Vicor Corp (VICR) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Vicor earnings results for the three and nine months ending September 30, 2010 conference call. My name is Adam 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 presentation over to your host for today, Mr. James Simms, Chief Financial Officer.

Thank you Adam. Good afternoon and welcome to Vicor's earnings conference call for the third quarter ended September 30, 2010. I'm Jamie Simms, Chief Financial Officer, and with me are Patrizio Vinciarelli, our Chairman, President, and Chief Executive Officer, and Dick Nagel, our Chief Accounting Officer.

Today we issued a press release outlining our financial results for the fiscal third quarter. This press release is available on the Investor page of our website, www.vicorpower.com. We have also filed a form 8-K with the Securities and Exchange Commission 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 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 Forms 10-K and 10-Q filed with the SEC.

A replay of this call will be available beginning shortly upon its conclusion through November 5, 2010 by calling 888-286-8010 and using the Pass Code 21117960. 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 third quarter earnings call. I am pleased to report Vicor performed well for the third quarter. The momentum established in the first and second quarters resulted in strong revenue for the third and the economy associated with increased volumes resulted in improved profitability.

Our Brick business unit, V-I Chip and Picor all performed well, both in terms of revenue growth and overall profitability.

Consolidated revenue for the third fiscal quarter increased to $68.7 million compared to $57.4 million for the second quarter, representing an increase of 19.7%. (Inaudible) represents a 43.8% increase over revenue recorded for the third quarter 2009. On a year-to-date basis consolidated revenue is up 19.4%.

Consolidated gross margin for the third quarter increased to $32.5 million compared to $25.7 million for the second quarter and $20.4 million for the corresponding period a year ago. Gross margin, as a percentage of revenue, increased to 47.3% compared to 43.3% for the third quarter of 2009 and 44.9% for the second quarter of 2010. Net income for the third quarter was $15.8 million or $0.38 per diluted share, but this total includes a nonrecurring, non-cash tax benefit of $5.2 million or approximately $0.12 per diluted share. This benefit was the result of a reduction during the quarter of a portion of an allowance against the deferred tax assets on our balance sheet. Jamie will address this transaction in some detail in his remarks.

On a pro forma basis, excluding nonrecurring tax adjustments, net income was $11.2 million or $0.27 per diluted share, which represents a sequential EPS increase of approximately 144% over second quarter EPS of $0.11 per share.

Turning to the performance of our business units, revenue from the Brick business unit or BBU increased $8.6 million, representing a 16.6% sequential increase with robust growth across (inaudible) lines. While we do not break out profitability by business unit, I can report that BBU experienced improved profit level and operating profit for the quarter. Supply chain constraints faced early in the year have been resolved. BBU bookings for the third quarter declined from the first and second quarter but remained at the level that supports our positive view of BBU's prospects. BBU is gaining traction with innovative new products based on our V-I Chip Inside strategy.

In particular, we're working with leading OEMs on applications that exploit the power density and efficiency of V-I Brick BCM and VCM, the VCM being one of our new V-I Chip platforms.

Turning to V-I Chip, V-I Chip revenue for the third quarter was $6.8 million, an increase of 57% sequentially and more than double the level achieved for third quarter 2009. Total revenue for V-I Chip, including inter-company sales to the BBU was $8.7 million for the third quarter. The increases in both external and inter-company revenue reflects shipments driven by strong bookings. Bookings for V-I Chip increased for the third quarter after dipping in the second quarter. While our current V-I Chip revenue base is not as diversified as we would like it to be, we are encouraged by the continued broadening of interest in V-I Chip technology across the range of industries and applications.

An imminent development is the general release of the PFM, the long awaited (inaudible) V-I Chip to be introduced at Electronica, the annual electronics trade fair taking place in Munich on November 9th. As previously discussed, we expect the highly differentiated PFM to be a meaningful contributor to our penetration of new market segments both as a standalone product and as an enabler of new V-I Bricks and configurable power system products.

I'm also pleased to report that we've recently formed a business development team focused on automotive applications of V-I Chip technology. With regard to the operating performance of V-I Chip we are experiencing lower unit costs and improved efficiencies with higher production volumes. As with BBU, certain supply chain constraints we encountered early in the year are being resolved. While V-I Chip has still far to go to reach the margins that we're projecting from full scale production, we are pleased that our assumptions regarding volume base production costs are being confirmed and making progress towards V-I Chip's profitability goals. We are aiming beyond BBU's performance, with gross and operating margin targets that are in line with leading companies in the power management space.

