Vicor Corp (VICR) 2009 Q3 法說會逐字稿

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

I'll be your coordinator today.

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

We will conduct a question-and-answer session at the end of this conference.

(Operator Instructions) As a reminder, today's call is being recorded for replay purposes.

I would now like to turn the call over to Mr.

James Simms, Chief Financial Officer.

Please proceed.

Thank you, Melanie.

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

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

Earlier this afternoon we issued a press release outlining our financial results for the quarter ended September 30.

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

We also filed a Form 8-K with the SEC in association with issuing this press release.

Before we begin, I remind all of you, as always, 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.

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 business 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 forward to 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 November 18, 2009, by calling 888-286-8010, and using the pass code 64647193.

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

This replay also will be available through November 18.

Please note the information provided during this call is accurate only as of the date of the 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 the 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 third quarter 2009 conference call.

I am pleased to report Vicor fared profitably for the third quarter, despite continued challenges in the marketplace.

Consolidated revenue for the third quarter totaled $47.7 million, compared to $50.6 million for the second quarter, representing a sequential decline of approximately 5.5%.

On a year-over-year basis, third quarter revenue declined approximately 7% from the $51.3 million generated in the third quarter of 2008.

Consolidated book to bill ratio for the third quarter of 2009 was 1.19 to one compared to 0.79 to one for the second quarter 2009 and 0.99 to one for the first quarter of 2009.

Backlog at the end of the third quarter was $50.5 million, compared to $41.5 million at the end of the second quarter of 2009, an increase of 21.6%.

During the third quarter, we generally saw improved conditions in our markets.

This does not necessarily mean that the third quarter increasing backlog is representative of a trend.

As discussed in the previous conference call, management does not consider the quarterly book to bill ratio, nor comparisons of quarter end backlog, to be definitive indicators of the Company's [full] revenue, as the timing of large orders and shipments can skew these metrics one way or the other.

Nevertheless, the nature and mix of our order flow during the third quarter were encouraging.

Consolidated gross margin as a percentage of revenue decreased for the third quarter on a sequential basis to 43.3% from 44.6% for the second quarter of 2009, but increased on a year-over-year basis from the third quarter 2008 level of 42.7%.

Our flexible manufacturing model and our ongoing expense control and efficiency initiatives contributed to steady profitability for the quarter with a slight sequential decline in gross margin, attributable to shifts in product mix and somewhat lower volumes.

Net income for the third quarter was [$1.4] million or $0.04 per diluted share, compared to net income of $1.3 million or $0.03 per diluted share for the second quarter of 2009, and net income of [$609,000], or $0.01 per diluted share for the corresponding period a year ago.

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

For the third quarter, our Brick Business units revenues [started off] $44.3 million, representing a decline of 6.9% on a sequential quarterly basis.

Given improvement in order flow, we anticipate the Brick Business unit revenue will stabilize and later recover as conditions in our targeted market segments improve, and as our expanding V-I Chip inside brick and configurables [power] road map gets rolled out.

Turning to V-I Chip, revenue increased to $2.9 million for the third quarter from $2.4 million from the second quarter.

As always, this figure represents only external sales and does not include [$0.5] million in V-I chips sold at an [arms length] price to other business units within Vicor for using products sold by those business units.

Before inter-Company international's, V-I Chip had revenue of $4.5 million for the quarter, up from $3.7 million from the second quarter, a sequential increase of 21%.

We've discussed before the leverage of increased production on V-I Chip margins.

To date, we've been absorbing a great deal of overhead in V-I Chip manufacturing as we build infrastructure for future needs.

Similarly, at relatively low volumes, we've been incurring high unit material costs.

However, we continue to focus on manufacturing cost reductions.

As volumes grow to 2010, we expect that our efforts to drive efficiencies up and costs down will result in significant profitability improvement.

We continue to progress toward a major production ramp in 2010 of our DC to DC V-I Chips.

We began our capacity expansion, have already installed, or are about to install, new production equipment and expect to be qualifying it all by the end of the first quarter of 2010.

