Vicor Corp (VICR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vicor earnings results for the fourth quarter and year end December 31, 2010 conference call.

My name is Larry and I will be your operator for today.

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

We will conduct a question-and-answer session towards the end of today's call.

(Operator Instructions).

I would now like to turn the conference over to your host for today, Mr.

James Simms, Vice President and Chief Financial Officer, as well as Doctor Patrizio Vinciarelli, Chairman of the Board, President and Chief Executive Officer.

Please proceed.

Thank you, Larry.

Good afternoon, everyone, and welcome to Vicor's earnings call for the fourth quarter and fiscal year ended December 31st, 2010.

I am Jamie Simms, Chief Financial Officer, and with me here in Andover is Dick Nagel, our Chief Accounting Officer.

Patrizio Vinciarelli, our Chief Executive Officer, is on the line from Montego Bay, Jamaica.

Today, we issued a press release outlining our financial results for the fourth quarter and the full year.

Press release is available on the investor page of our website, www.vicorpower.com.

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

Before I begin, I remind all of you, as I always do, 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 March 9, 2011 by dialing 888-286-8010 and using the passcode 4760-4980.

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 conference 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 have prepared remarks after which we will take your questions.

Patrizio.

Thank you, Jamie.

Hello, everyone, and welcome to our earnings call for the year and quarter ended December 31.

I will start off this call by publicly welcoming Phil Davies as Vicor's new Vice President of Global Sales and Marketing.

Phil joined us this month to lead a growing sales and marketing organization that will pursue compelling opportunities for the [balanced budget accentuated] technology of our Brick, V-I Chip, and power component paradigms.

Phil has a semiconductor and power technology background that we are confident will serve him well as we pursue more opportunities with global OEMs that require innovation, rapid time to market and flexibility typical as we share the semiconductors vendors.

Welcome to Vicor, Phil.

I am pleased to report that Vicor generated record revenue for the fourth quarter led by substantial orders received during the first three quarters of the year.

V-I Chips made up a growing fraction of revenue dollars and, in particular, of unit volumes as the average selling price of V-I Chips is less than half [that of our big] products.

All of our business units performed well and we continue to see improvements in business unit level profitability.

Consolidated revenue for the third fiscal quarter -- I think this should have said fourth fiscal quarter, increased from $73 million compared to $68.7 million for the third quarter, a percent and increase of 6.3%.

This dollar represented a 48.5% increase over revenue recorded for the fourth quarter of 2009.

Considering the revenue for the full year increased to $251 million, a percent to year-over-year increase of about [27%].

And there was over revenues of $198 million achieved in 2009.

Considering gross margins for the third quarter, for the fourth quarter I should say, rose slightly to $33 million compared to $32.5 million for the third quarter and $22.5 million for the corresponding period a year ago.

Gross margins percentage of revenue decreased slightly to 45.2% for the fourth quarter of 2010 as compared to 47.3% for the third quarter of 2010 and 45.8% for the fourth quarter of 2009.

Consolidated operating income for the fourth quarter declined to $10.5 million from the prior quarter $11.4 million, about half of the $2.6 million earned for the fourth quarter of 2009.

Operating margin or the ratio of operating income to revenue was 14.4% for the fourth quarter, down from 16.6% of revenue margin realized in the third quarter, but ahead of the 5.2% operating margin realized in the fourth quarter of 2009.

After-tax net income for the fourth quarter was $10.10 million or $0.26 per share compared to $15.8 million or $0.38 per share for the third quarter and $2.3 million or $0.06 per share for the fourth quarter of 2009.

Recall that the third-quarter numbers included a nonrecurring non-cash tax benefit of $5.2 million or approximately $0.12 per diluted share.

A smaller, non-cash tax benefit of $[1.2] million or less than $0.03 per share was recalled in the fourth quarter.

Jamie and Dick will address our tax calculation in some detail in their remarks.

Overall, each of the business units performed well during the quarter.

Revenue from the big business unit did decline 3.6% sequentially from the strong third-quarter performance primarily due to the winding down of one large customer program.

However, building on this foundation of legacy products with new high-performance Bricks, utilizing V-I Chip's advanced power conversion technology, the big business unit has the potential to grow substantially over the next few years.

Breakthrough products such as the recently announced Bus Converter Bricks (see press release) with double the density and efficiency of industry-standard bricks underscored the capabilities and opened doors with leading OEMs seeking short-term continuity of supply and long-term competitive advantages enabled by the higher density of our Bricks.

