Vicor Corp (VICR) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vicor 2009 first quarter earnings conference call.

My name is Eric and I'll be your audio coordinator for today.

Now at this time, all participants are in a listen-only mode.

(Operator instructions) I would now like to turn your presentation over to Mr.

Jamie Simms, Chief Financial Officer.

Good afternoon everyone and welcome to Vicor's first quarter 2009 earnings conference call.

As stated, I'm Jamie Simms, Chief Financial Officer and with me today is our Chairman, President and Chief Executive Officer, Patrizio Vinciarelli, as well as Dick Nagel, our Chief Accounting Officer.

Earlier this afternoon we issued a press release outlining our financial results for the quarter ended March 31st.

This press release is available on the Investor page of our website, www.vicorpower.com.

We also have filed a form 8-K with the Securities and Exchange Commission in association with issuing this press release.

Before we begin, I remind all of you, 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.

In addition, I also remind you, various remarks we may make during this call about future expectations, trends, plans and prospects for the Company and its businesses, constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are denoted by such words as will, would, believe, should, expect, outlook, estimate, plan, anticipate and similar expressions that look toward future events or performance.

These forward-looking statements merely reflect our current beliefs, expectations and estimates, which we share with you during our quarterly conference calls.

Forward-looking statements are based on current information that by its nature is dynamic and subject to rapid and even abrupt changes.

Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied in our statements.

Such risks and uncertainties are discussed in today's press release, as well as our most recent reports on forms 10-K and 10-Q filed with the SEC.

A replay of this conference call will be available beginning shortly upon its conclusion through May 20, 2009, by calling 888-286-8010 and using the pass code 66470419.

Please note our press release of April 27th had the incorrect date through which this replay would be available.

Again, the replay will be available through May 20th.

In addition, a webcast replay of this conference call will be available on the Investor Relations page of the Company's website beginning shortly upon its conclusion.

This replay will also be available through May 20th.

Please note, the information provided during this conference call is accurate only as of the date of this call.

Vicor undertakes no obligation to update any of the statements made during this call and you should not rely upon them after the conclusion of this call.

Patrizio and I each have prepared remarks, after which we will take your questions.

Patrizio.

Thank you, Jamie.

Good afternoon everyone and welcome to our first quarter 2009 conference call.

As the global recession continued to deepen, Vicor did not experience a precipitous decline in its business, however, as disclosed in our press release earlier today, we did incur a net loss for the first quarter of approximately $2.5 million or $0.06 per diluted share.

The first quarter was particularly challenging as we undertook a reduction force of approximately 8% and incurred [epitas] expense accrual of approximately $3.1 million to cover severance payments and related costs.

We also undertook other initiatives to reduce our overall cost structure.

When compared to the first quarter of 2008, consolidated revenues for the first quarter of 2009 decreased to approximately $50.5 million compared to approximately $53.5 million for the corresponding period a year ago, representing a year-over-year decline of approximately 5.7%.

When compared to the fourth quarter of 2008, consolidated revenues for the first quarter of 2009 experienced a sequential decline of approximately 1.7% from approximately $51.3 million for the fourth quarter of 2008.

Our consolidated book-to-bill ratio for the first quarter of 2009 was 0.99 to 1, as compared to 0.93 to 1 for the fourth quarter of 2008.

Backlog at the end of the first quarter of 2009 was $52.1 million as compared to $52.7 million at the end of 2008.

As we cautioned [business] in the past, the book to bill ratio can be an inaccurate indicator of our forward revenue, as the timing of large orders can skew the ratio one way or the other.

Nevertheless, a book to bill ratio [near unity] and the stable backlog are encouraging, particularly in light of recent economic conditions.

Our consolidated gross margin decreased to approximately $21.9 million for the first quarter of 2009 as compared to approximately $22.5 million for the corresponding period a year ago and approximately $20.8 million for the fourth quarter of 2008.

This decline in absolute terms in gross margin dollars is associated with the lower revenue amount.

