Vicor Corp (VICR) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vicor Corporation second-quarter results conference call. My name is Rachel, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (Operator Instructions). And I would now like to turn the presentation over to your host for today's call, Mr. Mark Glazer, Chief Financial Officer. 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, I would 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 would 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 I, and Legal Proceedings sections included in our quarterly and n 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 July 27, 2004, by calling 888-286-8010 and using the pass code 71309428. In addition, a Webcast replay of the conference call will be available on the Investor Relations section of this company's Web site 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 time. We undertake no obligation to revise or update of the statements made during this call. In order to reflect events or circumstances they 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 Q&A portion of our conference. I would ask that you limit yourselves to up to 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. Rachel, we will now take the first question.

(Operator Instructions). Steve Smigie, Raymond James.

Congratulations on a nice revenue improvement. My first question relates to the book-to-bill; however, obviously you had (ph) less than one and somewhat lower than last quarter. I was wondering if you could talk about whether that represents a seasonal trend or what was the cause for the drop there and the drop in the backlog?

Some softness in Europe, North America -- to some extent, more recently in the Far East, during the second quarter. There may be a seasonal factor. I think it is, at this point, uncertain to what extent that is the most significant driver as opposed to some general slowing down. I think time will tell.

Okay. And then, in terms of the third quarter, would you expect to see some sort of sequential revenue growth?

I think that it's a little too early to say with respect to that. I think the book-to-bill suggests that if the improvement that we see in the recent quarters were to continue, it will be a significant -- I think a more likely scenario is an essentially flat revenue growth quarter.

My last question, and then I will let somebody else get on -- with regard to the V-I chip, I was just curious if you could give an update on that -- and then I particularly noted that you mentioned you had a chip -- (indiscernible) he had the lines of I believe with the PRM, and I was wondering how the customer was reacting to that, and just in general comment. Thanks; bye.

The PRM thus far has only been provided in very select engagement. It has not been made generally available. Our plans with respect to rolling out PRMs involve first of all doing it through so-called (ph) brick replacement products, which are alternate sources for industry standard bricks that are assembled through a combination of VTMs and PRMs. That's going to be followed by stand-alone general introductions (ph) of the PRMs -- stand-alone products. In the interim, we're going to be expanding a program of showcasing the PRM as a stand-alone product to some select customers.

Jeff Benkick (ph), Jefferies & Co.

Great quarter. Couple of questions on the Sony licensing agreement -- when do you expect to receive revenues from that agreement? And then how big is this potential licensing revenues for you, and when do you expect that? And then what specific products do you see Sony using the V-I chips for?

I really can't give you any specific information with respect to our Sony license. We are subject to strict confidentiality provisions. And because of that, I cannot comment in any way with respect to either the types of products or their time to market or the potential significance of those products.

Okay. Can you give me any idea in terms of the scale of it for you?

Well, I'll put it this way -- Sony is, I think, is a $70 billion company. A good deal of that is hardware. So it's potentially significant, but I would underscore the word "potential." So we will have to wait and see. And again, we really cannot get into any details with respect to that.

And then one more quick question on the R&D spending. It increased up to 6.5 million versus sequentially from 5.9 million. Was there any particular reason for that increase, and then how should we look at that going forward?

The particular reasons have to do with some particular items relating to the V-I chip activity -- one in particular is project materials. The intensity of new models generation and the attendant (ph) costs have increased, particularly in the recent quarter. We expect that that level of activity going forward should suffice in order to support the introduction of this V-I-chip-based product lines. But there was a significant step-up in the last quarter. We would expect, again, to all (ph) the increased level going forward, and be able to get a jump down on at that level. Another factor was some tooling it again related to V-I chip type activities.

Craig Irwin, First Albany Corp.

First of all, congratulations on the absolutely solid gross margins there. It was a great quarter. My questions really do focus on the gross margins and the significant improvement you guys posted there over the last few quarters. I was hoping, Patrizio, that you could maybe give us a little more color behind what's driven the continued gross margin improvement in this overall environment, and maybe contribution from the different product lines, mainly first-gen versus second-gen?

Well, I think last year, we told you that we expected our breakeven to be a level somewhat higher than what we'd been able to achieve, meaning we have through improvements in gross margins been able to get to the breakeven point -- revenue levels that were lower than what we have suggested.

