Vicor Corp (VICR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Vicor earnings results for the second quarter ended June 30, 2010.

My name is Jennifer 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, Dr.

Patrizio Vinciarelli, CEO.

Please proceed.

And I'm turning it over to Jamie, so there you go.

Good afternoon and welcome to Vicor's earnings conference call for the second quarter ended June 30, 2010.

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

Today we issued a press release outlining our financial results for the fiscal second quarter.

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

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

Before I begin, I remind all of you today's conference call is being recorded and is the copyrighted property of Vicor Corporation.

I also remind you various remarks we may make during this call may consult 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 Forms 10-K and 10-Q filed with the SEC.

A replay of this call will be available beginning shortly upon its conclusion through August 6, 2010 by calling 888-286-8010 and using the Pass Code 73796664.

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?

Thank you, Jamie.

Hello, everyone, and welcome to our second quarter earnings call.

I am pleased to report the momentum established in the first quarter continued through the second quarter with strong growth in both consolidated bookings and consolidated revenue.

All three of our primary business units performed well and our outlook is positive.

The consolidated book-to-bill ratio for the first quarter was 1.43 to 1, compared with 1.39 to 1 for the first quarter of 2010, while consolidated revenue increased 11% sequentially.

Total backlog at the end of the second quarter was $103 million as compared to $78 million at the end of the first quarter of 2010.

Second quarter net income rose sequentially to $4.7 million, an increase of $2.8 million from the prior quarter.

Basic and fully-diluted earnings per share increased to $0.11 as compared to $0.05 per share for the first quarter.

Jamie will address the specifics of our Consolidated Income Statement and balance sheet in his remarks.

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

The Brick Business Unit experienced strong sequential growth with revenue increasing 9.9% quarter to quarter.

Our Power System Business performed well during the quarter as via the Westcor Division, which manufactures configurable systems.

Our Brick Components Business remains a steady performer.

The BBU's quarterly bookings increased to 19.6% sequentially driven by orders for Power System products, as well as the underlying Brick power components.

We are encouraged by the continued strength in orders, as well as the sustained profitability and cash generation of the BBU.

From our perspective at mid-year, we expect the BBU to continue to perform steady for the balance of 2010.

With a longer-term strategy involving a range of new V-I Chip-enabled products, the BBU should see significant growth opportunities in the years ahead.

The V-I Chip continued during the quarter to build momentum in the marketplace.

Total V-I Chip revenue for the second quarter totaled $6 million, representing a 14% sequential increase over revenue of $5.2 million for the first quarter.

Of this total, $4.3 million was revenue from third parties, which increased 11.3% sequentially.

V-I Chip bookings remained strong on an absolute basis, but they declined sequentially on a relative basis, falling 19.5% quarter to quarter, reflecting the significant initial orders placed by a major customer during the first quarter.

This customer, along with others, continued to place orders through the second quarter.

We also continued to build momentum operationally with improved efficiencies driven by higher production volumes.

An important recent development was the long-awaited engineering release of the PFM.

We're now planning for general availability of this exciting AC-DC product starting in September.

As previously discussed, we expect the highly-efficient PFM to be a meaningful contributor to our transaction of new market segments, both as a standalone product and as enabler of new VI Bricks and configured Power System products.

We are also making significant progress with several BCM platforms that are DC to DC variance of the PSM.

We are already working with potential customers on BCM-based solutions that we expect will raise the performance bar significantly in high-powered DC-DC applications.

We continue to be optimistic about V-I Chips near-term and long-term prospects.

However, a possible reversal in general economic conditions might inhibit customers' demands for V-I Chips.

While we have not seen evidence of a double-dip recession, we are aware of the possibility that macro considerations might impact our rate of progress.

We're also very focused on more tactical, short-term variables, such as a supply chain, and believe we have identified and are effectively addressing short-term supply chain risks.

However, if shortages or stock outs of key raw materials were to occur, we could experience delays in meeting customer requirements that may materially impact V-I Chips financial results.

Regarding Picor, we are pleased to report that it also grew sequentially, experienced strong bookings, and improved product-level profitability.

