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Operator
Good day, ladies and gentlemen and welcome to Vicor earnings results for the first quarter ended March 31st, 2010 conference call.
My name is Michelle, and I will be your Operator for today.
(Operator instructions.) As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Mr.
James Simms, the Vice President and CFO of Vicor.
Please proceed.
James Simms - VP, CFO and Secretary
Thank you.
Michelle.
Good morning, everyone, and welcome to Vicor's earnings call for the first quarter ended March 31st.
I'm Jamie Simms, Chief Financial Officer.
And with me in Andover is Dick Nagel, our Chief Accounting Officer.
We are joined on the call by Patrizio Vinciarelli, our Chairman, President, and Chief Executive Officer, who is in Rome, Italy.
On Thursday we issued a press release outlining our financial results for the first quarter.
The press release is available on the Investor page of our website, www.vicorpower.com.
We have also filed an 8-K with the Securities & Exchange Commission in association with issuing this press release.
Before I begin, I remind you all that today's conference call is being reported and is the copyrighted property of Vicor Corporation.
I also remind you various remarks we make, may make during this call may constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
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 our most recent reports on Form 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 7th, 2010 by calling 888-286-8010 and using the pass code 45895028.
In addition, a webcast replay of the conference call will be available on the Investor Relations page of our website beginning shortly upon its conclusion.
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?
Patrizio Vinciarelli - Chairman, President and CEO
Thank you, Jamie.
Hello, everyone, and welcome to our first quarter earnings call.
I am pleased to report the demand for Vicor products in the first quarter strengthened considerably, confirming expectations of future growth.
Each of our three primary business units experienced a step up in bookings, along with increasing revenue and (inaudible).
The consolidated book-to-bill for the first quarter was 1.39 to 1, as compared to 1.16 to 1 for the fourth quarter 2009, while consolidated revenue increased 5.2% sequentially.
Total backlog at the end of the first quarter 2010 was $78.4 million as compared to $58.5 million at the end of 2009.
Pretax operating income was essentially unchanged sequentially due, in part, to an increase in operating expenses.
Net income declined slightly due to a sequential increase in our consolidated tax provision, and the effective tax rate jumped to 24.1% from the prior quarter of [7.3%].
Basic and fully diluted earnings per share declined from $0.06 per share for the fourth quarter to $0.05 per share in the first quarter.
Jamie will address the specifics of our consolidated income statements and balance sheet in his remarks.
I will now briefly address the performance of our three primary business units.
The Brick business unit grew sequentially with (inaudible) in its configurable systems and improved performance of our Japanese Subsidiary.
We have highlighted in the past the ability of our Brick unit to maintain steady revenue while expanding profitability and cash generation despite the (inaudible) due to the diversity of its products and markets and efficiency of our highly automated (inaudible).
The increase in Brick's unit bookings for the quarter is reassuring as it points to a sustained demand for (inaudible) products, while our V-I Chip is (inaudible) strategy enables new leading edge brick and power system products as a part of our strategy for growth.
Sales of the V-I Chip product for the first quarter, sales of $5.3 million representing a 39% sequential increase.
Of this total $3.9 million was for revenue from third parties, which roughly doubled quarter-over-quarter.
V-I Chip bookings stepped up considerably in the first quarter, as a large customer began placing volume orders for new programs.
We also received several initial orders from other early adopters of (inaudible).
While adoption of V-I Chips is still at an early stage we will start capitalizing on our success with early adopters to drive further acceptance across [trial size] end markets.
Growing traction with early adopters bodes well for the emerging V-I Chip (inaudible) product.
We have started using the standard manufacturing capacity that was installed late last year to manufacture higher volumes of V-I Chip, and expect increase in transaction rates through 2010.
We are also beginning the plan of further expansion and capacity with a new manufacturing line to be procured later this year (inaudible) the first half of 2011.
With increased volume we expect improvement in (inaudible) profitability due to the leverage from a substantially (inaudible).
However, inefficiencies that are inherent in a significant ramp may delay achievement of our efficiency in margin targets.
In addition to the steepness of the ramp, inefficiencies are being caused by supply constraints and component shortages due to the recent revival of economic activity.
We are cautiously optimistic that the V-I Chip momentum that is now building will continue to build in 2011.
Of course, a possible reversal in general economic conditions might (inaudible) customers (inaudible) of V-I Chips and (inaudible).
However, new families of (inaudible) power components being introduced this year will significantly expand the market opportunity for V-I Chips.