We continue to work closely with our key customers on both product requirements and production scheduling, and we similarly are collaborating with our materials vendors and equipment suppliers in anticipation of next year's ramp.

We also continue to progress to our commercial release of our AC to DC products.

As discussed at both our last earnings call and the shareholders' meeting in June, we are focused on completing our PFM, or power factor module, together with a complimentary FEM or front end module.

As with the DC to DC V-I Chips now approaching mass production volumes, the level of technical innovation contained within the PFM has caused the development schedule to be longer than anticipated; however, the PFM is now approaching release from engineering, and its performance, coupled with V-I Chip connectivity from the AC wall plug to the point of load, would expand the market opportunity for V-I Chips.

Significantly, PFM availability will expand the market opportunity for V-I Bricks and more generally, V-I Chip inside brick and configurable product lines.

A few words about Vicor, our fabulous silicon based products business unit, which had a steady quarter in terms of revenue, and a good quarter in terms of design activity and new customer attraction.

Revenue slipped slightly after five consecutive increases in quarterly revenue.

While [theoretically small] in absolute terms, Vicor is, however, well ahead of where it was this time last year and continues to make great progress with [our preferred] customers and new products development.

This concludes my prepared remarks.

I will now turn the call over to Jamie.

Jamie.

Thank you, Patrizio.

As set forth in our press release this afternoon, consolidated revenue for the third quarter declined sequentially by 5.7% and 7% on a year-over-year basis.

On a year to date basis, consolidated revenue totaled $148.8 million as of September 30, in contrast to the prior year to date period's $154 million, representing a decline of 3.4%.

During the third quarter, international revenue increased to 41.8% of consolidated revenue, up from 39.9% for the second quarter.

In absolute terms, international revenue declined 1.3% sequentially from second to third quarters.

Recall that we sell in dollars worldwide with the exception of Japan.

Therefore, our international sales benefit from the weakening dollar and this is seen when you compare the 8.6% quarterly decline in domestic revenue to the modest 1.3% decline in international revenue.

The slight increase in international revenue as a percentage of total revenue is attributed to higher volumes shift to offshore contract manufacturers utilized by our domestic customers.

As such, true international revenue remained roughly the same for the quarter.

Gross profit decreased to $20.7 million for the third quarter, compared to $22.6 million for the second quarter of the year and $21.9 million for the corresponding period a year ago.

Consolidated gross margin as a percentage of revenue decreased on a sequential basis to 43.3% from 44.6% for the second quarter, but increased on a year-over-year basis from the third quarter 2008 level of 42.7%.

As Patrizio indicated, this slight sequential decrease was related to mix and volumes, not related to pricing pressure.

Consolidated operating income exceeded $1.9 million for the third quarter, down from $2.1 million for the second.

Our operating margin was 4.0% for the third quarter, slightly down from 4.2% for the second quarter.

Consolidated results include a payment of $750,000, which we received from a vendor that had entered into a release and settlement with us regarding some product performance issues we had encountered with certain of the vendor's products.

The payment was recorded on our income statement as a gain from litigation and other settlements.

On a pro forma basis, excluding this payment, operating income totaled $1.2 million, representing 2.5% of revenue.

For the third quarter, Vicor generated cash from operations of approximately $4.3 million, a decrease of 44% from the $7.3 million generated in the second quarter.

After capital expenditures for the quarter of approximately $1.5 million and various financing and investing transactions and changes in working capital, cash and cash equivalents increased by $5.5 million for the quarter.

Total cash, cash equivalents, and short-term investments, inclusive of restricted cash, total $37.0 million at the end of the quarter, up from $31.5 million at the end of the second quarter.

Long-term financial instruments, consisting of student loan-backed auction rate securities, carried at an estimated market value, totaled $35.4 million at quarter end.

We have seen increased evidence of a thaw in the auction rate securities market, particularly with regard to redemption activity.

During the quarter, we had several redemptions, including one single redemption at par value of $2 million.

We have no debt, we own all of our primary facilities, and with cash equivalents and investments of $72.6 million at quarter end, representing 41% of total assets and 47% of total equity, believe that we have more than adequate resources and liquidity to fund our operations.