Gross margin as a percentage of revenue actually increased to 43.4% for the first quarter of 2009, as compared to 42% for the first quarter of 2008, and increased on a sequential basis from 40.5% for the fourth quarter of 2008.

This increase was due to a more favorable mix of higher margin products sold during the first quarter.

Our operating loss for the first quarter totaled $1.8 million whereas the operating loss for the fourth quarter of 2008 was just under $1.4 million.

Our operating loss this quarter included the aforementioned charge of $3.1 million associated with the workforce reduction which was completed in January.

I will now briefly address the quarterly performance of our three primary business units.

For the first quarter our Brick business units sales of DC-DC converters and AC-DC configurable systems declined on a sequential basis, due largely to soft domestic demand inside the industrial market segment.

(Inaudible) sales of our Japan subsidiary also declined, reflecting the poor conditions of the Japanese economy and in dollar terms, declined further due to the weakening of the yen during the first quarter.

Total first quarter revenue for the BBU was approximately $48.8 million, which when compared to revenue for the first quarter of 2008, represented a decline of 0.5%.

In contrast, first quarter revenue grew 2.2% sequentially from fourth quarter revenue of $47.7 million.

With respect to the remainder of the year, we remain concerned about overall global economic conditions and the implications of what could be a prolonged recession on the BBU revenues and profits.

Given our past mix of business and well established market position, I do not anticipate a significant decline in revenue for the BBU.

However, ongoing weakness on the global economy could translate into lower revenues and that would have a negative impact on profit and cash flow.

Turning to V-I Chip, revenue declined to $1.3 million for the first quarter, representing a decline both on a year-over-year basis and on a sequential basis.

I should point out that this figure represents only external sales and does not include approximately $1.9 million of V-I Chips sold at the non-select price to the BBU for use within VI Bricks.

Before inter-company eliminations we achieved revenue of approximately $3.3 million.

When discussing V-I Chip during prior conference calls, I made reference to the timing of when the adoption of factorized power in V-I Chip might transition from early innovators to the broader market or as Jeffrey [Moore] would put it, from visionaries to pragmatists.

We've found that technology leaders have been the early adopters of factorized power.

Such leaders are more aggressive than their competitors and therefore willing to make their own investment in the adoption of this new disruptive technology.

We had hoped by this point in the development of factorized power in V-I Chip to be leveraging our success with these technology leaders into creating a broader base of customers.

However, early adopters such as makers of high end computing platforms and high end tests and measuring equipment, have been experiencing substantial declines in demand for their own products over the last few quarters, resulting in soft bookings for V-I Chips, and for the first quarter a sharp decline in standalone V-I Chip shipments to third parties.

In spite of these delays, we are continuing to focus our efforts on early adopters.

In addition, we are completing key technological developments in several new products that will be introduced during the year, expanding our product line with complimentary capabilities and expanding the range of applications in which V-I Chips can be used cost effectively.

Based on our current forecast, assuming that the economy begins to improve in 2009, we expect V-I Chip shipments to bottom out in the second quarter and gain momentum by the fourth quarter.

We have customer forecasts for V-I Chip volumes that support [our suggestion] that our revenue for 2009, including of V-I Chips consumed within VI Bricks sold to the BBU, will be ahead of 2008 levels.

We also have customer input that leads us to project that the extent of revenue for 2010 will be more than double the level of 2009.

We're also expanding our use of V-I Chips in VI Bricks which combine the electrical attributes of V-I Chip with the mechanical and thermal management flexibilities of Vicor's Bricks.

As previously disclosed, we have high expectations for VI Bricks that enable designers to take advantage of factorized power with customary Brick-like packages.

We believe this complimentary implementation of V-I Chip technology will become an essential part of the big business unit future product portfolio.

With respect to Picor, it experienced a strong first quarter in terms of shipments, new orders and further development of new power pad management devices.

Picor has considerable momentum with its [mesh of] supply strategy and is working closely with current and prospective customers for design wins in high volume projects.

In concluding my prepared remarks, I want to say that I believe we're taking the steps necessary to return Vicor to robust profitability, however, an adverse economic environment may negatively impact our short-term revenue and that may delay the return to profitability.