We expect these products to set high industry benchmarks for (inaudible) and efficiencies, expanding the reach of V-I Chip technology across major end markets.
As the (inaudible) of the recent sales meeting, the performance attributes of the PFM and its (inaudible) are broadly applicable (inaudible) V-I Chips and quite attractive as V-I Chips inside (inaudible) system level products.
Turning to Picor, we are pleased to report that it also grew sequentially, (inaudible) strong bookings, and improved top level profitability.
Vicor is collaborating closely with V-I Chip in providing distinctive (inaudible) solutions and, in particular, is sharing in V-I Chip's success with important early adopters.
Picor is still relatively small in absolute terms but a key element of our overall strategy.
As high performance, (inaudible) centric, power conversion components in (inaudible) come to fruition (inaudible) Picor's growth while also complementing V-I Chip and the Brick offerings.
While our consolidated bottom line is still being supported by Brick business units, the time when V-I Chip first and Vicor second will make their expected contributions to the bottom line is getting closer.
We will then be deciding on (inaudible).
This concludes my prepared remarks, and I'll turn the call over to Jamie.
James Simms - VP, CFO and Secretary
Thank you, Patrizio.
As set forth in our press release on Thursday consolidated revenue for the first quarter totaled $51.7 million compared to $49.1 million for the fourth quarter, representing a sequential increase of approximately 5.2%.
International sales as a percentage of consolidated revenue represented 48.5% of total revenue for the first quarter, up from 45.4% for the fourth quarter and 41.8% for the third quarter.
In absolute terms international revenue increased 12.4% sequentially, Vicor sales in dollars worldwide, with the exception of Japan.
Since the dollar strengthened against key currencies during the first quarter we attribute the continued increase in international revenue to the relative level of economic recovery in certain markets, notably Asia.
As Patrizio stated, our consolidated book-to-bill ratio for the first quarter was 1.39 to 1.
While we do not generally break-out specific book-to-bill ratios by business unit, we should point out that the strong consolidated book-to-bill was the result of booking growth across all of our businesses, not just V-I Chip.
First quarter bookings for V-I Chip were a multiple of sales but still a relatively small fraction of the $71.6 million in total bookings.
While we are encouraged by the first quarter ratio, we caution listeners that Management does not consider the quarterly book-to-bill ratio nor comparisons of quarter end backlog to be definitive indicators of forward revenue, as the timing of large orders and shipments can skew these metrics one way or the other.
Consolidated gross margin as a percentage of revenue decreased for the first quarter on a sequential basis to 45.1% from 45.8% for the fourth quarter.
This sequential decrease in gross margin for the fourth quarter was largely attributable to shifts in product mix.
Consolidated operating income was $2.6 million for the first quarter, the same amount roughly earned in the fourth quarter.
Our operating margin was 5.0% for the first quarter, a slight decline from 5.2% for the fourth.
First quarter operating expenses increased 4.1%, but this is largely due to a significant increase in premium we pay for employee health benefits.
Net after-tax income for the first quarter was $2.0 million, representing $0.05 per diluted share, down from $2.3 million for the fourth quarter, which was $0.06 per diluted share.
Higher operating expenses and, as Patrizio mentioned, a sequential increase in our consolidated tax provision yielding an increase in our effective tax rate to 24.1% from the prior quarter of 7.3% were largely responsible for the decline in net income and earnings per share.
For the first quarter cash and cash equivalents rose $1.4 million.
Cash flow from operations declined to $461,000 for the quarter as we experienced a $4.6 million increase in accounts receivable as our days sales outstanding increased to 50 days from the prior quarter's 44 days.
I should point out, however, that our consolidated DSOs average around 48 days, and that the yearend level of 44 days was uncharacteristically low.
Capital expenditures totaled $2.4 million for the quarter.
We expect our investments in equipment to temporarily subside as we near the completion of the build out of the new capacity for V-I Chip installed at the end of 2009, prior to the next step up in capacity currently planned to start at the end of 2010.
Total cash, cash equivalents, and short-term investments inclusive of restricted cash totaled $42.4 million at the end of the first quarter, a slight decline from the $43.0 million at the end of the fourth quarter.
Long-term financial investments, including our portfolio of student loan backed auction rate securities carried at an estimated market value, totaled $29.2 million at quarter end.
All of our auction rate securities continue to pay interest in accord with the terms of their respective indentures.