Notably, Picor is approaching break even at the operating level.

As previously discussed, Picor is working closely with V-I Chips to develop our distinctive power management solutions, particularly with important early adopters of V-I Chips.

This concludes my prepared remarks, and I'll turn it over to Jamie.

Thank you, Patrizio.

As set forth in today's press release, consolidated revenue for the second quarter totaled $57.4 million compared to $51.7 million for the first quarter, representing a sequential increase of approximately 11%.

International sales as a percentage of consolidated revenue represented 47.5% of total revenue for the second quarter, a very slight decline from 48.1% for the first quarter.

In absolute terms, international revenue increased 8.6% sequentially.

As Patrizio stated, our consolidated book-to-bill ratio for the second quarter was 1.43 to 1.

While we do not disclose 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.

As always, 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 second quarter on a sequential basis to 44.9% from 45.1% for the first quarter.

The sequential decrease in gross margin for the quarter was largely attributable to slight shifts in product mix.

Our cost reduction and containment efforts are paying off with increased operating efficiency.

Operating income as a percentage of revenue rose for the second quarter to 8.1% from the prior quarter's 5.0%.

While consolidated revenue increased to 11% as stated, total operating expenses increased only 1.7% reflecting the leverage in our operating model.

The increase in SG&A was the net result of increased spending on certain V-I Chip marketing initiatives, while the increase in R&D was the net result of increased spending on V-I Chip prototypes and development project materials.

Compensation expense for both SG&A and R&D declined quarter to quarter and we also experienced a decline in expenses associated with outside service providers.

Quarterly pretax operating income, including interest income and the net effect of accounting for certain changes in the value of our investment portfolio, increased sequentially over $2.4 million to $5.1 million representing 8.8% of revenue, up from the prior quarter's percentage of 5.1%.

Second quarter net income rose sequentially to $4.7 million, an increase of over $2.8 million from the prior quarter.

Our improved revenue and profitability drove the majority of this increase, but we also experienced a decline in our effective tax rate.

Our expected Federal Income Tax expense remains low due to the availability of net operating loss carryforwards.

As discussed during earlier calls, we have a complex organizational structure that contributes to an equally complex book-tax calculation.

As such, we cannot offer you meaningful guidance on how to forecast what our book-tax provision or effective tax rate may be from quarter to quarter.

Basic and fully-diluted earnings per share increased to $0.11 per share from $0.05 per share for the first quarter.

Our basic and fully-diluted share counts were essentially unchanged quarter to quarter.

Cash flow from operations totaled $3.9 million for the second quarter reflecting the increase in net income and a slight increase in depreciation expense, offset by a net increase in working capital that was tied to the buildup of raw material inventories to meet our V-I Chip manufacturing forecast.

Capital expenditures net of proceeds from the sale of out-of-service equipment totaled $2.0 million for the second quarter.

As previously discussed, we expect significant investments in equipment to temporarily subside for at least a few quarters.

However, we are already carefully assessing our V-I Chip capacity requirements and will be later this year developing a formal capacity plan for expanding our production capabilities in 2011.

Turning to the Consolidated Balance Sheet, cash and cash equivalents rose $4.9 million for the second quarter to $46.6 million.

Total cash, cash equivalents, short-term investments and long-term investments, including restricted cash, totaled $74.1 million as of June 30, an increase of 3.2% from March 31st.

Long-term financial investments, including our portfolio of student loan backed auction rate securities carried at an estimated market value, totaled $18.4 million at quarter end.

All of our auction rate securities continue to pay interest in accord with the terms of their indentures.

As planned, we executed the rights we had with UBS to receive par value for the approximately $8.6 million of auction rate securities we purchased through UBS that remained outstanding.

This amount is carried on the second quarter balance sheet as a short-term investment at full value reflecting the fact that the trade settlement date occurred in July.

The proceeds from the sale of these securities are held in a readily-accessible money market account.

We still have no insight as to when we might expect to receive par value for the $19.25 million of auction rate securities we purchased through Bank of America.

