Vicor Corp (VICR) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Vicor's fourth quarter teleconference. As a reminder, this conference is being recorded.

I would now like to turn the program over to your host Chief Financial Officer Mr. Mark Glazer. Please proceed, sir.

Thank you. Good afternoon and welcome to Vicor's quarterly conference call. I'm Mark Glazer, Chief Financial Officer, and with me is our CEO, Patrizio Vinciarelli.

Before we begin, we'd like to remind all of you that today' conference call is being recorded and is a copyrighted property of Vicor Corporation. Any rebroadcast, reproduction or other transmission of this conference call in whole or in part without the prior written consent of Vicor is prohibited.

We'd also like to remind that you various remarks that we may make curing during this call about future expectations, trends, and plans and prospects for the company and its business constitute forward-looking statements for the purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995.

These forward-looking statements merely reflect our current beliefs, expectation and estimates which we share with you during our quarterly conference calls, and we cannot assure the future results or outcome of the matters described in any of those statements. Actual results may differ materially as a result of risks and uncertainties, including those discussed in the MD&A part 1 and legal proceedings sections included in our quarterly and annual reports filed with the SEC on forms 10-Q and 10-K.

A replay of this conference call will be available beginning shortly upon its conclusion through February 17, 2004, by calling 888-286-8010 and using the pass code 50477270. In addition, the webcast replay of the conference call will be available on the interrelations section of the company's website at www.vicorpower.com/IR webcast beginning shortly upon its conclusion.

However, the information we provide during this call is accurate only as of the date of this call and investigators should not assume that the information remains accurate at any later time. We undertake no obligation to revise or update any of the statements made during this call in order to reflect events or circumstances that may arise after this call, and you should not rely upon them after the conclusion of this call.

We are now ready to begin the question and answer portion of our conference. We will now take the first question.

The first question comes from Mas Siddiqui from Jefferies & Company.

I had a quick question on your end, Mark. I wondered if you could give us some color on that with your large defense your larger mark in the quarter and maybe some idea of what markets are stronger than others.

There was no particular change in the mix among the various markets.

And it's still the largest, then.

Defense was contributing as much as it did in prior quarters.

Can you just give us any idea in terms of the tone of business in I know obviously last quarter we spoke of some weakness in the defense area that looked like it's sort of bounced back. Can you just talk a little bit about that?.

We don't have anything specific to say with respect to that.

Then I wonder wondered, Mark, could you go over, I know obviously the tax rate impact for the quarter, there were some adjustments for that, can you give us any guidance as to what we should use for our models going out?

Well, obviously it's going to depend on the company's profitability, so at this point we don't really have an estimate as to what that will be in 2004 yet.

Will it be -- I know a couple of quarters ago we talked about how I guess because of the limiting of the tax law carry-forwards that would limit the ability to I guess realize a tax benefit. Is that still the case?

Yes, that is still the case next year.

Okay. Thanks very much.

The next question comes from Steve Smigie with Raymond James. Please proceed.

Great. Thank you. Just following further on you partly answered that last question on taxes, but you had also mentioned I think there was a one-time non-recurring item and so would you just characterize a little bit more the nature of the benefit in the quarter and why it would not be recurring in.

Sure. The depreciation for tax purposes and to a lesser extent for book purposes is lower in future period if you look out past 2003, and it enabled us to book a tax benefit against the 2003 losses. You've actually compelled us to book under the appropriate FAS 109.

In terms of the strong growth in the revenue in the quarter, would you expect to see a similar level of sequential growth in the first quarter? I know you gave a book-to-bill ratio in the press release, but I'm wondering if maybe you can give us some more color on that growth.

Well, at a qualitative level we continue to see this quarter the same level of improvement. So we would generally provide guidance to the extent of in the short-term seeing continuing improvement in the top line in the margins and in the bottom line.