We look forward to the beginning of the third quarter when we will execute the rights we have with UBS to receive par value of the 10.75 million of auction rate securities we purchased through UBS.
Unfortunately, we have no insight into when we might expect to receive par value for the 19.45 million of such securities we purchased through Bank of America.
When Bank of America settled with various states' attorneys general in 2008 the Bank repaid at par amounts invested by individuals, charities, government entities, and certain small businesses.
However, large corporate investors were left out of the settlement.
We are encouraged, however, by the outcome of a recent financial industry regulatory authority arbitration in which a corporate investor that bought student loan backed auction rate securities through Bank of America received a multi-million dollar award for compensatory damages as well as reimbursement of legal fees.
To conclude, we have no debt on all of our primary facilities and with cash and investments of $71.8 million at quarter end, representing 39.1% of total assets and 45.4% 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.
Michelle, please open the call?
Operator
(Operator instructions.)
Your first question comes from Jim Bartlett at Bartlett Investors.
Please proceed.
Jim Bartlett - Analyst
Yes, Patrizio, in your prepared remarks you mentioned that V-I Chip orders included some initial orders from other early adopters.
Could you share with us the number of those, how many of those were there?
And some insights into what type of products or end markets those would be?
Patrizio Vinciarelli - Chairman, President and CEO
There were a handful of significant design wins, some with others in the hundreds of thousands of dollars, which are representative of this use first time.
They included opportunities in different markets.
I think an (inaudible) win was in the communications market, which is one where Vicor played in the recent past but has not been really a factor in recent (inaudible).
Jim Bartlett - Analyst
You also mentioned in that that the large customer that placed orders for different programs, could you give us an idea of what you mean by programs?
Would that be like a program be like one specific, say, server that they might be rolling out or what does that mean?
Patrizio Vinciarelli - Chairman, President and CEO
So when more than one program is involved with a particular customer, the progression is that there are different machines, different products by the customer, that are being in this particular case rolled out in the (inaudible) timeframe.
So those are the programs that were referenced (inaudible) in the (inaudible).
Jim Bartlett - Analyst
Thank you.
Operator
Once again if you would like to ask a question please press star one.
You have no questions at this time.
Oh, your next question comes from [Randy Hech].
Please proceed.
Randy Hech
Thank you.
Patrizio, your plans to increase capacity at yearend, what -- you said that adds -- to add a line.
What does that represent in terms of on a percentage basis to your existing capacity?
Patrizio Vinciarelli - Chairman, President and CEO
It would be a significant step up.
We have, last year with our existing capacity has expanded late last year, with additional shifts, which (inaudible) percent going to seven-day full utilization of the line, a significant incremental step up.
By definition, the addition of another line would be significant on that scale.
So with it obviously there is significant capital equipment investment, and with a view to that we are (inaudible) on the need for additional capacity, but we are beginning to plan it and we will probably be pulling or making a decision about pulling the trigger as we get to the July timeframe.
Randy Hech
Okay, so I'm sorry, I'm -- today you have two lines or just the one line on the -- for the V-I Chip?
Patrizio Vinciarelli - Chairman, President and CEO
Well, we have largely two lines.
There are certain operations that are shared in the sense that they do not involve separate lines but they do involve a multiplicity of sessions, a multiplicity of equipment.
So you can't say with 100% accuracy that these two lines, generally speaking they use both some duplication of large portions of the lines, and generally speaking duplication of sessions of equipment along the various lines.
Randy Hech
Okay, and is that -- when we think about your capacity today or for the balance of this year, we're thinking in terms of two shifts rather than three?
Patrizio Vinciarelli - Chairman, President and CEO
Well, we've been hiring an additional shift, and we will be getting to three shifts, five days a week, as we progress through the year.
We have the option, as I suggested earlier, to migrate with a different arrangement, a different set of scales for coverage to full coverage over seven days, and in fact 24, 7.
And that decision has also not been made, but it is something that could be used to expand capacity from the existing lines.
Randy Hech
Okay, so when you're -- so, again, when you're talking about potentially adding a second -- an additional line at your end --
Patrizio Vinciarelli - Chairman, President and CEO
I'm talking capital equipment.
I'm not talking greater utilization of the existing lines, I'm talking additional brick-and-mortar in terms of further expansion in our manufacturing capacity.
Randy Hech
Okay, but just in theory your capacity, once that's done pro forma would increase by another 50% or so -- 5, 0?
