Vicor Corp (VICR) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience.

Welcome to the Vicor Corporation third quarter 2005 results conference call.

My nickname is Jackie and I will be your coordinator for today.

At this time all participants are in a listen-only mode.

We will be conducting a question-and-answer session towards the end of this conference.

If at any time during the call you require assistance please press star followed by 0 and a coordinator will be happy to assist you.

As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Mark Glazer, Chief Financial Officer.

You may go ahead, sir.

Thank you.

Good afternoon and welcome to Vicor's quarterly conference call.

I'm Mark Glazer, Chief Financial Officer and with me is our CEO, Patrizio Vinciarelli.

Before we begin, we'd like to remind all of you that today'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.

I'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 of 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 November 1st, 2005 by calling 888-286-8010 and using the pass code 84174601.

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 undertaken 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 into queue to ask additional questions.

Jackie, we will now take the first question.

(OPERATOR INSTRUCTIONS) Steve Smigie from Raymond James.

Wondering if you could first of all just comment a little bit on your -- the increase in revenues you discussed?

Could you give us some quantifications in terms of sequential improvement?

And along with that maybe an outlook for what '06 type revenue growth might be?

We see a continuation in the short term of the pattern of the last few quarters, what we characterized as modest revenue growth.

Looking into 2006, there is going to come a point in time when the revenue growth should accelerate but it's still too early to give you a precise forecast with respect to that.

If I could ask a question on the VI technology?

I was just curious if you could comment in the further design win activity during the quarter and, specifically, on what you've done here with the adapter technology without the going specifically after adapters for notebooks?

And if so would you go say, direct-to-dial, Dale or would you go to like Delta (ph) Electronics?

We have been working with key OEMs in terms of pursuing opportunities where VI chip technologies (indiscernible) the A.C. adapter opportunity stands out as meeting those requirements.

Looking at it in a couple of different ways, both following in the industry (indiscernible) with respect to partitioning of the power system as well as with new architecture, there is distinct benefits and leverages as factored as power.

Particularly in terms of providing adaptive capability with 95, 96% efficiency in very very high density.

After this point, this development of being, again, (indiscernible) working in conjunction with and being sponsored by particular customers over time we went to broader horizons in terms of this market opportunity.

Could you say you are working specifically on notebook adapters, then?

We are working on AC adapter applications for mobile devices.

And AC adapters can also be used in conjunction with specialty equipment.

They have broader and broader opportunities in consumer electronic-type applications.

Jim Bartlett from Bartlett Investors.

Following up on the AC adapter, a question in the Wellward (ph) article and it was talking about the adaptive chip, PFM chip which is available in November in production quantities next year.

And they are talking about a target price of under $40.

What would be the detail price of that product that it would go into?

There are two distinct products, the PFM being one of them.

That's a double big VI chip that performs all of the functions of an AC to DC front-end converter and the functions include isolation, voltage shutdown, and line regulation including pro factor production.

That is the device that is being benchmarked in connection with the electronic design article. $40 initial price range in relatively small quantities.

Beyond that, there is a different device in a (indiscernible) package which is half the size of double big.

And this device I believe is the advanced DVTM that you are referring to and the price point of that device is, roughly speaking, half or maybe a little less than the PFM.

And it is that device that is (indiscernible) to AC adapter type applications.

And if that was, say, a $20 device, it would go into an adapter that would be priced at -- say for a laptop what?

Roughly?

There is short-term and then there's the longer-term.

This device has capability, the power capability that is actually well beyond the capability or the TP (ph) requirement for AC adapters.

So initially it would be an overkill in terms of power delivery or power capability but we have plans to address that issue over time and make available a solution that would be much more cost-effective.

The picture included in the three of those 3 adapters with the final one much smaller adapter.

Is that picture of the adapter with your device in that?

That picture refers to first of all, the run of the mill conventional technology adapter.

And a adapter that performs all the functions of the conditional adapter leveraging VI Chips in a much smaller package and the clear alternative is the more radical factor, ice power solution that achieves even greater efficiency and an even greater reduction in size and weight.

So the three alternatives -- one being an effective baseline and the other two being two alternative ways of deploying VI Chips to advantage in terms of shrinking the Wall (indiscernible).