Leading OEMs in networking, data storage, and computing are for the first time becoming customers of our big business units.

And this would support greater diversification and long-term momentum for Bricks, V-I Chips, and Picor components.

V-I Chips inside VCMs and TFM bricks are also getting traction in new applications and complementing our expanding Brick product portfolio.

I am pleased to also report that both V-I Chip and Picor reached record revenue levels.

The revenue remains concentrated with a small number of early adopters, but we continue to make progress with a range of substantial customers and prospects across a range of markets and applications.

Based on recent new product announcements, and current development activity, we expect to achieve important new design wins for V-I Chip and Picor during 2011.

V-I Chip and Picor made progress operationally during the quarter as we experienced lower unit costs and improved efficiencies with higher production volumes.

Of note, V-I Chip produced a record number of units and, with this volume, made good strides towards reaching our longer-term profitability goals.

For the fourth quarter, V-I Chip produced approximately 39% more units than in third quarter, which itself was 57% ahead of the second quarter.

Having essentially doubled V-I Chip production in 2010, we are forecasting another double in 2011.

A near-term consequence of this ramp is a decline in our consolidated gross margin, reflecting the higher volume of V-I Chips sold representing a larger percentage of our [follow-up] sales.

The gross profit margin for the BBU wasn't changed quarter to quarter reflecting deficiencies and excellent cost control for the BBU organization.

As discussed last quarter, we are targeting gross and operating margins for V-I Chip that will compare favorably to those of the BBU or any best in class [for management] component vendor.

However, we expect our consolidated gross margin to remain under some pressure until production volumes for V-I Chips reach the level at which manufacturing efficiencies are in line with what the BBU has achieved.

I am now prepared to say -- I'm not prepared to say when this will occur, but based on the encouraging progress we have made over the last year, I am confident that our targets will be reached.

We currently have sufficient manufacturing capacity to meet the V-I Chip production forecast, which is based on current and expected bookings.

We have added some additional equipment and a production shift and can further expand headcounts to meet near-term requirements.

However, we are also monitoring our longer-term requirements especially in light of our [expectation] that we will be broadening our customer base over the coming quarters.

I will now address recent events involving litigation of intellectual property clients.

In December 2010, Synqor Incorporated won a jury award against 11 other manufacturers of commodity bus converter bricks.

Vicor was not named in that suit which was tried in the federal district court of eastern Texas.

However, as we manufacture and sell our own differentiated and proprietary bus converter products, we sought confirmation that Vicor bus converters do not infringe Synqor patterns by filing a complaint for the [collaboratory] judgment in federal district court in Massachusetts.

Shortly thereafter, Synqor filed suit against Vicor in Texas claiming pattern infringement.

As asserted against Vicor products, Synqor's claims are totally without merit.

And like square wave converters that were found to infringe Synqor patterns, our [san amp] converters, our resident converters that do not fall within Synqor claims [through some other antiquated technology].

We intend to vigorously defend our products against Synqor's frivolous claims and are confident that Vicor will prevail.

Because of the sensitivity of this topic, this is all I will say on this call regarding this litigation.

To sum up my remarks, I continue to be very optimistic about our prospects.

Innovative V-I Chip, Brick and Picor solutions enable our customers to realize competitive advantages arising in part from the unique power system density and efficiency attributes.

Vicor's future is promising, its advanced power system solutions leveraging V-I Chip technology and building blocks are getting traction across new vertical markets, supporting revenue specification and long-term growth opportunities.

Last quarter, I stressed concern that the possible reversal in general economic conditions might be needed to customers' demand for our products.

While I do remain wary of the possibility that microeconomic considerations might impact our rate of progress, I am enthusiastic about Vicor's future and encouraged by 50% step up in demand during the current quarter.

This concludes my prepared remarks and I will now turn the call over to Jamie Simms.

Jamie.

Thank you, Patrizio.

As Patrizio mentioned and as set forth in today's press release, consolidated revenue for the fourth quarter was $73.0 million compared to $68.7 million for the third quarter and $49.1 million for the corresponding fourth quarter of the prior year.

The sequential growth represents a 6.3% change and the year-over-year growth represents a 48.5% change.

Revenues for the full year 2010 increased by 26.7% to $250 million -- $250.7 million from $198 million for 2009.