Patrizio Vinciarelli - Chairman, President and CEO
Well, the extent of the additional line or lines hasn't been structured out.
The process up to this point has involved recognizing that under certain demand scenarios we would be approaching a percent of total capacity that is a (inaudible) for deploying additional capacity.
As we get close to that point, which as I suggested earlier may be towards the middle of the year or early in the third quarter, we would look at how much more we want to deploy in this (inaudible).
Randy Hech
Okay.
Patrizio Vinciarelli - Chairman, President and CEO
And whether that's a 50% increment or more than that it's really too early to say.
Randy Hech
Okay.
Thank you.
Patrizio Vinciarelli - Chairman, President and CEO
Thank you.
Operator
Your next question comes from the line of Jim Bartlett at Bartlett Investors.
Please proceed.
Jim Bartlett - Analyst
Yes, you mentioned that you stated that productivity, product productivity and profitability will expand, but you did not expect to reach the efficiency or margin targets in 2010.
Were those the margin targets that you had for, specifically for 2010, a 2010 goal, or was this a longer term target?
Patrizio Vinciarelli - Chairman, President and CEO
I think it's a combination of both, so let me be very specific with this, back to these.
Needless to say, at the time of significant ramp, scale-up in throughput we are going to be incurring inefficiencies because things may not ramp in effect as smoothly as they would under more (inaudible) growth conditions.
So efficiency to say in different words needs to take a backseat to some extent in the short term, to the priority of stepping up the volumes to meet customer needs.
So this is a factor, in the short term, the ramp, as I suggested in my prepared remarks, (inaudible) it involves a [multifold] increase in volume on a time scale of a few quarters, and that is putting the burden on the manufacturing organization that again will keep it from achieving the levels of efficiency that are going to be there once we get somewhat further along.
So that's a short-term factor that, by the way, gets compounded in the short term by, as mentioned in my prepared remarks, some difficulties in procuring certain components which have become a factor within the last couple of months due to a general surge in the level of activity in (inaudible) the semiconductor space in particular.
So that has been a factor with respect to availability of certain components, and that's a factor that again takes away from manufacturing efficiencies because the builds of particular types of products may need to be rescheduled from time to time subject to component availability.
So those are short-term factors that will limit our ability to capitalize on the increase in throughput and the absorption of the fixed costs that we've had in place for some time to improve the product line profitability.
But in spite of that we expect improvements are going to be significant.
How significant, we are really only going to know as the year progresses, depending on how well we do tactically and operationally.
With respect to the other part of your question relating to longer term goals of gross margins and overall profitability for V-I Chip, those are really not very near-term objectives.
They go into 2011 and to some degree into 2012.
It will obviously take some time to on the one hand get to significantly higher levels that bring about the kinds of scale and so, pursuant to the early part of my answer to your question, the achievement of a certain level of stability and profitability in the V-I Chip operations will make the most out of the efficiencies that are going to be there.
So we have some short-term challenges and opportunities, and then longer term ones that will play out over a timeframe of a few years.
Jim Bartlett - Analyst
All right.
Thank you.
Patrizio Vinciarelli - Chairman, President and CEO
Thank you.
Operator
Your next question comes from the line of James Lieberman with Wells Fargo Advisors.
Please proceed.
James Lieberman - Analyst
Thank you.
I'm enjoying seeing the momentum that you're referring to.
Regarding the momentum you were talking about, can you comment further whether this is across a broad array of product lines as in flat panel television, servers, other kind of computer systems and other kind of electric devices?
Or can you be more specific?
Patrizio Vinciarelli - Chairman, President and CEO
Well, there is a number of different products involved, and these products, you know, span a range of capabilities in getting (inaudible).
They span very high voltages in the front end of certain systems to at the other end of the spectrum, very low voltages (inaudible) at the point of load.
And in between the two.
So what we are manufacturing and ramping production of in particular for one large customer is something in rough terms of the order of 10 products, 10 different products.
So don't take that literally, it's 10 as opposed to one, for 20 or 30.
It's 10 different products, some of which have to do with high voltage, low current from 10 type applications.
Other ones are regulator devices that perform a function in between the front end and the point of load, and other devices are point of low current multipliers that they use to supply current to processor and memory in particular in several applications.
James Lieberman - Analyst
Thank you.
Operator
Your next question comes from the line of [Sho Ing] with [Lotus Investment Management].
Please proceed.
Sho Ing - Analyst
Good morning.