Turning to Picor, our fabless semiconductor business unit, experienced a 19.4% sequential revenue growth during the quarter with sales growth linked to both V-I Chip implementations with major customers as well as execution on new standalone opportunities. Given the substantial bookings recorded in the second quarter, Picor bookings for the third quarter actually declined, however on a year-to-date basis, 2010 bookings are more than three times the level of 2009. Picor generated a positive contribution margin being profitable for the third quarter.

We continue to be optimistic about the near-term and long-term prospects of BBU, V-I Chip and Picor, however, a possible reversal in general economic conditions might (inaudible) customers' demands for our products. While we still have not seen evidence of a double-dip recession affecting our customers or demand for our products, we are aware of the possibility that market considerations might impact our rate of progress.

We also are very focused on more tactical variables such as our supply chain and believe we have a very short-term supply chain risks, however, if shortages or [stock outs] of key raw materials were to occur, we could experience delays in meeting customers' requirements that would materially impact our financial results.

In conclusion, our investment in R&D is beginning to pay off with top-line growth. Novel bricks, Novel V-I Chips and CD concentric Picor products enable our customers to realize competitive advantages arising in part from the unique power system density and efficiency attributes. Vicor's future is promising as advanced power solutions leveraging (inaudible) via chip technology and building blocks are getting traction across new vertical markets supporting greater diversification and long-term growth opportunities.

This concludes my prepared remarks and I'll now turn the call over to Jamie.

Thank you. As Patrizio mentioned and as set forth in today's press release, consolidated revenue for the third quarter was $68.7 million compared to $57.4 million for the second quarter and $47.8 million for the corresponding period a year ago. This sequential growth represents a 19.7% change and the year-over-year growth represents a 43.8% change.

Revenues for the nine months ended September 30th increased by 19.4% to $177.8 million from $148.8 million for corresponding nine-month period a year ago. Our consolidated book to bill ratio for the quarter was 1.02 to 1. Total backlog at the end of third quarter was $104.7 million compared to $103.2 million at the end of the second quarter. As listeners know, we do not disclose specific book to bill ratios by business unit. Much of our revenue is derived from multi-period programs and therefore subject to irregularity in bookings, shipments and revenue recognition. As always, we caution listeners that management does to consider the quarter 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.

International sales as a percent of consolidated revenue represented 50% of total revenue for the third quarter, an increase from 47.5% for the second quarter. In absolute terms on a dollar basis, international revenue increased 26% sequentially, however, much of this growth is related to increases in sales to Asian contract manufacturers working on behalf of US OEMs that have designed our components into their products. If such sales are backed out of the total, our international revenue was in line with historical averages. As a reminder, we sell worldwide in dollars with the exception of Japan.

Consolidated gross margin as a percentage of revenue increased for the third quarter on a sequential basis to 47.3% from 44.9% for the second quarter. The sequential increase in gross margin for the quarter was largely attributable to shifts in product mix and improved absorption of overhead due to increased volumes. Increased unit volume is also driving our operating level profitability. Operating income as a percentage of revenue rose for the third quarter to 16.6% compared to 8.1% in the second quarter. Total operating expenses were actually flat for the quarter, reflecting the leverage in our operating model.

Quarterly pretax operating income, including interest income and the net effect of accounting for certain changes in the value of our investment portfolio, totaled $11.5 million representing 16.7% of revenue. This is a sequential increase of $6.4 million over the prior quarter's operating income of $5.1 million which represented 8.8% of revenue.

Third quarter net income rose sequentially to $15.8 million, but as Patrizio mentioned and we addressed in our press release, included a nonrecurring non-cash benefit of $5.2 million or approximately $0.12 per diluted share. On a pro forma basis excluding nonrecurring tax adjustments net income was $11.2 million or $0.27 per diluted share.