While fourth-quarter revenues set a new record for the Company, full year 2010 revenue fell slightly short of the record level of $257.6 million established in 2000 at the height of the telecom market.

Our consolidated book-to-bill ratio for the quarter was .66.

Total backlog at the end of the fourth quarter was $78.9 million compared to $103.5 million at the end of the third quarter.

As regular listeners know, we do not disclose specific book-to-bill ratios by business unit.

Much of our revenue is derived from large multiperiod programs and, therefore, subject to irregularities in bookings, shipments, and revenue recognition.

The fourth-quarter book-to-bill ratio is particularly representative of the wide swings that occur due to the timing and magnitude of orders and shipments.

The current ramp in V-I Chip shipments was preceded by substantial customer orders in the first, second, and third quarters of 2010.

We anticipated order flow would slow in the fourth quarter at the same time we began to ship higher volumes of product, contributing to the sizable swing in our book to bill.

As always, we cautioned listeners that management does not consider the quarterly book-to-bill ratio nor comparison 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.

Turning to the performance of our business units, revenue from the BBU decreased $2.2 million or 3.6% sequentially to $58 million largely as a result of a decline in shipments associated with a large configurable product program that is coming to an end.

BBU bookings for the fourth quarter declined from the third quarter but remained at a level that supports our positive view of BBU's prospects.

While regular listeners know we do not break out profitability by business unit, I can state that BBU contained its product and operating level profitability for the fourth quarter.

V-I Chip revenue for the fourth quarter was $13.5 million, an increase of 91.3% sequentially.

Total fourth-quarter revenue for V-I Chip including interCompany sales to the BBU was $16.1 million, up from $8.9 million for the third quarter.

The increases in both external and interCompany revenue reflect shipments associated with the strong bookings of the earlier quarters.

For the full year, V-I Chip recorded $29.0 million, a third-party revenue, and $36.7 million of total revenue, again including interCompany sales.

Bookings for V-I Chip declined for the fourth quarter.

But as stated, this was anticipated given our understanding of our customers' scheduling requirements for 2011 and 2012.

Until our V-I Chip customer base is more diversified, we will experience pronounced swings in book-to-bill.

However, based on current backlog and current and anticipated order flow, we expect V-I Chip to continue to record quarter-to-quarter revenue growth this year.

Picor, our fabless semiconductor business unit, recorded third-party revenue of $1.5 million, up 2.7% sequentially, again representing a record level.

Total revenue for Picor including interCompany sales to the BBU and V-I Chip was $2.8 million, unchanged from the prior quarter.

For the full year, total revenue, including interCompany sales, totaled $11.1 million.

Third-party sales for the fourth quarter were largely linked to V-I Chip implementations with major customers.

As was the case of V-I Chip, Picor's bookings for the [third] quarter declined from the particularly high levels of the preceding quarters.

Vicor continues to work collaboratively with V-I Chip and the BBU on customer solutions as well as on its own merchant strategy; and we are confident Picor's aggressive product roadmap will contribute to improved results this year

Returning to consolidated results, international sales as a percentage of total revenue represented 50.2% of total revenue for the fourth quarter, essentially unchanged from the third-quarter level of 50%.

In absolute terms on a dollar basis, international revenue increased 6.8% sequentially.

However, as reported last quarter, 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 attributed to the domestic OEMs, our international revenue would be in line or even slightly below historical averages.

As a reminder, we sell worldwide in dollars with the exception of Japan and Vicor BV.

As such, we have limited currency exposure.

As Patrizio mentioned, consolidated gross margin as a percentage of revenue decreased for the fourth quarter on a sequential basis to 45.2% from 47.3% for the third quarter.

The sequential decrease in gross margin for the quarter was largely attributable to shifts in product mix towards V-I Chip's offset by improved absorption of overhead, due to increased unit volume.

Operating income as a percentage of revenue decreased for the fourth quarter to 14.4% from 16.6% for the third quarter.

Operating expenses increased for the fourth quarter, largely due to increases in year-end compensation, both in the form of sales commissions, pay and non-cash charges associated with options accounting.

We also incurred an increase in expenses associated with large trade events that occurred during the fourth quarter.

Our total headcount at year end was 1,070 up from the prior quarter's total of 1,050.

The increase is largely attributable to the expansion of V-I Chip and the addition of personnel on the manufacturing line.

Quarterly pretax income, including interest income and the net effect of accounting for certain changes in the value of our investment portfolio, totaled $10.4 million, representing 14.3% of revenue compared to $11.5 million representing 16.7% of revenue for the third quarter.