Just looking historically at SG&A, it seems the recent number of quartz you've been higher as a percentage of revenue ÿ and also a I higher a little bit on the dollar number, and I'm just wondering other than something like the change in the furlough program are there plans to bring down SG&A spending going forward or is that part of your plan to keep that low? Thank you.

Well, our best way to bring down SG&A is a percentage of the top line, is really by growing the top line. We're making investments in response to the business, and we're making investments to create new opportunities in terms of products and end markets. And that is the underlying strategy with respect to (inaudible) and to some extent SG&A.

Thanks. I'll get back in the queue.

And the next question comes from Ron Opel with Moors and Cabot. Please proceed.

Yes, congratulations on the nice uptick, the sequential uptick. Question, first question is there were a lot of design ends Vidac related and non-Vidac related, first and second generation products. The question is are second generation products now sufficiently cost-reduced so that profitability on second generation products could begin to approach first generation products within, say, three or four quarters?

Profitability has improved, but it's not at the level of first generational products.

Is the difference mainly one, simply one of depreciation?

I think this combining of factors, depreciation is one of them, as Mark pointed out earlier, we're looking forward to decline in years to come. Beyond that, it's the top-line growth with respect to second gen that will make a different for the better.

Okay. And the next question regards the new VI chip products. If in the first quarter, is it possible that in the first quarter they begin, and I'm assuming that's going to be in the current year, that they begin to generate significant revenue, could they put out gross margins or create gross margins that are comparable to the older products, that early on in the program?

We expect the margin of opportunity with the VI chips to be as good if not better than the first generation of products. With respect to the timing of their making a real impact on the financial statements, we need to be realistic about the times associated with significant programs and significant design wins.

Thank you.

And the next question comes from Gary Ross with AEM Partners. Please proceed.

With this Vic in the brick strategy, I assume that's because the design ends haven't moved as fast as you anticipated with the new architecture. I don't know if that's correct. And secondly in the Vic in a brick strategy would that then automatically have a lower gross margin than if someone adopted the new architecture itself in.

No, I think that the assumption is not correct. We have seen tremendous interest in the VI chips, in consumer IT, traditional markets such as cash, industrial, and other markets. So the motivation for the Vic in a brick strategy that is nothing to do with the appeal of the product in its own right; it has to do with the marketing opportunity of making manifest to customers, the IVM markets but particularly where big have become standards, the benefits of the VI chips.

It is a wonderful way to prove to customers how they can leverage VI chips in a way that the customers can very rapidly conclude. Since the considering VI chips are very obvious in the Vic in a brick pro product since they are realized through one or two or multiplicity of VI chips which are very obvious from a look at the product itself.

And the gross measuring question, if they do buy Vic in a brick can is it a lower gross margin to the company?

The gross margin opportunity may not be quite as good as for Vic sold as Vic, but we expect it to be good and we expect it to be supportive of very aggressive pricing strategy in the marketplace for these kinds of products.

One final question. In terms of if you start to get significant demand in the second half, what's the capital expenditure amount per dollar, in other words, if you have to produce $10 million worth of these chips, is there a significant capital investment?

I'm not going to quantify that, but I think I can tell you that that right is a lot smaller than the corresponding rate for second generational products. It's a tiny little fraction of that. In quantitative terms, I can't tell you that for this year we're looking at a number between 7 and $10 million in terms of equipment outlays. That compares with about $6 million last year.

Thank you.

And the next question comes from Craig Irwin with First Albany. Please proceed.

Hi Patrizio. I was wondering if you could give us a little bit of a commentary on your design strategy with your view VI chip products and how you've designed these for both I guess volume production as well as for efficiencies of production. Efficiencies of manufacturing.

No, not anything to do with the marketing strategy, just the manufacturability of the products and the way that the economics sort of favor this product versus some of the problems you may have had in the past.

Well, the VI chips themselves are highly manufacturable. They are brought about by primarily a plain two-sided assembly, assembly. There are a few specialized processes, but generally speaking, they do not amount to a very substantial hurdle. Again, on the scale of the second generation of products, this is a pretty (inaudible).