As regular listeners know, Vicor has a complex organizational structure, including several subsidiaries in which we have less than 100% ownership. This complex structure has contributed in the past to quarterly tax provisions and by implication effective tax rates that varied significantly from period to period and for investors, were frustratingly unpredictable. Regular listeners may also recall that Vicor incurred substantial losses in prior years that resulted in net operating loss carry-forwards that had been recorded as a deferred tax asset on our balance sheet.

The total value of our deferred tax assets included loss carry-forwards, tax credit carry-forwards and deductible temporary differences between book and tax calculations. Reflecting uncertainty regarding our future profitability and therefore our ability to utilize these various offsets against future income taxes, we established an allowance against our deferred tax assets, thereby reducing their carrying value on our balance sheet.

With the recent steady improvement of our pretax income, we have been able to utilize a substantial portion of these various offsets and in fact we completely consumed our federal net operating loss carry-forwards during the third quarter. As such, we concluded that reducing the allowance against a portion of our deferred tax assets was necessary and appropriate. Consistent with accounting guidance and our own assessment of a, a history of cumulative earnings before taxes for financial reporting purposes over a 12 quarter period, b, our year-to-date pretax income being sufficient to consume our federal net operating loss carry-forwards, and c, an expectation of future taxable income, we determined it was more likely than not a significant portion of our deferred tax assets would be realized. As such, we have reduced or relieved a significant portion of the allowance and in doing so have created a non-cash benefit that has increased our book income for the quarter.

We should point out that we did not feel confident we could make such a more likely than not determination in prior recent periods, largely due to global economic conditions and the possible impact continued economic and business uncertainty would have on our business. Given our full consumption of our federal loss carry-forwards, we concluded ongoing uncertainty regarding long-term performance was no longer adequate justification for maintaining the full balance of the allowance. We also should point out that the decision to release a substantial portion of the deferred tax asset allowance should not be interpreted as an indicator of future profitability. We continue to maintain a valuation allowance for other deferred tax assets for which realization cannot be considered more likely than not, at this time.

In the past we've not been able to provide guidance to listeners regarding what they might expect for our future quarterly tax provisions, however, with the accounting transactions undertaken for the third quarter we can state that it is our expectation at this time that we will be recording tax provisions more in line with statutory federal and state rates in 2011.

Cash flow from operations totaled $6.4 million for the third quarter, up from $3.9 million for the second quarter, reflecting the increase in operating income, offset by an increase in working capital tied to increases in inventory and accounts receivable associated with our higher revenue. Capital expenditures net of proceeds from the sale of out of service equipment totaled $2.9 million for the third quarter, consistent with levels for the prior two quarters. As previously discussed, we expect significant investments in equipment to temporarily subside, at least until the second half of 2011.

Turning to the consolidated balance sheet, cash and cash equivalents were unchanged for the quarter at $46.7 million. Total cash, cash equivalents, short-term investments and long-term investments, including restricted cash, totaled $65.7 million as of September 30th, a decrease of 11.3% from June 30th. This decline reflects the payment during the quarter of $12.5 million of dividends, offset by the increase in operating cash flow.

Long-term financial investments, made up of our portfolio of student loan-backed auction rate securities purchased through Bank of America, were carried at quarter end at an estimated market value of $19.0 million. These securities continue to pay interest in accord with the terms of their indentures, although we still have no insight into when we might expect to receive par value. 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 other 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 the securities. We continue to assess alternatives available to us, including litigation or pursuit of an arbitration claim.

Our receivables portfolio remains in very good shape with days sales improving to 47 days from the prior quarter's 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 continues to be exceptional.

We have no debt, own all of our primary facilities, and with cash investments representing 33.1% of total assets and 39.3% 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 will now take your questions. Adam?

(Operator instructions) Our first question is from Ron Opel.

Patrizio, congratulations on a great quarter. Been waiting for this one for quite a while. I wonder if Jamie, disclaimers notwithstanding, if you would comment generally on the sequential booking pattern over the last several quarters? There was a big jump first quarter over fourth quarter and then there was another nice improvement in the June quarter and in the September quarter it's back down to some extent. Have we plateaued if it's roughly $70-$75 million vicinity?

Based on the bookings history earlier in the year, we have not plateaued. We're looking at top line growth in the fourth quarter. Bookings in the fourth quarter will determine where we go from there. As Jamie pointed out appropriately, one should not read too much in quarterly bookings because they can be bumpy one way or the other, depending on circumstances outside of our control.

