Vicor Corp (VICR) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to our Vicor Corporation first-quarter results conference call. My name is Rob, and I will be your operator today. Throughout this conference, all lines will be on listen only. (OPERATOR INSTRUCTIONS) Now I would like to turn the conference over to your host for today's call, Mr. Mark Glazer.

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's conference call is being recorded and is the 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 you that various remarks that we may make during this call about future expectations, trends, plans, and prospects for the Company and its business constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward looking statements merely reflect our current beliefs, expectations, 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 April 27th, 2004, by calling 888-286-8010 and using the passcode 32010070. In addition, a Webcast replay of the conference call will be available on the Investor Relations section of the Company's Website at www.Vicorpower.com\IRWebcast beginning shortly upon its conclusion.

However, the information we provide during this call is accurate only as of the date of this call, and investors should not assume that the information remains accurate at any later date. 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're now ready to begin the Q&A portion of our conference. I would ask that you limit yourselves to up to two questions at a time so that everyone gets a chance to ask his or her question. You may, of course, get back in the queue to ask additional questions. Rob, we will now take the first question.

(OPERATOR INSTRUCTIONS) Steve Smigie.

Congratulations on a very nice quarter. My first question is with regards to the gross margin. If you could describe maybe in a little bit more detail what sort of productivity increases drove that? And then in terms of shipments, if you could characterize what sort of product lines were most evident there? And if we would expect to continue to see that going forward?

Most of the gross margin improvement related to a significant reduction in unit cost. Both with respect to first-generation products and second-generation products. We also enjoyed a slight increase in our sale prices, but the bulk of the margin improvement had to do with cost reductions.

Okay. And in terms of -- that was the productivity as well -- was the cost reduction in -- per units, or --

Yes, more units produced with less unit cost.

Aside from the book-to-bill that you discuss, do you have any particular comments on, if possible (ph), first-quarter revenues -- or excuse me, second quarter?

The book-to-bill suggests that all our (ph) shipments should (ph) increase.

I think maybe in the press release you mentioned you can't directly draw a comparison with -- do you have any sense maybe of a sequential percentage increase?

We made a few (ph) comment in the fourth-quarter release. And that comment is generally based on some leading level (ph) uncertainty with respect to the action of the economy in particular, the action of those segments that affect our business. I should point out that in some areas we've seen a revival of sectors that we are certainly (ph) dependent upon and in recent years had not done well. An example that would be some of the copy (ph) equipment segments, that test equipment -- some of the semiconductor (ph) test equipment, in particular. Whether or not this is a continued trend remains to be seen.

Nate Kellogg.

Nice quarter, just two quick questions. Just wondering if you guys would give a little more color on what's driving the lower unit costs? And then just an update on the VI Chip -- sort of where you guys are in that, and are there any updates from the quarter?

The lower unit costs, as commented earlier, related to productivity improvements, particularly a reduction in level content (ph) together, efficiencies through the factories, other ways to get both first generation and second generation product built.

Okay, and then any sort of update on the VI Chip?

Good improvements within the quarter. We've -- in terms of product introductions, there's some product introductions. We went to make some adjustments in the schedule for product introductions due to a combination of factors we've -- in preparation for the account (ph) introduction of the PRM (ph), which is a fundamental building block in factorized power. We've made provisions -- we make provisions for some new interface fixtures (ph) that are going to add even better levels of flexibility in many applications in many markets. We've also have had to accommodate some uniquely repairments (ph) relating to some potentially very high volume applications which have bumped some of the schedules around.

Okay, thanks. Last question. Will you guys -- I realize you guys aren't going to sort of break it out. But can you give a little sort of color on first generation versus second generation? You know, whether you're seeing more demand for one versus the other, and if any of it is sort of sector-specific?

I would not give you a very specific answer to that question. There are fluctuations from quarter to quarter with respect to that. And I would not generally point it to a trend.

Fair enough. Nice quarter, guys.

Ron Opel, Moors & Cabot.

Yes, Patrizio, did I understand you to say that semiconductor test equipment demand was strong in the quarter and it may not be in subsequent quarters?

I think the first part of your comment is correct. The second part may be stronger than I want you to make it. All I was saying is that we still perceive a certain level of uncertainty, and because of that, we urge caution. And we urged the same caution three months ago.

Okay. Were VI Chips any part of the revenue mix in the first quarter?

VI Chips are still in terms of shipments at the power production stage -- we have yet to get any significant production orders. But we made a good deal of progress towards that goal.