And then have the manufacturing yields to date been in line with your expectations of these products?

I think that the trend obviously with respect to manufacturing yields confirms that indeed these are going to be highly manufacturable products.

Fantastic. Fantastic. And did can you tell us if there was there was any license contribution from your license of this product to Celesteca? Was there any contribution in the product?

Celesteca took a license three months ago so then again I think we should be reel sticks with respect to expectations. The following comments going back to the manufacturability and the earlier question with respect to margins in Vic in a brick, so to speak, system level products built out of VI chips, those two are designed for manufacturability. Those two count together, basically, by, again, assembling on a Kier board the appropriate complement of VI chips.

Okay and do you still expect volume production from VI chips in the first quarter?

We expect an escalating level of activity, and beyond that I'm not going to, for a variety of reasons, define.

Excellent. And then just one small question about the quarter, obviously the gross margin improved quite nicely sequentially. Could you give us any additional color here behind that?

It's a combination of factors. The top line growth, one of them reduced, costs in manufacturing, including reduced fixed costs, improved yields. Those were the primary factors behind the improvement in margin.

Okay. And then was there any effect of the furlough or the end of the furlough on the quarter as far as your operating expenses that might not be present in the coming quarters?

No. Everything that would have been expensed for the end of the general furlough was taken for the most part into the third quarter.

Okay. Fantastic. Thank you.

And the next question comes from Jim Bartlett with Bartlett Investors. Please proceed.

In your last conference call, in the third quarter, you gave us an estimate that second gen was about one-third of total demand. Could you characterize what it was in the fourth quarter?

You should go back to the first gen products are roughly steady. There is improvement with respect to the second gen products. And we are very early, very, very early in the life of VI chips.

Second question. The Vic in the brick and in the announcement, you're talking about I price is low, is 11 cents a watt in OEM quantities. Can you characterize, compare and contrast how some of your products might compare with other quarter brick product that are out there now in terms of pricing and then what the benefits and speed and density. Well, not so much the density -- but that they provide versus the competitive products.

We believe they are very cost effective products and they're cost effective because of their high degree of manufacturability because of the facts of the underlying technologies. That is the case for the products that are already been introduced, the vast con converter type products. The pricing you made reference to is aggressive in the marketplace, is below typical competitive pricing.

We anticipate going forward that we're going to be able to be as aggressive with additional type of brick products that we're going to bring out as the year progresses to go after traditional VCV converter applications.

With the emphasis on price there or is the emphasis really more are you selling more of the speed benefits and other benefits?

The emphasis is on performance, but price is a factor in the marketing strategy. The paramount impact has to do with the much higher density, both in terms of power capability and in terms of increased current capability beyond what competitive technologies are able to deliver. It is in terms of efficiencies, again, above competitive products. But to proceed with designing a competitive price always helps, and that's part of our strategy.

Thank you.

And the next question is a follow-up question from Steve Smigie with Raymond James. Please proceed.

I was wondering if you could characterize to date the size and perhaps the number of design wins that you have with the VI chip and then in any particular situations where you've had wins, if you could talk about the competition and how who you may have displaced or won against.

I'm going to be not very specific with respect to answering that question beyond saying the following: There are major opportunities for which VI chips are being considered or being designed in a variety of end markets, including markets that have not been traditional vibrant markets, particularly consumer type.

The factors driving VI chip solution as compared to conventional old PW and technology type of solutions have to do with the high density, the cost effectiveness, the dollar per watt or I should say cents per watt or the corresponding dollar or cents per amp figure, per unit of current delivered, and the issues are a little different depending on whether the application has to do with point of load or customers require very, very high prompt delivery of very high concentrations, meaning a product can have very transitory loading demand or at the other end of the spectrum whether the application requires very high power levels of high voltages where the currents involved may not be of significance.

So the issues are different depending on the type of application, but the general superior attributes of the VI chips having to do with their ability to process power very densely, very efficiently, the ability to deliver 100 amps with very fast, well beyond what any competitive products can do, are design factors in a variety of applications.