So what we can say is that the backlog that we've built up early in the year bodes well for the near-term. The evolution of the economic environment over the next several months will tell the story for the medium term, looking out beyond Q4 and further beyond that as we look into let's say 2012, as implied in my earlier remarks, the substantive level of designing activity that is taking place across all three business units bodes well for the long-term as well.

Your next question is from John Dillon.

Congratulation to everyone on a great great quarter. Patrizio, can you give us a little color on the gross margins; it looks like they were up very nicely and I'm just wondering what contributed to that?

Well, as we should expect, given our essentially fixed cost structure and operating leverage, high revenues translate into high profits; it's no mystery. We can drop a substantial fraction of incremental revenues to the bottom line. In a nutshell, that's the answer.

So going forward, if you expect revenue to increase in the fourth quarter I would expect then the margins could also increase in the fourth quarter?

Well again, subject to the usual disclaimers that Jamie's famous for, as a general rule, that should be the case.

Great. I think I heard you comment on the PFM a couple of times. One, sounds like it's going to be introduced in November to the general public, but did I hear correctly that you think your margins will actually be higher for that than the other products?

The comment with respect to margins are long-term objectives on margins with respect to V-I Chip were not unique to the PFM; they are really applicable to the whole fleet. What I said in different words is that we are seeing, as volumes increase, but in terms of our cost of the [bulk] material and in other ways, progress towards long term goal, which consistent with the opportunity that should be brought about by a technology foundation which we invented over $150 million, that being a very differentiated technology platform with a good deal of proprietorship, IP and so on and so forth and attractive features that enable customers to achieve competitive advantages. All of that needs to translate into a substantial margin opportunity, one that I would generally characterize as long term, needing to exceed the levels that (inaudible) and more recently as PS with Bricks.

Great. The PFM, it sounds like you've got some of those initial units at customer sites; how are the customer sites going and do you see a potential for nay near term PFM business in the next, let's say six months or so?

I think we're going to have to be [old fashioned] with respect to that. Obviously as we're all aware, we experienced significant delays with this product. This has been our most complex V-I Chip platform, however, as commented earlier, it is one that is ripe with opportunity both in terms of its AC to DC, that is AC input applications as well as in terms of its (inaudible). In fact, we already have design wins with in particular one VCM. There is a derivative of the PFM. So, I will look at the next major event in terms of (inaudible) release. Some timeframe that is characteristic of industrial products with long lead times, typically anywhere from six to 18 months for (inaudible) from (inaudible) introduction to significant revenue contribution.

And with the DCM, would AC to DC manufactures, power supply manufacturers would they be interested in that product?

Well, the DCM technologically is a minor variant of the PFM or in a different way of saying it without putting one ahead of the other, there are really different ways to use the same engine. In one case in order to perform AC-DC conversion in the other case to perform this is the second version. So the typical applications for DCMs would include the telecom systems, they would include automotive systems, where in one case a relatively low voltage telecom (inaudible) let's say 36 to 75 volt would be applied the input of the DCM.

In the other case where a high voltage pass such as busses found in electric and (inaudible) vehicles, ranging from 100-200 volts would be a source of power for conversion to, let's say, low voltage batteries such as 14 volt batteries.

Excellent and congratulations on setting up a business development unit to get the automotive; that sounds like an interesting plan, so looking forward to hearing from that in the future and I'll get back in the queue.

(Operator instructions) Your next question is from Jim Bartlett.

Let me add my congratulations as well. At the annual meeting, Barry Kelleher was talking how he (inaudible) was certainly looking forward very much and very excited about the double Bricks, the PFM and the DCM once they're available and he said he expected favorable effects in the component and (inaudible) custom business. Wouldn't the impact there be a little shorter duration than some of the design in times that you expect for the more general PFM and DCM products?

Yes, to the following extent that as noted in the past, in the Brick power component paradigm we're dealing with an established market in the sense that there's a multibillion dollar market that Vicor played a key role in developing, which unfortunately we do not as of this moment have the kind of market share that we would like to have but that is nevertheless a large market, substantial market, well established where customers acceptance of the power component, the Brick with its thermal match (inaudible) attributes, with its interface attributes, with PIN (inaudible) to a customer board, it represents a known entity in terms of designing cycle is faster to execute than the V-I Chip, which is a new power component paradigm; it's a surface mount product, it has its own unique attributes as a component, as a package in terms of its thermal management, in terms of its interface characteristics.

