the range gets difficult to say. But this is the best directional answer we can give at this point.

Tore Svanberg -- Stifel -- Analyst

Yes, that's great. Thanks for that color. Moving onto the product. So BridgeSwitch, it sounds like that product line is really hitting the momentum. You talked about some big design wins there. How should we think about the margin profile of that product -- that business. Is it similar to the other products?

Balu Balakrishnan -- President & Chief Executive Officer

Well, again, it depends on the market and in the consumer market, it will be similar to the consumer gross margin we have. And we expect it to grow very nicely next year. We have many design wins this year. We will get few million dollars in revenue this year, but it will really start accelerating next year. The revenue growth on BridgeSwitch has been delayed because of COVID. Because in appliances when they go to a totally new platform like BridgeSwitch, it takes quite a bit of design work and we were unable to physically go and help them. And so it made the designing process much longer, trying to help them remotely. But the interest level always has been high, but we're finally seeing the benefit of this revolutionary product. Meeting is going to do extremely well going forward.

Tore Svanberg -- Stifel -- Analyst

Great. Just one last question, I know the trend, the fast as the market has been for going to surely moving outer box that, but you talked about several in box design wins, I think you said even your largest single order to date for InnoSwitch was 67-watt in box, so is there still sort of a mixed bag as far as where the trend is between outer box and in box?

Balu Balakrishnan -- President & Chief Executive Officer

Yes, there is still true, because the Chinese OEMs are really focusing on charge time and they believe that their unique approach allows them to charge at a much faster rate. I mean you can imagine, 67-watts have a lot of power. If you have used to the 5-Watt tube charger, this is substantially higher. It's about 30-40 times higher in charge rate and they believe that their protocol allows them to do that. So they are not too anxious to go to a standardized protocol and USB PD because they think they lose their advantage. They are able to do something other people can't do. So, we don't see them transitioning in the near future and could it happen in the long term? Yes. But is it going to happen quickly? I think it's happening slower than even we anticipated. As you already know, one of the major OEMs have switched to USB PD. Another one is switching partially the USB PD. But beyond that, we have not seen a significant move to USB PD which is actually good for us because it's all different designs and therefore they -- the fact that they are focusing on fast-charging means that they're going to continue to put it in box because each generation has a much higher feature level, whether it's higher power or higher performance. So they use it as a marketing tool. So, they haven't transitioned out of the box.

Tore Svanberg -- Stifel -- Analyst

Thanks, guys. Congrats again on an outstanding quarter. Thank you.

Balu Balakrishnan -- President & Chief Executive Officer

Yes. Thanks, Tore.

Operator

Thank you. We have the next question comes from the line of Gus Richard of Northland. Your line is now open. You may ask your question.

Gus Richard -- Northland Capital -- Analyst

Yes, thanks for taking the question and my congratulations on a good quarter as well. Just quick, can you talk a little bit about channel inventory on the consumer side. You said it built up in communications, but I was wondering if that was true for consumer as well?

Balu Balakrishnan -- President & Chief Executive Officer

It's not gone up as much in consumer because the demand on the appliance side continues to be extremely strong. And as we have said and we had talked earlier the normalizations and different end markets, what happened just point of time, but the demand on the consumer, especially on the major appliances continues to be very strong. And that's an area where we are waiting to see when that normalizes because it has been way above normal levels. But also the other part, which is very good that is happening as we talked about in our remarks is, we are -- our gains have accelerated because of people prioritizing other stuff plus people exiting this marketing or defocusing. The gains that we would have had over a period of time had actually accelerated and that is going to be a very positive even when things normalize because that will be a nice offsets to that -- the share gain.

Gus Richard -- Northland Capital -- Analyst

Got it, got it. And then just thinking about the model going forward. If one were to assume that you hit normal seasonality, whatever that is. Going forward would your op margin stay above 25% but below 30% going through next year?

Balu Balakrishnan -- President & Chief Executive Officer

I think at this point in time, because even though we haven't done manual plan, but I'll do my stop up eyes, I feel, if you take where we will end up this year which will be in the range -- somewhere in the range that you're telling, I think in the middle of the range, I think it'll be give and take that. I think next phase after the first, we can model -- we will be similar to the whole year, the most margin this year. Because we believe we are going to grow next year. It's hard to tell how much, but we feel very good about growing next year.

