Power Integrations (POWI) Q3 2026 earnings review
Power Integrations profit margins rise, but appliance chip sales fall
Power Integrations, which makes chips for high-voltage power conversion, expanded its profit margins through cost cuts even as appliance chip demand weakened. Revenue rose 6% from a year ago, landing slightly below the middle of the company's plan as consumer sales shrank. Chief executive Jen Lloyd kept tight control of operating expenses, lifting profit per share excluding one-offs by 28% to $0.46.
| Revenue | $125.5M +5.5% from a year ago |
|---|---|
| Operating margin, excluding one-offs | 21.4% up 6.2 percentage points from a year ago |
| Free cash flow (by our math) | $36.5M +51% from a year ago |
| Q4 revenue outlook | $118–126M middle of the range: +18% from a year ago |
⚖️ Verdict: 🟢 Bullish
The story got better because the company lowered its operating cost base by another $3 million a quarter and held gross margin above 55%, carrying a 20% operating margin outlook into the fourth quarter. The bad news: consumer sales fell about 6% from the second quarter by our math, and industrial growth from a year ago slowed to 8%.
The question now is whether industrial and gallium nitride chip wins can accelerate total revenue growth while electric-vehicle and data-center orders remain years away. Either new industrial projects offset weak home-appliance demand, or growth fades once the easy comparison against last year's fourth-quarter slump passes. First-quarter 2027 revenue outlook will tell.
🐂 Bull Case
Cost Cuts Lifted Operating Margin Past 21%
"We also delivered strong earnings growth in the quarter reflecting our continued focus on expense discipline and profitability," chief executive Jen Lloyd said. Power Integrations cut its workforce by 7% in February, and this quarter operating expenses excluding one-offs dropped to $42.4 million, $2.6 million below the bottom of its own plan.
- Operating margin excluding one-offs: 21.4%, up 6.2 percentage points from a year ago
- Selling, general and administrative costs excluding stock pay: 16.2% of revenue, down 3.6 percentage points by our math
- Research and development excluding stock pay: 17.6% of revenue, down 2.5 percentage points by our math
- Fourth-quarter operating expense plan excluding one-offs: $42.5 million to $43.5 million
The lower cost base matters because it resets what the chipmaker earns on every dollar of sales. For three quarters operating costs excluding one-offs sat near $45 million, and the fourth-quarter outlook keeps them near $43 million, so the 20% margin middle of the range holds even on lower seasonal revenue.
What to watch: operating expenses excluding one-offs in the fourth quarter. A reading at or below $43.5 million would confirm the lower cost structure is permanent rather than a one-quarter dip in project spending.
Gross Margin Held Above 55% Despite Currency Pressure
A standing concern was that a weaker Japanese yen would squeeze gross margin in the third quarter. Instead, gross margin excluding one-offs rose to 55.2%, beating the 54.0% to 55.0% outlook range, while the GAAP figure reached 55.6%.
Industrial products carry higher margins than consumer chips, and industrial sales stayed at 43% of total revenue. For the fourth quarter, the company plans for gross margin excluding one-offs of 54.5% to 55.5%, lifting the middle of the range by half a percentage point and putting the currency concern to rest.
What to watch: fourth-quarter gross margin excluding one-offs against the 55.0% middle of the range. Holding 55% when high-margin industrial sales typically dip at year-end would prove product mix can carry profitability.
Factory Inventory Dropped While Cash Generation Rose
Power Integrations has been working down a large pile of unsold chips sitting in its own warehouses. In the third quarter, balance-sheet inventory fell by $7.5 million from the prior quarter to $150.3 million, which is down 8.7% from a year ago.
By our math, that brings inventory down to about 246 days of supply, from 265 days in the second quarter and 292 days in the first. Turning those stored chips into cash helped lift operating cash flow to $42.6 million and free cash flow to $36.5 million, up 51% from a year ago by our math.
What to watch: inventory days on hand in the quarterly filing and on the call. The figure still sits well above the company's long-term goal of under 200 days, so another drop in the fourth quarter is needed to finish the cleanup.
🐻 Bear Case
Consumer Appliance Sales Shrank Again
Power Integrations sells power chips for home appliances, its second-largest market at 32% of revenue. After returning to sequential growth in the first half of the year, consumer share dropped from 36% in the second quarter to 32% in the third.
By our math, consumer revenue fell about 6% from the second quarter to $40.2 million, and slipped 0.7% from a year ago. That drop pulled total revenue to $125.5 million, $0.5 million below the middle of the company's outlook after seven straight quarters at or above it.
Thefourth-quarter revenue outlook of $118 million to $126 million looks like an 18% jump from a year ago at the middle of the range, but only because sales fell to $103.2 million in last year's appliance slump. Against the $125.5 million just reported, the plan points to a 2.8% sequential decline by our math.
What to watch: consumer share of revenue in the fourth quarter. A second straight sequential drop would show that weak housing and tariff caution are overpowering new appliance chip launches like TinySwitch 5.