Fourth-quarter net income totaled $10.8 million, representing $0.26 per diluted share compared to third-quarter net income of $15.8 million or $0.38 per share.

However as Patrizio mentioned and we addressed in our press release, both figures included non-cash tax benefits.

For the third quarter, that benefit was $5.2 million or approximately $0.12 per diluted share.

For the fourth quarter, the benefit was approximately $1.2 million or roughly $0.03 per diluted share.

Therefore on a pro forma basis, excluding nonrecurring tax adjustments, third-quarter net income was $10.7 million or $0.26 per share and fourth-quarter net income was $9.6 million or approximately $0.23 per share.

Last quarter, I addressed the changes being made to our deferred tax assets and the rationale for reducing the allowance that had been established against the value of these assets.

I also pointed out that we completely consumed our federal net operating loss carryforwards during the third quarter.

Since the provision for income tax for book accounting purposes is calculated using annual estimates of income and tax do, we were able to further reduce our valuation allowances during the fourth quarter, resulting in the benefit of approximately $1.2 million recorded for the quarter.

We anticipate our tax provision calculations in the coming year will be less complex and the resulting effective tax rate more in line with the statutory norms for federal and state rates, although we do continue to have various tax credit carryforwards that may reduce the provision from the full rate we might otherwise calculate.

We continue to maintain evaluation allowance for other deferred tax assets, for which realization cannot be considered more likely than not at this time.

Cash flow from operations totaled $6.1 million for the fourth quarter compared to $6.4 million for the third quarter.

Capital expenditures totaled $4.3 million for the fourth quarter, reflecting additional equipment for the V-I Chip manufacturing line.

Turning to our consolidated balance sheet, cash and cash equivalents increased to $49.3 million at year end, up from $46.7 million for the third quarter.

Total cash, cash equivalents and short-term investments including long-term investments totaled $67.7 million as of December 31.

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 $18.4 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 certain small businesses.

However, large corporate investors 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 continue to assess alternatives available to us, including litigation or pursuit of an arbitration claim.

Our receivables portfolio is in excellent shape with day sales improving to 46 days from the prior quarter's 47 days.

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

We have no debt.

We own all of our primary facilities and, with cash and investments representing 33% of total assets and 37.8% of total equity, believe 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.

Larry?

(Operator Instructions).

Jim Bartlett of Bartlett Investors.

Could you discuss the size of the opportunity and the bus converter market that you recent -- product which you recently introduced?

And I just want to make sure that I understand it.

Currently you are not allowed to sell this product until there is a resolution from the courts -- with the Massachusetts court, the Texas court doing battle here?

So, the size of the market it estimates to be somewhere between $100 million and $150 million [in yearly time].

There is no restriction with respect to our ability to sell products into these markets.

And in fact as you've seen from recent press releases, we have introduced products that reset the sale of the -- or with respect to these bus converters with as mentioned earlier, double the density, double the efficiency.

And so, based on the opportunity, the fact that our products do not infringe any legitimate Synqor claim.

We expect to do well in this market.

So you are free -- you are out there selling these products now?

Yes.

And could you talk a little bit about the -- to make sure I understood.

On the V-I Chip or -- revenue which was very, very strong in the fourth quarter, the margins on the V-I Chip revenue, were they up to your expectations?

Yes.

As we discussed in the past, the path to achieving the kinds of margins that we have achieved with bricks and beyond that the kinds of margins are really achieved by leading management companies, these are ultimately [long term].

We are not going to get there overnight and the keys to getting there involve economies to scale, a little bit of patience with respect to manufacturing efficiencies.

But as inclusive in the level of progress that has been achieved, with a very significant step-up in volume and capacity from quarter to quarter went our way there.

Another way of saying this would be that while stepping up capacity so rapidly, economies of scale are not immediately attainable.

So it takes achieving our volumes and achieving a level of growth from quarter to quarter that it's more down to earth for us to be able to get to the unit costs that we are anticipating.

Don McKenna of D.B.

McKenna & Co.

Yes, I wanted to ask about the incoming order rate and if my calculations are right it would seem as though it's currently coming in when you talk about a 50% increase over what you experienced last quarter.

It would be at a rate of about [$72] million for the quarter kind of (multiple speakers)?

The quarter is not over.

But quarter to date, our daily bookings rate is about 50% of what it was at the same time in the prior quarter.

