Vicor Corp (VICR) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Vicor Corporation's second-quarter results conference call. My name is Carlo, and I will be your coordinator for today's presentation.

At this time, all participants are in a listen-only mode, and we will be conducting a question-and-answer session during today's conference. (OPERATOR INSTRUCTIONS).

I would now like to turn this 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 am Mark Glazer, Chief Financial Officer, and with me is our CEO, Patrizio Vinciarelli.

Before we begin, we 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 provision 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 call. 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 One" 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 August 1, 2005 by calling 888-286-8010 and using the passcode 27208467. 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 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 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.

Carlo, we will now take the first question.

(OPERATOR INSTRUCTIONS). Steve Smigie, Raymond James.

I was wondering if you could comment a little bit on the comment you made in your press release about modest revenue growth for the balance of 2005. I guess specifically, you mentioned a book-to-bill of less than 1 for this quarter. So is there potential for sequential revenue growth? And if so, what would be the magnitude of that? Or are you expecting more growth in the back half -- pardon, excuse -- the last quarter.

There is potential, but no guarantees with respect to revenue growth. But under reasonable expectations, some revenue growth, as suggested in the press release, is anticipated for the balance of the year.

Okay. And are there particular end market drivers, or are there particular other drivers that you expect to drive that growth?

The main source of uncertainty that we see at this point -- at a very general level has to do with a great deal of resiliency (ph) in committing to capital equipment investment that is impacting, as an example, our test and measurement business. So any overall change in terms of the sectors of the business that relate to capital equipment will have a positive impact.

Okay. And would we expect to see any growth or any revenue in the third quarter from either the VI Chip or even just a VIC-in-a-brick -- any -- maybe a $1 million level or anything like that? Or is it just still pretty early stages, the sampling stages for those?

It is still pretty early stages.

Ron Opel, Moors, Cabot.

Patrizio, the capital spending for the year at the end of the second quarter was 2.6 million. You mentioned at the Annual Meeting that the -- you had embarked earlier in the year on a $4 million capital expenditure process. Is that still on schedule? And have you begun to think in specifics with respect to a follow-on tranche?

Yes. That is still our strategy; although, we expect to receive all that equipment and have it installed and if the capacity comes with that, within the third quarter. And as mentioned in the past that we continuously look at future needs and contingency plans in place to deal with a variety of eventualities with respect to further capacity needs.

Is it more likely that VI Chip -- VI Chips as a content of the book-to-bill will show up in the second half of next year, as compared with the first half for the first time?

When I think of the book-to-bill at this juncture, Ron, I think of it in terms of a legacy business, specifically with respect to the book-to-bill for the second quarter being at 0.99 -- essentially 1. What I see into it is a reflection of many customers playing it close to the vest in terms of not wanting to commit far out, given a variety of uncertainties affecting their businesses' deductions. That is what I see in the book-to-bill.

In terms of the impact of book-to-bill, on book-to-bill by VI Chip business, that is going to come about next year. And I think the impact of that is somewhat unpredictable in terms of upside and -- under a variety of scenarios.

David Khan (ph), Ardor (ph) Capital.

My question is in the realms of -- the hazardous substance initiatives. Could you give any guidance as to any further payments you would have to make, or would that be it?

Well, let's be clear. The Company didn't do anything wrong that caused us to make any payments. RoHS compliance is a general requirement that is imposed on every electronic manufacturer in order to meet new standards that have been driven by, in particular, Europe. It has to do with going over to electronic components that are essentially lead-free. I mean, now, RoHS compliance means more than lead-free. But lead-free is, to some extent, was with -- the prime change. And the implication is simply that as of the end of this year, many customers will in effect require that a product shipped to them comply with lead-free components, lead-free soldering all the components onto PC boards.

And so this is what is at issue with respect to the bulk of the inventory adjustment over valuation adjustment that we made. The conversion of our products -- or second generation of products to FasTrak, which is lead-free, is the primary factor.