And in the last one, where you have to put I guess the TRM (ph) inside the laptop this would take a longer time to be, I imagine, accepted by a manufacturer because it's -- .

It's a percent in architectural change and in so far as architectural changes involve inevitably as longer lead times but it does offer a number of major advantages including the ability to use the mobile device with both AC inputs and PC inputs, without the need for additional hardware.

Being able to use the same AC adapter for a variety of different mobile devices.

And with respect to what goes inside the notebook, the PFM function can not just perform the power factor production function that is traditionally part of a high-powered AC adapter but it can also perform a (indiscernible) charging function.

That is usually dealt with separately so there is some synergy that can be had inside the mobile device.

So should we expect earlier devices, the earliest revenues for Vicor really to come from the most technologically advanced device? (MULTIPLE SPEAKERS)

I cannot make (MULTIPLE SPEAKERS) point.

We are pursuing both alternatives and there are different prospects involved.

And is too early to say which one will turn into the volume opportunity.

Second question on the gross margins.

You talked about them being higher in the fourth, expect them to be higher in the fourth quarter.

Most of that improvement is really from Gen 2.

At the end of the third quarter what percent of Gen 2 was FasTrak?

And then would you expect that to be close to 100% at the end of the fourth quarter?

It won't be quite 100% of the end of the fourth quarter.

I think we are going to see it getting to 100% in the first half for next year.

But I think it would be reasonable to assume that the cost reduction opportunities are not confined to the first second version.

That is an identifiable opportunity that we can all relate to, but the cost reduction opportunities go beyond that and involve even first generation type of product which have essentially 20-year-old in conception.

So.

There are economies that the operations team in the legacy business has been able to achieve.

And they feel strongly that there's even better opportunities ahead of us.

And the percentage of FasTrak and Gen 2 at the end of the quarter?

It's becoming the major share of the second gen product but as suggested earlier they're still in the fourth quarter and in the first half of next year, additional conversions will be made.

Ron Opel from Moors & Cabot.

Patrizio, would you comment, please, on the areas of market sector strength in the third quarter?

And in that connection, does the moderate uptick in book to build signal that there is a slightly increasing pattern of demand for electronic capital equipment in general?

First of all, in terms of areas of strength, the international part of the picture continues to be stronger than the domestic part, particularly Asia.

In terms of market segmentation and your question with respect to where things stand in terms of the AT (ph) business, our largest customer to date for 2005 is in the AT business.

The second largest is the medical application.

Third largest is government defense type applications.

So that gives you a sense of where we're geographically in terms of market segments, that all these (indiscernible).

The slightly improved book to build sequentially suggests that things are getting gradually better in terms of overall demand?

I don't see a fundamental change from last quarter.

You probably recall that last quarter we had a book to build that was less than one but forecasted a modest growth for the third quarter.

And likewise, we see a similar situation this quarter the fact that book-to-bill happened to be stronger in the third quarter and second quarter.

It is certainly a good indicator but the comment that was made last quarter with respect to this ability being limited, because customers wait closer and closer to the (indiscernible).

That comment still applies.

So as in particular we look at the fourth quarter, we see a lot of fill.

Most of the backlog is in the fourth quarter.

And that's a sign of customers perhaps being somewhat uncertain with respect to their business prospects and only placing orders for the very near term.

And you might read into that, that the book-to-bill understates the opportunity bat the flip side of it is that the (indiscernible) certain level of uncertainty in the customer base.

Okay and I have a question on Vicor capital expenditures.

It was about 4 million, I guess, for this quarter.

Is that an uptick relative to what you had been planning?

It is pretty much according to plan.

As we told you earlier in the year, we've been investing in certain equipment for VI Chip.

And within the past quarter, a good deal of that equipment came in and (indiscernible) equipment line item.

Don McKenna from DB McKenna & Co.

Nobody has really said great quarter but it sure seems to be one.

I wanted to ask you a little bit too on the revenue side of things.

My calculation's going back, even though you are showing the slight gradual improvement in the revenue.

But that the orders received, it would have gone up pretty significantly from about 44 million in the second quarter to about 50 million in the third.

It's about a 14% increase.

Is that trend in place?