This concludes management's prepared remarks.

So we're happy to take your questions.

Melanie, would you please open the call to our listeners?

Yes, sir.

(Operator Instructions) And our first question comes from the line of Walter Nasdeo with Ardour Capital.

Good evening, gentlemen.

This is Sean Lockman for Walter.

I was wondering, we are seeing some encouraging signs on the book to bill ratio and also your backlog, just wondering if you guys could shed some light on which industry segments or where some of the renewed orders are coming from, if you can give us some color on that?

There is no particular pattern.

I think it's in keeping with the (inaudible) improvement that the markets at large have seen in recent months.

Obviously, the outstanding question is how sustained that will be.

Yes.

I mean are you seeing it in specific industries or across it's the board?

I mean you're seeing capital spending picking up and buying for your products and so forth?

Yes.

We've seen it pretty much across the board, so to give an example, the test equipment market has been particularly depressed for quite some time.

We've seen some signs of life in that market.

Again, the big question is how sustainable it will be.

Okay.

And do you have any indication yet of - - I mean from your prepared remarks, it sounds like things might be a little flat in 4Q, but could pick up next year?

I will say that generally speaking if [on point] capitalization, I think that, just as the book to bill ratio for the second quarter was about to be not as much of an indicator of sequential decline, we don't expect the book to bill for the third quarter to be indicating an uptick.

I think we're in a level period prior to significant pick up, which, based on current expectations and forecasts, barring major changes in general economic conditions, should begin to take place in the second quarter of 2010.

Okay.

Thanks for that.

And I was wondering if you could give us an update on sort of demand trends that you're seeing for the V-I Chip.

I know you're ramping up capacity obviously.

Can you give us a little bit of direction on what you're seeing there and your outlook for the year for V-I Chip?

Okay.

So V-I Chip is, in the near term, the business unit that has the most significant prospects, as implied by the comment in the press release with respect to the major increase in production capacity that we're installing, and as discussed in earlier conference calls and at the annual meeting, we are putting in place a standing capacity in anticipation of a significant step in demand that is forecasted for, in particular, the second half of 2010, but beginning based on current plans in the second quarter of 2010.

With respect to the Brick Business unit, it has obviously continuing to do remarkably well, based on its legacy products.

It's began to see some significant growth within the product segment that we are generally characterizing as V-I Chip inside, but a more significant opportunity within the general class of products awaits additional product introductions, particularly the rollout of AC to DC based V-I Chip product capabilities.

And with respect to [Picor], as suggested in the opening remarks, we're still dealing with an embryonic entity that is however now beginning to experience some traction with some key customers and exciting products, but obviously the prospect for substantial revenue contribution from [Picor] is still a couple of years away.

Great.

Thanks.

And just one other thing.

I mean we talk about V-I Chip demand for next year, and you're talking about a significant step up.

Can you give us any direction in terms of a percentage?

Are you looking for it to be 20%, 30%?

Are you seeing a lot of interest, and are you able to quantify that yet?

Well, I think I would only quantify it by relationship to what we had in the press release, pointing to a three fold increase in capacity.

It goes without saying that being judicious with respect to [having that equipment] investment, we're not deploying the capacity just for the sake of it, that we're deploying it in anticipation of actual demand, and so that's the basis for drawing your own conclusion about this step up in volumes with V-I Chip.

Having said that, I will caution the audience with respect to all of the uncertainties and vagaries of these kinds of significant steps in demand, as a lot of factors apply into that, ranging from our customers, [end] customers who, any potential delays with respect to our customers' products, and so on and so forth.

So we are preparing for a significant step up in anticipation of the demand that's forecasted, in effect, staying ahead of that power curve, whether or not it all happens on time remains to be seen.

Okay.

And so just to confirm, you expect, in terms of the three-fold increase, you expect to be running at 100% capacity say in the second half of next year on that?

No, we don't expect to run at 100% capacity because obviously that would not be a wise thing to do, but we expect to run based on the existing forecast in the latter part of next year up significant capacity (inaudible), well above 50%.