Okay. So do you foresee any more expenses going into that conversion or no?

Not at this point in time, no.

Jim Bartlett, Bartlett Investors.

My calculations indicated that your gross profit, which you mentioned in the press release as being up, given -- before all the reserves, etc. -- it is 41.9 on 18.69 on 44.579 revenues. Would you agree with that?

You are referring to the gross margin?

Yes.

I think by our calculation, if you exclude the licensing income and the recurring items associated with the valuation adjustments in the inventory, we come up, Mark, with --

It is just over 41.

Just over 41.

Just over 41. At what percentage of second-gen product is now on FasTrak as opposed to the old 300 platform?

It is past the halfway mark, and we expect it to get it to essentially 100% by year-end.

And is there any potential on gen 1 as well being on the FasTrak or not?

Not really. There wasn't ever a need for, in effect, overhauling the first-gen platform, whereas as commented in past conference calls, on the general subject -- as we all painfully remember, we had some significant yield issues and cost issues associated with the 300 platform for second-gen.

There's still potential for margin improvement in first-gen -- well or not?

I think we should all be satisfied with the fact that first-gen is a very high-margin product. That that was -- always been that way. It still is. Obviously, we constantly drive for manufacturability improvements and cost reductions and improved margins. So just as part of the general culture, we are driving hard to reduce linear (ph) cost and reduce overall product cost, and that effort is now limited to second-gen. It is a companywide effort.

Is that spread now between first-gen and second-gen on gross profit basis less than 10%?

I don't really -- I am not really prepared to comment on what the split is. But I can tell you that second-gen is becoming a more significant fraction of the total. And a lot of new business opportunities relate to second-gen.

(OPERATOR INSTRUCTIONS). Steve Smigie, Raymond James.

If I could follow up a little bit more on the gross margin questions. So the gross margin guidance you gave for some improvement going forward -- would that be offset sort of 41 base, or is that off the 38 or so base that we saw this quarter?

I think the comment earlier in the year after the Q1 results was that we expected improvements (technical difficulty) in margins (technical difficulty). And in fact, that is what we saw in the second quarter. And again, if we look at the margins exclusive of nonrecurring items, they got into the low 40's, very low 40's. And we don't believe that is the end of the road. We think that there is continuing opportunity for improvement and generally speaking, that should be steady from quarter to quarter.

Okay. Can you give me some sense of what the impact of the last half of gen 2 going to FasTrak could be? Is that a couple 100 basis points improvement, or--?

I really can't give you a specific number. But it is a key factor in improving margins going forward. Overall, capacity utilization is not a factor. And there are other factors as well. The conversion is a key item. Overall level of business is another key item. And there are other factors that play a role.

Okay, is there some range you could give me of -- if everything went well or what is the high end of the range?

Are we talking short-term or long-term?

Let's say short-term over the next couple of quarters. You mentioned it was going to transition by the end of the year. So let's say that transitions by the end of the year, and then you have the modest revenue growth that you mentioned through '05. So what would that sort of scenario look like?

I think that the dry steam (ph) is separating from the progress that we have demonstrated -- we have been able to make -- is a reasonable scenario. But again, the actual performance is going to be impacted with both upsides and downsides by factors that, to some extent, are difficult to pin down.

Okay, and just one more. In some of the write-offs you took, I think I read that either there were some obsoletions, materials for some of the VI Chips -- if I read that right. And I was just curious what that would be related to -- it's up to that -- there has been a lot of production on that?

Well, we have been doing and we continue to do a lot of pilot to production of various models. And in connection with that, as you may imagine, with something as new and as radical as VI Chips, we have from time to time some material obsolescence having to do with materials that get ordered in anticipation of particular runs, and they get modified at the last-minute, as a result of some evolution in the requirement. So that was a factor with respect to that particular item.