Regardless of what the economy holds for us in the near-term, we are very well capitalized and with the resiliency of our big business and the opportunity before us with VI Chips, VI Bricks and Picor products, very well positioned for the future.

I will now turn the call over to Jamie Simms.

Jamie.

Thank you, Patrizio.

I'll address cash and balance sheet considerations.

For the first quarter Vicor generated cash from operations of approximately $3.4 million, which was down 20.3% on a year-over-year basis from the $4.3 million generated in the first quarter of 2008, but was an increase on a sequential basis from the $738,000 consumed by operations in the fourth quarter of 2008.

Cash, cash equivalents and short-term investments totaled $26.5 million at quarter end, up from $24.6 million at year end.

Long-term financial investments, including our portfolio of student loan backed auction rate securities carried at market value totaled $36.5 million at quarter end, roughly equal to the balance of $36.2 million at year end.

We have no debt and believe that we have more than adequate resources and liquidity to fund our operations.

Finally an update on recent litigation.

On November 14, 2008 a jury in the U.S.

District Court for Massachusetts found in our favor in a lawsuit against certain of our insurance carriers.

The jury awarded $17.3 million in damages to Vicor, although the verdict was subject to challenge both in the trial court and on appeal.

Both parties filed certain motions subsequent to the ruling and on March 2nd the judge in the case rendered his decision on the subsequent motions, reducing the jury award by $4 million.

On March 26th the District Court issued its judgment in the matter, affirming the revised award of $13.3 million, plus interest of approximately $3.2 million, representing a total judgment of approximately $16.5 million.

The insurance carriers have filed their appeal to this judgment.

This concludes Management's prepared remarks, so we're happy to take your questions.

(Operator instructions) Your first question is from Jim Bartlett with Bartlett Investors.

Patrizio, on the AC-DC product or the (inaudible) product, you had categorized this, I believe in the last call as very close and before that there was levels of functionality and performance that you needed to achieve.

Could you just fill us in a little bit more on the process of doing that and where you are in that process?

We are closer, but not there yet.

We're still resolving some final functionality issues and performance improvement opportunities.

The product is not done until it is done, and that means released from engineering and gone through in applications engineering validation phase.

We expect to be in that phase in the month of June.

But we're not going to be done until we're done.

We're closer; not there yet.

And the Brick product that you had introduced that are integral to -- this is integral to those, would they follow shortly or is that something that's a follow-on that's several months out after that?

Well, we have a number of what you might call derivative products that ride the same technological platform, both AC-DC products and DC-DC products.

The gating element, the foreclosure on all these products is the baseline product, which we discussed numerous times.

It has eluded us in terms of closure for quite some time, but we are hopeful to bring to closure eminently.

Your next question is from Jim Lieberman with Wells Fargo Advisors.

Are you able to elaborate in more detail which areas you think will be the first real surge of orders will come from in the electronics field?

I'm sorry, for the V-I Chip.

So what specifically do you have in mind?

Well for the V-I Chips, in terms of whether it be some new orders regarding flat panel televisions or some new other electronic products that are being introduced.

Can you envision which would be the first real acceleration of orders for the V-I?

The forecast that I was referring to in my prepared remarks suggesting a slight increase in revenues this year in a recessionary environment and a more than doubling next year in hopefully a more favorable environment.

That is predicated on primarily early markets that consists of high end servers and test equipment, those being the primary focus markets for V-I Chip in its early going.

Beyond that, I would reference to the earlier question that Jim Bartlett asked with respect to AC-DC.

We see opportunities for the AC-DC product line and (inaudible) play that involves both AC-DC and DC-DC products in a variety of markets, including in particular, consumer electronics applications that value particular attributes of these products, such as thinness, density, efficiency or other attributes of these products.

So, in the early going, high end servers and test equipment are the pillars of the early market presence of V-I Chip, to be followed by consumer electronics, and longer-term, other market opportunities.

Your next question is from Ron Opel with Marsden Capital Management.

Patrizio, the revenues that you're potentially looking at involving consumer electronics, would you expect to realize the majority of those in license revenue or in discreet product revenue?