Okay so that would come out that if it continued at this rate it would come out somewhere in the low 70s or 72 ballpark-ish?

Well, we are doing a little bit of a [separation], obviously, there's still more than a month ago to the end of the quarter.

But (multiple speakers).

I understand that.

I think what we can do is count the chickens we have which, through this time in the quarter, had been substantially handled last quarter.

That's great.

With that being the case, too, does your business plan call for sequential revenue growth on a quarterly basis going forward?

Well, I will let you draw your own conclusions based on the book-to-bill for the fourth quarter and the lead times as scheduled with filling new orders from customers.

You know, our lead times have come down to something approaching five or six weeks.

So we are able to turn new orders more rapidly than we were able to at the end of last year.

However they still -- it just appears associated with filling our new orders.

I think I had rather approach the general scope of your question in the following terms.

So rather than pinning it down to a single-quarter performance for the year as a whole, we are looking particularly with respect to our main engine of growth of V-I Chip, essentially dabbling revenues from approximately $30 million in 2010 to approximately double that this year.

We also have an engine of growth in Picor that's less significant than V-I Chip at this stage.

But we expect it to become very significant as we get into 2012.

And then getting back to our historical bread and butter business.

The Big Business Unit with its big file compartment (multiple speakers).

As discussed earlier, we recently found great opportunities to expand the big business, to turn it once again into a significant growth business through a V-I Chip [in size strategy].

And that's V-I Chip in size strategy which, as of late last year, was limited primarily to in effect using a V-I Chip or multi-use of V-I Chip within a Brick.

It has recently been expanded to a more comprehensive strategy to in effect use V-I Chip technology as open frame assemblies in a big -- understand that's a big footprint.

And that is what was dished out using V-I Chip technology in competition with commodity Bricks, very recently.

And so, that is another area of opportunity for significant growth by the Big Business Unit in years to come.

So while we wouldn't want to make a specific forecast for the first-quarter revenues in 2011, we see a lot of opportunities across the whole range of our file component paradigms involving the old, the new, and the future of Picor products.

John Dillon of C&B Capital.

It's D&B Capital.

Congratulations on a great quarter.

Patrizio, you've mentioned significant growth a number of times for the brick business.

What does that mean?

Can you kind of narrow that down for us?

I mean, does significant 10% growth?

Does it mean more like 20%, 50%?

Can you just give us some kind of ballpark?

I think to put it in the proper frame of reference, the big business has been a steady cash cow for the Corporation, one that has enabled us to finance major investments in new technology, as you may know.

The profits generated within the big business has financed to the tune of -- upwards of [$13 million] per year investments in new and well advanced technology for V-I Chip and Picor.

Those are obviously the greater area opportunity in terms of revenue growth in the medium to long term, because they are [percent] power component paradigms that expand the developed market for power components and will expand it significantly.

But getting back to bricks.

The brick market which is one that Vicor established, the [13 DA] is a $2 billion, $3 billion market.

It is one that is not going away because the big power component paradigms has its benefits and unique attributes.

It is suited for a certain class of peak actions that has limited market potential.

You never see rates, let's say, in consumer products or the [motor] applications or very [conciliatory] applications in markets other than communications.

But in the communications market in particular some [bricks] storage applications, some computing applications.

Traditional bricks continue to have a foothold that will be there for years to come.

So our strategy very simply is to reestablish a greater share of that market.

We once held a very dominant share.

We gave it up when the telecom bubble burst in 2000.

We are now re-entering the market with a very compelling V-I Chip technology, which is way ahead of the competition and in many ways the bus converter opportunity is an opportunity to make that superiority evident for concern.

Because in effect in comparing V-I Chips with alternatives, that comparison is somewhat [confiscated] by the different power component paradigms.

With open frame bricks, the paradigm is the same and the merits of technology are very evident for everybody to see.

We see these as a strategy that not only will enable us to significantly grow brick revenues, but will also enable us to penetrate key accounts with V-I Chip and power components.

So it is a Trojan Horse of sorts with very significant opportunity both [in action and reaction].

Thank you.

That sounds like is a very bold strategy and what I think I'm hearing is what you are saying is your technology is so superior that, for the first time, you are coming out with a PIN compatible brick and you are going to be able to take market share away from the others.

And I would imagine you will be able to take business away rather quickly since it is a PIN compatible market.

Am I correct in those assumptions?

We expect to see some near-term returns out of this investment which only started really a few months ago.