Or is that a little bit deceptive that you might have gotten a large order that would have been call for shipments over a period of time?

Can you shed a little light on that?

The actual bookings for the quarter were marked -- somewhere between 46 and 47.

Yes.

And there's nothing unusual with respect to that bookings filing in that, as I mentioned earlier, a good deal of it is carried over into the fourth quarter.

And they always carry over into next year.

David Mazzarini (ph) from Locke Capital Management.

I have a question.

One of your major competitors have come out with a pin for pin part compatible to your VI Chip right now.

And they are pursuing the applications you are now present in.

Do you see an erosion in margins or ASPs in that part now that you have a major competition out there with that device?

Are you sure you are referring to VI Chips as opposed to bricks?

I'm referring to the VI Chip exactly.

I guess I'm not aware of what you are describing.

I have seen the data sheet and I've seen it from your competitor.

What is the name of the competitor?

I/O 1 (ph).

I think there may be a little confusion.

But please send us the data sheet.

I'm 99.9% confident that the information you are referring to may be misunderstood.

I would tend to not believe that, since from the information I have and the data sheets I saw, the part looks identical to the part you have.

I don't know if they reverse engineered it or you licensed them.

It's --

I can tell you already we've not licensed them and I would be very skeptical that anybody could reverse engineer VI Chips.

And beyond that, VI Chips are protected by some 30 new patents that really mean through intellectual property as opposed to fiction.

And so I can tell you unequivocally that you must have some incorrect information.

But please send us what you have and we will be happy to comment on it.

I suppose it's possible.

Steve Smigie from Raymond James.

I was hoping you could comment a little bit on some operating expenditures.

One, just for this quarter, seemed like R&D was up on a dollar amount and on a percentage of revenue.

I was just wondering if you would see that similar pattern going forward?

Or if we'd expect to see that R&D back off a little bit?

In the short term, we are expecting the R&D line to continue to go up pretty much at the rates that you see.

We are hiding people and a good deal the R&D line has to do with and the content session, there is project material relating to developments of new VI Chip models and so on and so forth.

So all of those activities are continuing and in the short term, the number will continue to be going up.

On a dollar basis?

On a dollar basis.

Correct.

I was wondering if you could give us any update on zoning, if there is any?

I'm sorry to say, as I mentioned in the past, that we cannot comment on engagements with customers or licensees.

So I can't tell you anything about that.

Could you comment a little bit on the tax item in this quarter?

And if we will see that going forward?

Sure.

That's just as it is described in the press release.

We tend to file our tax returns in all jurisdictions in the third quarter of each year.

And this happens to be an item that closed from six or seven years ago.

So, and that is all it is.

So normally without it, you would add that back to the benefit and the tax provision in the quarter would have been about 600,000.

Okay and -- .

So it's a once-a-year event.

Thank you.

Ron Opel, Moors & Cabot.

Patrizio, power over ethernet and flat-panel displays you've mentioned from time to time as being associated in terms of being prospective applications for VI Chips.

Are either or both of these included in the large-scale or large volume opportunities that you see for '06 and '07?

Power Ethernet tends to be relatively low power and in the short term it is not part of the opportunities that we are looking at.

With respect to displays, there is parts of the opportunities that we are looking at.

August has been on the higher power.

Applications that were the benefits of VI Chips and factor rice power are more significant.

Frankly, we have more opportunities than we can pursue.

And we like to be focused on those opportunities and those end markets and those customers and development projects that are represent, that give us leverage.

So that extended to favor higher power applications, in particular, in consumer electronics and some extent automotive type applications, and information technology applications.

Are there other large volume potential categories in consumer electronics, aside from or in addition to power adapters and flat-panel displays?

Yes.

Just one question for Mark.

I probably am overlooking an obvious answer but retained earnings dropped consecutively by about $3.5 million.

I'm wondering what the reason for that was?

The dividend gets applied and earnings.

So if you take the 5 million and roughly $25,000 dividend add at the year-to-date earnings, you should come out with that number.

Thank you for the answer and the dividend.

Jeff Bencik, from Jefferies & Co.

I just was wondering.

Do you have any share repurchase plans for the fourth quarter?

We still have about 21 million --

It's over 21 million.