We see a combination of both, both direct revenues and the potential of license revenues.

But the discreet products revenue for that application I'm guessing would materialize first?

Well, I think it's a little uncertain as of now which may materialize first.

Okay.

Any characterization that you're able to give on the outlook for licensing revenues?

Is that included in your overall comments concerning the outlook for V-I Chips?

No, those are bottom up forecasts based on strictly product revenue, exclusive of license income or service revenues or (inaudible) charges.

They're incidental to the business.

So license revenue for either this year or next year or both could accrue on top of that forecast?

In theory they could, but realistically, we don't expect any appreciable licensing income this year.

So based on the timing of the AC-DC product introduction, as of now, the earliest prospect for significant licensing income would be starting the first quarter of next year.

Your next question is from Don McKenna with D.B.

McKenna & Company.

Could you identify for me what the annualized savings is from the headcount reduction and also give me an idea of what the impact was in the first quarter; was it two months' worth or one month's worth or what have you?

The impact in the first quarter was in fact for two months.

We had an immediate effect on performance as a result of the reduction in force.

We are also undertaking a number of other initiatives, and I'm not in a position to give you specific guidance about the outcomes.

I believe that we will start to see improvement in there near-term, but I don't want to quantify it at this point, given that we're looking at a number of things that could be subject to timing decisions on implementation.

So a number of variables apply, as suggested earlier.

We are taking a very comprehensive look at all of our processes; the reengineering processes where there is an opportunity to improve efficiencies and we believe there is significant opportunities in a number of areas.

In those that were reflected in the first quarter, were most of those in the direct labor or the indirect labor areas?

Are you referring to the reduction in workforce?

The reduction in workforce was primarily indirect, almost exclusively indirect.

Your next question is from Jim Bartlett with Bartlett Investors.

Could you (inaudible) a little more, the outlook that you see in the U.S.

and Europe and Japan and Asia and the assumptions that you're making for those markets this year?

Well, we've seen, as mentioned earlier, we've seen weakness in Japan, also significant weakness in Europe.

It's not as bad in other parts of Asia.

I think generally speaking in this regard, I don't believe there is anything unique to our particular pallet.

In other words, that's an aspect which we tend to track the electronics products marketplace a lot.

And case in point, as we all know, as we all read, the Japanese market being as export dependent as it is, has suffered in spades from the events of the last few quarters, and so it's not unexpected that we would see significant shrinkage in the short-term for product opportunities in that market.

Could you also update us on Great Wall?

Well, I don't know that there's anything of great significance to be said with respect to Great Wall at this point in time, beyond saying that we continue to look at Great Wall as a key supplier of great products that in many ways enhance the capabilities of our new product lines.

And is there anything you can tell us about new product introductions, what's going on in Picor?

Picor has got a very busy calendar of new product introductions.

I think there's going to be mentioned in our report you're about to get with respect to some examples of their success story in recent times.

Let me not [trap] that at this moment.

But I think in general terms I can say that what I see is a good deal of opportunity there.

It will take time to realize.

In general terms I see Picor being a couple of years behind V-I Chip in terms of their market opportunity, revenue opportunity and value proposition.

Your next question is from Richard Baxter with Ardour Capital.

This is [Sagat] for Richard Baxter from Ardour Capital Investments.

How do you see the trend for SG&A levels through 2009?

Well, I commented in the past that relative to our long-term business model, SG&A for a variety of good reasons, had gotten well beyond the long-term average levels and I suggested earlier in the call, we are taking various steps and initiatives to reengineer our various processes to reduce SG&A costs without detracting from our opportunity to grow the business as fast as we can in other ways.

So quantitatively I don't have a number to give you, but qualitatively I can tell you that the Management team as a whole is very committed on delivering results in terms of pursuing aggressively a variety of efficiency improvements and cost reduction opportunities that will ultimately bring operating expenses in line with long-term averages that make sense, in terms of a profitability model that we've demonstrated in the past as being how to be accomplished.

Okay.

And how do you see the mix of products going forward affecting near-term gross margins?