And in general, with respect to the earlier question of margin, the margin overall, I think, gotten up to a little bit north of 41%. We should remember that -- factor into that, these costs associated with VI Chips that -- as this point in time -- a negative impact on margins. So the legacy business is, as commented before, financing the new initiatives in a variety of ways. And one of the particular ways in which it is financing the overall strategy is by the effect it has on margins.

Okay. Actually, if I could ask one more -- could you comment on any further design wins on VI Chip or any new OEM partners?

I can say that we are making inroads in places where the Company historically has never been in the other Moody (ph) markets and other end markets and with customers -- where historically Vicor was not at all a factor. It is very exciting. There is a lot opportunity. And needless to say, there is a lot of challenges that come with this. But overall, we are very excited about the nature of the opportunity and where it might lead us.

Jeff Bencik, Jefferies & Co.

One of the -- you received a 2.5 million payment for a legal settlement, it looks like. Do you expect additional legal settlement revenues from some of the other competitors that you sued for patent infringement?

Not at this point in time.

Okay. And if you exclude the 2.5 million settlement you received, your revenues came in at 44.3 million. Was this in line with your expectations at the start of the quarter?

It was a little bit below our expectations at the start of the quarter.

Okay. And what particular areas were a little bit slower than you expected?

The test and measurement segment didn't do as well as we thought earlier in the year. Generally speaking, where we are seeing relative strength is geographically in Asia. Japan did fairly well this past quarter. Europe and North America remain relatively weak. And by end market, again, test measurement didn't do quite as well. Industrial markets, we did relatively better than anticipated.

Okay. And in terms of the share repurchase that you did in the second quarter, in the first quarter, going forward, what should we expect -- a similar type of repurchase levels?

I think generally speaking, you should expect that the Company will continue to see value in its own stock, and we are going to be in the market from time to time to buy the stock.

Okay. And in terms of the VI Chip, is it taking longer than you anticipated to get the customer acceptance and to get the orders, or is it sort of progressing as you expect?

I think if we look at it in the right perspective, which is taking to account the magnitude of the change and the magnitude of the opportunity, looking at it, that is, in the right perspective -- the nature and potential impact of this product capabilities -- it is going pretty much the way one should expect.

We are not dealing with marginal improvements in industry standard products. We're dealing with radical improvements associated with a new architecture and a wholly new way of providing for a power system. And given all that, it is going as well as one might expect.

Okay. And then finally, as we stand here now, what is your best guess in terms of when you expect significant revenues from the VI Chip?

First half of next year.

I'm sorry, could you say that again?

First half of 2006.

Daniel Gorman (ph), Gorman Investments.

Yes. At the Annual Meeting, you had talked of an expense. I think it was approximately $0.25 per share, if I remember -- concerning the VI Chip and some of the associated expenses. Were there any expenses this quarter that were associated, that you would have put in the same category of $0.25? And if so, approximately how much?

I think there may be a little misconception with respect to the number 25. You might be thinking of a comment that I made with respect to the yearly run rate of our aggregate investment in VI Chip and Vicor being in the neighborhood of 20 to $25 million.

That's correct.

Also, the per quarter figure or a cents-per-share figure, it was --

No, I think I tried to convert it. Is it still that same number of 25 million for this quarter?

Yes, but that would not convert into $0.25 per share. But the level of investment is going up. It is not going up at a dramatic rate, but we are pushing on the accelerator on a number of fronts. It is suggested in the press release, we were actively recruiting talent to take the new business units to the next stage of development. And as part of that, in other ways, we are stepping up on the level of investment.

But if you didn't have those expenses, your legacy business would have produced a fair amount of profits for the quarter?

Yes, if we didn't care about having a much brighter future by way of making the right investments in products that can bring the Company to a different kind of enterprise altogether. To your point, we would have even more of a cash cow legacy business. But obviously, the long-term viability of that business would be questionable. So we are leveraging our legacy business to make judicious investments in technologies and product capabilities that we believe will bring the Company to new kinds of levels and capabilities.