Gus Richard -- Northland Capital -- Analyst

Right. Is the gross margin of the consumer -- I'm sorry, communications market better because you've got more aftermarket guys, they are taking smaller volume. Is that a good way to think about it?

Balu Balakrishnan -- President & Chief Executive Officer

Exactly, yes. Our communication gross margin is increasing because of that.

Gus Richard -- Northland Capital -- Analyst

Okay, got it. And then -- all right. So, I talked to you guys to talk to your competitors. And trying to stress out, what topology is the best and their argument that, they have better energy efficiency because they use soft switching. In other words, they don't, both current and voltage don't cross over to the same time. Could you talk about that topology versus yours and why you think your topology in having -- you know, how that applies to, how you sense current, etcetera. Can you -- in layman's terms explain what's going on?

Balu Balakrishnan -- President & Chief Executive Officer

Yes, absolutely. The -- this is almost strange because the product is up switching. It doesn't -- converter and InnoSwitch4 is even better, zero voltage switching, which is even more efficient by using those planned set of product. So I don't think anybody can even come close to our efficiency at all. I mean, it is just -- if you want to build the smallest adaptor in the world, we are -- yes today.

Gus Richard -- Northland Capital -- Analyst

And do them label you use smaller magnetics?

Balu Balakrishnan -- President & Chief Executive Officer

Yes. So we talked about in my prepared remarks that our latest product Inno4, operator by frequency, and that's why it's only the GaN. It doesn't have a silicon switch at all because of the high frequency operation. And then you go to higher frequency, it can reduce the size of the transformer, but you end up increasing the losses in the transformer and the switch. To recover that we have another companionship called ClampZero which recovers the losses and senses the output. So you can not only maintain efficiency, you can actually further increase efficiency using zero voltage switching. And so on top of that we also have MinE-CAP that nobody else has, by the way that will also review the size of the capacitor by 40%. So, between MinE-CAP and ClampZero, we are able to reduce the size of the transformer and capacitor which are the biggest components in a power supply. So in both cases, we reduce it by about 40% of each one of them. And then to make capacitor small, even that is not sufficient, because you have to have very few components, so that you can actually fit it into the small enclosure. That's where we really excel because we have typically one third the components of a competitor's GaN-based design.

Gus Richard -- Northland Capital -- Analyst

I understand. Thank you. And last one from me. You said you're going to add capacity for GaN products because the demand is that MOCVD is a testing. What you need to add?

Balu Balakrishnan -- President & Chief Executive Officer

We will have to add primarily on the front end. I can't go into details, but I could say that from a packaging standpoint, we already have enough capacity. We are expanding as we speak, but we will have -- that's the easier to do because of small -- shorter lead times. But it's the back end of -- I'm sorry, the front end where we are significantly expanding capacity in preparation for substantial growth, not only next year, for the next several years.

Gus Richard -- Northland Capital -- Analyst

Got it. Very good. Thank you so much.

Balu Balakrishnan -- President & Chief Executive Officer

Thanks, Gus.

Operator

[Operator Instructions] Next question we have at the line of Karl Ackerman of Cowen. Your line is now open. You may ask your question.

Karl Ackerman -- Cowen -- Analyst

Yes, good afternoon, gentlemen. I wanted to follow-up to your last question what Gus had kind of asked which was, and some of your prepared comments you indicated that channel inventory could possibly creep higher into Q4 and maybe eventually get back to normal. I know you had invested in late 2020 and early 2021 on additional capacity adds on the front end, which did prove fortuitous for you as others struggled with capacity. But my question is, does a normalization in channel inventory GaN and any plans for you to further expand capacity from here? And I have a follow-up.