Three questions.
One, I'm wondering if you can define backlog, over what point, period of time is the backlog to ship, is it 12 months?
Secondly, I'm wondering if you can give me a sense as to what the headcount was at the end of the March quarter and what you think it might be at the end of the June quarter?
And the third would be how many greater than 10% customers did you have in the March quarter?
Thank you.
Patrizio Vinciarelli - Chairman, President and CEO
I'll answer the first two questions, and Jamie will take the third one.
The backlog that is referenced and reflecting the book-to-bill is backlog that is shippable over, largely, not entirely but largely over the next six months.
Sho Ing - Analyst
Over the next six months?
Patrizio Vinciarelli - Chairman, President and CEO
Yes.
Sho Ing - Analyst
Would you be willing to give a backlog for 12 months, over 12?
Patrizio Vinciarelli - Chairman, President and CEO
Generally speaking we, behind backlog is orders shippable within 12 months, but as I suggested a moment ago most of those orders are demanded by the customers to be shipped within a shorter timeframe.
So if you look at the distribution of the orders and the ship of backlog over the bookable period of 12 months it is mostly concentrated over actually the next few months and it will tail-off within a six-month timeframe to relatively low levels that practically speaking are not all that significant.
James Simms - VP, CFO and Secretary
But, Sho, to be specific it is a technical definition of a 12-month backlog.
Sho Ing - Analyst
I see, got it.
Okay.
Headcount?
Patrizio Vinciarelli - Chairman, President and CEO
So the headcount is (inaudible) Jamie may be able to give you some specifics.
I don't have that in front of me, but are generally calculated as follows -- as you might expect in the V-I Chip operational team there have been some additions of late, we've been, as suggested earlier, adding part of an additional shift, so there's been some headcount additions in connection with those activities.
But primarily the headcounts have changed somewhat.
Jamie, do you want to--?
James Simms - VP, CFO and Secretary
Yes, very slightly, though.
The total headcount as of quarter end inclusive of a couple dozen part time employees was 979, 9-7-9.
Sho Ing - Analyst
Okay.
James Simms - VP, CFO and Secretary
That is down from the year ago we were at 1,011.
And, as you may recall, we did have a reduction in force that took place through the first half [of last year].
Sho Ing - Analyst
Right.
Do you have a sense as to what it might be, say, at the end of the June quarter?
James Simms - VP, CFO and Secretary
I don't think you could -- you'd look back and see a material change.
Sho Ing - Analyst
Okay.
Got it.
James Simms - VP, CFO and Secretary
And as far as your third question, we do not have from a Reg FX type of disclosure requirement we do not yet have, we've not yet reached that threshold for a 10% customer.
Sho Ing - Analyst
Okay.
Great.
Thank you.
Operator
Your next question comes from the line of [John Dillon], [D&D Capital].
Please proceed.
John Dillon - Analyst
Hey, guys.
Congratulations on a great bookings quarter.
Patrizio Vinciarelli - Chairman, President and CEO
Thank you.
John Dillon - Analyst
Patrizio, I want to go back to the number of shifts, what I think I heard, tell me if I heard correctly, is that you're running -- on the V-I Chip line you're running one shift now and then you plan to go to a second shift very shortly, and then you have provisions to go to a third shift if you need to by the end of the year, is that correct?
Patrizio Vinciarelli - Chairman, President and CEO
Not exactly, no.
We are running two shifts, adding resources for a third shift.
And, as I mentioned earlier, beginning to look at the possibility of going 24, 7 in terms of fully utilizing capacity.
That's an option that's being considered, not one that we've made a sound decision to execute upon.
John Dillon - Analyst
How long have you been running two shifts then?
Patrizio Vinciarelli - Chairman, President and CEO
For some time, for quite some time.
John Dillon - Analyst
And is that strictly on the V-I line, or is that both lines?
Patrizio Vinciarelli - Chairman, President and CEO
Well, I presume you are referring to the V-I Chip line, has expanded the end of last year.
John Dillon - Analyst
Okay.
Patrizio Vinciarelli - Chairman, President and CEO
And, yes, generally speaking, the V-I Chip operations as of the expanded line capability apply to all of it.
John Dillon - Analyst
Okay.
Patrizio Vinciarelli - Chairman, President and CEO
And to be a little bit more specific with respect to this, and the answer to the question as to where we have two shifts and when we might have three shifts, that's really not a question that is generally speaking applicable to the line or lines as a whole.