And that's no accident. It is the result of a concerted effort to drive productivity improvements in the factory. And those productivity improvements apply pretty much across the breadth of the various product lines, including very old generations of products and newer generations of products. I think it shows the leverage that is present in the business that has very much to do with topline growth. So to the extent that economic conditions and more fundamentally, breakthrough technology -- instructive (ph) technologies can open up new kinds of market opportunities for the company going forward. As we said in the past, we expect to see significant opportunity -- further opportunity -- in the gross margin line.

Great. If I could just circle back on that same subject, you did mentioned that the breakeven point that you achieved in this quarter is significantly lower than where you said it was before. One of the issues that you guys have encountered over the last couple of years was difficulties with certain product yields. And the lowering of the breakeven point sort of suggests that you might have handled those issues and have developed a technology or process there that really improves your yields and improves the overall cost structure. Can you give us an idea on the relative contribution there?

There have been improvements in yields, and to your point, those are a factor that plays in the gross margin. And I would emphasize that we've been able to show these improvements in spite of the fact that we have been able within the last quarter to institute a salary (ph) increase -- we haven't had (ph) a salary increase for quite some time. So the improvement would have been actually a little better, were it not for the salary increase.

Okay. Then is it fair to say that the questions in the past about product yields have essentially been put behind Vicor?

They never get put behind, because the goal for yields is 100 percent, and that is a goal that is, by definition, impossible to achieve. (laughter) But let me put it this way. We believe there is further significant room for improvement in that area, and to the extent we're able to achieve that, that will contribute in its own rights to improve margins and improve bottom-line performance.

Ron Opel, Moors & Cabot.

Patrizio, the pattern of demand during the quarter -- did it fall off in June relative to April and May? And was this more than was expected to fall off?

I think we saw some softness earlier in the quarter. And that's not to say that it got worse later in the quarter. But I think the signs were there earlier in the quarter. And as I suggested earlier, those signs were present in the North American and European market. But we have also seen signs in the Asian market of some weaknesses.

So, did I hear you correctly say that you expected the third-quarter revenues would be at roughly the same level as second-quarter revenues?

I think that's the significant short-term -- very short-term question. I think the answer to that question depends on whether those people that believe that the recent weakness is a seasonal factor, is a temporary slowdown -- or other people believe that there may be a more long-term significance to that are correct. You know, we are being cautious. I think we pointed out in past quarters that the improvements in the book-to-bill did not constitute what we would regard as a trend. And again, yes, we caution the other way. A quarter book-to-bill does not really mean anything one way or the other. What happens will depend on what goes on as the quarter progresses.

So if that were to be the case, if third quarter revenues were roughly the same as second quarter revenues, one could expect no gross margin improvement from increased volume, but perhaps some from yields that are continuing to improve?

Yes. I would emphasize, though, that the topline growth is very important to improving margins. It is the first order driver, and other factors, while significant, are secondary. So in terms of modeling the opportunity for gross margin, I would look at topline growth as the area of greatest opportunity.

Travis Meyer (ph), Falcon Fund (ph).

17 percent growth year over year is -- at least to my knowledge, significantly above what the industry has been growing out. Is that just a function of coming off a low base in '03, or are you guys taking any marketshare?

Well, I think that the effect that we suffered through the debacle of the new millennium was significantly less, measured in terms of a drop from peak revenues, than some of the companies we are essentially (ph) compared with in the power supply industry. So, I would submit that it is a manifestation of the business model of the company, our presence in diverse markets, a lack of reliance on markets that narrowly support topline growth -- the telecom market being a fine example of that over the last few years.

Okay. Which end markets were showing particular strength in the quarter?

The markets that relate in one form or another to capital spending, semiconductor test equipment, AT (ph) industrial applications from locomotives to you name it -- but ideal (ph) industrial types of applications. And these are applications to some extent, even though the pattern of growth there is less, and in a sense priorities have shifted from one kind to a different kind. Medical (ph) and transportation has been relatively flat in recent quarters. The telecom sector since just a month ago remains weak.

Okay. Have you had any specific design wins for the V-I chip or any of the modules?

All I can say with respect to that is that we are involved in potentially very significant programs. And the ultimate outcome of those opportunities will be determined over time.

Okay. And my last question would be, can you give a breakout on the inventory between raw materials with and (ph) finished goods?

Yes, I believe I can. Let me see. Do you have another question while I am looking for it?

You guys mentioned an ASP increase earlier. Can you kind of give a magnitude of what ASPs have been increasing at year over year?

I think it's been very, very modest.

Low single digits?

I would say essentially flat to maybe slightly up.

Okay.