Okay.

Great.

Thank you.

That's it for me.

Thank you.

(Operator Instructions) And our next question comes from Jim Bartlett with Bartlett Investors.

Go ahead.

Just to clarify on the PFM, where do you now expect commercial introduction?

We expect it to be engineering released this quarter.

We had nearly final prototype units undergoing evaluation by several constituents, both internally and, to some degree, externally, and the date of a actual introduction has not been set yet because we want to wait until we're done to set that date.

I wouldn't expect it to happen within this quarter, but I would expect, based on what we know at this point, that it will happen generally within the quarter.

And can you just help me understand the time line in moving and V-I Chips and bricks into when the products for configural products and for bricks and for custom products would be I don't want to say complete, but, a significant number of products that would then start generating revenue in each of those categories?

What would be the time line on that?

Well, the time line to some degree is now, so next year, V-I Chip inside products should represent something of the order of, in round numbers, $10 million, which begins to be a tangible measure of success with the product concept.

You know, as discussed in the past, and again today briefly, to get all of the momentum going with this general product capability, we believe takes the AC to DC capability coupled with the DC to DC capability that we already have in place or are about to introduce.

So to say it in different words, the V-I Chip inside strategy leverages V-I Chips that convert the power from 40-volt or low voltage sources to the point of load.

That represents opportunity in the marketplace that however does not benefit from what I refer to as the wall plug to point of load connectivity, that the PFM will merely bring about.

Everybody in the Brick and V-I Chip Business unit shares the vision of significant enhancement in opportunity, stemming from their connectivity.

And their connectivity will play itself out in a variety of brick light products and configurable products that combine in various combinations, the PFM with the [DFEM] and on occasion with other types of V-I Chips.

So these will not all come about overnight as you can imagine, but we believe that availability of the PFM will represent a key milestone in terms of opening up a world of opportunities.

When you mentioned the $10 million next year - -

That's from DC to DC V-I brick products.

Do not include any AC to DC capability.

Right.

And that $10 million, what does that compare to to the current year?

I don't have a number for the current year, but it's a significant step up.

All right.

Thank you.

Thank you.

Our next question comes from the line of Unidentified Participant.

Go ahead.

Patrizio, I wanted to ask you about the V-I Chip utilization, capacity utilization.

I know at last quarter you mentioned that the production levels at that point in time were nowhere near full utilization.

How about this past one, before you add this tripling of capacity, what kind of utilization rate were you running then?

We're still at a very comfortable, for lack of better words, level of capacity utilization.

In other words, the capacity right now is far from being such that we could make significantly more, and we're waiting, the pickup in demand has been forecasted to utilize to a greater degree both the existing equipment and the additional equipment that is now being deployed.

When you say that you're not fully utilizing, is that on a single shift or are you running multiple shifts on that?

We are not running anywhere close to 24/7.

We are not operating a third shift at this point.

We are making plans to add a third shift, together with the additional equipment and capacity that is being installed.

So when you talk in terms of the additional capacity coming on board next year and towards the end of the year, you could be running well north of 50% utilization.

Could we be thinking along the lines of a multiple of five to six times what the current rates are?

To be clear, the additional capacity will be in place, qualified, ready to make product in Q1 of 2010, which is ahead of the planned ramp.

The planned ramp begins in the second quarter, it steps up significantly in the third quarter, and in the second half of next year, based on current plans, which again are subject to change at a moment's notice, would have us at a large multiple of today's run rates.

Okay.

Thanks a lot.

Thank you.

(Operator Instructions) And our next question comes from the line of Don Dillon with JMD Capital.

Please go ahead.

Hi, Patrizio, congratulations on a great quarter.

So relative.

Considering the environment, it looks pretty good, and the book to bill ratio, as you said, looks encouraging.

I didn't quite hear, when did you expect the actual official announcement of the AC to DC product, was that this quarter or in January?

I couldn't quite hear.

What I said was that we expected to have the product in general release this quarter, but we've not yet set an introduction date.