So we moved very rapidly.

We executed very well.

And delivered some great products to initial customers that are very much interested in pursuing further opportunities with us.

Great.

Do you have any sense for the expectations for gross margin as a percentage of revenue going into next quarter?

Do you expect that to increase or are you going to get your economies of scale up so you can bump that up a little bit?

I think that would be too close a call to make even if we wanted to make it.

You know, margins are impacted by a variety of factors, some not recurring.

As an example, last quarter we had, in the V-I Chip mix, a significant amount of nonrecurring engineering charges that were publicly speaking at zero margin because of the national development in support of [fewer] customer needs.

That is a nonrecurring comment going forward.

But I'm sure every quarter, there's going to be some nonrecurring element in one form or another that impacts the margins.

So you know, placing margins within 1% or 2% quarter to quarter is not something that we want to do.

It's not that that's scientific.

I thought it was pretty good that your margins were so close considering the high jump in the V-I Chip.

So congratulations on that, too.

In regard to the PFM, you made the announcement.

I'm just wondering how is that going along?

What's your level of interest in that?

Are you winning any new designs for that product?

Yes.

We are doing relatively well with it.

We might have expected a little bit more but there are some initial limiting factors that are getting overcome.

And so I'm very confident we are going to see a lot of traction with PFMs.

So we've done well with VCMs with initial acceptance by some key customers; and I think it will take a little while, but we had greatest attachments with respect to PFM.

We look at that as a key element of a very comprehensive strategy.

It -- as I mentioned in the past, it provides connectivity from the wall [placket] to the point of load with very compelling attributes.

And it's a product that leads the competition (inaudible) in terms.

So density performance, low profile.

And it is an area where we continue to make very significant investments with follow-on product capabilities that we are going to be rolling out as the year progresses.

So a little bit of patience, but greatest of patience for the PFM [follow line].

Yes.

I'm surprised we haven't seen any advertising for it.

At least I haven't in any of the journals that I typically see your advertisements in, because I know the defense market and one is really hot on that product like that.

Yes.

So we have [promised the initial tracts] with the [V-I brick] format.

So with the V-I Chip inside strategy where the V-I Chip is sold within a brick.

We have not yet rolled out the -- if you will the naked V-I Chip.

We expect to do that in a little while.

And we think that that is going to add further opportunity.

But even in the big format, we see we see tremendous opportunities for the PFM V-I Chip.

And the PFM V-I Chip technology in one power component paradigm (inaudible).

And you mentioned the DCM.

I've not seen a press release on that.

Is that a released product now?

Is that what you're saying?

We made reference in the past to DCM.

It is fundamentally the same engine as the PFM except it's operated from a DC source as opposed to being operated from an AC input source.

We have significant customer opportunities already for the DCM.

(multiple speakers).

With DCMs in brick form.

Jim Bartlett of Bartlett Investors.

I believe there was a wind down in one large order from the brick unit that you received last summer.

Is that true, that had an impact for this quarter?

And will that continue into next quarter?

And then if that --?

Is there a chance of that large order being won or replaced with newer other product?

So, that's the program that came to an end late last year.

That's a normal part of the kind of business we do, certain programs, you know, certain lifetime and that particular program came to the end of its lifetime.

But there are new programs and new opportunities that will contribute both with legacy products and new V-I Chip technology-based products to the brick overall market opportunities.

So as suggested earlier, we have a [substantials] -- of the big business growing substantially over the next few years based on the aggregate, several opportunities.

Even accounting for the fact that certain programs (inaudible) and the like.

You mentioned the telecom market and getting back into that and you mentioned customers and some new OEMs that you would be working with that you hadn't done much with for a long time.

Could you size that opportunity?

I'm sorry, I missed the question.

Could you size the opportunity in getting back into telecom, the size of that?

Well, I think I mentioned earlier a number in connection with the bus converter [pro] market by itself which is in excess of $100 million.

But that is only a fraction of the overall communications market for power systems and (inaudible).

That market is much, much larger than the bus converter opportunity.

And that's a market for which we have great technology in V-I Chip form, in brick form, with V-I Chip on the inside and before too long with Picor components.

So we --.

I can't quantify the overall market.

Suffice it to say that is quite large.

It is a major market that we expect it to drive significant revenues from in years to come.

And it is a market that [publicly] speaking represented zero up till recently.

And it's a market by the way that we started penetrating again, even before the bus converter opportunity emerged late last year.