David Matzerini (ph), Locke Capital Management.

I think my question has been answered, but maybe you can clarify. In your press release, you said the VI Chip and Picor are actively recruiting key individuals to contribute to the next phase of their evolution. Can you once more explain what you mean by the phase of the next evolution of the VI Chip?

Well, both of these entities have been, in effect, development-stage companies. And we are looking now to take them into companies with revenues and tangible contribution in terms of profits in the future. And as part of that, as you might imagine, both in the front end of this business as in the back end, both in terms of sales and marketing and in terms of the whole infrastructure of the business -- there is a need and opportunity for additional talent.

Kenneth Carowana (ph), Wachovia Securities.

Relative to the statements that you have been making about new products and the statement in your press release, the -- I am wondering if you can give us some additional information -- and I presume you are talking about hybrid automotive developments. And I am wondering, are you working with all of the manufacturers of hybrids, or is it just one? Are you contending with someone in particular?

And I guess the same kind of question with respect to the consumer electronics -- what are we talking about?

No names will be mentioned. But generally speaking, what we characterize as automotive, which is not strictly automobiles, it is transportation automotive. We are working with a few different major companies. And with respect to the consumer electronics applications as well, we're dealing with a few different prospects.

And then, a different line of questioning -- you have settled this suit with Lambda. But do you still have ongoing litigation costs? And aren't there additional opportunities for recoveries at this point?

We believe so. Yes, we believe that there is additional opportunities for recovery.

And your litigation costs are roughly what at this point?

Well, there has been a lull in the action. But at any point in time, that could come to an end as the District Court judge decides to pick up this matter again.

But your statement to an earlier question was that you didn't expect any additional -- or something -- any additional recoveries. Perhaps you were just talking about -- right now, you don't expect it to--?

Yes. What I meant is that we don't anticipate anything this year.

Richard Feldman, Monarch Capital.

At the Annual Meeting, you made some reference to opportunities in AC to DC power conversion. I wonder if you could just update us on how things are going there.

Things are going well in the lab and in terms of imminent product opportunities. Generally speaking, this has to do with leveraging the engines of Factorized Power in VI Chips for AC to DC power conversion, which in effect bridges the gap from the AC wall plug to the point-of-load. The Factorized Power in VI Chips are, I would submit, uniquely applicable to the breadth of power system requirements. And roughly 60% of those requirements involve AC to DC power conversion, since most applications draw power from the utility outlet -- from your AC wall plug.

And that scenario has tremendous opportunity for VI Chips because their unique attributes in terms of high density, low mass and low profile -- that is thinness, high efficiency and their ability to process power from high voltage as well as low voltage. They make them uniquely suitable for, in effect, providing a power system capability that is all encompassing and there is tremendous benefits in terms of offering comprehensive solutions for OEM customers.

So that has been an area of progress that has been stimulated by some of the partners we are working with. And there is opportunities outside of those in that -- it is not meant in any way to take away from the opportunities that we see at the point-of-load in terms of the VTM engine being by far the fastest point-of-load converter out there.

The aim is to -- again, bridge all the gaps and offer customers with VI Chips comprehensive solutions for all of their power system needs.

Would you characterize your opportunity in the AC to DC conversion area as being one where there is likely, at least initially, to be less competition than in the DC/DC area?

Well, I wouldn't put it that way. I think there is always competition in the power management business and in most businesses. But maybe to your implicit point, the nature of competition may be a little different, and the issues associated with that competition might be different. Frankly, the AC to DC area is one that is perhaps being more neglected in terms of advancing the technology and one where complementarily that there is perhaps more vulnerability to the traditional solutions. And there is a greater need for high-density, high-efficiency solutions. So for that reason, as well as the overall strategy of leveraging VI Chips as comprehensive power system building blocks, we have within the last year -- again, to some extent, at the urging of some of our partners -- put emphasis on those kinds of developments.