Typically, we use them in effect selectively by particular session on a line, certain processes take relatively longer than other processes, or activity, less capacity on any one shift.
So those are the processes that first move to the second shift and a third shift, and in effect that's the way how this gets to roll-out.
John Dillon - Analyst
Okay, then on top of the plan to go 24, 7 is another plan to add additional capability?
Patrizio Vinciarelli - Chairman, President and CEO
Again, to be clear, we have not made the decision yet to go to 24, 7.
At this time it is being considered.
The additional line is another option that we're beginning to consider, and it is quite possible that we may pull the trigger on both, and the way we'd do it is first by going to 24, 7 while the additional equipment is being ordered and deployed.
John Dillon - Analyst
It sounds good.
Patrizio Vinciarelli - Chairman, President and CEO
The decision to go 24, 7 is a very substantial decision with many implications.
It is something that we would want to be done for the long term.
It is not something that we would consider as a temporary step, it is something that needs to have a strong rationale for the long term, which we believe it does because it does make for a more efficient utilization of capacity and equipment.
It is a practice of many (inaudible) .
John Dillon - Analyst
Okay, another question, with the backlog as it is and especially with it being shippable in six months, can we expect a double-digit sequential growth this quarter?
Patrizio Vinciarelli - Chairman, President and CEO
I would not want to be very specific with respect to that for a variety of reasons, but I think you can draw your own conclusions, the (inaudible) is very straightforward and in effect to answer your question it is implied by the numbers as reported.
John Dillon - Analyst
Yes, that's what I would think.
And what about you talked about the gross margin some, what about the short term consolidated gross margins?
Will we see an increase in the next couple quarters?
Patrizio Vinciarelli - Chairman, President and CEO
Well, so with respect to that, the fact of supply of more than one, as you might expect the margins, the aggregated margins for V-I Chip are not nearly by a long stretch as good as the margins we continue to make and surely improve upon quarter to quarter to some degree with our (inaudible) product lines of (inaudible) and consumer products whose underlying technology is (inaudible).
So those are not just the cash cows of the Company, but they're also the margin leaders by a long stretch.
With V-I Chip margins today are not in the same ballpark, but as suggested earlier there is an opportunity to get them in the same ballpark.
And this is [cast] on an earlier conference call, there's an opportunity to get into even higher levels than historically would be, given the nature of the technology, is a level of (inaudible) the benefits that it provides to customers in terms of giving them (inaudible) competitiveness with their own products.
And last, but not least, the opportunity to continue to reduce the cost of these products considerably as time goes on because as a young technology it is ripe with opportunity with respect to among other things performance improvement and cost reduction.
But this, again, will take some time to answer.
It is not going to answer overnight.
But in the short term the fact that we're going to be shifting much more without adding a significant incremental cost, yes, there are some factory workers that (inaudible) in the scheme of things that is not really changing our cost structure which is largely to do with manufacturing overhead, (inaudible) equipment (inaudible).
That cost structure as we shift the multiple of the product that we used to ship obviously gets absorbed much better.
And ultimately the key factor in this is the relationship between the (inaudible) material of what we make and the other [sell size] of what we sell.
And the gap between the two is such that as manufacturing, operating in particular gets absorbed our margins, particularly our incremental margins on incremental sales are going to be popping up.
But looking at it the other way as you blend the average margin of V-I Chip, which is quite low, with the big margins you would think there would be at least in the short term (inaudible) margins.
So various factors apply.
At the end of the day, from my perspective, what's most important in the short term is to ramp capacity and satisfy customers' needs, and do so in the most predictable way, from the perspective of satisfying those needs even though there may be some short-term inefficiencies.
But I think that we have the making of a significant opportunity, among other things, on the margin front.
And we'll have to wait and see how these different forces play themselves out.
But frankly I can see scenarios where the margins could be going up somewhat.
I can see scenarios where the margins could be going down somewhat temporarily, as we in effect deal with the short-term ramp needs and we put the (inaudible) capacity ahead, as we should, of achieving the ultimate in terms of factory efficiency.
John Dillon - Analyst
Okay, so it sounds like there's a couple different scenarios that could play out, but in the long term you definitely see the gross margins going up as you get your efficiencies and your volumes up?
Patrizio Vinciarelli - Chairman, President and CEO
Yes, you know, obviously for quite some time, if you followed the Company you could not have missed the fact that we've been making a major investment, planting the seeds of growth for first V-I Chip, and second Picor.