Okay, the raw materials are at about 24 million. Work in process is about -- is just under 3 million. Finished goods is just under 5, and we have reserves of approximately 8.

Okay. Thank you very much.

Michael Hung (ph), Ardor (ph) Capital Partners.

I was wondering, could you provide some color on how much web (ph) capacity the current SG&A structure can handle?

I don't have a precise number to give you, but I think there is significant capacity opportunity throughout the enterprise.

Okay. So as revenue goes up, then, you don't expect SG&A to increase proportionally then?

Not at a proportional level. But we're going to continue to make select investments in infrastructure in every facet of the company. Our objective has always been and remains today, given all the opportunities in front of us, to maximize long-term growth and profitability. So we're going to be making decisions on that basis.

And what do you expect your quarterly cash burn to be going forward?

Well, we've been generating cash.

Generating cash --

And we expect (multiple speakers)

I mean, I'm sorry -- use of cash.

Well, we've been adding cash, I think, from the end of last year to today into 2004 -- we than did about --

8.7 million between cash and short-term investments. Our largest use of cash, I believe, is buying short-term investments. You can see that our capital spending continues to be fairly low. It's actually lower than it was last year at this same time. So we're still being very conservative with those types of investments.

Allen Hicks (ph), Aimsley (ph) Capital Management.

I had a question I was kind of curious about -- on your products, when you talk about them being rated as 97 percent efficiency or whatever, does that relate to energy savings compared to a lower-rated products?

Well, efficiency relates to lack of waste, and its waste of energy, which is at the issue. I think most customers don't tend to view it that way, though. They tend to view it in terms of the heat, which is the manifestation of the waste and the management of the heat, which is something always challenging in electronic equipment -- that over time, it needs to get smaller and denser and more functional. So the primary driver when it comes to the efficiency performance is the ability to make things happen without as much concern for taking the heat out of the product.

So it's not so much related to saving a percent or two of energy?

It's not to say that individuals and companies that are green in their thinking and think of those ramifications. But I would say pragmatically, the primary driver is reducing the amount of heat that needs to be extracted (ph) from the particular product and application.

And if you get your new product, your V-I chips, into things like, say, TV monitors, set-top boxes, notebook computers -- is that an area where that maybe might apply more?

Well, I think it's no mystery that in all electronics -- particularly consumer electronics, the drive toward the small size, thinnest, is a constant drive, because of the pervasive nature of these kinds of products, and people don't want to carry around things that are any heavier than they absolutely need to be, and the small size, light weight, and thinness are primary driver's with respect to the product attributes, the attractiveness of these products. So those are factors that play very much in favor of the V-I chip, the paradigm. You know, V-I chips are only 250 mils (ph) -- or actually, a little bit less than a quarter-inch thick, and they can process as much as 300 watts in a package that is only a quarter of an inch thick and only one inch in square area. That's an unprecedented level of power density and an unprecedented level of capability. Also, because in addition to the package itself being as small as it is and capable of processing this much power, it eliminates the need for certain other components that all the technology products that don't switch nearly as fast and require much greater levels of simple (ph) board capacity or capacitors (ph) -- the duty (ph) parts. So we offer tremendous advantages with the V-I chip technology in the areas of density, low-profile, light weight, and high efficiency and fast dynamic responses, again, translates into the reduction in attendant energy storage elements that would otherwise be required in typical applications.

Okay. So say, small form factor consumer-type products would be a very good fit for that type of product?

Well, if the power level of those products is high enough to justify V-I chip entries as already introduced or discussed. As time goes on, we are going to have fractional (ph) V-I chips. And with fractional V-I chips, the soft spot of the opportunity in terms of power requirements moves way down. And with that, the kinds of products that would provide ripe opportunities for V-I chip technology get into the lower power, smaller type of applications.

So you're eventually going into that direction?

Yes.

Allen Mitrani (ph), Copper Beach Capital (ph).

Just one quick question. You talked about the sectors that were strong. I think you mentioned semi, test and others. You said telcom was relatively weak. Which areas within telcom are still weak?

They appear to be the areas we are involved in with our older products. (laughter) I cannot say anything beyond that at this point. You know, we are going to be performing what you might call a re-entry, using V-I chip technology and brick replacement products. And I think we're going to be doing that as the overall demand pattern for that part of the electronics marketplace picks up in years to come. But at this point in time and in recent times, as far as Vicor is concerned, the telcom market has been and remains relatively weak.

Do you service any wireless infrastructure customers?

We do, to some extent, yes.

Can you talk about that area at all?