Ron Opel, Moors, Cabot.

I am just rechecking the numbers. The nonrecurring items that increased cost of goods sold were 2.7 million for the inventory charges and the 1.6 million for the reserve increase. Is that correct?

No, Ron. The 2.8 is all encompassing. So the 1.6 and the 1.2 down below equal the 2.8.

I see, thanks.

Except that there is an additional 250, which is associated with the 2.5 nonrecurring licensing income.

Right, but that is in the operating expense area.

Yes. So Patrizio, I think you have mentioned back a few quarters that you anticipated -- my memory is that you didn't anticipate a significant adverse effect on margin improvement as the VI Chips became a significant part of the product line. Do I remember correctly, and is that what you continue to expect?

Yes, but we should be clear with respect to what that means. That does not mean that while we are in power production with the VI Chips, they are not going to detract from the margins of the legacy business. And that has been the operating model. Obviously, there are start-up costs that not only impact the operating expense line in terms of R&D in particular, but also impact frankly margins because of infrastructure associated with VI Chip operations.

Okay. And I wondered, you introduced or you talked initially about the three operating units that the Company has now at the Annual Meeting. I just wondered if you would provide a little additional color on what you have in mind for Picor.

Well, Picor is a separate entity. By the way, VI Chip is still part of Vicor and hasn't been formally set up as a company. But going back to Picor, the vision for Picor is that it will be a premier power management company, leveraging proprietary architectures and topologies to bring to the power management space the capabilities that allows. It is unique in that, unlike every other participant that I am aware of in the power management space, where the roots of the entities are from the semiconductor space. The roots in this case are from the power conversion, the power system expertise. And that gives Picor what one might call an unfair advantage with respect to approaching their space and their market opportunity. That is leveraged that by great expertise and technical excellence in the team. And the combination, we believe, is a recipe for great success in the future.

And that could suggest an ongoing series of new products over time as part of the VI Chip to throw (ph) it away?

Yes. There is going to be Picor products, as suggested in the press release, they have been working on a power roadmap, and they have some very exciting opportunities.

Steve Smigie, Raymond James.

Could you talk a little bit about the magnitude of the hiring and what sort of impact we might see on SG&A over the next couple quarters and into 2006?

Yes. I think that its significance isn't going to be all that much in terms of operating expense levels. Even though it will, without question, add to the operating expense levels. But I wouldn't be, in effect, concerned with respect to getting -- we are adding vice president level people that are going to contribute complementary experiences and complementary perspective in terms of advancing the opportunities for this new stepped up confidence.

I see you have announced a dividend. And I was hoping you could comment on what that might look like onto a full year '06-type dividend. Obviously, given the dividend, the stock buyback, investment capital equipment -- it seems like you have quite a bit of confidence in your cash flow. Is that coming largely from existing products being the cash cow or also have some hope -- you are looking at it, seeing the VI Chip come in as well?

Well, our cash position is around 120 million as of the end of last quarter. The dividend is less than 1% of the price of the stock. And it represents a small percentage relative to our cash. I guess, again, the legacy business is a cash cow. And the level of capital equipment investment required for providing capacity and the most scenarios with respect to VI Chips are modest enough that we feel very comfortable with respect to the increase that was made recently with respect to the 2005 dividend. With respect to 2006, we will cross that bridge in 2006. But in general, with respect that as the investments the company has been making pan out, there should be opportunity for returning to the shareholders some of the value of their investment through bigger dividends.

Great. And could you also comment on how things may be going on your Sony licensing agreement? Have they come to you with requests, or are you yet realizing any royalty revenue off that? And will they offer you some manufacturing capability in addition to whatever capital equipment you are putting on?

The only thing I can tell you with respect to that is what we've already announced, which was approved by Sony, and that is that under the licensing agreement that we are entitled to procuring certain semiconductor (ph) components from them. But I cannot comment with respect to the specific applications or opportunities relating to the license because of the strict confidentiality requirements.