So it's fair to say that V-I Chips take longer to get designed in than Bricks do and that's part of the thought process that underlies our strategy to in effect leverage the same core technology through different power component paradigms. It's a big paradigm that we pioneered quite some time ago, the V-I Chip paradigm which is a new concept and looking at the future on a smaller scale, a more (inaudible) concentric paradigm for lower power levels through (inaudible).

Would this really be bending the curve for the Brick unit some time in 2011?

Well, in order to bend a curve, you need to apply force and the elasticity will bring you to where you need to go. So we're now applying the force in many ways. We're getting a great deal of initial traction, excitement and that's something that feeds on itself, as we all know, so I think it's fair to say that the level of activity, the rate of new product introduction, customers, interest in this, if you will, package value to V-I Chip technology, that's all pushing us in the right direction with respect to turning the big business into a growth business once again.

And the opportunities, as I understand there are more near-term opportunities with the DCM; why is that?

Again, it's more to do with Brick versus V-I Chip than DCM versus PFM. The reason again, to say in different words, is that people in the power system business or power system architects, they all know Bricks; not all of them know about V-I Chips and the ones that do, view them as an emerging power component paradigm that has not reached the level of maturity and general acceptance that the big paradigm has reached. So the safe thing to do, if you will, isn't necessarily the same thing in one case or the other.

Your next question is from Dick Feldman.

Let me join the chorus and congratulate you on an excellent quarter. I have a question about a comment you made in the press release, talking about gaining traction in new verticals, although you still are not as diversified with the V-I Chip in terms of verticals as you would like, I wonder if you could give us some color on that?

I can say the following, that Vicor as a whole, for all practical purposes exited the telecom market right after the telecom bubble burst, essentially 10 years ago. Recently, within the last nine months, we have reentered that market based on the fact and capability of V-I Chip technology and we now have a multiplicity of engagements with leading customers in that general space. So this is an area where there isn't yet any appreciable revenue but there is tremendous potential for growth and a market play that is complimentary to the one that we've executed on the server front, on the test equipment front, which were early markets for V-I Chip technology based products.

Okay. I wonder if you could address the issue of capacity both in terms of Bricks and V-I Chips?

Our brick capacity at this point is adequate, in line with demand issues relating to the supply line, supply lines (inaudible) solved, we have made some incremental investments, including some recently within the last couple of weeks on additional equipment so we feel comfortable with respect to our capacity sense, the BBU as we continue to make improvements in its productivity. So given the near-term prospects, we are in good shape on the big front.

We've had some (inaudible) on the V-I Chip front over the last couple of quarters. I'm confident that they're getting resolved. Obviously we shipped a lot more in Q3 than we did in Q2 and we are looking at a significant further step up in Q4. That's the area that bears watching as we discussed in past conference calls. The (inaudible) of ramp is such that it takes our [fanning] execution to make it work flawlessly.

At what time would it be appropriate for your people to address the issue of added to capacity in the last call you sort of hazarded to guess that you had capacity with V-I Chips at roughly $100 million.

So the issues in the short term, looking at (inaudible) over the last several months are not issues of having brick and mortar type equipment and so on and so forth; they are more to do with the steepness of the ramp in terms of the supply lines, the components and matching it in many facets from one quarter to the next. We've got to give that some further time to settle out as it is happening. In order to take the next step with respect to additional capital equipment investment. So as suggested in Jamie's prepared remarks, at this point we're looking at the middle of 2011 as a timeframe for a next step on the (inaudible) front.

Your next question is a follow-up from Ron Opel.

Patrizio, one of the concerns that Barry mentioned at the annual meeting had to do with the completion of a five-year plan and strong use of budgets toward the end of that five-year plan. When you caution concerning future possible negative developments in macroeconomic issues, is this part of it and how concerned are you about that situation in China? I noted the other day of course they increased their interest rate as well because of the economy, where they wanted to change direction.