When Bank of America settled with various states' Attorney Generals in 2008, the Bank repaid at par amounts invested by individuals, charities, government entities, and small businesses.

However, large corporate investors, such as Vicor, were left out of the settlement.

We are monitoring the arbitration activity of the financial industry regulatory authority and are encouraged by numerous rulings in favor of plaintiff corporate investors against institutions, including Bank of America, through which they had purchased such securities.

We are assessing alternatives available to us, including litigation or pursuit of an arbitration claim.

Our receivables portfolio remains in good shape with Day Sales Outstanding steady at 50 days.

While bank credit remains an issue for some of our smaller customers, we have encountered few problems with delayed payments and our charge-off experience has been exceptional.

We have no debt, own all of our primary facilities, and with cash investments representing 38.3% of total assets and 49.2% of total equity, believe that we have more than adequate resources and liquidity to fund our operations, as well as the dividend of $0.30 per share payable on July 30, 2010 to shareholders of record at the close of business on July 16, 2010.

As a reminder to listeners, dividends are declared only at the discretion of the Board of Directors and depend on actual cash from operations, our financial condition and capital requirements and any other factors the Board may consider relevant.

This concludes management's prepared remarks, so we will now take your questions.

Operator?

(Operator Instructions) Our first question comes from the line of [Don McKenna] of D.

B.

McKenna.

Please proceed.

Congratulations, guys.

I just wanted to get a little bit of clarification if you could on the backlog and like how much of it, what percentage would be due for delivery over the next three months, the three months following, and what have you?

Jamie, do you want to take that?

Don, we're not going to get into a breakdown of the shipping schedule.

As we've discussed on prior calls, it is a one-year backlog.

The ending backlog is $103 million as it stands today, so we'll just leave it at that.

We're not providing color on the specifics, but that is all scheduled to ship within the four-quarter period.

Right and the bulk of it is much closer in.

Oh, much closer.

Yes.

Do you have a feel for how much of it is due to increased ordering for inventory on the part of customers versus actual final demand on their products?

That's actually a very good question, because I know that we've all been reading a lot lately about the tenure of the recovery and the fact that there's a lot of discussion about inventory replenishment.

We are not necessarily susceptible in our business to that type of influence.

Because first of all in our Brick business, we maintain a very slight, very modest finished goods' inventory.

We ship to order.

Similarly, the supply chains that we participate in where we're selling our components to customers for their use in creating assemblies and systems, they similarly are not in an inventory-stocking mode.

So, the Brick business, which, of course, is the majority of our revenue at this time, I would hesitate to say immune from that, but it's certainly not something that we believe has been a factor.

Thank you.

And similar comments would apply to V-I Chips and to a lesser degree to Picor.

Great.

Thanks very much.

Thank you.

Your next question comes from the line of [Paul Stultz] of [Capital Flows].

Please proceed.

Yes, thank you.

You spoke about the potential of a build-off plan, once again expanding capacity in 2011.

And I'm wondering operationally at what level in just a fractional basis what portion of your potential, your present manufacturing capacity are you utilizing?

I presume you are referring to V-I Chip capacity?

Yes.

Well, we've shared with you the quarterly V-I Chip revenue.

You know, from that you get to a run rate within the last quarter of approximately $25 million.

In a simpleminded way of looking at it in terms of gross revenue capability, a ballpark figure would be, and this is approximate as alluded to in the past, it depends to some extent on the particular mix of chips; whether they are full chips, half chips, double chips and the specific type of obligations that go into it.

But, as a round number something on the order of $100 million yearly run rate would be a good figure to keep in the back of our minds in terms of the dollar capacity of existing lines.

That's a number that does not fully leverage the capacity to 24/7 type of scenarios, which are obviously an option at the appropriate point in time, as we get closer to having to make decisions about additional brick and mortar and additional capacity.

Thank you.

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

Please proceed.

Good quarter.

Thank you.

The Brick business showed both bookings and billings growth that represented a very dramatic change from recent experience.

I wonder if you could discuss in greater detail what are the factors behind that?

How much of it is V-I Chips being put into the Bricks?

