Vicor Corp (VICR) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Vicor Corporation earnings results for the fourth quarter and year ended December 31st, 2011.

My name is Karis, and I will be your coordinator for today.

At this time all participants are in a listen-only mode, later we will conduct a question-and-answer session.

(Operator Instructions).

At this time, I would now like to turn the conference over to your host for today Dr.

Patrizio Vinciarelli, Chief Executive Officer of Vicor, Mr.

James Simms, Chief Financial Officer of Vicor, and Mr.

Richard Nagel, Chief Accounting Officer of Vicor.

Please proceed, gentlemen.

Good afternoon and welcome to Vicor's Earnings conference call for the fourth quarter and full year-ended December 31st.

I am James A.

Simms, CFO, and with me here in Andover is Dick Nagel, our Chief Accounting Officer, and joining us from Boston is Patrizio Vinciarelli, our CEO.

Today we issued I press release summarizing our financial results for the fourth quarter and the full year.

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 SEC in association with issuing this press release.

I remind all of you today's conference call is being recorded, and it 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 that may cause actual results to differ materially from those explicitly set forth or implied in our statements, such risks and uncertainties are discussed in our most recent Forms 10-K and 10-Q filed with the SEC.

Please note the information provided during this call is accurate only as of the date of the call.

Vicor undertakes no obligation to update any of the statements made during this call, and you should not rely upon them after the conclusion the call.

A replay of the call will be available beginning shortly upon its conclusion through March 8th, 2012.

The replay dial in is 888-286-8010, and the listener passcode is 68031223.

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

Patrizio.

Hello and welcome to our 2011 earnings call.

As set forth in this afternoon's press release Vicor report its fourth quarter earnings of $0.02 per share, down from the third quarter earnings of $0.03 per share.

For all of 2011 we reported $0.21 per share as compared to the 2010 earnings of $0.08 per share.

On a pro forma basis we earned $0.65 per share in 2010, reflecting certain non-recurring adjustments to deferred taxes.

The markets we serve remain soft, and our disappointing sales for the fourth quarter reflect this softness.

However, we are experiencing a high level of design activity, and remain hopeful we will see improved results as this year progresses.

Our BBU, Brick Module and Configurable Systems business which serves defense, electronics, industrial, and professional markets worldwide, experienced mixed sales for the fourth quarter.

ITs exports shipments bounced back from a very weak Q3, while our North American shipments experienced a slight decline.

Our power systems business, [inaudible] and defense electronics had an encouraging quarter.

However, our Westcor Division which serves the industrial market segments saw its revenue decline.

Overall BBU revenue increased approximately 5% for the quarter.

Bookings for the BBU were essentially unchanged sequentially.

We achieved experienced significant declines in bookings and shipments for the fourth quarter, a consequence of the cancellation of a major supercomputer project reported in the third quarter.

We discussed the cancellation of the super Blue Waters project at the University of Illinois on our last earnings call.

Order flow from VHF while lower came from a broader range of customers, some of which have recently designed VHF solutions into their next generation products.

Picor our fabless subsidiary also experienced lower shipments for the fourth quarter.

However, Picor had a robust bookings quarter reflecting [air course supermold commercial flying so subject core margin products].

Macro economic uncertainty has been a source of weakness across market segments and geographies.

Another cause of lower than expected bookings and revenue as being delayed acceptance of our Intermediate Bus Converter products.

As discussed in the past our IBCs our excellent converters for [inaudible], computing and other segments in which there needs to a bus that is actually stable.

Our IBCs offer essentially twice the power density and conversion efficiency of the industry standard bus converters for which they present incompatible replacements.

Our IBCs utilize the same propriety [san optio] converter engine found in the VI Chip BCM and VTM converters.

In the IBC [permutation] converts energy 98% peak efficiency making performance-based competitive advantages for OEMs.

While our recent expectations for IBCs have not been met, design wins reflecting the [now westred] acknowledgement by the market of the superiority of our solutions supports our expectations that we will be shipping disguising volumes to cast on our enterprise networking.

Despite our disappointing recent performance we are looking beyond prime business conditions and remain focused on our strategic region.

Macro economic uncertainty aside, global trends and the increasing availability cost and consumption, strongly favor our valuable position.

We have invested heavily for many years in new technologies and manufacturing processes, and most recently the front Pandora business.

Our transition as a Company continues as we engage with global OEMs seeking the highest performance solutions to their power conversion needs.

Vicor now has a priority roadmap and the transactional capabilities uniquely suited to meet the complex demands of these sophisticated customers.

The most forward-looking of these customers already are designing Vicor products, via bricks, via chips, or Picor components, or a combination thereof into their next generation of products.

We anticipate an acceleration of bookings and shipments in the second half of 2012.