And, is there anything you could add by way of elaboration or color on the possible high-volume application that you just mentioned?

Not really --beyond what I said, which is there are some very unique opportunities have caused us to re-prioritize some of the development activities. And we've been able to accommodate that. And we're getting now to the point where there should be some significant new product introductions.

So would it be a correct inference to assume that there was nothing particularly unusual in the first quarter that would justify calling it non-recurring circumstances with respect to revenue and margins?

Only as occurring as (ph) the level of economic improvement in the job market. No; nothing unique to Vicor or our situation.

Jim Bartlett, Bartlett Investors.

How would you characterize the gross margin difference between second gen and first gen at this level?

First gen is still significantly more profitable. But there was a very significant improvement in both first-gen and second-gen cost reduction in the quarter.

So there wasn't really -- it wasn't a mix question -- it was more both improving?

It was both improving, yes, as mentioned earlier -- in fact, the improvement in second gen was larger than the improvement in first gen. But they were both very substantial.

In the backlog, is there much in the way of VI Chip in the backlog at all? Or is it because it's all pilot orders at this point very insignificant?

As I mentioned earlier -- to reiterate, we have yet to book any major production order. But we believe we're making good progress to that end.

Craig Irwin, First Albany.

Could you -- well, first question, I guess, is was there any sell-down of previously written-off inventory in the quarter that potentially benefited the gross margins?

No.

And what was the license revenue contribution to the quarter?

It was less than $400,000.

Less than 400,000. Okay, excellent. Can you give us a little more color on the end-market exposure for your revenue, now? Looking at this sort of sequential improvement use in here, have you seen much of a mix shift there?

Well, one development that is not working (ph) that I commented on already is significantly better tone (ph) with some of the capital equipment markets. Beyond that, I would say that government and defense remains both really strong. Those would be the only job (ph) comments I would make with respect to end markets.

What percentage of revenue was government and defense?

We don't provide a detailed number.

Okay. And can you give us a little more update on the actual sales volumes of your recently introduced VI Chip technology? I mean, how is the actual volume ramp progressing from here?

As mentioned earlier, we are still in power (ph) production. There are more and more flavors of product being touted (ph) through the factory, and those have included BCMs, or bus converter modules, for critical (ph) intermediate bus architecture applications. Some BTMs which are building blocks of factorized power, and more recently, some PRMs, which are other building blocks of factorized power.

Good, good. And could you offer us any metrics on the design win activity and sort of how -- I think you know (ph) the VI Chip could sort of unfold, looking forward over the next few quarters or maybe the next couple of years?

I would just reiterate earlier comments -- we see opportunity in all the major markets. We see significant opportunities in some of our traditional markets. We see very significant opportunities in nontraditional Vicor markets such as consumer electronics applications.

Steve Smigie.

With regard to the VI Chip, could you maybe comment if the customers that you are showing it to have tended to be your traditional -- maybe more mid-sized OEMs? Or are you seeing that also with larger OEMs, as well?

We've seen interest at all levels, from the smaller accounts to the medium-sized accounts to, as I mentioned a moment ago, accounts beyond our traditional reach.

Okay. And I guess another company in the DC-to-DC power conversion space -- Power-One -- obviously you've been talking about their new architecture. I think in the past you made comments that you didn't think there was a sustainable market necessarily for intermediate bus architecture. I was wondering if you could comment on that architecture again and maybe some thoughts on Power-One. Thank you.

Well, I would refer you for general information on this important topic to a recent Webcast in which I participated was sponsored by Electronic Design. I think you can get access to that Webcast going through the Vicor website-- it is recorded in some fashion. I think that in gory detail will give you the (indiscernible) background that provides comparative answers to your question.

In actuality (ph) here, we believe the applications for point-of-load converters have run into the increasing difficulties stemming from, to some extent, basic laws of physics. The need to receive your power to the point of load efficiently, which drives speaking (ph) requires distribution of relatively high voltages, come into conflict with at the other hand the lower and lower voltages required by contemporary loads -- microprocessors, DSPs and the pans (ph) ASICs. This fundamental disconnect cannot be helped out (ph) within the constraints of non-isolated point-of-load converters. And that's what traditional part supply companies have been pursuing. We believe this is ultimately a dead-end road, and embellishments can't (indiscernible) problems relating to that predicament.

Ron Opel.

Patrizio, if demand levels over the next few quarters remain strong as they were in the current quarter -- as strong as they were in the current quarter, is it reasonable to expect that there will be continuing margin improvement?