Okay. Sort of following up on a margin question from earlier, in some of the analogies in the connector companies out there may have a gross margin on 70%. I'm wondering if that's sort of the range you are hoping to get out of the VI chip as well.

I think that we have to take at a separate time and not at this stage get it down to any particular number for a variety of reasons, because we want to maintain flexibility in the marketing strategy, in the pricing strategy, and those levels are going to provide us a functional time as a functional penetration, as a function of many things.

So I think it is fair to say that given the level of technological advance and the level of proprietorship of these products, we should be able to deliver margins, as I said earlier, as good and possibly better than first generation of products delivered back in the late 80s.

It's a very comparable situation in many ways. The VI chip competitiveness and VI chip superiority is superior to that of first generation technology. So the margin opportunity and the financial starting opportunity should be as good and possibly better.

Okay. Any plans to further license the technology beyond Celeste. Celesteca or have you engaged in that discussion at all?

We have engaged in discussion on that front.

Final question, could you give any update on Vicor and any activities there? Thank you.

We're continuing to have progress in expanding business plan of very exciting products.

Thank you.

And the next question comes from Alan Mitrani with Copper Beech Capital. Please proceed.

Hey, guys, not going to keep you long. In making to some of your other I won't call them competitors because you like to say you have specific products that don't really deal with some of the other brick makers or other guys, but in talking to some of those guys and a lot of customers everybody is seeing a pickup in business in. Component companies are talking about sequential revenues coming high, inventory levels seem to go as low as they can go.

Judging by your balance sheet it looks like you guys are, too, people are seeing a better tone going into '04 than they did in past yeast. Are you looking into the next few weeks but into the next 16 to 18 months? Besides the production, how is the end market and which end markets are doing better?

I think the tone of the market is getting a lot better than it was last year, but case in point, you made reference to our balance sheet, our level of investment in the assets. We're still being cautious with respect to that, capital equipment being a prime example, and we believe that most companies out there are still being cautious with respect to that.

I think from the vantage point we have, having been a supplier with all the mix, doing business with a lot of companies around the world in a variety markets, the picture that is still present is one of improved optimism but cautious optimism, and we're affecting that, in a sense, in the guidance and the posture that we're taking about.

Okay. What would make you become more bullish or more optimistic rather than cautiously optimistic? What do you need from thing? What indicators do you look at to get, you know, to get you more excited about the actual business rather than just cautious optimism?

I think at this juncture, given where we're coming from and what would be lurking out there, we want to see it happen, and we're going to be giving it fully as it happens.

Okay. And then lastly, are you servicing the wireless infrastructure mark at all? It's been a mark that's been difficult in the last few years but there that is been consolidation between Andrews buying Allen and then loosen and no, sir toe.

People seem to be rolling out 3G networks and spend than some money. Are you servicing any of these markets? Is that an area you see goats in.

We're servicing those markets with older generational products, and we are looking to service those markets with VI chips.

Thank you.

And the next question comes from Ron Opel with Moors & Cabot.

Is it possible that some of the design ends that you have for the second-generation products, as the new VI chips become available, could they be changed over to the VI chips before the ordering against those design ends, you know, had reached the level it might have earlier been expected?

I think looking down several quarters, absolutely, this has been an opportunity to service our customers through products that are built out of VI chips, and in effect, we can do with our own customers for earlier generation of products what we're going to be doing to power supply cuss customers with their brick products.

Would that result in a negative cannibalization at any point or do you have enough control to prevent that?

I think part of the cannibalization has to do with competitive products. We obviously don't worry about. As far as our own, we would do it with respect to that it includes the market.

And if the present growth trend line continues, is it reasonable to expect continuing improvement in the overall gross margin for the remainder of year?

As suggested early earlier, we would like to kind of take it one quarter at a time, and we're going to go as far as saying that the short-term trend is positive, but in terms of top line margins and consequently bottom line.