That will only happen after all of the constituencies, internal and to some degree external, are satisfied with the performance of the product.

Okay.

But there will be like a general announcement, a product announcement to the general public of this product this quarter then?

Right.

When the time comes, it will be no different than any of the many other V-I Chips that we've introduced, including a more and more comprehensive [rampup of the VC to VC-VI] chips that suggested in the opening remarks are now getting ready for some real mass production volumes.

So it will be done with the same level of fanfare, if you will, or publicity as with other V-I Chips.

Okay.

And I would imagine, I think you said you've got some engineering releases to some key customers already, so some of your key customers are evaluating this product already; is that correct?

I don't want to go into a lot of detail with respect to that.

Beyond what I already said, which is that as we had progressed towards completion of this project, we've been able with recent [introduction] of the products to go through internal evaluation, and some external evaluation with good results, in particular I can point to the assessment of our applications group, V-I Chip applications group, relative to the PFM performance as being much improved and getting to the point of meeting their expectations.

Great.

Okay.

You mentioned in your opening remarks about the nature and the mix of the book to bill ratio, the bookings in particular is encouraging.

Now, when you say it's encouraging, and I think you said the real question is is it sustainable, and so my question to you is is it sustainable?

Do you think it is sustainable to keep the book to bill ratio above one for the next couple of quarters so that V-I Chips start hitting?

Well, I think the big question is where does the economy go from here, insofar as it affects the BBU business, right, so the BBU business over the next year, setting aside VI bricks or V-I Chip inside products, looking at its legacy, constituency, will very much depend on continued progress with respect to recovery or not, and obviously that will continue over the next 12 months to dominate our financial performance.

Now, as we get towards the end of next year, the V-I Chip contribution becomes a lot more significant.

What affects that is, once again, the economy at large and the vagaries of programs that are new, radical in many ways, and due to be stepped into volume production.

So there are, in effect, different uncertainties playing with respect to the V-I Chip revenue plan for next year that are not, I would say, first are driven by the economy at large, they're first [off] driven by other factors, with the economy playing a secondary role.

And, finally, as discussed earlier, [Vicor] still not a factor in the GAAP picture and it will not be for a couple of years.

So to say it in different words, if the economy held its own, you know, BBU should, on its legacy products, continue to hold its own until the new products built on a V-I Chip inside strategy kick in on a grander scale.

V-I Chip, if things go according to plan, should have a bang-up year, particularly as we get into the second half of the year, and [Vicor] should continue to make progress.

Okay.

So even if the economy is so-so, if the Brick Business holds its own, you do expect the V-I Chip to at least get some growth into the Company then?

Right.

But obviously if we look at, in effect, a down scenario for the economy at large, the down side with the Brick Business unit might not be made up until later in the year by V-I Chip.

Now, having said that, I think it's fair to note that our revenues this quarter were, quote, only 7% lower than last year and well, it's somewhat difficult to cry about that in one way of looking at it relative to the power industry at large, it's, relatively speaking, pretty good performance, because I think many companies that operate in the power space [would need to] commodity products, have reported a 30% reduction in revenue levels from 2008 to 2009.

So the fact that essentially on BBU type products we were able to hold it within less than 10% bodes well for the year to come, even if the economy were not to perform as well as all of us hope.

Right.

Now, with the V-I Chips, with you expecting the increase, the second half of next year or sooner, I would imagine the bookings are going to show up probably a quarter before the actual shipments, is that a fair guess, or do you have any feel for when you might start really seeing the ramp in bookings in the V-I Chips?

That would be one, two months ahead of the shipments, so, yes, your point is well taken, that the set back in V-I Chip bookings should begin to get noticeable to some degree towards the end of the first quarter, to a greater degree towards the end of the second quarter, if things go according to plan, which they mostly never do.

So we're prepared for every scenario, including the scenario where they might be going better than planned.

But I think we should all be prepared for a high degree of uncertainty with this [type of] major step up in demand.

And you're cautioning us, it sounds like, because these are new product releases from the companies that you're working with, from the server companies?

Yes.