So we've already done some early work with DCMs in that market and we see a growing range of opportunities.

Was there a 10% customer in this quarter?

In fourth quarter.

Jamie?

For the year, there -- yes, but not for the quarter.

For the year there was a 10% quarter -- customer?

It will be disclosed in the K.

And when will the K be out?

We're hoping in 10 days to two weeks.

Thank you.

Bob Sales of LMK Capital Management.

My apologies.

I missed the discussion about where your gross margins would be over the next few quarters given the ramp of the V-I Chip.

Could you specify or quantify what it would be, relative to this quarter's margins?

We did not quantify that.

Particularly in the short term, as I mentioned earlier, there would be a very difficult statement to make, given the variety of factors that can affect the margins one way or the other by a few points.

I think that it is safe to say as we've discussed in the past and again today that we expect longer term our margins to expand.

And that should be refractive of the high technological content of the highly proprietary nature of our technology that is covered by tens of fundamental patterns with significant opportunity in terms of differentiated products with market appeal.

So we (multiple speakers) -- we expect, we expect to see a growth in margins long term, but we are not going to make a forecast with respect to margins in the first quarter or second quarter of this year.

Okay and without defining the forecast, can you at least help us as we build our models?

Describe whether the downward pressure in the margins is something like 100 basis points, a few hundred basis points or some range that would just give us some idea of how we model the next several quarters?

Well, again, looking at that from the longer term perspective, we fully expect margins in years to come to get past the 50% mark.

How we get there on a quarter-by-quarter basis is not something we like to get pinned down at this point.

Okay, and longer term you think a couple years?

Or three years?

In that general time frame.

Yes.

We think that the aggregate opportunities we have, with respect to continue cost with actions with V-I Chip products.

Significant license income, other opportunities should result in expanding margins to levels past 50% and beyond.

Fair enough.

And then, as we think about taxes for 2011 with the NOL fully consumed but some other credits being available, how should we think about quantifying the tax rate?

Would we be at a full -- close to a full rate in the mid-30s?

Well, as we said in our remarks it's more than likely that we won't be at a full statutory.

I mean if we could for purposes of modeling I'd look in the low to mid-30s.

Low to mid-30s beginning in Q1?

Yes.

Okay and then with respect to the V-I Chip ramp, I think you describe that the V-I Chip revenue was on the order of $30 million in 2010 going to $60 million in 2011.

And is that -- does that include the interCompany sales as well?

We expect that would be beyond $60 million including interCompany sales.

And roughly what portion of that is interCompany versus external?

Well, historical, it has been a greater portion, it is going to be this year and years to come.

So I think, as with Picor, with V-I Chip we are transitioning from an internal model to an external model.

And that's particularly going to be the case with Picor where historically virtually all the sales were internal and where in years to come, we expect to where most of the sales be third party sales.

(multiple speakers)

Great job on 2010.

(multiple speakers).

I'm sorry?

Great job on 2010.

Thank you.

Dick Feldman of Monarch Capital.

Wonder if you could touch on the issue of license income and the related issue as to being a sole source supplier?

Well, generally speaking, our position regarding the opportunity for our technology is that the opportunity is far bigger than Vicor itself.

They actually are two, three business units it can address.

The first for this kind of solutions with a high density of efficiency, power system flexibility, [fact price] power flexibilities is very high.

But in fact, mitigated by the lack of available [outlier] sources.

So we are very committed and actively discussing opportunities with third parties interested in licensing V-I Chip technology particularly for certain markets and certain class obligations.

So we are committed to that.

We are patient with respect to as part of this opportunity.

We look at it from a perspective of it being a long-term play with a timescale that gets measured in five, 10, 15 years.

And other relevant input is that we've obviously invested a significant amount of R&D dollars.

At this point, I think it is over $160 million in bringing about the V-I Chip technology that we now have in its proprietary structure.

And obviously in approaching a licensing deal, we want to be sure we have the requisite for return investment.

So we're in discussions with various partners and pursuing opportunities for the long term.

Would it be reasonable to expect some type of deal or deals this year?

Or when you mean long term, perhaps you want to hold out and see a larger market response to convince people of the value of your license?

Well, we are not in a hurry even though we recognize that the market opportunity is there to be had.

It is more important to structure the right deal than trust [bad] licenses that do not fit within a long-term model that enables our partners to win with us in the market place.