Industrial Growth Slowed as Comparisons Toughened
"Revenue grew five percent over the prior quarter driven by PowiGaN™ products as well as continued strength in the industrial market, where revenue is up 13 percent year-to-date," Lloyd said. PowiGaN is the company's gallium nitride chip technology for high-voltage power conversion, and industrial is its largest market at 43% of sales.
While industrial sales grew 5.5% from the second quarter to about $54.0 million by our math, growth from a year ago slowed to 8.0%, down from 23% in the first quarter and 10% in the second. That pulled nine-month industrial growth down to 13% from 16% at the half-year mark, because high-power grid and rail projects arrive in uneven batches.
What to watch: fourth-quarter industrial share of revenue against last year's 37% dip. Holding above 40% would show that battery storage and grid wins are smoothing out the usual year-end project slump.
Risks this quarter didn't answer
Four standing concerns could not be read from the third-quarter press release because the details live in the conference call or the quarterly filing.
- Data-center and electric-vehicle timelines: Lloyd said high-voltage chips are aligned with artificial-intelligence and electrification needs, but the release gives no dollar figures or production dates.
- Distributor inventory weeks on hand: not in the release after sitting at 7.3 weeks in the second quarter; the call will show how much of third-quarter sales came from distributor restocking.
- Customer concentration and Asia billing shifts: the quarterly filing will show whether the top distributor stayed at 33% of sales and whether billing kept moving from China to Singapore.
- Computer and communications scale: computer was 13% of revenue and communications 12%, leaving both segments at a quarter of total sales combined.
👓 Other Themes
Legal Settlement and Modest Dividend Increase
Power Integrations settled "a judgment in a legal matter which was settled in the quarter ended September 30, 2026, resulting in a reduction of the reserve previously established for the judgment" of $1.8 million in GAAP operating costs. Separately, the board raised the 2027 quarterly dividend by half a cent to $0.22 per share, a 2.3% increase, and bought back no shares for a fourth straight quarter.
💲 Other KPIs
Total cash and marketable securities rose $25.5 million, or 9.7%, from the second quarter and $38.6 million from year-end 2025. The company carries no debt, and cash is building again because free cash flow of $36.5 million easily covered the $12.0 million quarterly dividend while share buybacks remained paused.
Uncollected customer bills rose 4.3% from the second quarter alongside the 5.5% sequential revenue increase, but fell 11.4% from a year ago even as sales grew 5.5%. That means customers and distributors are paying on time, boosting third-quarter operating cash flow.
Employee stock pay fell from $11.3 million in the second quarter and $21.2 million a year ago, when the former chief executive's retirement triggered a $13.6 million charge. At 7.5% of revenue, stock pay still drove diluted shares excluding one-offs up 0.8% from a year ago to 56.6 million.
🔮 Guidance
New. The middle of the range is $122.0 million, down 2.8% from the third quarter and up 18.2% from last year's depressed fourth quarter by our math. Against the undistorted fourth quarter of 2024, the middle of the range is up 15.9%, and it puts full-year 2026 revenue growth at 7.0% by our math.
New. The plan calls for a 54.5% middle of the range, down 1.1 percentage points from the third quarter (which included a $0.6 million stock-pay credit) and up 1.6 points from 52.9% a year ago.
New. The 55.0% middle of the range sits 0.2 percentage points below the third quarter's 55.2% result and 1.7 points above last year's fourth quarter. It is 0.5 points higher than the outlook set for the third quarter.
New. The $53.5 million middle of the range is up from $50.6 million in the third quarter because the $1.8 million legal settlement credit does not repeat, and it includes $10.5 million of stock-based compensation.
New. The $43.0 million middle of the range is $2.5 million lower than the third-quarter outlook range and down 4.4% from a year ago by our math. Actual spending has landed below the guided range for four straight quarters.
New. The 11.0% middle of the range steps down from 15.2% in the third quarter, when the legal reserve reduction lifted GAAP profit, but sits 2.5 percentage points above last year's 8.5%.
New. The 20.0% middle of the range is 2.0 percentage points above the third-quarter outlook and more than double last year's 9.7%, dipping 1.4 points from the third quarter only because of lower seasonal revenue.
❓ Key Questions
Where did distributor inventory weeks finish the third quarter?
Channel inventory sat at 7.3 weeks in the second quarter, and management expected some restocking toward 8 weeks in the third. Knowing the ending figure will show how much of the $125.5 million in sales was restocking rather than customer demand.
Why did operating expenses drop $2.6 million below the plan?
Operating expenses excluding one-offs fell from $45.2 million to $42.4 million, and the fourth-quarter outlook keeps them near $43 million. Investors need to know which research or sales costs were cut after the February layoffs had already finished.
What is the dollar base for automotive and PowiGaN sales?
Chief executive Jen Lloyd credited PowiGaN chips for third-quarter growth, and previously said automotive revenue would double this year. Without a dollar figure for either, investors cannot test whether those products are big enough to move total sales.
What are the final terms of the settled legal judgment?
Footnote (b) says a legal judgment was settled in the third quarter, reducing the previously established reserve by $1.8 million. Management should clarifywhether the $11.3 million wrongful-termination appeal is now completely closed and how much cash will be paid out.