And talk about future dynamics of this business.

And also, maybe, are there any capacity issues here?

Okay, so V-I Chip is a factor, but it's not yet a dominant factor.

I would say that in general terms a key factor has to do with the differentiated strategy, which has been characteristic of our Brick and Power System business.

In the markets that it addresses, as discussed in the past, the reason has been and it's remarkable that so far into the technology cycle that we only started 20 to 25 years ago with classic Bricks, that there is the longevity and modest growth capability that there has been.

As discussed in the past, the necessity will not last forever.

Our model for growth for what we call the Brick power component paradigm and the power system business that is built upon it rests, in large part, going forward on V-I Chip inside strategy, which as implicit in your question, is beginning to be a factor.

But again, it's not yet the dominant factor.

So, it's a combination of considerations at play ranging from the nature of our Bricks and how well they play in a variety of different markets and beginning to be a difference in a positive way by a V-I Chip inside strategy.

Okay.

Your other question was relating to capacity?

Right.

So, on that front, there isn't an issue with respect to capacity.

There has been within the second quarter to some degree an issue with respect to the supply chain.

The Brick Business Unit has experienced some delays at the end of the second quarter stemming from availability of components.

These are discreet components, semiconductor components that are used in our Brick assemblies.

That's an issue that is getting resolved, but there would be the greater reality concern.

We're not concerned about capacity in terms of manufacturing equipment, but the supply chain has been somewhat precarious.

Now, there's been considerable progress made on key fronts and we expect to be able to get and are getting the parts we need in order to support the plan, both for Bricks and for V-I Chips.

Okay, thank you.

Let me add to that to be complete in our answer to your question.

As a matter of course, we don't disclose specifics about the market segments, customers and the like.

But implicit in your question was an element of where did this growth come from and how sustainable is it?

We believe that the economic recovery has contributed, but we also believe that we have been very successful in differentiating ourselves.

Patrizio eluded to the performance of the products.

But also, we offer a range of products in a flexible manner with a great deal of service and support behind them, such that we differentiate ourselves significantly from our competitors and from those that sell their products through catalogs.

Our customers are coming to us for differentiated solutions and we're succeeding on that basis.

Your next question comes from the line of Sho Ing of Lotus Investment Management.

Please proceed.

Good afternoon, a couple of questions.

Jamie, one, I don't know if you gave a number for international revenues?

Yes, I did.

I'm sorry, could you repeat it?

Yes, let me pull it up for you here.

International sales were 47.5% of the total of 57.4%.

Got it, thank you.

Totally separate, I've noticed that the deferred revenue line is going up faster than the revenue line.

Can you tell me what's in there?

It really is a mix of things from recognizing the NRE-related bookings.

In many businesses that number would essentially be, in effect, deposits.

We're not in that game, so we're not taking that.

It's largely just related to contract work where we're booking the obligation of revenue.

Okay, and would I be right in thinking that the gross margins on that would be higher than your "corporate average?"

That's right until we are able to book it in order to draw that conclusion.

Yes, it's very specific to customers; some yes, some no.

Okay, and then lastly, Patrizio, you answered a question about the capacity, something like $25 million per quarter, $100 million run rate.

I'm assuming that's still under three shifts.

Would you have the capacity or the type capability to go to four shifts a week?

Yes, I suggested earlier that gross number, and again, that's an approximate number.

It really is very much dependent on me so, to be more specific with respect to that; such things as the level of activity support of power plans for new models.

That has a way of carrying into the overall manufacturing capacity, so that is a factor.

The mix of particular Chips is a factor.

Obviously, their average selling price is very much of a factor.

But, that $100 million rough gross number would not represent the maximum possible that can be garnered out of existing lines.

In particular, it doesn't represent 100% capacity [each session] for any combination of shifts.

It's based on a conservative 70% each session, which is what our operations management believes is a conservative indicator of real world capacity.

It doesn't push the envelope with respect to 24/7, each session of manufacturing lines.

Okay, but basically that number is based on running more or less 15 shifts a week then?

Well, the way in which the factory is organized and how the shifts are used within a week, excepting that we have had it under review.