So if the server companies slip, you slip, obviously, but you're still specked in, you still have the design win, and you're still going to generate revenue when the new products come out, is that correct?

[With production], yes.

That's good.

Okay, and you talked again in the introduction about how you expect to get the economies, once you get the quantities of the V-I Chips, you'll see the margins improve.

So I'm wondering, do you have any kind of a target gross margin for 2010?

Yes, I do, but I'm not going to share it with you.

Can you tell us if it's going to - - I mean from the remarks, I can infer that you expect it to increase.

Is this a fair assessment, and can we expect at least a couple of points uptick on the gross margins for next year?

Well, the V-I Chip gross margin will increase much, much more than that.

Correct.

But obviously that impact on the tall margins are diluted by the significant or lion's share contribution that as of now the BBU revenues provide.

Obviously.

Okay.

So it is obviously important for us to deliver on our margin expectations with respect to V-I Chip because this is kind of stating the obvious, once V-I Chip revenues in the second half of next year represent a much more significant percentage of total revenues, were they to be disappointing, it would be a drag on, if not our bottom line, our margin performance.

So we're working very hard and we're focused on getting the builds of materials for V-I Chip to levels that, coupled with greater capacity utilization, support some pretty decent margins by the second half of next year.

Good.

Okay.

And on the AC to DC product line, do you expect we'll see that in any flat screen TVs in the first half of next year?

Not in the first half of next year.

So as we discussed in the past, that program has been moving to the right and it's not been nailed yet, so I'm not in a position to forecast any date for that, either the first half or in the second half of next year.

What I can tell you, with a little reservation, though, is that [data in] a flat panel display or in other types of applications, both the V-I Chip Business unit and the Brick Business unit view the PFM as a game changer of a product.

So we have very high expectations with respect to what it will do for top line growth, as a stand alone V-I Chip or as a system level product for a variety of bricks and configurable capabilities.

And, again, I couldn't quite understand exactly when do you expect to actually see some revenue from the AC to DC products?

Would you be shipping products the second quarter, third quarter of next year?

Let's wait until after we have a general product release to get more specific with respect to that.

I think we should all take comfort in the fact that even though all these products, be they DC to DC products or AC to DC products, they advance, technologically [very] advanced products, difficult to develop.

We are now seeing significant traction with the DC to DC products that would suggest, with just a small dose of common sense, that when we get to the AC to DC market, which is larger, considerably larger than the DC to DC market, and where thinness of solutions be it the flat panel displays, other kinds of products that leverage the thinness attribute or other power density attributes, or other attributes, efficiency attributes, of the PFM, all of these represent opportunity in a variety of different ways, in a variety of different dimensions in consumer electronics and other markets, as well.

All right.

You know, the market really needs that product.

I know that.

So just one final question then.

I mean the tripling in capacity really has nothing to do with the AC to DC, then.

You're going to be tripling capacity really for the DC to DC and so you expect those revenues to be significant next year?

That's correct.

In our capacity plan, we have not set aside yet any capacity for AC to DC products, but we will soon, and we're prepared to deploy additional capacity, as necessary.

Obviously we're going through right now a major capacity step up.

This effort will come to fruition in a matter of three months.

It is well underway.

Once that is completed, the same resources can get on to the next step of capacity.

So we obviously want to do it in an orderly way, in a cost effective way.

We've been able to procure our (inaudible) equipment on very cost effective terms, given the [sad] economy in recent times, and frankly in one way of looking at it, in an adverse economic environment, to some degree, it might represent great opportunity for us in some ways, at least.

I agree.

It's really just great also to see a company expanding manufacturing capability in the US in such a severe recession, so thank you.

Thank you.

Our next question comes from the line of Dick Feldman with Monarch Capital.

Go ahead.

Patrizio, the anticipated surge in V-I Chip shipments in the second half of 2010, will that change the mix of customers dramatically?

As I understand it, still the biggest end user would be servers.

How would it appear if you're successful in the second half of 2010?

What will be the large end users?