So we are eager in one way, but patient with respect to doing it the right way.

Could you share with us what are the benchmarks that would represent what you consider to be a good deal?

That would be inappropriate at this point.

But it would be by definition a deal that works for all parties concerned.

Ideally it is a good deal for customers that are able to make the right decisions with respect to technology with access to the suppliers that they want to deal with and a multiplicity of suppliers.

And for the suppliers themselves, ourselves included.

So all those ingredients have to be in place for the deal to be the right deal.

Okay.

Thank you.

Don McKenna of D.B.

McKenna & Co.

Patrizio, if -- when you introduce your new technology in your initially and that push phase when you are trying to sell it all and eventually you get to this spot where everybody wants it and it's the pull phase, if you were to put that into 10 different steps, would you say you are in the second or third at this point in time?

Well, I don't know that I can count the steps precisely.

But we are certain it would say far along from a variety of different perspectives.

We are obviously way past the fundamental R&D stage.

We are past the point of early acceptance by industry pioneers, and we are also past the point of seeing it manifest itself in a variety of different ways.

We talked earlier about V-I Chips getting traction, as V-I Chips.

You know we are now looking at V-I Chip technology getting traction in brick form and significant traction at that.

And I think before too long as we get into the end of this year or next year, we are going to be talking about the V-I Chip technology getting traction through a [package system], a package type of solution at lower power levels.

So all of this, I think, builds momentum in the marketplace, that there's significantly serve interest in many different markets from markets that we have had earlier such as several market to the test equipment market, to the automotive market, to the (inaudible) market.

And momentum builds momentum.

So we think that with recent steps to add more bandwidth to our self and marketing transaction, we are well equipped to go after the big market opportunity again, working with the right kinds of partners that are well equipped to address some or all of these markets.

All right and one other question, too.

When you mentioned before about having the capacity in place that you didn't need much more in the way of capital expenditures this year, what level capacity are you utilizing at this point in time on the V-I Chip?

It is a capacity that is really growing every week.

You know obviously when you have a step-up in production, as we have had in the third and fourth quarter last year, with high double-digit rates quarter to quarter, 50%, 30% and significant further expansion in capacity, in all capacity this quarter, next quarter.

You know, capacity is something we need to watch very closely, which we do, and work from every angle in terms of getting more out of the existing equipment, overcoming bottlenecks that hold the capacity down while also deploying [connective] equipment and changing our machine coverage in terms of the strategy for production shifts.

So all these factors play into, in effect, making the most out of the capacity and continue to expand into best market mix.

And with that, I think we are maybe at the point of taking one last question if there is one.

John Dillon of D&B Capital.

Patrizio, you mentioned new design wins a couple of times in your remarks.

And in particular, I am wondering if you could comment -- at one time you were very positive on the high-end server market that you would win a large share of that market.

What I'm wondering is, have you had any new design wins in the server market?

And how is it going to grow your share in that market and also on the vein and the communication markets, do you have like one new customer in the communications market or is it multiple customers?

I think we are dealing with a multiplicity of customers in both.

I think particularly with respect to the communications market the main players, obviously, not all of the same size, but we are getting traction on a variety of fronts.

So, I'm encouraged by the fact that the early adoption by one customer in each of these markets, you need, too, greater adoption by other customers for a simple reason.

By incorporating our products, our customers get a competitive advantage of loyalty to their competitors.

And as the benefits of that competitive edge become obvious to the competitors, it becomes very compelling for the competitors to follow suit.

And that's how the kind of ecology we have plays itself out in the marketplace.

In the storage market is there a multiplicity of customers in the storage market also?

Yes.

Excellent.

And one final question and I will make you go back to Jamaica.

And that is your business development group for the automobile industry, how is that working out?

Are they getting any traction?

(multiple speakers).

I know it's a long term.

It is a long-term proposition.

Let's be clear about that.

We are now looking at [long-term] revenues of any significance this year or next year.

It is a longer-term flight.

But there's a lot of interest in the technology involving leading confidence in that space and US and elsewhere and we are very optimistic about the medium to long-term opportunities in that market which, as we discussed in the past, as a very significant content in terms of electronics in general and power systems in particular.

And that's particularly the case with the more advanced propulsion engines and electric and (inaudible) in particular.

But even outside of that, we see a lot of opportunity in this and a lot of interest.

And with that, thank you very much and we will be talking to you in a couple of months.

Thank you.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may disconnect at this time.

Have a great day.