I'm not terribly concerned about it because of the fact that I believe we have for a variety of reasons ranging from diversification to different power component paradigms, diversification through different end markets, which is growing as suggested in answer to a question a few minutes ago. Given the growing level of demand for electronic products and the growing role of density, efficiency, green solutions in a variety of different settings, there's really no doubt to the growth opportunity is out there in many markets. So the caution has to do with what may happen in the medium term that is always somewhat difficult to forecast.

We obviously understand where the road takes us over the next three months. I think we have very good understanding of where our opportunities will take us further out. I think the evolution of a somewhat shaky economic environment may influence performance one way or the other in between, as we look out to the middle of next year. That's an area where new design ins that we're now getting may not yet be in volume production so they're not going to contribute to the upside and there could be downside, depending on whether or not there is a double-dip after all.

Okay. In the electronic testing market, I'm guessing that that is a fairly significant part of the strength in the demand for bricks in the third quarter and I'm wondering is that correct? And number two, in the past that of course is a very cyclical market place, has strong demand in prior cycles lasted over several quarters?

To your point, the test market and capital equipment market, semiconductor market, when it comes to capital equipment, is a very cyclical market that is driven in effect by the rate of change of demand in end markets and they can be very volatile. I think that today in (inaudible) space is primarily to do with V-I Chip technology based products and particularly V-I Chips. The V-I Chip form factor enables great strides to be made in test equipment capabilities that go beyond what is possible competitively. It is a market that's recently come out of a very difficult couple of years. It may subside again; I'm not smart enough to know. I do know that (inaudible) percent a large share of our total market opportunity, no matter how you look at it, including what currently makes up our customer base. So I wouldn't worry too much about the cyclicality of the test market for the near term, since (inaudible) very well diversified.

Another follow-up question from the line of John Dillon.

You paid a dividend a couple of quarters ago and I was just wondering, what is your intent on that; is that something that's going to be an annual thing, a semiannual thing?

It's going to be one of those things that we'll all find out about once they happen. That's all I can say about it. It was obviously something that happened because of our confidence that we as a management team and as a Board have in the company and its outlook, beyond here, time will tell. I cannot make any predictions.

Can you talk a little bit about what the priorities for the cash going forward might be, for example, would the first priority be for dividends or would it be for stock repurchase? Because it looks like with capital expenditures going down and the revenues going up, we hope to see the cash starting to build up, so I'm just wondering if there's any kind of general information you can give us about that?

Consistent with the overall philosophy that hasn't changed, being a high technology company, we want run our business in a very conservative way. Cash is a good thing; it provides a good deal of flexibility. In a variety of scenarios ranging from one extreme, a scenario where our business might be doing very well, there may be great demand, we may need to deploy additional lines at a time in which perhaps financial markets aren't open to raise funds, so it would not make sense for us to deplete that cash to a level that doesn't provide the rational flexibility that we'd always want to have.

I think you kind of answered the question, but I was wondering if you could give us even a little bit more color. You said in your statement about the design activities were very high and I'm wondering if you can give us a little more color; what markets are these? For example, you mentioned telecom but are you in the routers and also are you in the storage market or any new markets?

There's a lot of activity as I said earlier, in the telecom space in a variety of different applications and that's something that's been gaining momentum over the last nine months. There's also activity in the test equipment market, which was one we referenced a little while ago, there's activity in the server space, there is significant interest in automotive. So there's a number of very different markets; there's significant interest in defense, obviously the lightweight in density and efficiency attributes of V-I Chips and bricks made out of V-I Chips afford a great deal of flexibility in modern [warfare] in a variety of systems. So there is a lot of opportunity that our technology base gives us the flexibility to pursue.

It seems like the V-I Chips with their incredibly fast response time would be very good for FPGA based systems and it looks like Altera and Xilinx are doing very well. Are you guys attacking that market at all; are you seeing any design win activity with FPGA based products?

I can't comment with respect to that.

Your next question is from Don McKenna.

I think I'm the last of the regulars, if you will, to offer my congratulations as well and thanks for helping me prove to all my investors that this has been a reflection of my patience and not my pigheadedness. Now that you do have your story in hand and it's pretty obvious, what if any plans do you have to try to broaden the ownership of stock in the company relative to developing or redeveloping really, the relationships you had in the past with the retail brokerage community?