I guess if we're going to have a surge, there's going to be an accompanying [insurgency], and are we going to be dealing with a broader mix of our customers?

In the short-term, the capacity expansion is going to be primarily motivated by a few key customers that drive demand for DC to DC products.

I think beyond that, as suggested in earlier comments, we are going to have additional capacity deployed in anticipation of demand to create an opportunity for AC to DC products and other DC to DC products that are making their way to the development pipeline.

It may be good to mention, and this was mentioned in the past, that the PFM platform is an AC to DC platform.

It is also a spring board for some very exciting DC to DC products in the same double [thick] package, and these are relatively simple derivatives of the baseline PFM, which we'll be working on and which we are bringing to fruition.

So I am very excited about the prospects, not just for the PFM, but for its derivatives at the V-I Chip level and then leveraged up through bricks and configured products.

So basically, at least initially, the greater demand is going to be from greater penetration of existing customers?

That's correct.

So this is working, just as theory says, you plant the seeds, it takes some time.

The business opportunity the V-I Chip is going to be enjoying next year is really the fruit of effort from the development perspective and the applications perspective that has been going on for quite some time.

With new products, AC to DC products, other DC products and products leveraging V-I Chip within the brick and configured product paradigm, we'll be planting new seeds, and those seeds will take some time to come to fruition, and that time, obviously, will give us the opportunity to deploy additional capacity as necessary and so it goes.

If I understand what you're saying, new uses and new end user is likely to come not so much in 2010, but in perhaps the years beyond, given the design cycle?

Well, generally speaking, I think for looking at major programs, absolutely.

And this is good in some respects, I know, maybe a little frustrating in others.

You have the normal gestation period of an OEM product, which typically gets measured in 12, 18 months, in some cases longer, in some cases shorter.

One caveat, and that is that with AC to DC products, there may be pockets of opportunity with a somewhat shorter fuse, and that's particularly the case when we take advantage of the V-I Chip inside strategy, because that plays into a paradigm that to some degree Vicor earlier generations of technology developed in the marketplace, it's the paradigm that there's got widespread market acceptance, gets measured in billions of dollars per year worth of power system revenues.

Unfortunately, only [it's more fashionable] that retained by Vicor itself, but nevertheless, it is a large, established market for that product paradigm.

The V-I Chip paradigm is a brand new paradigm in many ways.

Obviously the chip itself is a surface mount device to place on a customer board with different mechanical and terminal attributes.

It's a part of a factorized power system that represents new opportunity that, however, carries with it certain obstacles for customers to implement.

Over time, this will become easier, success stories breed more success stories, but with V-I Chip, the gestation period is generally speaking longer.

With bricks and configured products, it can be shorter, because you can leverage the technology inside within, again, an established market and an established paradigm, and that's part of the logic and the strategy for what I referred to as the [rational rose] model of leveraging up a silicon power component paradigm into V-I Chip or a component paradigm into a brick and configured product system paradigm.

Okay.

That's all for my questions.

Thank you.

Thank you.

Our next question comes from the line of Ron Opel with Marston Capital.

Go ahead.

Patrizio, I came across a press release within the last month or so from a company called Diode that was introducing new products, and they said they had developed these products in collaboration with Vicor corporation, and among the applications that they listed for their new products, based partly on your technology, they included telecom equipment, but they did not include servers.

Any comments you can make on - - I'm assuming that this is a licensee that you may have referred to generically in the 10-K, and can you confirm that and maybe provide a little color around that licensing situation, if it's real, and the licensing strategy in general?

This is a component that we plan to use within some of our AC to DC products.

So that announcement by that vendor simply has to do with the fact that they addressed some requirements we had with respect to enabling a component [with certain statistics] for use within some of our AC to DC products.

That's the scope and extent of that.

Well, do I understand you to say that you're licensing their technology or are they licensing - - ?

They are a vendor, so the relationship is a supplier/customer relationship, they're the supplier, we are the customer, and the application opportunity within our products is within the forthcoming AC to DC product line.

Okay.

And how about the licensing effort in general?

Is that moving forward?

Yes.