Balu Balakrishnan -- President & Chief Executive Officer

Well, first of all, until the market normalizes, we want to keep as much inventory with us because that's where we can serve the real demand most effectively. If inventory get distributed among many customers distributors, it makes it really hard for us to take it up upsides, right? We are seeing in the appliances. We are seeing a significant upside that we did not anticipate simply because our share gains have suddenly accelerated for reasons that Sandeep already mentioned. So, it's really important for us to have that with us. However, as things normalize, we will be able to build inventory as opposed to a normal as possible, whether it will happen in Q3, I don't think so. I think where demand is still pretty high. And in Q4, there is a likelihood that we could go up or creep up a little bit, but it's also possible that we won't be able to do that. It all depends upon how much -- how long this normalization will take in the cellphone the normalization has happened to a large extent in Q2 but in appliances, it's still very, very hard.

I mean, there is a -- demand is very high. And so it is possible to take one, two or one three quarters for it to normalize. But having said that, we are continuing to expand capacity across all of our technology, especially GaN. GaN is where we see the most dramatic growth in terms of capacity requirements. So we are focusing on that, but we also need silicon capacity which we're expanding as we speak and we will have more capacity available next year. You can see it; we are going to grow 40%. We are on target to grow 40% plus and the only way we're going to done that, that we have the capacity in place. We put the capacity in place. We have -- we've built enough inventory. So we are in a much better position than almost anybody in the semiconductor industry. And we also have a very unique manufacturing model. We don't use, what it call, standard foundries. We use how -- we use fabs that are owned by product companies who have excess capacity to give it to us and it's committed to us. Because we are committed through contracts. So we are able to do this is much better than almost any other company you can think of.

Sandeep Nayyar -- Chief Financial Officer

The other thing I'd like to add is our internal inventories, they are only sitting at 92 days. Our running model is 125 days. So we are well below the model that we would really like to run and in spite of the growth that we have this year and the growth in the prior year, we feel very good because of the share gains in the secular that we will grow again very nicely next year.

Karl Ackerman -- Cowen -- Analyst

I appreciate that, following Sandeep. Very helpful. There has been much discussion on today's call regarding, I think your competitive differentiation within GaN and so I don't want to believe that point but I think what is interesting is, and one of the questions that I've seen quite a bit intra-quarter is the growth trajectory that your peer has articulated over the next couple of years for GaN. And the question is, is that indicative of a rapidly expanding TAM, that's also greatly beneficial to you or does that constrain your growth? And so as you address that question, I was hoping you could also talk about whether you are seeing new opportunities to maybe move into the server market or outside of your consumer offerings that could also expand your TAM overtime? Thank you

Balu Balakrishnan -- President & Chief Executive Officer

Yes. Let me answer the last question first, that is that GaN will enable us to go to much higher power levels within integrated switch. However, we don't talk about products in the higher areas, until we have them. So that's one of the reasons we don't go crazy on what this could be in the next five years. If you are being -- if you're going public through a SPAC, you can -- you have complete freedom to show, whatever you want for the next five years. So we are just very, very conservative in that regard. As far as the GaN propelling other companies. Yes, GaN is a very, very important technology. So when -- as GaN gets popular, it will lift all the boats, obviously. The question is, who is going to benefit the most and I believe the one who benefits, is the one who makes it easy for our customers to use a GaN. And secondly, the company that has the most cost effective and reliable technology.

And I think we have really proven that should -- by shipping very high volume for the last four years, that we have a very good reliable technology and a very cost effective technology. The proof is in the fact that we are now in the main line in the box chargers at six to seven watts. This is the first large volume GaN design that we know off where we are in very high volume charger design with one of our OEMs.

Karl Ackerman -- Cowen -- Analyst

Very helpful. Thank you.

Operator

[Operator Instructions] There are no further questions at this time. Please continue presenters.

Joe Shiffler -- Director of Investor Relations

All right. Thanks, everyone for listening. There'll be a replay of this call available via our website investors.power.com. Thanks again, and good afternoon.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Joe Shiffler -- Director of Investor Relations

Balu Balakrishnan -- President & Chief Executive Officer

Sandeep Nayyar -- Chief Financial Officer

Ross Seymore -- Deutsche Bank -- Analyst

Christopher Rolland -- SFG -- Analyst

Tore Svanberg -- Stifel -- Analyst

Gus Richard -- Northland Capital -- Analyst

Karl Ackerman -- Cowen -- Analyst

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