And particularly in the case of V-I Chip we deployed first line at a time when we did not really have any appreciable demand, and then last year you saw us pull the trigger on, using a capacity of (inaudible) again at a time when the demand for the product had not yet materialized.
So these investments are now being in effect by (inaudible) by the orders that have been coming in, and orders that we expect to come in as the year progresses, and there isn't really much magic to this if you understand how the technology products go through these stages.
And so we've been in investment phase.
One might argue we're still in an investment phase even though we're now going to begin to see some significant contribution to the top line and to (inaudible) over time to the bottom.
John Dillon - Analyst
Great.
One last question, on the PFM, anything new on the PFM?
When might we see an announcement on that?
Patrizio Vinciarelli - Chairman, President and CEO
As suggested in the prepared remarks, there was an important milestone that took place within the last couple of weeks in terms of a demonstration of its capabilities at the [West Coast] Sales Show.
We are ramping things up in terms of (inaudible) action.
We're still making some improvements in the [firmware].
It is a product that in addition to having a significant hardware platform innovation, also has some significant firmware innovation in terms of how the workings of the product are controlled through a [microcontroller] (inaudible) in terms of some of the functionalities of the product.
This has been the object of some further improvements, given the testing that has been done on the product.
This is coming to closure and we expect to be moving on to the next stage with the PFM in the next couple of weeks.
Beyond that, as suggested earlier, there is a significant range of (inaudible) products that share the same platform, that are relatively straightforward derivatives of the core product, that are also progressing along, and in particular there's a couple of them that are also nearing what we call (inaudible).
And so we're looking forward to these capabilities with respect to expanding the market opportunity, even though as implied that by the level of bookings that we've been able to obtain with all the products we are obviously already getting a lot of traction with products that we released, and the customer, and for quite some time.
John Dillon - Analyst
Great.
Congratulations again.
Great quarter.
Patrizio Vinciarelli - Chairman, President and CEO
Thank you.
Operator
Your next question comes from the line of [Dick Feldman], [Monarch Capital].
Please proceed.
Dick Feldman - Analyst
Patrizio, given that volume is starting to take off for the V-I Chip products, could you give us some updates on your efforts to -- with regard to licensing and royalty potential?
Patrizio Vinciarelli - Chairman, President and CEO
I don't have anything specific that I can disclose on that (inaudible) front beyond saying that there's activity and there's likely to be more activity as the traction we've gotten with V-I Chips' base accounts gets to drive the level of activity.
So nothing specific to report at this point in time, but as optimistic as I've ever been with respect to the prospects for making the most of the intellectual property opportunity not just by way of top line and product sales, but also in the (inaudible) through partners and licensing relationships that are aimed at expanding the market opportunity, accelerating rate of growth, directly, indirectly, and making the traction of a new (inaudible) more significant and valuable.
So there is activity but nothing I can tell you that's very specific to report at this point in time.
Dick Feldman - Analyst
On a different topic, I'm trying to understand a little bit better your capacity situation.
You have talked about a several fold increase in V-I Chip shipments as the year progresses, and yet you're already running two shifts.
Does that imply that -- and then you also spoke about that you expand capacity on a station-by-station basis, does that imply that there may be certain bottlenecks and that you don't need to build a whole new line, you can get a significant improvement in production just by adding a few more stations?
Patrizio Vinciarelli - Chairman, President and CEO
There are no particular bottlenecks.
There isn't a particular process that is holding up the works in terms of capacity.
We've obviously had some time to plan this out, and so the throughput of equipment and each of the process that has been reflected in deployment of equipment that has already taken place.
And so there isn't any particular outstanding challenge on that general front.
Now, that doesn't mean that everywhere up and down the line you have the same level of utilization of the equipment, while the factory is one where from time to time the need for an additional shift or additional resources may change.
So nothing particularly an issue that would raise to what one may call a bottleneck.
We've had plenty of time to plan for this, and I would say that the execution so far has been quite good.
Dick Feldman - Analyst
So how do you get the large increase in shipments that you're talking about as the year progresses?
Is it just going to a third shift, or is it--?
Patrizio Vinciarelli - Chairman, President and CEO
Well, what may be a source of some confusion is the fact that the addition of another shift needs to take place ahead of putting a much larger quantity of units into finished goods because part of our process is to ensure high quality products is to hire, train operators ahead of the actual ramp.