And the PRN, the preregulation model, that's the only I think basic building block of VI chips that hasn't yet been introduced. Is that coming along according to schedule?

Well, first of all, I should say that it is not the case that the only fundamental building blocks. There are other fundamental building blocks that play a role with respect to the power system capability.

The PRM point is an important block, and what I would say with respect to that is that, as you have seen, there's been an in creased pace of activity with respect to VI chip introductions, and we expect the trend to continue, and we're going to make press release the moment that particular product is introduced, but we're getting there with respect to that and we're getting there with other fundamental building blocks.

We're making very good progress with respect to expanding the metrics of VTMs and bus converters and creating comprehensive power lines that are going to give us critical mass in typical applications. Up to recently, we had only introduced a few units and just within the last few weeks we have introduced several more, and we're about to introduce more, so there is continued products.

All right. Thank you.

And the next question comes from Don McKenna with DB McKenna.

Patrizio, I would like you to go back and take a look at the standardization program. When you first introduced the new product, your strategy was for, you know, licensing agreements and partnering and what have you to get a rapid acceptance and standardization in the new product.

Nine months into it, I'm wondering if you could just kind of characterize your progress? Do you feel that the way things have gone, you're on schedule or ahead of schedule or how would you characterize things going?

I think we're doing well. We said at the beginning that we wanted to be very selective; that we're not going to be indiscriminately licensing the products, and I think what we've done so far is consistent with that, and what we're looking to do is also consistent with that.

The time scale for, in a sense, judging this strategy is not one of six months. I think it's one of five or ten years or even longer.

We expect that the VI chip product opportunity is one that is going to change the industry, and when it comes to licensing the strategic relationships are ones that need to be viewed in that longer-term time frame, so we've had plenty of opportunities. We have a number of opportunities that we are carrying on, and we'll close the ones that make sense.

Thank you.

The next question comes from Robert Katz with Sunvest.

Hi, Mark, Patrizio. Nice quarter. I have a question about design activity now that you're producing other of building blocks with the VI chip. Are you starting to see increased demand in design activity around your chips and do customer on potential customers get access to newly released products to go ahead to start design activities in different design markets?

We allow customers to start playing with the product as the product is approaching completion of qualification prior to release.

What would you anticipate, like, how many more markets can you address in the upcoming quarters based on the different releases coming out? Is it significant? Is there significant milestones that need to play out in the next quarter for releasing parts or building blocks for the product to actually go to market?

Well, I think the significant amounts, as indicated earlier be have to do with the completion of the development effort for new fund building blocks that play a role with respect to the power system vision of characterized power and VI chips.

Those are the key milestones, and closing on those milestones will expand the market opportunity greatly because, obviously, the market opportunity in most end markets with most applications is very much dependent on having a complement of building blocks. It usually cannot get the job done just by adding a small set of VI chips.

Even though there are opportunities for the limited seller products that we've already introduced, and some of the time these opportunities have to do with, you know, power supply companies or customers integrated, the VI chip within larger power system or the rest of the system is architected and designed to use a different solution, but obviously using the VI chips just as part of the system isn't as effective as being able to architect the entire system based on a VI chip set of building blocks.

Because of that, having the wherewithal with a larger complement of functionalities, with the PRM and other building blocks that are part of the architecture, will greatly expand the rate of penetration and the appeal of the products in the marketplace.

Do you feel that this will happen by the second half of this year?

As we said before, we believe that we're going to see and have an expanding rate of new product introductions. We are pursuing a very aggressive plan. We said set very hard and ambitious goals for ourselves, and we're doing by quite bell, by my estimation.

Thank you.

The next question is a follow-up from Steve Smigie with Raymond James. Please proceed.

For sorry for all the questions. Just a quick one. I guess at the peak of the last cycle you achieved approximately 20% EBIT margin. I was just wondering if there was any sort of internal goal to get back there at some point in the near future or if that's not given the way you're planning your business model.

That's where we're planning our business model. There was a reference earlier to a power management company, not in the power supply, per se, that has a tradition of great profitability and great margins, great success, and that is a lot closer to our model than what we have seen in our own case in the recent past and what we've seen in the power supply industry which we operate.

So the goal is to deliver high growth rates, high profitability based on novel, revolutionary power system solutions and power component building blocks and the VI chip concept is the international debt financial vision.

Okay. The last question is it seems that you're pretty confident in the success of the VI chip, and given that, I'm surprised that you haven't just begun the stock repurchase yet at this point. The chip shows more signs of success that the stock price would go up, and I'm just wonder what the trigger would be to get you to go ahead and start buying.

Well, similar questions have come up in the past, and the answer is along similar lines. We want to be very conservative in the fiscal management of the company, and we believe that having significant cash position and flexibility, irrespective of whatever may be coming your way in the market place, is very important, and that can mean many things.

We want to be in a position to be able to make the necessary investments without being concerned about the financial resources to do it. And we think that, particularly in the short term, that will be the most leveraged way of delivering better value for our shareholders.

Okay. Great. Thank you very much.

Sure. The final question is a follow-up from Jim Bartlett with Bartlett Investors. Please proceed.

What changes are you making or have you made in sales and marking given the myriad of new products and systems that you're rolling out?

We are reviewing our options with respect to dealing with the expanded opportunities that the VI chip products and technology will afford.

We essentially separate in our minds various products and opportunities that represent different type of challenges in terms of the marketing and the selling of the product and look forward to being able to be more progressive in terms of VI chip type of products on the one hand, the personal products on the other hand, the system level products, and in yet a different way.

These are different kinds of products. They relate to one another in the case of big Vic professional products they are built on VI chimes but, in effect, the VI chips themselves are only a component of the Vic professional product, and in turn the VI chips can be components to larger kind of power systems.

There are several issues associated with the marketing and selling of these different kind of products are somewhat different and somewhat unique, and we're taking a very good look at our aligned skill sets with different kind of products to leverage the most of the market opportunity.

And would you expect the changes, these changes to be made near term? I mean, something happening this year?

Yes.

One final question. Last conference call you were talking about the band wagon that was developed as a result of the intermediate bus architecture and non-isolated pointer load converters, and you talked about some of the technical this approach had severe limitations. The market starts feeling those limitations on its own besides what you're doing, in the near term or is this something that's years out in.

The market or, specific applications within the market at the very least are feeling those limitations. They are fundamental limitations. They have to do with the basic laws physics, if you will, and they are of a nature that, in effect, marketing talk cannot get it out, but having said that, our strategy is not to bet on any one particular approach.

We believe we can leverage the technology that is embedded in the VI chip products by offering customers the choice to deploy solutions that meet their distribution architecture, whether it's (inaudible) or more traditional distributed power or whatever is appropriate through power architecture, and to the extent that customers are in a position to make that choice and take advantage of our products, we can take advantage of all these opportunities, but going back to the fundamental question as to whether the basic architecture a dead-end road. I do believe it is a dead-end road.

The reasons for that have to do with the basic fact that microprocessors or advanced [inaudible]. I can require lower and lower voltages of higher and higher currents, power levels that require the power to be delivered to the point of load of high voltage, while at the same time the road itself is by its nature very low voltage with higher and higher currents.

This is the main conflict of requirements is the reason why the architecture is limited in terms of its opportunities and the reason why many customers in many end markets are very excited about VI chips and BTMs in particular as a way to overcome the fundamental problem.

Thank you.

I'd like to thank everybody for participating on the call, and we'll be speaking with you at the end of our first quarter. Thanks again. Bye.

This conclude Vicor's fourth quarter teleconference. Thank you for your participating today. You may now disconnect.

Vicor has not participated in nor authorized the preparation of this transcript nor reviewed it for accuracy or otherwise and disclaims all responsibility for any inaccuracies that may appear herein.