But the considerable design activity of late should yield for that in orders.

Turning more specifically to the design activity during the fourth quarter we developed our first VI Chip based solution to Intel based server designs.

In the first quarter we had received the initial purchase orders from a lead caster.

We regard the ability to power processors using Intel's latest VI 12 specification as an important milestone and believe the broader enterprise server space represents a very promising market opportunity for us.

Our VI Chip solutions offer additional benefits and market leading performance for server OEMs.

We expect shipments of these solutions to ramp in the second half of the year.

Ultimately representing a sustained 8-figure revenue opportunity each year.

Last quarter we announced the release to mass production of our first BCM based modular converter for data comm applications, rated at 470 watts, and over 800 watts per cubic inch power density.

With the 48-volt [phenomenal] input it is a chip inside the [ABIC] product will be followed by product variance capable of addressing growth market requirements, for input voltages ranges from 6 to 420-volts.

We remain on schedule with an early adopter customer for production to ramp during the first half of this year.

Also during the fourth quarter we delivered prototype units of a very innovative V-I Chip solution to an automotive OEM for use in pure electric and hybrid vehicles.

This ECM V-I chip would be the building of 380-volt, to 1400 volt automotive Power Systems, providing greater than five-fold reduction in size and weight versus existing competitive solutions offered by traditional automotive electronics vendors.

We are working closely with OEM customers interested in these products.

We have several activities under way in the EV space, and we are very encouraged by the pace at which developers are utilizing micro capabilities.

Turning to Picor, Picor has maintained new product announcement momentum and was particularly busy at the recent APIC trade event in Orlando, where several new products in our cool power converter module, white power EMI filter, and cool swap out swap controller and circuit breaker power lines were introduced.

Picor transition towards the merchant salvage continues, as we get closer to introduction of our most innovative extension of the cool power line of lower voltage, lower power management solutions.

At the beginning of Q2 Picor expects to start sampling its first system in a package silicon based switching regulators, which will offer significant performance advantages over competitive offerings.

Three highly differentiated power families based on the propriety of other switching technology, enable a leveraging a core zero voltage switching controller architecture, across support back boost, and back boost implementations capable of operating efficiently from and to the PVI high voltages.

These innovative power families would support unprecedented performance at relatively low cost enabling scaling of our technology to lower power cost sensitive point to road applications.

Picor SIP devices will complement and fully enable our vision of comprehensive solutions from the AC outlet all the way to the point of load.

Before I turn the call over to Jamie who will discuss the financial statements, I want to highlight the announcement in January of this year of a partnership with Digi-Key, the leading internet based distributor of electronic components.

With this expansive internet based market reach Digi-Key should be a strong complement to future electronics helping Vicor to extend its global message while increasing our presence in trivial markets.

As we expand the of the number of standard via brick, trip and Picor products, it can be staffed by new distribution partners, we expect distribution channel to become a meaningful contributor to our total revenue.

Jamie.

Thank you, Patrizio.

I will now review our quarterly performance providing some background and business unit specifics.

Consolidated bookings for the fourth quarter totalled $50.1 million, a a decline of approximately 12% from the prior quarter.

Total one year backlog at year-end stood at $54.2 million, a decline of approximately 14% from the prior quarter.

Backlog scheduled for shipment in Q1 at the end of Q4 totalled $40.4 million, or 74% of total backlog, down from $45.7 million of backlog scheduled for shipment in Q4 at the end of Q3, which represented 73% of total backlog.

BBU bookings were stable quarter-to-quarter with a decline in Japanese bookings offset by an increase in Vicor Andover bookings.

As commented on last quarter we believe the decline in Pentagon spending on the types of communication solutions we power, an important driver of North American BBU demand has ebbed.

We do not anticipate a return to the levels of 2009 and 2010 in the foreseeable future, but we expect the current level of activity to be sustained given again the nature the programs we support.

As should be the case with many of the BBU products targeting industrial and transportation applications, we expect future growth in defense electronics will be the result of the use of our advanced V-I Chip and Picor technologies in meeting the higher performance requirements of next-generation applications.

As Patrizio mentioned V-I Chip bookings for the fourth quarter were off sharply as the cancellation of the Blue Waters supercomputing project took a big bite out of our bookings forecast for 2012.

However, our prospective on V-I Chip's 2012 bookings and revenue is brightened by recent developments in the Intel based server space that Patrizio spoke about a moment ago.

Picor's bookings increased 19% sequentially reflecting the uptake of new products announced during the year,notably quiet power filters.

With several new product announcements recently and the planned rollout of SIP-based regulators we anticipate continued momentum for Picor.

Turning to revenue Vicor as stated recorded consolidated revenue of $58.6 million for the fourth quarter, the same level we recorded for the third quarter.

We did experience a slight shift in mix for the quarter.

BBU revenue increased 5.1% sequentially, based on improved shipments from the Vicor Andover modules business our largest, and our Vicor custom power entities.

V-I

Chip revenue declined 12.4% reflecting the rescheduling of certain shipments from the fourth quarter to the current quarter.

Picor revenue declined almost 39% quarter-to-quarter due to an inventory correction undertaken by a contract manufacturer for Picor's largest customer.

We do not anticipate a recovery of this volume in the near-term, but do expect increasing shipments of new products throughout the year.

As previously discussed, we have adopted a multi-channel distribution strategy, and announced our relationship with Digi-Key this quarter.

With thenewDigi-Key relationship, and a maturing Future Electronics relationship, we expect our financial statements will reflect increasingly higher sales through these stocking distributors.

However, for the fourth quarter our newly established relationship with Future Electronics generated only modest sell-through.

Our mix of North America and export revenue was consistent quarter-to-quarter with International revenue representing 53.7% of consolidated total revenue, down slightly from the 55.8% share in the third quarter.

Fourth quarter shipments to Asia-Pacific which excludes Japan in our definition recovered, and would have been much higher but for the decline in shipments by V-I Chip and Picor to Asian contract manufacturers working on behalf of our large customer.

The Asian industrial markets and in particular the Chinese railway market appear to have caught their breath in the second and third quarters of 2011, and have now recovered.

We are hopeful their current relative strength will be sustained.

Consolidated gross profit margin as a percentage of revenue for the fourth quarter was 41.8%, essentially unchanged from the prior quarter.

The change in product mix was reflected in a slightly higher margin for the BBU, and a slightly lower margin for V-I Chip, reflecting volume related changes in overhead absorption.

Consolidated operating margin as a percentage of revenue for the fourth quarter was 2.1%, down sequentially from the third quarter figure of 2.9%.

The expansion of our marketing and sales effort again was a driver of higher spending,as our SG&A expenses increased 5% sequentially.

Higher legal fees associated with our Synqor litigation also contributed to the fourth quarter increase.

R&D expenses predominantly compensation declined 2% sequentially, but this was largely because of a relatively high stock option expense included in the Q3 total.

Quarterly pre-tax income including interest income and the net effect of accounting for certain changes in the value of our investment portfolio totalled $1.2 million, representing 2.1% of revenue in contrast to the third quarter pre-tax income of $1.7 million, representing 2.9% of revenue.

Our effective fax rate for the fourth quarter was 36.9% but for the full year was 33.7%, reflecting the methodology by which we calculate a full year provision and adjust our calculation of the incremental quarterly tax due, based on a comparison of our original pre-tax forecast to actual results.

Cash flow from operations totalled $4.7 million for the fourth quarter, up slightly from $4.6 million for the third, reflecting a net reduction in working capital for the period.

Our net capital expenditures remained at the maintenance level of $1.2 million for the fourth quarter, the same level as the prior quarter.

While we anticipate the need to add production capacity, we are focused on enabling capacity expansion that minimizes incremental CapEx.

Turning to the consolidated balance sheet, our Receivables portfolio remains in excellent shape with days sales at 46 days, up slightly quarter-to-quarter from 44 days.

Consolidated inventories quarter-to-quarter declined very slightly, and our annualized inventory turns stood at 4.1, a slight decline from 4.2 for the third quarter.

At December 31st we had $71.9 million of cash and equivalents, as well as long-term investment securities carried at a book value of $9.6 million.

Included in this total are auction rate securities with a par value of $9.1 million that are carried at a book value of $7.5 million.

I will now turn the call back over to Patrizio for a few closing remarks before we take your questions.

Patrizio.

Long-term listeners know our quarterly communications have highlighted for some time the transitions under way within Vicor.

We have invested substantial amounts in the development of innovative power technologies and high differentiated products.

Recently we accelerated our investment in taking these technologies and products to market.

Unfortunately, we are currently experiencing soft demand in some of our served markets just at the point of which our value proposition is achieving recognition in the marketplace.

The markets we are focused on are coming to terms with the realities of the world becoming more and more tend on electronic products that must be small, light and efficient.

Defining characteristics of Vicor products conversion power density and efficiency have become cast in our priorities.

Not just for the high end applications we traditionally serve, but for the broader range of applications and our customers.

Our value proposition is well suited for today's increasingly power conscious market, and we have changed our strategy and our transgression to address these market opportunities.

As customers seek higher performance with a lower total cost of ownership, Vicor is uniquely equipped to fill a considerable void in the competitive landscape.

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

Vicor's evolution will continue in the years to come, as V-I Chip inside Bricks will represent a larger percentage of the BBUs revenue, while V-I Chip and Picor enjoy growth enabled by their advanced power component paradigms.