I really cannot. As a matter of general policy, discuss particular types of applications.

And also, a lot of OEM customers we're seeing -- at least that have reported so far -- are showing faster inventory growth as opposed to revenues. You guys seem to keep inventories pretty lean here. And do you expect inventories to grow faster than revenues for the rest of the year, or do expect some customers to start taking up product?

To your point, we watch inventory and we have been able to make quite a bit of progress in that general area. I think this past quarter, I wouldn't rank that as a quarter of great performance in terms of inventorization (ph). To some extent, the change in the demand pattern that has taken place within the quarter impacted that.

To your other point, I think there has been a higher level of expectation within many industry segments that have proven justified. And that has manifested itself in a growth in inventories in the pipeline in many different areas. And now we're going to have to see that the inventory we absorb (ph).

And then lastly, if I can -- what percentage of your sales went through distribution this quarter and how was that channel in terms of its strength?

We do not rely to any measurable extent on distribution as a channel that absorbs inventory. We do use distributors in some geographies -- in Asia, in Europe. But, effectively, they are in the middle between the customers -- their customers, our customers, and ourselves. And we will, in fact, ship just-in-time through them to the customers.

Dennis Haruwatu (ph), Wachovia Securities.

Patrizio, a question you haven't addressed is the amount of spending on litigation -- what you spent this quarter, and perhaps quick (ph) plan to spend, and just maybe a progress report?

We spent a certain amount of money this past quarter. I don't have the figure in front of me. The spending was necessary. We reported in the financial press release that's we were actually able to deal with a commercial dispute. And we had reserves greater than turned out to be necessary in that particular area. So that's what I can say with respect to that.

And another quarter in which you didn't purchase shares -- your thoughts going forward?

We've obviously piled up quite a bit of cash. And we are mindful of the opportunity that comes with that and the need to put it to good use. We think we have done some good things with the cash in terms of investments -- which, by the way, should be reflected into people's view with respect to our changes in cash position. But the issue of how to maximize the opportunity for cash is very much on our screen, and we will be doing that.

Robert Katz (ph), Senvest.

I had a question about the fractional (technical difficulty) the V-I chips you have on the market now. When will the fractional (ph) V-I chips be out, and is that going after applications like laptops and PDAs?

Well, to set things in the proper perspective with respect to which products went out and which products we're going to have out (ph), what (technical difficulty) holds with respect to fractional V-I chips, just to make sure we're on the say the same wavelength -- we should emphasize that in the years since we introduced the first V-I chip, we have only introduced a few models of the BCM/VTM product line. We have not had any official introduction of the PRM. And a loose analogy with respect to these may be along the lines of being a shoe business, and offering to sell shoes, but in effect, having only the right shoe to sell and showing off the left shoe. In some select cases, and (technical difficulty) now beginning to be in a position to make both shoes available. We're still dealing in large size for the time being, and we're not going to go into the kids' market (ph) therefore for little while yet. But it is very much part of our plan. The technology is quite adaptable (ph) to the lower power applications. And it is quite scalable. It's (technical difficulty) including cost-effectiveness, so that's very much part of our roadmap.

But we need to stay focused in terms of taking the right steps -- no pun intended -- at the right time. And our focus has been to provide the other half of the full bit (ph) capability, which is the PRM -- to do it in a way that the confidence of VTM -- by providing a good deal flexibility in terms of variety of input voltage to service broad applications in every major electronic market at higher power levels. And as we get close to accomplishing that first task, we will be moving into the lower power fractional deep (ph) applications.

When will the PRM be ready (inaudible) multiple voltage?

We've already sampled two (technical difficulty) voltage versions of the PRM -- 48-volt and 12-volt input version. They all tied into the same VTM product line. So while the advantages of our strategy with respect to this is that we can leverage a common metric, so we can support a variety of input voltages by in effect typing in those different input voltages through various types of PRMs. We'll be moving on to 24-volt inputs -- and again, these products are still at a pre general introduction stage. We've done some limited sampling. We are as a next step going to be playing them out as part of the so-called brick replacement products, which are plastic industry standard pinout (ph) brick type products that are going to be more cost-effective than traditional bricks. They are going to be much higher performance than traditional bricks, and they are going to demonstrate the paradigm shift opportunity by evidencing the left and right shoe, in a sense, playing together on a brick footprint.

Are you going to be using them to replace your current brick offering?

Well, that is an opportunity in the long-term. But it's not an area of progress (ph) in the short-term because, frankly, we've got bigger fish to fry. But, over time, that's definitely in the cards.