And so we've been adding people as the additional equipment was being deployed and training them on the new equipment as the additional part of the line or lines were getting qualified in preparation for getting incremental throughput out of the line.
We're very comfortable with our capacity assessment.
As I mentioned earlier, distribution has been very good, and we're quite confident about the fact that as we progress from the first quarter to the second quarter, to the third quarter, fourth quarter this year, we're going to be able to realize the expected capacity out of the line and the shifts as deployed.
Dick Feldman - Analyst
Right, I understand.
One last question, it would seem possible that if you have a large shift in the mix to V-I Chip that V-I Chip margins could improve and margins in the other businesses could improve, and yet the aggregate margin, gross margin be down because of the shift in the mix.
Patrizio Vinciarelli - Chairman, President and CEO
Well, as I suggested earlier, there are competing forces at play and that could end up being I think a delicate balance.
I wouldn't want to stick my neck out to predict what force will be (inaudible).
As I mentioned earlier, and one way of looking at this with the new products, particularly the V-I Chip products, you have something which is that aggregate today is at the margin level, that doesn't come close to Bricks.
So if you were to simply look at that and say, we're going to be selling more, we're going to be shipping more of this product, you then come to the conclusion, well, that could drive or drag the (inaudible) margins down.
But there is a, I would say, a more subtle way of looking at this, which has to do with in effect the (inaudible) that the fixed costs have already been there, they're reflected in our (inaudible) numbers, they've been reflected in our Q4 numbers largely and most of last year.
So as we progress from quarter to quarter and ship more products (inaudible) material is a fraction of the selling price, that differential will have the (inaudible) margins in dollars and not be a drag in terms of percentages.
But there are many [factory] supplies, and again we'll have to wait and see.
I'll say something else in terms of a general comment on this issue.
My experience for that business is that because of the fact that we have so much dependency on what is largely a fixed cost structure, that top line growth or lack of growth (inaudible) on margins.
And generally speaking selling more and top line has a very beneficial affect on the bottom line.
With the following caveat, though, that as would be the case with V-I Chip the step up in volume takes place very dramatically over I think a short timeframe, and (inaudible) inefficiencies limits that opportunity.
So generally speaking selling more of a product whose raw material is a fraction of the selling price is a good thing for margins (inaudible).
Dick Feldman - Analyst
Okay.
Thank you.
Operator
Your next question comes from the line of Jim Bartlett, Bartlett Investors.
Please proceed.
Jim Bartlett - Analyst
Patrizio, you mentioned this quarter, and it was also mentioned last quarter was the strength in the [configure] of systems business.
What percentage of total revenue is that category currently?
And what kind of growth are you seeing there?
Patrizio Vinciarelli - Chairman, President and CEO
I don't have a percentage to give you, and this is something that we generally do not disclose.
I think it's fair to say that it is part of our business model, as we discussed in the past (inaudible) dollar analogy which I use from time to time to describe this, part of our vision for making the most of the (inaudible) opportunity is in effect to leverage the capability from the inside out.
And that's how in effect the Picor components, which as mentioned earlier (inaudible) components and with the V-I Chip components, which are somewhat less (inaudible) centric, somewhere in between Bricks and silicon based products.
V-I Chip, in turn, plays within Bricks, which in effect leads in an earlier generation product component (inaudible), and getting back to the point of your questions, you know, Bricks in particular play within high level systems that tend to use a multiplicity of Bricks, and over time they use a multiplicity of V-I Chips and Picor products.
But that's part of the general vision and approach to the marketplace given the fact that the marketplace isn't (inaudible) to which particular type of solution is needed, that is a function of the application.
The (inaudible) in an industrial application are different from the server, which are in turn different from the communications applications.
The system products tend to play a role in some of these markets more so than other markets, where smaller components, base solution is appropriate.
But they have a significant market opportunity which the big business unit has been able to capitalize upon for quite some time and with which there's been greater and greater success.
Jim Bartlett - Analyst
Thank you.
Operator
You have no more questions at this time.
Patrizio Vinciarelli - Chairman, President and CEO
Very good.
James Simms - VP, CFO and Secretary
All right.
Thank you, Michelle.
Thank you, Patrizio.
And thanks to all our listeners.
See you next quarter.
Patrizio Vinciarelli - Chairman, President and CEO
Thank you.
Operator
Ladies and gentlemen, that concludes today's conference.
Thank you for your participation.
You may now disconnect.
Have a great day.