Okay but I guess -- do you have a license line on your income statement? And I assume that if you recognize revenue from that, that would show up on that line?

That would be correct, Steve.

Jeff Bencik, Jefferies & Company.

Okay, this question has sort of been answered. But can you detail how many new salespeople you are planning on hiring for the VI Chip? And does that take effect starting the third quarter?

I think that all that I can say at this point in time is that we are actively recruiting and that over time, there is going to be additions made. But I wouldn't want to get pinned down with respect to what many people want.

Okay, would it be reasonable to assume that your gross margins will actually go down before they go back up unless you get a corresponding increase in sales?

I think that would not be a reasonable assumption. Because, again, if you look at the pattern going back several quarters, including this last quarter, the gross margins have been improving, in spite of the fact that our rate of investment in VI Chips has been going up. I think it would be fair to assume that the R&D line, which has been climbing up to the level within the last quarter of 16, 17%, may also be creeping up a little bit before it, over the longer-term, settles back down to more typical long-term levels of perhaps around 10%. So we are making investments, and they are costing us, particularly in terms of adding expenses, and to some extent, in terms of detracting from what the margins would otherwise be. But the margins have been climbing and the overall profitability -- it stands for the Company -- has been improving in spite of very significant investments we’re making our future.

Jim Bartlett, Bartlett Investors.

Are you with Vicor, really?

No, I am not with Vicor. You know, I am not on the payroll.

I thought we had a new employee; I didn't know.

One of the recent hires.

The operating expense in your case would be far too high.

Could you comment on the technical feasibility -- or how realistic would it be for you to offer a universal power adapter for laptops PC? You have got two people, I guess, that you have said publicly you have been working with on power adapters for their individual PCs. What about your technology offering universal power adapter?

We are working with partners with respect to that. And we believe that that is one of the major opportunities for VI Chips going forward and not the only one by far but one of several.

You had also mentioned that the -- there were some design wins. There is certainly potentials at the high power range in tens of kilowatts in power systems. Could you give some possible product examples in that area?

Information technology, high-end servers, that would be an example. Automotive applications or other kinds of transportations applications -- very high power level. Somebody earlier made reference to hybrid vehicles. But at even higher power levels, these opportunities for VI Chips are actual engagements involving up or down conversion from high voltage buses to low voltages. And this is something that the VI Chips excel at, both in terms of density, efficiency, and cost-effectiveness.

Richard Feldman, Monarch Capital.

You mentioned that Picor will be introducing products under its own name. Would these be different than the products it is designing for you?

Yes. Picor, early in its life, played a critical role with respect to the development of VI Chips, in particular, with respect to the many control chips that are in effect the brains of VI Chips. Those technologies, those capabilities have application with respect to unique product opportunities that Picor is looking to pursue.

Over what time horizon should we -- would this be something that let's say, revenues from the source be beyond the time horizon? It looks like getting additional revenues from VI Chip -- is it further away, or is it--?

Well, there is already some low-level revenues but not significant enough to impact Vicor's overall financial statements. As we look out 3 years, we expect that Picor will be a significant company that might be independent, spun off from Vicor in that timeframe. Obviously, that is far enough in the future that there is a good deal of uncertainty with respect to timing. But I have very little doubt with respect to the prospects for success.

Why would you spin it off? Would you see a conflict between your long-term ownership of it?

Well, fundamentally, it is a different business. It is complementary in many ways but different. And the issues and the opportunities are not really the same. And from a different perspective, we believe that there is great opportunity for realizing financial returns for the shareholders through entities that are visible in their own right and separate in their own standing. So that that is part of the vision going forward.

And, sir, we have no further questions at this time.

Okay, well, thank you for participating, and we will be speaking with you again at the end of our third quarter, sometime in October.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect.