Vicor Corp (VICR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vicor earnings results for the three and six months ended June 30, 2011 conference call.

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

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

Later, we will conduct a question-and answer-session.

(Operator instructions) As a reminder, this conference is being recorded for replay purposes.

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

James Simms, Chief Financial Officer.

Please proceed, Mr.

Simms.

Thank you, Nicole.

Good afternoon, and welcome to Vicor's earnings conference call for the second quarter ended June 30, 2011.

I'm Jamie Simms, Chief Financial Officer and with me here in Andover are Patrizio Vinciarelli, Vicor's Chief Executive Officer and Dick Nagel, our Chief Accounting Officer.

Today, we issued a press release outlining our financial results for the second quarter and announcing a cash dividend on our common stock.

This 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.

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 financial reports on forms 10-K and 10-Q filed with the SEC.

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.

A replay of the call will be available beginning shortly upon its conclusion through August 10 by calling 888-286-8010 and using the pass code 57907539.

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.

Patrizio and I each have prepared remarks, after which we will take your questions.

Patrizio?

Thanks, Jamie.

Hello everyone, and welcome to our Q2 earnings call.

Vicor recorded consolidated revenue of $65.4 million and net income of $3.1 million or $0.07 per share for the second quarter.

Although consolidated revenue declined 7.2% sequentially, it increased 14% year-over-year.

For reasons I will describe shortly, Vicor is making good progress toward our longstanding goal of establishing the Company as a global leader in innovative, cost-effective power system solutions.

Each of our business units are progressing as planned toward executing their shared strategies.

As I addressed at our Annual Shareholders Meeting in June, Vicor is in a period of considerable strategic and organizational transition.

We've entered an exciting phase of evolution of the Company with new product platforms and new approaches to reaching customers.

As Jamie will address the specifics of the income statement and the balance sheet in his remarks, I will focus my remarks on the evolution and strategic and operational trends within our traditional business units.

The Brick Business Unit, our largest which sells brick components, configurable systems and custom solutions worldwide, is experiencing its own transition in terms of markets, go-to-market strategy and products.

For the second quarter, the BBU experienced an approximate 12% decline in revenue quarter-over-quarter, largely as a result of continued deferral of funding for defense electronics products.

As discussed in the past, defense electronics and related projects have represented approximately one-fifth of our consolidated revenue and upwards of one-quarter of BBU revenue from brick components and custom products.

With the ramp of V-I Chip and Picor sales over the last two years, these percentages have declined on a relative basis and largely as a result of funding deferrals for the Pentagon, such revenue also has declined on an absolute basis.

Also contributing to the absolute decline was the conclusion in the first quarter of a significant defense electronics program that came to its end of life.

While we anticipate a recovery at some point in defense electronics spending, order flow from second quarter levels, we are expecting defense electronics revenue to represent the lower percentage of the BBU's revenue growth going forward.

This is one of the important transitions underway.

While we believe defense spending may be entering a longer-term steadier decline, the question of whether defense revenues also experience a steady decline as a percentage of our total revenue will depend upon how rapidly Factorized Power and V-I Chips are incorporated into new defense programs.

Innovative systems such as Unmanned Aerial Vehicles already utilize V-I Chip components, which are well suited for applications in which high-power and small lightweight form factor are priorities.

Two other significant transitions are underway within the BBU and they involve a shift to serving global OEMs with a range of new products, some of which are offered in industry standard formats.

In the first quarter, we made the first of several subsequent new product announcements, involving or expanding IBC line of VI BRICK Intermediate Bus Converters, offering essentially double the density and efficiency of industry standard bus converters, which again replace on a pin-compatible basis.

These products which we expect to be a significant contributor to BBU revenue growth are isolated, fixed ratio converters for power system applications in networking and computing.

IBCs utilize the same Sine Amplitude Converter engine found in V-I Chip, BCM and VTM converters.

In their IBC implementation, our Sine Amplitude Converter engine delivers 98% peak efficiency, allowing for the replacement of quarter-bricks with pin-compatible eighth-bricks enabling greater design and manufacturing flexibility and performance-based competitive advantages for OEMs.

We are actively marketing these products to OEMs in the enterprise networking and computing segments, as well as their contract manufacturers.

Because we have not for sometime targeted such customers, the new IBC line opens up a new broad range of opportunities for the BBU and Vicor at large.

[Getting] sample products to dozens of interested parties, we have recently received promising order flow and have started shipping production volumes.

The differentiated performance of IBCs has reacquainted the communications industry with our leadership in technical innovation and we're increasingly finding traction with OEMs seeking to leverage our broadest set of capabilities.

Until the end of May, the BBU's progress with its new bus converter product line has been somewhat handicapped by SynQor’s attempt to restrict competition and inhibit fair trade by making spurious claims of patent infringement and seeking to enforce a preliminary injunction against Vicor.

As disclosed and previously addressed, SynQor won a jury verdict in December 2010 against 11 manufacturers of commodity bus converters.

Vicor was not named in their suit, which was tried in the Federal District Court of Eastern Texas.

However, as we subsequently introduced our own differentiating proprietary bus converter products, SynQor unable to compete with their own product's superior performance and cost effectiveness responded to our product introduction by suing Vicor and one of our early customers.

As disclosed at the end of May, one week prior to the scheduled court hearing, SynQor withdrew its preliminary injunction motion.

SynQor withdrawal is an indication of the weakness of SynQor claims as asserted against Vicor.

Our Sine Amplitude Converters are resonant converters that SynQor specifically disclaims in pursuing infringers of its square wave technology.

Unfortunately, in spite of lacking merit, SynQor's litigation as at up to the end of May, its intended effect to interfere with short-term adoption by potential customers attractive to the superior performance of our products, but reluctant to place production orders given the uncertainty caused by the trails of injunction.

As stated a moment ago, since the end of May, we have however received production orders and are getting design wins with a growing list of customers.

Turning to the BBU's transition in its go-to-market strategy, we announced on June 22 our partnership with Future Electronics thereby adopting a multi-tiered distribution model with direct sales, (inaudible) and for the first time in North America distribution partnerships.

We expect Future Electronics, one of the world's leading distributors of electronic components, to be a good business partner for Vicor.

It is known for its value-added approach of design support, which fits well with a differentiated product capabilities.

Future is recognized as a provider of collaborative engineering services, supporting sales efforts and we expect this hands-on approach to business development to create substantial new opportunities for us.

Today, we serve North America through a network of regional manufacturers' representatives, which has helped facilitate our mass customization strategy.

However, the relatively limited reach of our historic channels would have constrained the revenue growth going forward.

Global distribution will give the BBU access to a much broader customers' list to a much larger sales force with little overlap with our regional rep network.

Vicor will continue to invest in its North American rep network, while bringing on other complementary distribution channels.

We anticipate the high degree of collaboration between reps and distribution partners as frequently occurs in similar multi-tiered distribution relationships.

Global distribution is also a good avenue for V-I Chip and Picor products, which are particularly worse suited for distribution channels.

To close on the exciting transition, our go-to-market strategy, let me state that the potential of this new element of our strategy is significant.

This is the first time Vicor is working with distribution of the scale, range of capabilities and hands-on differentiated approach.

Turning to V-I Chip's second quarter performance, I'm pleased to report V-I Chip had record revenue of $14.7 million representing a 9.6% revenue growth quarter-to-quarter, and more than double year-over-year.

V-I Chip revenue for the quarter represented 22.4% of consolidated revenue, also a record level.

V-I Chip also continued to improve gross margins with higher production volumes and ongoing implementation of efficiency initiatives in manufacturing.

While I will not speak to specific gross margins of individual business units, I reiterate what I've said in recent communications.

V-I Chip is making substantial quarter-over-quarter progress at reducing average unit cost.

Unit volume is the primary driver of lower unit cost, whether because we can spread overhead across higher volume or because we can obtain more favorable pricing from suppliers on higher raw material and component volumes.

For the first half of the year, unit volume, which varies based on product mix, averaged above 20,000 units per month.

While V-I Chip gross margins are below our long-term target levels, progress today supports the expectation of improvements in margins to be enabled by economies of scale and the and the economy inherent in new product platforms utilizing next-generation V-I Chip packaging technology, which we refer to as power molding now in its final development stage.

Sustained high volumes, greater efficiency and lower material costs complemented by advances in packaging technology should contribute to continued improvement in V-I Chip's profitability for the balance of this year and for the longer term.

An important ongoing transition for V-I Chip is customer diversification, whether with new products or new customers for existing products.

In light of current activity with various customers, we expect the diversification of the V-I Chip revenue base to accelerate in 2012 as V-I Chip revenues break through the $100 million level with significant contributions from networking applications and test equipment applications, complementing our early penetration of high-end computing.

Recent traction in automotive applications underscored development contracts for an automotive DC-DC converter points to greater market diversification and continued long-term growth opportunities for V-I Chip.

Turning to our Picor Business Unit, a fabless developer of silicon-centric power components, the transition towards a merchant strategy continues to accelerate with 13% quarter-over-quarter sequential growth.

We expect new sales channels made available by global distribution to further contribute to Picor's growth.

We're particularly excited by the potential of new support System-in-Package or SiP converters, which Picor expects to introduce starting in early 2012.

Picor's silicon-centric SiP products will have market-leading performance attributes and represent game-changing products for Vicor's [solar] power system capability.

These DC-DC converters would provide high-performance, cost-effective solutions and lower power levels typically near or after the point-of-load.

As such, SiP products should be highly complementary to V-I Chips and VI BRICKs thereby expanding the breadth of applications served and achieving critical mass with customers seeking high-performance, cost-effective power system solutions from the wall plug to the Point-of-Load.

To close my remarks, I am satisfied that Vicor is executing our vision of providing a comprehensive array of power component solutions for a growing customer base.

The transitions necessary to execute this vision are underway.

The BBU is expanding its products and changing its go-to-market strategy to drive robust future growth.

V-I Chip is successfully pursuing a growing list of early adopters that will diversify its customer base and accelerate growth as it has to our -- its own standalone status.

Vicor is very close to launching highly differentiated, high-performance SiP converters that will be of the core of its merchant strategy, thereby pursuing accelerated revenue growth in its own critical mass.

Vicor's strategy is driven by our vision of an evolving power system marketplace.

Its energy efficiency and power system density are becoming critical performance metrics for designers of electrically power products.

Our innovations put us at the forefront of this important shift in customer priorities.

With these three aligned business units, Vicor is capable of providing differentiated integrated power system solutions that enable customers to achieve competitive advantages linked to power system performance.

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

Thank you, Patrizio.

I'll now review the specifics of our quarterly performance.

As covered in our press release and addressed by Patrizio, consolidated revenues for the second quarter of 2011 totaled $65.4 million, down 7.2% from the $70.5 million realized for the first quarter, but up 14% from the $57.4 million realized for the corresponding quarter a year ago.

The majority of this year-over-year increase is associated with the ramp of V-I Chip, but increased component sales by the BBU and improved sales by Picor also contributed to the increase offsetting the decline in revenue from Vicor Custom Power.

Export activity remained a strong contributor to our consolidated revenue.

For the second quarter, international sales represented 62.0% of consolidated revenue, up from 55.7% for the first quarter of 2011.

This relative increase in the overall share implied can be somewhat misleading, however, as a slight absolute increase in international revenue was offset by a larger decline in North American revenue, largely as a result of the aforementioned deferral of funding for our defense electronics projects.

As reported for prior quarters, much of the recent growth of international sales is related to increases in sales in dollars 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 more in line with the historical range of 60% domestic, 40% international.

With the increased focus of the BBU on OEMs with products like the new IBCs, we expect in the longer term we will see a continued shift to greater shipments to offshore contract manufacturers, thereby skewing our international mix.

Since Vicor sells in dollars worldwide, except for Japan, such an increase would not be accompanied by an increase in currency risk.

Speaking of Japan, our subsidiary Vicor Japan Company Limited or VJCL has performed quite well since the March earthquake, tsunami and subsequent nuclear crisis.

We have been relieved no VJCL employees were hurt and only minor physical damage to our Tokyo offices and (inaudible) facility in northern Japan was experienced.

VJCL's dollar-denominated revenue for the second quarter increased 4.4%.

Turning to bookings, as regular listeners know, we do not disclose specific book-to-bill ratios by business unit, nor do we consider the quarterly book-to-bill ratio for comparisons of quarter-end backlog to be definitive indicators of forward revenue.

Our consolidated bookings vary considerably, as much of our revenue, particularly that of V-I Chip and Picor, is derived from large multi-quarter programs and therefore subject to irregularity in bookings, shipments and revenue recognition.

However, we are watching North American booking activity for the BBU closing, as slow second quarter order flow for the BBU was a large contributor to the roughly 16% sequential decline in consolidated bookings.

Our consolidated book-to-bill ratio for the second quarter was 0.85 compared to 0.94 for the first quarter and 0.66 for the fourth quarter of 2010.

Total backlog at the end of the first quarter was $64.9 million compared to $74.8 million at the end of the first quarter.

Our consolidated gross profit for the second quarter was $27.3 million, down 10.3% from the $30.5 million realized for the first quarter of 2011, but up 6.1% from the $25.7 million realized for the corresponding second quarter a year ago.

Gross margin as a percentage of revenue decreased to 41.8% for the second quarter from the 43.2% of the first quarter in 2011.

Patrizio has focused on the numerous transitions underway, both strategically and organizationally.

Our consolidated financial statements also were undergoing several transitions, one such transition involves our consolidated gross margin.

During prior quarter's calls, I have addressed this decline in absolute and relative gross profit pointing out the significant influence the shift in revenue mix is having on consolidated gross margin.

The decline this quarter was largely associated with the further decline of relatively higher-margin defense electronics revenue as a percentage of total revenue.

As Patrizio stated, we anticipate Pentagon funding authorizations will resume at some point, although we do not expect to recover to levels we experienced in 2010.

Also, while it is too early to forecast specific product profitability, we are expecting revenue and profit from the new IBC line may offset and in the long run eclipse the decline of defense electronics revenue and profit.

Another contributor to lower consolidated gross margin has been the increase in V-I Chip revenue as a percentage of total revenue.

We are pleased with the progress being made by V-I Chip in reducing average unit cost.

However, we are still early in the ramp of V-I Chip and the gross margin realized on these products are short of our targets.

As such, our consolidated gross margin reflects the higher percentage of lower-margin products in our total mix.

As we expect V-I Chip revenue will continue to increase at the current rate for the next several quarters based on existing backlog and scheduled shipments and we expect ongoing improvements in unit cost, we anticipate the impact of incrementally higher percentages of V-I Chips in total revenue will not have a meaningful impact on consolidated gross margin beyond what we've experienced today.

As we diversify V-I Chip's customer base in 2012 and beyond, the trend in consolidated gross margin should reverse, as steadily higher volumes should contribute to accelerated unit cost reduction.

Consolidated operating income for the second quarter was $4.4 million, down 31.7% from the first quarter level of $6.4 million, but roughly equal to the $4.6 million realized for the corresponding second quarter a year ago.

Operating margin, as a percentage of revenue decreased to 6.7% for the second quarter of 2011 from 9.1% for the first quarter of 2011 and also declined from 8.1% for the first quarter of 2010.

SG&A expenses declined 8.2% sequentially for the second quarter, reflecting lower sales commissions, which are disproportionately recorded in the first quarter of any year.

And legal expenses, which declined with the decline in activity associated with the SynQor litigation.

R&D expenses increased a modest 0.5% for the second quarter.

On a year-to-date basis, both SG&A and R&D, which are substantially tied to headcount, reflected the year-over-year increase in personnel.

Combined, SG&A and R&D expenses increased 12.2% on a year-to-date basis, reflecting the increase in total headcount from 1,000 as of June 30, 2010 to 1,079 as of June 30, 2011.

Note that headcount was 1,081 as of March 31.

The majority of the net expanded headcount was associated with the addition of additional shift and additional shifts for the V-I Chip manufacturing line to address production requirements, and the hiring of senior sales and marketing professionals to execute our integrated multi-channel go-to-market strategy.

With the exception of expenses associated with our more robust sales and marketing initiatives, we do not anticipate further increases in absolute SG&A and R&D expenses for the foreseeable future.

The unknown will be the amount of legal fees incurred as the timing of any substantial courtroom activity is unknown.

Quarterly pre-tax income, including interest income and the net effect of accounting for certain changes in the value of our investment portfolio totaled $4.9 million, representing 7.5% of revenue, in contrast to the first quarter pre-tax income of $6.2 million representing 8.8% of revenue.

Our effective tax rate for the second quarter was 35.0%, up from 33% for the first quarter.

The full-year 2011 provision for income taxes, which is based on an estimated annual effective tax rate for 2011, approximates a full statutory rate as compared with the lower effective tax rate for 2010.

As discussed on prior calls, by the end of 2010, we had utilized all of our federal and a significant portion of our state net operating loss carry-forwards.

We continue to have certain deferred tax assets against which we maintain a valuation allowance for which realization cannot be considered more likely than not at this time.

While we have certain other tax credit carry-forwards that may reduce our provision in future periods and we may generate additional credits that may reduce our provision in future periods, we expect to be a full taxpayer going forward.

Net income for the second quarter was $3.1 million or $0.07 per diluted share compared to first quarter net income of $4.0 million or $0.10 per diluted share.

Net income for the second quarter of 2010 was $4.7 million or $0.11 per diluted share.

Cash flow from operations totaled $7.1 million for the second quarter, down from $10 million for the first quarter, largely as a result of a lower net income and the absence of the favorable swing in working capital we enjoyed in the first quarter.

As the continued use of inventory built up in 2010, the V-I Chip production ramp was largely offset by an increase in BBU raw materials to facilitate the anticipated IBC production ramp.

Capital expenditures totaled $2.1 million for the second quarter, down from $3.0 million for the first quarter reflecting additional equipment for both the BBU and V-I Chip that came online during the quarter.

While we are monitoring our production requirements, especially in light of our expectation that we'll be broadening our customer base in the near term, we are not yet scheduling substantial additional CapEx for an increased capacity.

As discussed, we have adopted a multi-channel distribution strategy.

Our new relationship with Future Electronics, because it will be a stocking distributor, has required Vicor to adopt certain revenue and cost recognition policies, so that our financial statements will accurately reflect sales through distributors that stock our products.

We have kicked off the future relationship in Q3, and while initial volumes are likely to be modest for the third quarter, our September financial statements will reflect these new policies.

In short, we will be following customary accounting practice known in the distribution world as POS or point-of-sale accounting, whereby we will record a sale transaction, recognizing product revenue and associated product cost only when the stocking distributor notifies us of its sale of a product to its end customer.

Shipments of product by us to a distributor will be recorded as deferred revenue and associated product cost will be deferred as well.

The net of these two amounts will be carried on our balance sheet as deferred revenue or current liability.

Our third quarter 10-Q will set forth our accounting policies and practices regarding how we will recognize revenue and cost for transactions through a stocking distributor.

Turning to the consolidated balance sheet, our receivables portfolio is in excellent share with days sales declining to 44 days, an improvement from the prior quarter's 47 days.

Consolidated inventories quarter-over-quarter changed very little as discussed above and our annualized inventory turns stood at 4.3.

Cash and cash equivalents increased to $69.8 million for the second quarter, up from $56.4 million for the first quarter, largely due to cash flow from operations and the redemption by issuers at par of $4.8 million of long-term investments in auction rate securities.

These long-term investments made up of our portfolio of student loan -- auction rate securities par value of $11.2 million, there were purchased through Bank of America.

These securities were carried at quarter-end at an estimated fair value of $9.6 million.

These securities continued to pay interest in accord with the terms of their indentures.

Although we have no insight into when we might expect to receive par value for the remaining portfolio, we are encouraged by the steady redemption activity and the efforts issuers are making to bring liquidity to the market.

We believe cash flow and existing resources are more than adequate to fund operations, any capital expansion and of course the announced dividend.

Regarding the Board's declaration of the cash dividend on our common stock, the dividend will total approximately $6.3 million and will be payable on August 31 to shareholders of record as of August 9.

This concludes management's prepared remarks.

So now, we'll take your questions.

Nicole?

(Operator Instructions) Your first question comes from the line of [Paul Schultz].

Please proceed.

Oh, yes.

Thank you.

Can you tell -- two questions, please.

One is, what was the defense electronics program that came to an end of life this quarter?

And the other question is, has SynQor partnered with any outside IP firms relative to the lawsuit?

So the first question, I'm not sure I can answer.

Jamie, do you want to take a crack at it?

Thanks.

We can't -- Paul, we can't disclose the program --

Yes.

I know the program, but I'm not sure I can disclose details.

I think it's safe to say that it relates to activities that are coming to an end.

And as you might imagine that program of the lifetime and with those activities coming to an end, the lifetime ran its course.

I think generally speaking, with regards to our participation in defense programs, we can tell you that based on a long history of investment in high-density solutions that are particularly valued in a variety of defense applications, we are very well penetrated in literally every program with every major defense company in the US.

So we participate in literally every program, obviously, to a different degree.

The one that you asked about was associated with an engagement that came to an end.

Regarding your second question, I don't know what you mean by partnering, obviously, SynQor has attorneys.

They, from what I can tell, appear to be very DC motivated people, but beyond that I can't comment.

The question really was, has any of the IP held by outside firms or all of it only by SynQor?

As far as I know, the IP worthless as it is, is owned by SynQor.

Thank you.

Your next question comes from the line of Bob Sales.

Please proceed.

Hi, just a couple questions.

I think, I know you guys have not been precise in providing gross margin guidance, but I'm just looking at my notes and Q4 is 48%, 43% in Q1, and 41.7% in Q2.

And I think what I heard you suggesting is that, we shouldn't see that kind of material degradation going forward given that the V-I Chip won't be weighing the gross margins down materially going forward.

Am I reading that right?

Yes, that's a correct interpretation.

I mean what fundamentally we're talking about here is the associative principle that we all learned back in middle school.

And that is, the average gross margin has to date been brought down in part, because of a higher and higher volume of V-I Chips for which the gross profit margin is steadily increasing, but it is starting from a relatively low position.

We're encouraged with the progress being made and think that just what you were pointing to was these -- meaningful decline in our consolidated gross margin that we're not expecting that much of an impact.

What has been also a major factor certainly quarter-over-quarter is the aforementioned end-of-life program for the Defense Department that because of its size and because of the urgency with which the Pentagon required the products had a very attractive gross margin, and now that's gone.

And that was completed in Q1?

Yes.

That was completed in Q1, so it was not a factor in Q2.

And let me add to Jamie's remarks.

With respect to any trend on margins, the underlying forces of play have to do, as Jamie pointed out, with a growing percentage of V-I Chip revenues.

If you go back many quarters ago, I think many shareholders worried about how long it took for V-I Chip to get traction and for V-I Chip revenues to begin to grow.

Well, guess what they've now grown, and they are promising to grow to much higher levels.

Now, the concern has shifted from when is revenue growth coming to the impact the revenue growth that might have on margins.

And to Jamie's point, reading into a temporary decline over a couple of quarters in margin, any long-term trend that will be is huge mistake because fundamentally the level of innovation, the superiority of V-I Chip technology coupled with the investments we've made in cost-effective products that it will lend themselves to very cost-effective solutions, will lead to margin opportunities far above the current levels.

Another factor to be considered is the role starting next year that Picor will play with respect to its margins, which I think are going to start off of very healthy levels, given the different nature of its manufacturing processes or lack thereof its reliance on outside sources for assembly and manufacturing of the products.

So whether it's the V-I Chip growth coming to fruition, Picor forthcoming growth coming to fruition, and going back to the BRICK revenues, the change in their mix, contribution from new products with a V-I Chip inside technology strategy, I think the fundamental trends for the medium to long term are very positive regarding not just topline growth, but bottom line growth and in particular, margin growth.

Okay, thank you.

And then on the defense business, it sounds to me like there may be some modest recovery in defense, which won't -- the end of life was end of life, but you're not seeing any recovery as you look at your bookings into Q3, is that true?

We've had a very healthy first several weeks in July with bookings level far above the Q2 levels, and with some contribution from markets that have been subdued in the second quarter.

So again, I think trying to read too much into quarter-to-quarter changes associated with programs and shift in mix we'll be really missing forest and trees in that the underlying forces are whether it's topline or bottom line, I think, fundamentally quite healthy.

And that will include a continued participation in defense programs because of investments that date back little early 20, 25 years.

Okay, thank you.

Thank you.

Your next question comes from the line of Don McKenna.

Please proceed.

Hi, Jamie, the point-of-sale accounting that you're talking about with Fortune --

Yes.

I'm not totally familiar with that, but if you could just tell me is that have -- during the stock up process, is that going to have a neutral, negative or positive impact on earnings?

Well, I think the number is going to be subtle enough for Q3 and the footnote is robust enough to explain the process that -- I'll give you a much better answer on next quarter's call.

Well, let me jump in.

I think that it’s going to be totally immaterial, because we're being very judicious with respective to the stocking plan.

We are walking before we run and we would now want to put on any distributor shelves product that would sit there.

And by the way, the distributor is not entitled to return by the very small fraction, I believe, 5% of the product they purchase.

So there isn't any risk, any appreciable risk with respective to products that is going to go on the distributor shelves.

And --

I think what Don is getting at though is -- and what I was trying to address was the fact that we defer when we ship to the distributor if it's a stocking distributor, we defer not only the revenue, but also the cost.

Right.

So there would be an incremental lag in there, that would be what you're concerned about.

The numbers are really too small to make a difference in Q3.

And again, the real significance of this transition has to do with the fact that these small initial volumes represent seeds that are going to be planted with new customers worldwide, which in time will lead to new programs and further revenue growth.

So the short-term impact on our financial statements is going to be totally immaterial.

We do anticipate as we get into next year, the beginning of a significant contribution for the long term both in terms of topline and bottom line.

Okay.

I can't remember how many reps they had out there, but I know it was pretty significant like 1,300 or so.

Do you have a training program aligned for them?

Oh, yes.

So this is a major effort for us.

We have on board executives that are very experienced, they've done it before, they've instituted $1 billion plus, and that's a billion with a B, distribution programs with distributors such as Future.

This is being done the right way.

And it's being done with an expectation that it will work quite well for concerns without undue glitches.

Great.

Thank you.

I also wanted to ask you about BlackRock and I thought I had noticed a reduction in their position that they filed at the end of the year.

And I noticed that recently they indicated that they were now under a 5% holder, at least that's the way I read it.

I was wondering if -- I would expect you would have had conversations with them to see if their intention is to liquidate their entire position and how long a time period they anticipate that to take or is this just one of the managers inside their multitude of platforms has decided to get rid of the position with Vicor?

Okay.

I've had no conversation with BlackRock.

Yes, nor have I.

And, Don, as a practice we can't speak to what any particular investor might do.

Keep in mind that the BlackRock position was their acquisition of the --

Yes, Pequot.

No, no, no.

No, it was when Barclays Bank I believe had a series of funds in which they've taken positions in Vicor and then BlackRock absorbed that.

And I can't speak to what may be going on, but it's not as if there's a particular portfolio manager voting with his feet, this is a very diverse holding within the number of funds inside that larger organization.

Okay.

Thank you very much.

Thank you.

(Operator Instructions) Your next question comes from the line of Jim Bartlett.

Please proceed.

Could you give us some idea of the ramp and your bus converter orders of how you might see that contributing to the third and fourth quarter and then as you move on into 2012?

Well, there's been a significant step-up that started about three or four weeks ago, I think it's an evolving situation, so I'm not going to speculate about specific levels of growth rates.

I think it's enough to say that we are engaged with a large number of customers, I would say with literally all of the leading customers, I mean the users of bus converters with a growing number of design wins and with early participation in existing programs.

So I think that even though for the reasons I [figurated] earlier, the traction in terms of not appeal by the product, but rather orders, even though that was delayed by the cloud created by SynQor through their three main traction initiatives.

With that behind us, we've seen good progress in the last month-and-a-half.

And the margins on that product would be more likely to get a brick, your BBU unit?

We expect margins to be quite healthy, even though the product is competitively priced.

It is priced at levels far below SynQor's.

We understand those levels to be, it is a much superior product in terms of that inefficiency.

And in spite of all those attributes, it is a product that we can make with a very good margin.

Also, you mentioned something about the next-generation packaging, giving a name, and could you -- which I did not get.

And could you expand on that packaging in terms of where you are in that and what kind of timelines you're looking at there?

Yes.

So we talked about this to some degree at the recent shareholders' meeting, this is the new V-I Chip package.

We've just taken delivery of first molding equipment, it just arrived within the last week.

We are involved in automotive program that will leverage this packaging technology with deliveries starting early next year, in the first quarter of '12.

We are looking at this package as a package that will advance (inaudible) the density, the efficiency and the cost pressure of V-I Chip substantially in rough terms.

We're looking at being able to process about 70% or 80% more power in the same footprint, a significant increase in efficiency, and a cost reduction measured in terms of cents per watt that will be quite substantial.

It is a package that supports all of the V-I Chip functional blocks from bus converters to other sorts of measure modules to regulators of a variety of kinds, two full-blown DC-DC converters both in relatively low input voltage, as well as high input voltage as found in automotive applications and in offline products.

Again, the package supports AC to DC products, as well as DC to DC products.

I expect that this will become a standard for power components for many years to come.

So the first application being an automotive rollout and then increasing that during 2012 and then -- will that be a substantial percentage by the end of 2012 of V-I Chips?

We expect and obviously these expectations are still somewhat tentative, because while this program is being ongoing for some time and we've invested significantly in it, it doesn't come to full fruition, but it's been progressing remarkably well, remarkably on time.

I don't anticipate any glitch in the next few months and absent any last-minute surprise, I think we're going to start seeing product announcements for brand-new V-I Chips that are power molded before the end of this year.

And these are going to be products in the AC to DC, as well as the DC to DC arena.

Great.

Thank you.

Thank you.

Your next question comes from the line of Don McKenna.

Please proceed.

Yes.

I got back in line because I didn't hear you say anything in your prepared remarks about automotive and of course, you just mentioned it here.

But I was going to ask you too because I -- at the annual meeting, I thought I overheard you in a conversation afterwards talking about the potential of the automotive being somewhere in the $100 million range over the next five years.

Could you address that?

We have a lot of interest.

That interest has been nurtured for now a few quarters.

I think we had discussed in earlier conference call the fact that we instituted a dedicated team focused on developing the automotive market.

And these efforts in the interest of OEMs in the density and efficiency and cost attributes of V-I Chip products recently led to a development contract from a major automotive manufacturer with other opportunities that are tracking along.

So, I think this initiative is progressing as expected, because they use the fundamental alignment between the technology attributes that are needed in the automotive space for which there doesn't appear to be any competitive alternative in what we have to offer.

And does the potential down the road have that kind of magnitude additional business?

In gross terms?

Yes.

So, yes.

Yes.

This is part of a relatively grand plan that involves expansion into new markets, as well as further expansion into existing markets.

But we've earmarked based on feedback or rather you see the automotive market is a significant market for us as we look out three to five years.

Thank you.

Thank you.

Your next question comes from the line of Dick Feldman.

Please proceed.

Good afternoon.

I have one question, you were speaking about the new packaging for the V-I Chips.

Is this in any way proprietary, are there any patent surrounded and does it have applicability beyond your own products?

It is hardly proprietary, it's the subject of pending patent applications and it has the combination of attributes that in our opinion are needed in order to advance the power component, a concept to a level of cost effectiveness and performance that will encourage widespread adoption.

That's asking that we achieved packages -- have to a limited degree as we all realize with existing V-I Chips.

We have solutions that are cost effective enough for applications that demand the ultimate in terms of density and efficiency as we've been able to achieve based on that package, but not cost-effective enough for more mainstream applications.

I think that we expect that with power molded devices, we're going to raise the bar on density and efficiency while at the same time reducing the cost per watt to a level that will greatly broaden the market opportunities.

To the point where -- as an example going back to the automotive marketplace, which as you might expect is quite competitive and very demanding.

It makes the V-I Chip solution very cost effective in terms of the cents per watt figure made.

Never mind, the higher density and efficiency attributes.

I wondered with this new development if before you develop this packaging the available market is X, what would you think this packaging will enable you to do, or how much will expand the market that you can address?

Well, before I answer the part of questions to do with the power molded packages and their potential in terms of a standard market, I want to make sure that I don't -- I don't say how to do justice to the V-I Chip package as we've had it.

Obviously, that supported good revenue growth, growing profitability.

As discussed in the past, we've had a couple of years of -- we've shown 100% revenue growth based on V-I Chip packages as we know them.

This year would be essentially doubling our revenues.

And as we look into next year, we're looking at another significant expansion in V-I Chip revenues based on the V-I Chip packages as we know them, the material packages that have been around for quite some time.

But -- so having given credit to the existing V-I Chip packages for what they are, they are good packages, they do represent what one might call the first-generation package for this type of our component.

And this analogy here with semiconductor packaging where as people are knowledgeable about the field, they know.

Over the decades, there has been significant evolution in semiconductor packages in general.

These are packages that, in effect house silicon chips.

Well in a similar way when it comes to a V-I Chip which typically contains more than silicon it contains magnetic components, semi-capacitors and there are energy storage devices.

Here too there is a corresponding opportunity for evolving the package in ways that enhance if key attributes of density, efficiency, cost-effective recessional substrates would play a significant role with respect to the construction of the product.

So, the short answer to your question is that, with a major reduction in cost per watt and a significant further advance in watts per cubic inch that is power density and a significant improvement in efficiency, the market opportunity should grow very substantially.

And I think it well just as it has in the semiconductor industry with more advanced surface mount packages that have supplanted over time earlier technology packages.

So, a similar type evolution is going on with respect of power components and here once again I think Vicor is pioneering and inventing and parenting from the mentor developments that I think are going to be doing us good for many years to come in terms of our market opportunities.

If you give us any estimate as to what type of reduction in cost per watt, or however you want to measure it that could be brought about by this new technology?

So, with reference to one particular product which is the AC to DC product, DFM which is a double VIC.

We would be able to process 30% more power in a product of which we are going to get 1.5 times as many for a given substrate.

So if you look at the compound effect of the increasing power throughput, about 30% with the increase in effect a power utilization 50%, that product is around 1.8, 1.9 factor, which is very substantial in terms of advancing a key figure amount.

Okay.

Good luck and thank you.

Thank you.

Your next question comes from the line of Bob Sales.

Please proceed.

Just a follow-up in terms of the revenue trend and bookings.

In Q1, the revenue was down sequentially from Q4.

In that quarter the, I guess, there was an end to a large defense project, offset by strength in BBU.

But with revenue being down in Q2 and the defense project being over already, what was the other weakness you saw in the June quarter?

So, as indicated earlier, the defense program that (inaudible) that you're referencing, still had some revenue in Q1.

But beyond that the issue with the defense programs is not being limited to that one program that came to an end of life in Q1, so for which there was no shipments and revenues in Q2.

But it was more widespread, because of the stall that has been going on with respect to funding a variety of defense electronics programs.

So, it's not one program.

It is a (inaudible) programs that have suffered delays, and one program that came to an end of life.

So was the BBU revenue up or down sequentially from?

The BBU revenue was down substantially in the second quarter, low double digits.

Down substantially --

That's 12% reported earlier in the call.

Was the non-defense, rephrase it a different way.

Was the non-defense business in the BBU unit, up or down sequentially between Q2 and Q1?

It was up.

It was up somewhat, not up by a lot, but it was up if you exclude the defense market.

And that obviously, I mean these kinds of comments are somewhat pointless in my mind because rationalizing what has happened with respect to this quarter-to-quarter decline in revenue in BBU by saying we did well in certain areas, and didn't do well in others so we'd really be missing the point.

So I understand -- I'm just trying to -- I know you guys don't offer guidance, so I'm compelled enough to try and extrapolate some idea of the next four quarters based on bookings and what's happened in the past, that's the reason I asked the question.

And to me your book-to-bill for Q2 suggest that little bit of uncertainty in terms of whether or not we should assume the $65 million in this quarter is a trough in revenue?

Well, I think you paganize face value with all the usual caveats that Jamie is fond of reminding us of.

The book-to-bill, being substantially below 1 in Q2 in and of itself is worrisome in terms of the short-term trend in top line.

However, as mentioned earlier, Q3 to-date has done remarkably well, and this is a reminder of the fact that for anyone of us to try and read the fine tea leaves associated with changes in programs or particular end markets.

Quarter-to-quarter is a way of slicing salami a little too fine.

I think that we have to step back and at least that's what I do and look at the bigger picture of what we're doing, what product capabilities we have, or what product capabilities we are bringing to market.

What we're doing in terms of marketing initiatives, sales infrastructure, channel development, what customers are telling us with respect to their traction to our products, why they are attracted to our products.

Why in short that these fundamental drive to penetrate more in a variety of markets, the ones that (inaudible) and new ones such as the some that we discussed today.

So as I look at that picture of 10,000 feet, I don't really focus all that much, I'm not remiss about these, but I don't spend a lot of time worrying about (inaudible) on the road to future revenues.

I think --

I appreciate that and I agree to long-term view.

But I'm also just trying to understand, because for your last four quarters, earnings per share have gone from $0.38 per share to $0.07, so I'm just trying to understand how long the transition is before we get to the other side.

So I hope you can appreciate the reason for my questioning.

I'm not --

Right.

Typically, and we warned the shareholders about this last year.

The $0.38 was a non-tax number, okay or for practical purposes non-tax number.

So we got to look at it in the right perspective.

And then beyond that, I think once you net out the effect of taxes, I think what we are seeing is simply when it comes to the bottom line the impact of some programs, a temporary change of mix given different margins and the vagaries, quarter-to-quarter vagaries of topline growth or as we've had in recent quarters, topline decline.

We have a very leveraged model, we have largely a fixed cost structure, we can make substantially more, particularly in the BBU, we have capacity to expand the production without incurring a significant incremental cost.

So the bottom line amplifies the changes quarter-to-quarter in the topline with a significant amplification factor.

And that's another way of saying that, the key here, over the next several quarters is going to be topline growth.

The topline growth will then drive bottom line growth at a considerably faster pace because of the economies associated with our cost structure in general business model.

And the effects of continuing advances with respect to the cost reduction and of course they are taking place in both in the big business unit, and particularly in V-I Chip.

And again, before too long as we get into next year, we're going to start seeing -- I think is a growing contribution from a power management entity Picor that I think will start off with very healthy margins from the word go with respect to its [new suite of] products.

So, I'm not concerned about the top line and I'm frankly not concerned about the bottom line.

I'm not concerned about the quarter to quarter changes.

As I look at the fundamentals of technology traction with customers, and to our customer excitement with respect to the products and the technology.

Okay.

Fair enough.

Good luck.

Thank you.

If there is any more question?

Yes.

Your next question comes from the line of Paul Schultz.

Please proceed.

Actually my question has been answered.

Thank you.

Thank you.

Have a good day.

Talk to you in a few months.

Thank you all.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.