-- in existing program within the past quarter in part because the dividend payment, that we were not active and generally speaking, we don't talk at a particular quarter or particular time, but market opportunity is adapted from time to time.

So I cannot tell you one way or the other whether or not we will be repurchasing shares in the fourth quarter.

We obviously have a program placed to do that and we may do it or not do it.

Just in terms of general timing on the VI Chip, when do you expect general traction now?

Is this still second half '06 or do you expect any full traction before that?

I think it is a function of what we mean by traction.

We believe we've had traction in terms of development, designing, a pursuit of higher leverage opportunities.

That will turn into fashion which is back to revenues -- which I believe is the way you meant to ask your question -- over time and we see that beginning to happen in the first half of next year.

Jim Bartlett from Bartlett Investors.

What was the headcount at the end of the quarter?

It was approximately 1100.

Just under 1120 people.

And how much -- what was that versus the end of the June quarter?

End of June was about 1140 people.

But down 20, were there any new hires?

You had talked last time about new hires in -- for the VI Chip area.

You talk about the progress there?

Yes.

A particular example in the VI Chip business unit that we hired an executive that joined the ranks about 45 days ago.

So there has been a key hire, Vicor hired a key individual within the last quarter.

So, we are going after the addition of management talent to expand the bandwidth of the management team and give us the capability that is needed in order to make the most of the opportunity of this new business unit.

What about the salespeople in the VI Chip unit?

We are still actively recruiting that area and not closed in on one individual yet.

But we are actively working that.

And why was the headcount down?

Because of continuing efficiencies with respect to the legacy business.

I mean, this continued level attrition in the legacy business and that's (indiscernible) with the improved margins and the improved productivity that you have seen taking place over the last several quarters.

You also mentioned the press release milestones in the VI Chip and in Vicor of meeting milestones.

What milestones did Vicor meet?

I really cannot tell you the specifics with respect to that for competitive reasons.

But Vicor accomplished a measured (indiscernible) within the last quarter in terms of a key -- let's put it this way, a new chip controlling device that was completed in that quarter.

And with respect to the VI Chip, the business unit, we -- as mentioned in the press release -- achieved milestones with expected to our flank products.

The PFM in particular.

When should -- when will we know about the Vicor milestone?

When will that be --

We are not really planning to oversize the steps that Vicor is taking with respect to establishing itself as a successful business.

But over time, those are going to become evident in their own right.

Thank you.

Kenneth Caruna (ph) from Wachovia Securities.

Patrizio, on the last conference call you discussed a little bit the hybrid vehicles.

I'm wondering if you might give us some kind of report of the progress that you are making there?

We are involved in developments.

And we expect to be involved in additional developments very soon in the general area, involving more companies.

As I mentioned in the past, these developments in terms of traction, revenue traction, as opposed to the (indiscernible) attraction are long the fashion.

We are looking at 2009, 2008 and more prolific scenarios, type of programs.

So they are significant in that we do believe that every major role in the automotive segment is key to long-term success because what happens in automotive will have profound influence on what happens in power systems at large.

But these are not the kinds of opportunities that are for the impatient investor, of long-term kinds of opportunities.

And a second, different question is can you just review where you are in the various litigations you have got?

For example how much did you spend this past quarter and what is the outlook for spending near term and just, perhaps, a general comment on your thoughts on the stage of litigation right now?

We didn't spend much this past quarter in the (indiscernible) there is going to turn on when cases get scheduled for trial.

And I have no way of predicting exactly when that is going to be.

Ron Opel, Moors & Cabot.

Just one more.

Would you have any comment on the outlook for capital expenditures for next year?

I think we have seen some strength with some customers.

Ron, are you referring to our capital expenditures?

Yes.

Vicor capital expenditures.

Mark, you want to comment on that?

Yes.

I think this year we are already at 6.6.

I think we will probably wind up between 8 and 9 million for the year.

And given the uncertainty, I guess, in the growth of the VI Chip we don't want to bring the equipment on too soon but I would suspect we would be in and around the $10 million range next year.

Stay tuned.

That's a number that is going to have to be adjusted as time goes on.

Dick Feldman from Roche Capital.

That's Monarch Capital.

And I wonder if you could comment on the magnitude of the losses of the VI Chip and Vicor this quarter compared to previous quarters?