Well, there are, I think two factors at play with respect to that.

Obviously with new products, we are not going to have for quite some time the margin opportunity that we've had and continue to have with mature products that have been in manufacturing for in some instances 10, 15, 20 years.

Obviously in the short-term, new products aren't going to enjoy the same kinds of margins.

On the other hand, just the leverage associated with increasing production rates, for instance with V-I Chip, making more units through an existing line or absorbing overhead through existing additional lines, all of these are factors that in the aggregate will help us achieve better overall margins.

So, the mix of new products versus older products is itself one impact, which by itself does not bode well in terms of improving margins as the mix shifts towards newer products for the short-term.

But it is counterbalanced by the improved efficiency and absorption of overhead associated with partial equipment or partial capacity utilization with the newer products.

Your next question is from John [Dillon] with [JMB] Associates.

Earlier you talked about some of the early adopters in the server market and I'm wondering if you're getting other high end server companies to accept or are they starting to experiment with, or are they evaluating the V-I Chips for their high end servers also?

Yes, we are seeing a broadening of adoption within our initial target markets.

That is happening not just in high end computing, but also in test equipment.

Great, okay.

So, some additional companies are coming on board in the server market though and are they looking at the complete factorized power or are they kind of experimenting with just a couple of chips initially?

Can you kind of give us a little more color on that?

Well, generally speaking, the pattern is what you would expect it to be.

Initially customers will take a conservative approach or they will first design in the product into an application having not fully taken advantage of the architectural flexibilities of V-I Chips and factorized power.

Having gotten through that experience successfully and with tangible benefits, they may then take the next more radical step.

And are these companies also looking at the AC-DC product and eventually will you have anyone who will be going from the wall socket basically all the way down to 1 volt in the server market?

I think that the server market may not be an early adopter of the AC-DC product capability for a variety of technical reasons, but I do expect that in the longer-term that's part of the opportunity in that market.

I see other markets as being more significant in terms of early adoption of AC-DC products and early adoption of a wall plug to the point of load total system solution based on factorized power.

And that's still in the flat panel market, is that where that would be?

I think that's one of the main candidates.

It certainly would make sense with the thinness.

And that kind of brings up a question.

At one time I think I heard that the V-I Chip was kind of like the enabling technology to get these LCD TVs or the panels to be really, really thin.

Is that still the case?

Well, I think the appropriate way to characterize that is that it's an enabling technology.

All of use who've been around technology for a long time are wise to the reality that it's never the case that there's only one way to solve a problem.

There's always a multiplicity of ways to solve a particular technical challenge.

Now the different ways may lead to different form factors, different figures are made, different technological capabilities, which may in effect set the bar from a competitive standing, in favor of one solution or another.

But in some of the cases there's only one way of getting the job done.

So we believe that V-I Chip technology has the best attributes in terms of thinness, density, efficiency, flexibility, in terms of enabling the thinnest displays, among other things and again, that's one target market, not the only one for consumer electronics application, either in terms of AC-DC or other type of future (inaudible).

Excellent.

And just one last question, with the high end server companies, are any of these guys or are your chips suited for the high end storage market also?

Yes.

All right, great, so some people will be using those in the high end server market?

I'm not going to make any forecast with respect to that, but in terms of the technical question, is the technology limited to computing or is it applicable to storage, absolutely it is applicable.

You know, let's do it this way; wherever the application is dependent on efficiency, low power consumption, low service costs, high density, high speed, as we all know, these are common traits that are quite pervasive with respect to a broad range of needs.

Great.

Congratulations on a pretty good quarter considering the environment.

Thank you.

I imagine it's all relative, right?

That's right.

Your next question is from Dick Feldman with Monarch Capital.

In answer to an earlier question, you mentioned that margins on new products were well below margins on mature products.

How would you characterize in this regard the VI Bricks?

Well, the VI Bricks are at this point higher than VI Chip, but I wouldn't read anything all that significant into that.

I think that in time and with enough volume, the various incarnations of what we're calling in general terms the V-I Chip enabling technology, has comparable opportunities, both in terms of top-line, in terms of margin and bottom line capabilities.