Yes. We expect it to continue to make improvements in margin -- obviously in going from Q4 to Q1, we had roughly 7, 8 percent point improvement -- seven?

Yes, 7 percentage points.

Yes, 7 percentage points. You're not likely to see that recur quarter after quarter for these reasons. But we do expect to see continuing improvements driven by topline growth. So to your point, the major variable here, the major variable that affects the margin is continued, healthy growth in demand by major end-markets, driving topline growth and with it, driving continued cost reductions and margin improvements.

Okay. And when you explain that VI Chips will have increasing value or that the reason that you expect VI Chips to be the predominant modality increasingly as time goes by, as amperage levels or loads increased and voltage levels decrease, are some of those benefits -- what is the shape of the curve roughly of the extent of the benefits over time? In other words, are substantial benefits available now? And will that increase greatly over a long period of time or a moderate period of time?

Well, these benefits can be quantified in terms of numbers. You know, quantitative comparisons of key parameters such as power per cubic inch; amperage or current per cubic inch or square inch; efficiency, transient response to dynamic loads; the ability to respond to the very dynamic requirements of some advanced chips. And today, with respect to every one of those parameters, the VI Chip technology offers major advances in those figures I made (ph). Power density is in excess of 1 kilowatt per cubic inch, or 1,000 watt per cubic inch are (ph) the points of load. That's well beyond any product that's based on traditional concepts, which is all that is available competitively.

The current density in one VI Chip we process, we introduce products capable of doing 80 amps in 1 square inch. And we have products in the works that go beyond that. The transient response of these VI (ph) is the ability to respond to a very dynamic load. It gets measured in hundreds of nanoseconds or traditional converters without resulting to the extravagant and costly complexities we have measured in 10 times that response time, which is, obviously, a key differentiating attribute and a key advantage of VI Chips translates in terms of customer benefits to further reduction in the amounts of volume (ph) space that is required in our support of dynamic load, because a larger bank of full (ph) capacitors that would be needed with conventional solutions are not needed with VI Chips. And the popularity comparison (ph) the boards goes on (ph). There's no attribute that I'm aware of where VI Chips today do not offer a superior statistics (ph).

And as competitive products increasingly hit up against -- bump up against Ohm's law, these comparisons could become more dramatic?

Well, I think the compelling natural of the story gets more so. I think that while the issues are present today, all that we know with respect to future developments of leading-edge chips points to the needs for more advanced solutions of which the VI Chip is really the only kind to become more and more critical.

Craig Irwin.

Hi, Patrizio. I have spoken to a number of engineers that have sort of explained your new product approach to me sort of as an isolation at the front of the bus. And they were pretty fascinated with this approach. Could you maybe describe this a little bit and sort of describe some of the product characteristics that allows you to develop that your customers are looking for?

Well, we actually provide through the VI Chip technology and factorized power a new distribution architecture that leverages isolation of the point of load, where the competitive solutions, by contrast, rely on non-isolated supported back (ph) converters to step down the voltage close to the chips -- loads that they need to (ph) power.

Not to get too technical, but in very general terms, the fundamental limitation of a back converter, whether a simple back or a complex back, employing a number of phases and extra complexity associated with each space (ph) -- it seems -- a fundamental trait of their approach is that there is not an opportunity to literally multiply the current or divide the voltage by a large factor of the points of load because of the lack of isolation. Isolation means more than galvanic isolation, that these not having electrical contact between an input and output. It means, in this particular case, being able to literally multiply the currents by arbitrary large factors so as to keep up with the low voltage radio car (ph) need of advance loads (ph), while at the same time, being able to deliver to the point of load the power efficiently.

So that's where architectural advantages stem from. Obviously, in addition to the architectural differentiation, there is need for fundamental product differentiation. And in that regard, there is need for power conversion engines that support the architecture. And with the factorized power and the VI-Chips, we have two fundamental new engines. One is called the VTM, which is the isolated point-of-load power device that, as I mentioned a moment ago, is capable of multiplying currents and divide voltages by arbitrary factors, and do so very efficiently and very densely. Another fundamental building block for which we've also developed a proprietary and very advanced new engine is the TRM, which is a regular emollient (ph) that can be placed close to the VTM at the point of load, or can be used to advantage by customers in architecting the power system, can be remodeled (ph) away from the point of load to provide even greater advances in density at the point of load, since all the VTM is to be present (ph), be close to the devices being powered.

Okay. And one of the things that I understand about point of load is that there is a certain, very specific customer groups who have actually not adopted point of load as a design approach yet, simply because of their stringent power requirements. Does this approach sort of make your technology more attractive to them? Or is there any particular customer group where your technology has a specific advantage that you believe would merit the adoption.

Well, you might be referring to hesitancy on the part of certain customers, particularly in communications applications, in accommodating the intermediate bus architecture, and I saw you (ph) point-of-load converters for fear of issues relating to their particular nature. Those kinds of concerns have given way to some extent to the cost pressures that these applications face, where traditional now (ph) solutions of this kind can offer significant cost advantages. But there is one technical aspect, one technical imitation of this (ph) bus architecture and traditional approaches of that kind that, among others, gets solidly (ph) overcome by the factorized power architecture in VI Chips. There's really a long list of advantages. Again, they come down to much better power density; much greater current density; much greater efficiency, which means less heat at the point of load, which is obviously a critical issue for many systems; much faster transient response, reduced need for large and not-all-that-reliable bulk (ph) capacity at the point of load; and so on and so forth. These are the key advantages of factorized power in VI Chips.

Okay, and Patrizio, given your reputation as someone that's been consistently at least ahead of the thought process in the industry, I wanted to get your comments on the current buzz about digital control, and what customers are saying to you about control processes and control approach for their power solutions, and whether or not there's potentially an intermediate solution or an alternate solution that best suits their near-term needs?

Digital control has been around for many years of varying degrees by a variety of sources. It is, I would say, a corollary to power as opposed to being the main chapter (ph) of power. To suggest that digital control is the key to successful future power systems would be like saying that the critical aspect of a microprocessor is the power. Obviously, power is a consideration in microprocessor design and something that must be dealt with in a suitable way. But it is not the critical or most critical aspect, it is just one of many. Likewise, digital control -- which, again, has been around for quite some time -- isn't a very significant issue in the customers we talk to or in the customers that some of our partners that we have discussed these issues with talk to, and that includes major OEMs around the country.

Great, and just one last question. If you could give us an idea of your customer concentration -- maybe percentage of revenue for top 10 customers or just general comments about customer concentration?

There's been no significant shift in that regard.

And where would that put things if there was no shift?

Well, it would put -- as we look at the top 10 customers, some of them in communications, some of them in defense, some of them in some or other traditional markets.

And is it fair to say that you have a pretty extensive list of customers that contributes to your top 50 percent of revenue? Is it a pretty high number? Or are we talking probably less than 10?

We remain highly dependent on a very large customer base. And we are delighted that to be the case. We do business with thousands and thousands of customers every year on thousands and thousands of different MOs (ph). And that's a business model that has worked relatively well for us, one that we want to build up on going forward. But that is still the business model today.

(inaudible) Jim Bartlett.

Yes. Could you comment a little bit more about changes in marketing that you, I believe, were going to highlight at some point or stand on? How you -- what changes you've made over the last six months? And give us any idea of going forward how things are different in the marking era (ph)?

What I can tell you is that we are active on a number of fronts to expand the reach of the company and open new kinds of opportunities in, again, our traditional markets, and markets where historically where we had no presence. And because of the lack of presence, we've had relatively low experience and capacity to penetrate. We're being rated (ph) in which we are leveraging the profit (ph) capabilities to expand the bandwidth in this regard.

And have there been many new hires in this area for you?

I can't comment on that at this point.

Could you also comment a little bit about Picor and what's happening there?

The power grain session (ph) is doing well. They have played an essential role with respect to our VI-Chip technology roadmap. And they are along the way to have very significant products of their own.

Finally, could you give us a headcount number at the end of the quarter?

Yes, I can give you that. We're at approximately 1,260 full-time employees -- I should say full-time equivalent employees; that includes part-timers. And that's down about 10 people from the end of 2003.

Don Messina.

I wanted to ask you about the process improvements and whether or not those were in place for the entire quarter or were they something that came through midway through that we haven't seen the full benefit from them as yet?

This is a continuing effort that does not stop. So during the course of -- we've had improvements. There's going to be further improvements in this quarter and the quarter after that. We're continuously striving to improve the productivity and the cost effectiveness of all the products that we make.

I know that's been an area of frustration for you over the years. Was there a particular breakthrough that took place during the quarter?

I cannot think of any one single thing. I think we've being very forward (ph) on this. I think that our rationals (ph) group should take credit for bringing this harvest (ph) to fruition in terms of the tangible results that are showing in the financial statements.

The other question I think was -- somebody just alluded to it, and that was the idea of the additional outside relationships with third parties that the licensing agreements -- do you have any -- and I know all your talks are serious -- but do you have any that you feel might bear fruit in a relatively short period over the next couple of quarters?