Is it any more burdensome or less burdensome?

We are spending a little bit more.

In very approximate terms this past quarter you are looking at around $7 million in investment.

7?

7.

Steve Smigie from Raymond James.

Just to follow up on that operating expense question.

Would we expect to see the SG&A also moving up pretty healthy basis on the dollar amount due to hiring and also look at litigation potentially?

I would expect the SG&A line to go up.

We are obviously focused on improving business metrics.

And we are going to be judicious with respect to investments we make in the new business units and at the same time as suggested earlier, this continuing improvements with respect to the legacy business.

So, objective is to continue to improve the profitability of the Company both in terms of gross margin and overall (indiscernible) margin.

So along those lines could I potentially see it as a percentage of revenue go up over the next several quarters?

I think you would probably be on par with revenue growth as a very rough estimate.

Yes.

I mean, the gross spending over the last number of quarters has been relatively flat for the SG&A line.

So we have done a good job managing that so some quarters when legal is up, other things are down and if you look over the last quarters, absent that settlement that we had last quarter, SG&A has been relatively flat.

Yes that's what I'm asking.

The past number of quarters, seems on the dollar basis it's been relatively flat.

Right but I would expect as Patrizio pointed out, as the revenue starts to go up, things like advertising, commissions, things like that tend to go up with the revenue.

We are committed to manage that because that's a little bit easier to manage than the R&D side.

Just one other quick question with regard to the VI Chip.

As we are shifting here on voltage regulator standards from the 10X over to 11X, is that something that you are focused on?

Or again is it one of those areas that has some good potential but not something very short term that you are focusing on with the VI Chip as much?

We have been focused on the earlier connects and developments to date deliver solutions based on the 10X capability.

An upgrade to the other standard, the something that we can make happen in relatively short order in a variety of ways.

Jeff Bencik with Jefferies & Co.

It seem that some of the markets you are targeting are very large for what you have historically done.

And I will presume that some of your customers or potential customers, new customers, would have some questions in terms of 1, your ability to supply that number of chips and, also, potential issues with second source.

Are you comfortable with who you have currently as a second source supplier and are these the type of questions you are being asked by your potential customers and how do you address that?

You are correct in expecting the issue of second source would be in the forefront, at least with some customers.

It is something that we are addressing.

We are having discussions with a number of parties and the issue providing additional sources for VI Chip is one that we are committed to provide in support of our large customer requirements.

And is C&D technology still a second source?

C&D technology is, I'm sure you know, acquired the power business of Celestica whom we licensed a couple of years ago.

We've been in communication with C&D and generally speaking, I can tell you that they have an interest in VI Chip.

And we are looking at ways to participate.

They are playing a role with respect to VI Chips.

They have not been very active up to this point but that is not to say that they couldn't become active in the future.

Okay.

We are very much engaged in developing an additional licensing and sourcing relationship in support of customer needs for alternate sourcing on VI Chips.

Dick Feldman from Monarch Capital.

As the profitability of the legacy products continues to improve, are you still as confident that the VI Chip family of products will still have higher margins?

Yes.

It will take some time to get there.

Fundamentally, my belief that that will be the case is predicated on a variety of factors, not least of which the cost-effectiveness, the unit cost-effectiveness of -- in every technology, the highly proprietary nature of the engines, the architecture, and the capabilities of VI Chip technology.

All of these are factors with respect to building a foundation of highest (indiscernible) with respect to VI Chip margins and cost-effective solutions for our customers.

When you speak of this, do you also include anything from licensing and royalty income?

As that was the case with earlier generations of products that we expected to be a contributor going forward for the VI Chip for business unit.

And for Vicor.

The intellectual property leads to, among other things, royalty income that can be a significant contributor to (inaudible).

We are looking at the overall opportunity and where (indiscernible) achieving very very low cost (indiscernible) for VI Chips is less to enable customers to enjoy the benefits of VI Chip, including very cost-effective solutions while supporting the kinds of margins that highly innovative, proprietary products that should be capable of supporting.

Thank you and good luck.

At this time, Sir, you have no further questions.

Thank you all for participating and we will be speaking to you again in February when we release our year end numbers.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.