These are very complimentary ways to leverage a common technology platform that, as you I'm sure know, we've invested a couple of hundred million dollars bringing to fruition.

So, it's all money, it's a major investment and parts of the opportunity lies in being able to leverage it in a complimentary way, both in terms of the play of different paradigms that serve different kinds of environments and market opportunities, as well as in other ways.

Of course, you mentioned earlier in the call that $1.9 million worth of V-I Chips went into the VI Brick unit.

I was referring to the VI Chip (inaudible).

That is not the consolidated product revenue to Vicor associated with those customer sales.

It is greater than that.

That's what I would think was there would be additional value added, which would make me believe that you're doing quite well right now with VI Bricks.

Yes, I (inaudible) over the particular mix of V-I Chip versus VI Brick and over time, Picor Chip or Picor power management power plays.

I mean, I referred to these opportunities, what comes to mind is the [direction] of (inaudible) of an inside-out strategy that begins with in effect the silicon component that is the core competency of Picor, gets leveraged up to a value add proposition in a V-I Chip power converter and can get leveraged up once again through an incremental value position in a VI Brick or other system product made out of V-I Chips.

Your next question is from Ron Opel with Marsden Capital Management.

Patrizio, when you look at the outlook for signs of the opportunities for high end computing and V-I Chips and so forth, has that opportunity say over the next two years, been diminished at all by recent business combinations in that marketplace?

Not as far as we can tell.

I think that our expectations with respect to the general opportunity, is if anything, gone up through other factors, not necessarily relating to changes within the industry, but we see opportunity in the industry irrespective of some of the changes that may be taking place.

[Burt Adke] indicated this morning that in the United States the general level of business equipment investment has remained very soft and yet the Brick business has remained resilient.

I would have to guess that the company doing this well in a soft economy and given your position with new design-ins and with the cost reductions that you've done, that when demand comes back that you should be positioned well for a fairly sharp upturn then in results.

Does that hang together?

Well that's what we are aiming to accomplish and we're very focused on that in the many facets that that proposition requires, ranging from having the right kinds of products to pursuing (inaudible) various strategy in the marketplace to, as discussed earlier, making sure that our internal processes in operations are as efficient as they can be.

And needless to say, times as difficult as the recent times have been, can be looked upon as an opportunity to really get into shape, so that as business conditions improve and product opportunities materialize, we can fire on all cylinders.

I have a housekeeping question perhaps for Jamie.

The new line item in the income statement, net income attributable to non-controlling interests, it's a new item for this quarter or for the first quarter and the year ago quarter has been reclassified.

I just need a little help in understanding what's going on there.

I will ask my accounting colleague, Dick Nagel to address this.

There were some changes brought about in terms of accounting classification that we had to address.

Ron, basically the new line item is a re-characterization of the old minority interest accounting line that you may have seen with other companies.

In our case, it's a reclassification out of other income expense net, down to this new line item based on the new requirements.

It affected both the income statement and the balance sheet, where the old minority interest line in the balance sheet was kind of in the mezzanine section, now it's down in the equity section.

But now you have two items on the income statement; minority interest and then this new one, whereas in the past you had--.

No, the non-controlling interest is a new name, new characterization of minority interest.

Oh, minority interest, that's why it shows zero for this quarter.

It did not change our bottom line results at all, it's just a movement of (inaudible).

Well that may be big dollars some day, depending on how Great Wall does.

This actually doesn't affect Great Wall; it affects certain of our subsidiaries that we own less than 100% interest in.

This is a separate item from Great Wall.

Okay, the minority interest then refers to Great Wall?

No.

The Great Wall line item -- the reason Great Wall is zero for this quarter is because at the end of last year we had written down the asset value to zero and so for the time being there's no more accounting to be done through the P&L for Great Wall.

I see.

Thank you.

We have no more audio questions in queue at this time.

Very good, thanks very much, talk to you soon.

Thank you for your participation in today's conference.

This concludes our presentation.

You may now disconnect.

Have a good day.