Okay. Thank you.

(Operator Instructions). Steve Smigie, Raymond James.

You talked a little bit about some monthly patterns earlier. I just wondered if you could talk about what you've seen so far in July. And then if you could talk about what sort of seasonal pattern you might typically expect to see in the fourth quarter, and if that's sort of where you feel you're heading right now, given your customer forecast?

We saw a slow start to July. We've had a couple of great days. Again, it's very hard to make predictions at this juncture with respect to how things are going to progress with the third quarter. Obviously, in some geographies, it's a slow quarter. There is an inventory correction taking place to some extent, at least with respect to some end-markets. But there are people that strongly believe that there is longevity and strength to the recovery that has been taking place, and fully that they are going to be right. Irrespective of whether or not they are right, and we are predicating our strategy on capturing new markets, capturing new opportunities that -- either in cooperative economic environment or adverse environment will force their (ph) growth and opportunity for Vicor.

Okay. On the first generation and second generation products, could you talk about any sort of mix shift that might have occurred between those products during the quarter? And also on second generation, I was wondering how sort of impact that FasTrak had on gross margins? Thank you.

I think there is probably a slight shift to first-gen during the quarter. But you know, overall, it wasn't a major difference. And from quarter to quarter, these things shift up and down. So, again, it's very hard to predict what the next quarter will bring.

And did FasTrak help out at all with the second generation -- is that part of the improvement in the gross margin?

Yes, I believe it is an improvement in the gross margin. In fact, I'm pretty sure it is an improvement in the gross margin. And the more units that we convert, the better the gross margin should be.

I think part (ph) of our cost structure has been supporting two platforms. So as we get to having only one platform for second-generation products, a lot of the costs that are incurred (ph) throughout the enterprise from materials to manufacturing processes and so on and so forth will be there to thin (ph) line.

And what sort of capacity utilization are you guys at overall right now?

We are in good shape from a capacity standpoint. As suggested earlier, we believe that there is significant opportunity for growth without having to recommence investment in either equipment or people adds.

Okay. And last question, and then I will get on again -- in terms of the V-I product, the discussion just had about not having both shoes ready -- would you characterize yourself as being in beta stage, or not there yet, or a little bit past that?

It depends on which particular product. There are some products that are in limited production -- early production. And other products are in the beta stage. Obviously, with respect to PRMs, we are in the very early stages.

Craig Irwin, First Albany.

Just a couple of clarifications. One of the things I wanted to just follow up on -- I know it was very clearly disclosed in the press release, but your tax rate -- for the rest of the year you indicated that you expected to pay roughly similar levels of taxes to what you paid in the second quarter. Yet looking at the overall trends suggests that Vicor could be nicely profitable in the last couple of quarters. Do you really -- do you expect us to stay around roughly around $300,000? Could you give us a little more visibility there?

I think that what it says in the press release is accurate. As we approach profitability at Vicor, we have loss carryforwards we can apply. So we are pretty comfortable at this point saying that it will be roughly the 300,000 in each of the last two quarters.

Mark, could you possibly quantify the value of the loss carryforwards -- roughly how big they are?

I believe in the 10-K, which is the last time I really looked at it, I believe we still had about 8 million -- maybe a little less than 8 million of loss carryforwards left.

Great. And then my second question, again, is really just for clarification. Patrizio, you mentioned the inventory adjustments that people have been talking about in the quarter. But Vicor posted a nice sequential gain in revenue, nice sequential growth. Were you at all affected by the inventory adjustment on an operational basis?

Well, I think we were affected to a greater extent in the bookings than we were in the top line. Some significant orders that were supposed to happen in Q2 did not happen. They've not gone away, but they get to be put off, procrastinated. And I think generally speaking, people are gather (ph) within the second quarter -- a little bit more cautious again with respect to placing orders. So that's something that has affected the bookings picture, and obviously, the book-to-bill more than the top line.

Okay. And then just a follow up on that -- do you think that the inventory adjustment is over as far as at least the near-term as it pertains to Vicor?

If I had that kind of crystal ball -- (laughter)

Well, I have to ask.

Well, you know, I think it's no mystery that we've been voicing caution with respect to -- the strength of the economic recovery. People tend to get carried away with improving trends. And we have cautioned that it may not be as long-lasting. Now, we caution the other way. I think that the recent slow down might not signify anything of long-term significance. But then again, we are really prepared to manage the business to deal with the other scenario. In the medium to long term, what really matters is what new opportunities we create and benefit from in terms of new markets and new applications for leading-edge products.