I really cannot comment about that beyond saying that we're engaged with new major licensing opportunities. As to the specific timing of bringing that to fruition, it is something that I really cannot comment here for a variety of reasons.

I hope when we see you at the annual meeting you will have a profitable quarter under your belt.

Well, I don't think the quarter will be over by then. But I look forward to seeing you there.

Ron Opel.

Patrizio, anything -- any new developments in the active clamp patent (ph) infringement litigation?

The Federal Circuit, which is the court of appeals in Washington, has taken up the case. There's likely to be a decision within about three or four months.

Okay. And just one final question. Even though you have not yet received any -- is it orders or significant orders for VI Chips, would you say that the level of interest on the part of customers and the level of excitement about the new products inside the Company is undiminished at this point?

Yes, I would say that the level of excitement is at a peak. I think that we have a lot of parties who are interested in seeing the PRM coming to fruition and we are working hard to make that happen in relatively short order. It is kind of the second shoe that we need to drop to begin to step ahead and run. In addition to PRM products, we obviously need to expand and compete -- problem matrices (ph) of VTMs that in conjunction with a few PRMs are going to enable a very broad product line at the level of the full making (ph), which is the first VI Chip. As all of this comes to fruition, we expect the momentum to start building very strong.

Steve Smigie.

Sorry, just a couple of quick follow-ups. It looks like on the SG&A line, it dropped as an absolute dollar level and a percentage of revenue. Do you expect that to continue to trend down, or stay flat on the dollar level and trend down on a percentage of revenue going forward?

Again, that -- as far as the percentage of revenue, I believe as the revenues increase, that percentage will continue to drop. However on a real dollar basis, I would expect it to grow. If you look over the last number of quarters, it does tend to go up and down slightly from quarter to quarter.

Okay, great. And the last question is with regards to the isolation properties of the VI Chip. My typical understanding of isolation is that that would be somewhat more expensive. And obviously, since you're doing isolations at each load, I would just think it would be more expensive. But I was just wondering if you could comment on that in terms of perhaps doing it in silicon if (ph) it doesn't work out that way. And I guess the overall question is related to cost effectiveness if that's the (ph) product.

I think the best way to answer that question would be to say the notion that isolation is more costly is a misconception. There is no such relationship based on fundamental laws. To the contrary, we believe that in a 100-ampere (ph) VI Chip at the point of load, we can be as cost-effective as any non-isolated point-of-load solution.

Kenneth Corana (ph) of Wachovia Securities.

Yes, Patrizio, I wonder if you could expand a little bit upon Ron Opel's question on litigation and perhaps what you're spending at this point, what the ongoing planned expenditures are? And then if you could share with us your thoughts on the million-dollar investment you made during the quarter, and why that investment and perhaps not purchasing any shares during the quarter?

I don't know what more I can say with respect to the patent litigation. As mentioned earlier, the Federal Circuit is going to enter (ph) an opinion on claim construction (ph) in about three or four months. Based on that opinion, the parties are going to go back to district court with what should be a definitive set of claim constructions, (indiscernible) professions. And that would be the basis for adjudication of potential damages.

How much money are you spending per quarter right now?

Well, it has been pretty light in view of the case pending in front of the Federal Circuit for the last eight or nine months. You know, these people (ph) will open up somewhat in a few months. I remind you that we have a contingency arrangement with our priority (ph) counsel on this matter, and that will reduce the burden on us.

And the question of your own internal investment process -- the plot behind the $1 million investment, and do you think that's going to be the maximum? Maybe you could tell us something about that, and then as to why that, perhaps, and not an investment in your own shares?

I think in terms of the posture that we have on the stock buyback, there's been no major changes since comments a few months ago -- there was a senior (ph) price at a point in time. And I believe the comment then was we are concerned about the environment. We want to be judicious with the cash resource of the company -- used, I mean, very leveraged ways. But we are obviously believers in the value of the stock, and we demonstrate that in many ways, and working (ph) hard to demonstrate it again, should there be an opportunity.

So can you tell us something about the million-dollar investment in this other company?

Not really. No, I can't. I'm sorry.

Thank you.

Sir, I have no further questions for you at this time.

Thank you, everyone, for participating. Just to let you know, our shareholders' meeting this year is on June 17 in the same location that it was in prior years. And we hope to see you all there. And if not, our next conference call will be in the middle of July to discuss the Q2 results. So thank you all for participating.

Thanks very much.

Thank you, sir. Thank you again, ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines at any time.

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.