Personally, I'm too busy in the short-term to worry about it. Jamie will probably give you a different answer, so feel free to talk to him about it.

With Patrizio out of the room.

I'll call him at a separate time. But also can you tell us, relative to the production you did put out the door this past quarter, how much of it did you need to do with overtime and have you added the third shift that we talked about before, have you brought on the equipment that still allows you to do it in the two shift basis?

Well, all of the above, so as I mentioned a little while ago, the V-I Chip capacity has been a little strained. We are making progress. We had to use a combination of additional capacity from new equipment that had been installed, some significant level of overtime. We are looking, we've hired additional people, we have made plans with respect to operating lines 24 by 7, there's been no execution on that plan yet, but we are looking at all the options with respect to expanding capacity while deferring substantial incremental capital equipment investment to get obviously better productivity and greater return on investment in the short-term.

Your next question is from Jill Mastoloni.

Congratulations on a great quarter. In the out quarter, do you anticipate all of your businesses to grow as well?

You're referencing Q4 this year?

Yes.

Yes (inaudible) is that we're going to see growth in each of the three business units.

And it seems like you're a little more subdued in your outlook and I'm just wondering, have you seen your bookings slow at all as you've exited the quarter and entered this quarter with just the macro uncertainty?

It's the macro uncertainty so we obviously consider that and we factor it in our plans. I think there is no question that relative to the pace of activity early in the year, there has been some general softening, which as you might have heard me say in prior conference call, we welcome because frankly it's made life in terms of the supplier components a lot easier than it was and would have been otherwise. So we are fine with how things have evolved. At this point we're looking into the outlook for the economy and the markets that we are playing in two or three quarters out to determine (inaudible) the growth as of that time.

Okay, so it sounds like maybe the next couple of quarters is just a little bit uncertain with the macroeconomic environment?

Well Jill, we all read the same newspapers and our comments regarding caution are the customary type of caution that you'd hear on any call. What we say again and again is that our business is lumpy. We are in sizable programs that themselves are prone to delivering purchase orders in bursts and what we saw with the initial ramp of V-I Chip order flow beginning this year, towards the end of the first quarter and into the second quarter we had an enormous surge of orders that I would characterize as pump priming, initial orders to get our supply chains going and get the manufacturing process going. So a comparison of quarter-over-quarter trends between any of our businesses can be a little misleading. If you step back and look at multiple quarter trends and patterns, you'll see that we're secularly comfortable. We just are cautious on a quarter to quarter basis.

So again, I would divide it up into three segments; the near-term, the medium term and the long-term. Very comfortable with the near-term, very comfortable with the long-term; the medium term will be what it will be and I think we're well positioned for it, irrespective of whether or not there is going to be a double-dip.

Thanks and great quarter, guys.

Your next question is from Jim Bartlett.

Patrizio, could you address your opportunities in the middle range or medium range server market? You're primarily in supercomputer and high-end servers; what are the opportunities down at the next level?

This market is considerably more cost sensitive. It is a market where in addition to performance, cost is king or I should say cost takes precedence to performance in many applications. I think that our opportunity in that general space is very much dependent on our next step with respect to V-I Chip capabilities coming out in the second half of next year. So we are anticipating and taking V-I chips that are key to those kinds of applications to their next level of proficiency, particularly efficiency and density and most significantly, a significantly lower cost card and that will be critical to penetrating markets such as midrange or low-end markets where cost is king.

Jamie, what would be the headcount at the end of the quarter?

Steady with what it had been; I don't have the precise number, but I want to say between 990 and 1,000.

Your final question today is a follow-up question from Dick Feldman.

Patrizio could you comment on license activity? I know in the past it's been an important part of your long-term strategy.

We are having discussions with a few parties. We have some licensees in place. We have growing interest and that's all that I can say at this point in time. Nothing has changed with respect to our strategy; we firmly believe that to make the most of the opportunity we need to partner with the right kind of partners, licensees. The market opportunity is larger than any one company on its own can address and the good news is that we have a lot of interest and we're pursuing these kinds of opportunities. You'll be the first to know the moment it happens.

Gentlemen, there are no further questions at this time.

Thank you very much. We'll be talking to you in a few months.

Ladies and gentlemen, this concludes today's presentation. Thank you for your participation. You may now disconnect and have a great day.