Again, operations management for V-I Chips is looking at a 24/7 strategy as a way to get more capacity out of existing equipment with obviously reduced costs and better margins.

Okay, good enough.

Thank you.

Thank you.

(Operator Instructions).

Your next question comes from the line of Paul Stultz of Capital Flows.

Please proceed.

Thank you.

Dr.

Vinciarelli, I'm not looking for specifications here, but rather quantitative comparison.

And that is, can you give us an idea on a new PFM and BCM products?

What kind of relative improvement in efficiency you would expect relative to what's available in the marketplace now?

Okay, so that's a difficult question to answer with just one number, a percentage improvement.

Because as with everything in this industry, the answer is really dependent on some benchmarks and comparisons to be fair and not misleading in any way on a combination of factors.

So, in carrying out that comparison, what you would need to look at for the comparison to be meaningful is the key attributes that effect converter products apart from one another, and that would include the efficiency that you alluded to.

It would include the power density, which is in effect the number of watts per unit of volume that the converter can process, as well as some other factors.

When you look at what would be called a figure of merit, which is in effect something that combines measures of density with measures of efficiency, the PFM on the one end is an AC-DC product.

And the BCM on the other end is a DC converter product, are by far by a large multiple, above any competitive product.

In other words, they are clearly more efficient and a lot denser.

So, in terms of density to give you some rough numbers, the BCM is above 1 kilowatt per cubic inch compared to physical converters are well below that.

We are at efficiency levels of the other 95% today.

For that density that's a remarkable efficiency.

Thank you.

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

Please proceed.

Patrizio, as volume of the V-I Chips moves up, should we initially expect some pressure on gross margins?

Well, I may be repeating myself here, but it bears saying.

So needless to say, the margins for the V-I Chip measured in terms of the way you would account for them considering all the fixed costs that we have in place and some more ties across the number of units that we're making, are far from the margins that we have achieved and are improving upon with the mature product such as Bricks.

So, we have a ways to go with respect to getting those margins up.

But in answering your question, what is relevant in my mind is, in effect the incremental contribution to margins.

Obviously, when it comes to incremental contribution, the key factors are material costs and selling prices.

Because we have the capacity in place, but in terms of equipment the depreciation is what it is in absolute dollars.

And, we have obviously manufacturing infrastructure and overhead that, again, measured in dollars is first of all unchanged as we make more and more products.

So, the contribution to the V-I Chip margins and corporate margin as a whole is actually primarily driven by the difference between selling price and the bill of materials and that difference is healthy.

So, while the margins for V-I Chips averaged a current manufacturing volumes throughout all that we make, are still well below where they need to be and what they're going to be.

Incrementally, there is a different factor of play, which is even in the short term a more comfortable number.

And because of that I would say that it would be difficult to draw a conclusion as to the impact on total margins that is brought about by selling a greater share of V-I Chips.

That could cut one way or the other, because overall it's not simply an issue of "mixing in lower margins" V-I Chip products.

So, what you're saying is the incremental margins on V-I Chips compared to let's say Bricks are not materially different?

Well, they are relatively healthy.

Let's put it that way.

Okay.

I'm not showing additional questions in the queue at this time.

Thank you.

We'll talk to you in October.

It looks like we have one more question that just popped up from the line of Don McKenna of DB McKenna.

Please proceed.

Thanks.

Patrizio, could you go back in your prepared statement?

You mentioned revenue from third parties, I'm assuming those being licensees, and I missed the number on that.

Could you expand on that a little bit?

Let me clarify, Don.

What we were getting at was the idea that V-I Chip sells its products to third parties, meaning external customers.

And we also sell internally to the Brick Business Unit and, for that matter, to other entities within the Company.

So that was the internal?

That's the internal, right.

Okay, great.

So those products then get built up into higher level assemblies that get sold as BBU products.

I understand.

Thank you very much.

Thank you.

Is there any other question?

Once again, I'm showing the queue is clear.

Very good, thank you very much.

Talk to you soon.

Ladies and gentlemen, that does conclude today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.