Great. And then just one last question. I know you're always cautious to comment on things like this for competitive positioning and I guess your own conservatism. But if you could potentially describe how you envision the products for the factorized power architecture sort of taking hold in the market -- the potential market, the gross margins that they could achieve out there and sort of how you conceivably could see these ramping up over the next couple of years?

Well, I think there is going to be applications that take full advantage of the factorized power architecture early on. But more typically, cautious customers are going to use them in a lower-risk approach where, in effect, they leverage them as a combined entity -- left shoe and right shoe next to one another, so to speak -- either as a brick replacement type of product or in a footprint that could easily be substituted into a brick alternative. I think over time, the benefits of taking full advantage of factorized power in terms of the greater flexibility in deploying the power components where they're needed as best suited in order to maximize the appeal of the end product will take hold. But I think with cautious customers, they will take it one step at a time, and first deploy the products in tandem.

So at this juncture, what we're reading from most of the several hundred customers that sampled V-I chips is where is the PRM? They want to see the other shoe, so to speak. I think they're going to take that as a pair, and deploy it conservatively in applications to get comfortable with it. And then, as they see an opportunity that gets (ph) -- to leverage their own product, they will make a more advanced use of the V-I chips as factorized power components. There are going to be applications, though, where the advantage to the customer is substantially enough that it's worth taking whatever risk is being perceived to be taken. Now, we have a merchant licensee in Celestica. We have a captive and to some extent merchant licensee in Sony. So over time, the perception of risk is going to change. And maybe more in the general area of development that will take place over time.

And if we could potentially talk about the margins of these products, would they be comparable maybe to second-gen or maybe even superior to second-gen once they get out there in the market?

I don't think second-gen would be my first example (laughter) of a great margin product. Our first-gen products would come to mind. And as we indicated in the past, we believe that proprietary products that enable customers to achieve much better performance deserve good margins for the companies that provide them. And everybody wins in the process. And we believe that V-I chips are definitely in that category.

Ron Opel, Moors & Cabot.

Patrizio, has there been any reduction or diminution in the level of interest of prospective licensees, and are you continuing those discussions?

We are continuing discussions in this area. As emphasized since a year ago, as we announced the program with V-I chips and the strategy with respect to alternate sourcing and licensing, we emphasized the fact that is this was not going to be a very short-term show, that the steps that we're going to be part-time (ph) -- that we would be selected in the partners that we work with. The deals that we have already entered into took many, many, many months to come to fruition. And we're working on other things that are also on a long-term track. So as explained in the past, the logic behind leveraging, licensing, and partnering with respect to factorized power and V-I chips products has to do with the many different dimensions in which this technology can go in our classic markets -- communications being one of them; in the consumer electronics market that we pointed to. As a prime example, a year ago, transportation market -- another market; a great opportunity for the technology. What we're going to be looking to do is add incremental dimensions that complement each other -- that don't create this active competition in the marketplace, but facilitate pervasive participation by V-I chips in most electronic market segments.

I think in the last conference call, at the annual meeting, the company had not received as yet any production orders for V-I chip products. Is that still the case?

We've received some small production orders. So we are, as I said earlier, in limited production -- thousands of pieces for particular customers.

And in a bad-case scenario, if demand for OEM capital spending and electronic capital spending products were to remain soft for several quarters, would incremental contributing revenue from the new V-I chip products begin to become significant, say, by the first quarter of next year?

I think we're looking at a number of quarters out before they could become a dominant engine of growth. To some extent, that's going to be a function of what happens with some large applications that we're working with. Any one of them coming to fruition would make a substantial difference. But, none of them is bound to come to fruition in the very short term, meaning weeks or a few months.

So, certainly, for the rest of this year and perhaps a quarter or two into next year, all of the significant revenue will be coming from first- and second-generation products in all likelihood?

That is a fair expectation.

Thank you.

Racial, we'll take one more question, if there is one.

Michael Hung.

Can you actually give a little more color on whether or not COGS will decrease in future, or do you expect them to stay at relatively the same levels?

Are you referring to COGS as a percentage of --

Yes.

We expect that, as I indicated earlier, margin improvements will take place, driven primarily by topline growth, when and as that topline growth happens. To a lesser extent, there's going to be contributions from further productivity improvements, independent of the topline growth -- yield improvements and other kinds of improvements that affect the COGS and product cost.

Okay. Thank you, everybody. And we will be talking to you again in October.

Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect your lines. Have a great day.

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