It's a complex landscape with greater rate of advance on some fronts than others.

It is a landscape that may expand over time as we discussed in the past.

We have not been very aggressive or proactive with respect to taking on an expanding stance on the general front, but I expect that 2010 will be a year of significant opportunity in that general arena.

And that statement is predicated on value considerations ranging from some new, early interest, to the availability of new and exciting V-I Chips, to success stories with key customers that will serve a role in terms of establishing V-I Chip as a very visible competitive power component in the marketplace.

So all these factors individually and particularly in combination, I think should create good opportunities from a licensing perspective in starting in 2010.

It's occurred to me that your prospective sales into server markets, which is, I take it, behind the outlook for growth in 2010, these sales in the servers markets might be finding their way in the future into cloud computing capacity.

Is that a valid way to look at it?

That could be.

To be honest with you, I don't have a detailed level of visibility with respect to that.

So I'll leave my comments on that, but generally speaking, that is part of the opportunity.

Okay.

And this is kind of a blue sky question, but my curiosity is peaked.

You've talked to some considerable extent about V-I bricks as well as V-I Chips today, and my question is, looking out 18 months to two years when things start - - and assuming these product introductions that you've talked about today all take place and so forth, would you see considerably more dollar volume in revenue coming into Vicor from V-I Chips, both AC and DC then, as compared with the dollar volume that you would generate from V-I bricks?

Well, that's a very interesting question.

And the answer to that question turns on different factors.

So starting with V-I Chip, obviously V-I Chip is far along in promoting its products at least in some initial target markets, with some key customers, and to that extent they have in the near term, a greater opportunity for top line growth.

On the other hand, as commented earlier, the V-I Chip sales opportunities are predicated on customers' acceptance of a V-I Chip power component paradigm.

If we go back to the '80s with the introduction of the brick paradigm, it took a while for bricks DC power to become as significant as they became in the '90s and more recently, because even though technically the products might be very appealing and might offer customers competitive advantages, there is a gestation period associated with adopting radically new and different technology.

So that's in fact both the potential and the predicament of the V-I Chip opportunity.

They're off to the earlier start.

It takes V-I Chips first to enable a V-I Chip sized strategy for bricks, so by definition, they're off to an earlier start, but at least in the short-term, the opportunity is limited by the rate of acceptance of a brand new power component paradigm in the marketplace.

Now, visionary companies, visionary people of those companies see their market opportunity and their competitive standing being advanced and they're moving forward with these novel solutions, but there are just so many of those kinds of people, and until there's a crossing of the chasm, if you will, merger and adoption may not take place.

With the brick paradigm, it's a different story because in that case, customers don't have to get comfortable with solving a V-I Chip to a mother board or having to embrace all the benefits of factorized power.

They can to some degree leverage the advantages of the technology to a lesser extent, but within the comfort of several solutions that they're very accustomed to, so there is established market advantage.

So in my mind, sorry for the long-winded answer to your question, this is going to be a horse race that will be won by the caliber of the horses.

I think there is opportunity on both sides, I think, from playing out to different strengths and at least temporary relative weaknesses.

But I would expect that there is great opportunity on both fronts, and it could well happen that one horse gets off to the early lead, gets overtaken by the other before it overtakes it back.

Because in the longer term, I have no doubt about the fact that the V-I Chip paradigm is the next generation of paradigm, but to the extent it may take a while to get widely embraced, the opportunity, as I shared would leverage the technology up [with] the V-I Chip inside strategy may in the next two, three years contribute to consolidated revenues potentially more.

Delighted with the long-winded answer.

It takes me back to 1990 when the original brick had been on the market for, what, six or seven years, and sales were just beginning to take off around 1990.

So that did take time.

Right.

Thank you.

Thank you.

Ladies and gentlemen, that does conclude all the time that we have for questions today.

I'd like to turn the call back over to Mr.

Simms for any closing remarks.

Please proceed.

Thanks to everyone for participating.

We look forward to speaking with you next quarter.

Thank you.

Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference.

That does conclude the presentation.

You may disconnect.

Have a wonderful day.