Our power offering continues to expand, as do the range of our applications served, and the breadth of our customers base.

I am therefore pleased with the progress Vicor has made in recent years.

While I am certainly disappointed with recent financial results, I remain enthusiastic about Vicor's future.

This concludes our prepared remarks, so we will how take your questions.

Operator.

(Operator Instructions).

And you have a question from the line of Jim Bartlett.

Please proceed.

Yes.

Patrizio, could you give us a little more understanding on IBC of what kind of shipments we might expect this year?

And give some idea of breaking that down in terms of from Cisco and from other potential vendors, and again, talking about the hesitation in the market and the Synqor suits that have stymied the market?

Well to your point this was discussed in prior calls.

Last year the trends from Synqor in a variety of forms, injecting the impacted the rate of progress in design wins with a number of customers.

I would say early in the year with most customers as the year progressed we were able to for a variety of reasons ranging from the objective difference in the products which customers can very quickly relate to owing to their performance to positive advances in the litigation against Synqor on a variety of fronts.

We were able to make progress, and at this point I would say that the Synqor threat is no longer a factor.

The emperor is being seen as closed by a number of customers.

Not all.

There are still some that have some concern, but I would say at this point looking at 2012, we don't anticipate there being a significant a factor in terms of design in activity.

What it has done it has in effect delayed the start of the penetration to the extent that the penetration was delayed.

The level of revenues got all pushed to the right into the future, in that design in activity was stalled for a good part of last year, but at this point in time as I look at major customers in the US and outside of the US, I see in particular with let's say one customer who shall remain nameless, but a very significant customer, their basic designing activity which promises to turn into very significant business over the next several years.

I think this year will still suffer from the impact of the delayed uptake last year, as we get into next year we expect very significant contributions for our IBCs, but there is going to be a ramp through this year and going into next.

Would you see some of that ramp in terms of revenue by the fourth quarter?

I don't want to give you for a variety of reasons a figure, but I was sitting over lunch today with two key executives discussing the IBC opportunity on the brick business side, and we were communicating with each other regarding how significant opportunities on a variety of front.

We are very focused on these, again we have products that are so superior to the competition, all of the competition in terms of density and efficiency, that the opportunity is there to be had, and again, the legal all of that is no longer a significant factor except for the late start.

So I can say in general terms that one major account, we have seen the design in activity stride across a variety of programs we are going to have a very pervasive presence, a better count, and this one of four or five orders where there has been a good deal of design activity.

So I think this year it will be significant as we get to the second half of the year, and it should be more significant the next year.

On the same line could you talk about when you would start seeing momentum from both future and now Digi-Key in terms of having a significant impact on revenues?

Could that happen as early as the third quarter of this year, or fourth quarter?

When do you start seeing something meaningful there?

I think the target for this year for the channel contribution is still for obvious reasons relatively modest.

We are obviously dealing with the industrial product and I am now referring to our entire power line, marketed through the channel, getting designed into customers where historically we haven't had a reach, but still requiring a characteristic design cycle, so let's say industrial products that typically take 12, 18, sometimes 24 months to come to fruition, in terms of any level of production revenue.

So I think we need to be very slick and patient with respect to that.

It is one of many initiatives that are being carried forward in power.

We are not looking at any one of these initiatives by itself to make a very substantial difference.

We are looking at the aggregate of a large multiplicity of initiatives with products, with the distribution channel, with greatly expanded sales and marketing, it seems with a much deeper structure to reach and to touch customers that historically we have had very low access to.

Thank you.

And your next question comes from the line of John Dillon, please proceed.

Hi Patrizio.

I have got a question on the Intel server based opportunity that you talked about.

And I just want to make sure did I hear correctly that that is an eight figure revenue opportunity?

That's being projected as an eight figure, yes.

So that's tens of millions of dollars am I doing my math right?

I think that is what 8 figures means.

And is that on a yearly basis or is that what you expect this year?

That is on a yearly basis.

We expect it to start ramping the second half of this year.

Okay.

Okay.

And is this with a new server company, or is this one of the existing server companies you are working with?

Well, this is a development that has been in the making since last year.

It is a secretive development that cannot authorize in any detail the company is very sensitive about it, and so I have told you pretty much all that I can say about it.

Okay.

Have you had any new server companies sign onto your architecture your defactorized power architecture

Yes, yes.

I think we have seen progress, primarily driven by the utilization by some customers of the benefits of the architecture, particularly in application environments where the power source for a variety of reasons wants to be 48 volts instead of 12-volts.

The power system architecture demands 48 volts, we have a level of superiority in terms of density efficiency that is very compelling, we are also far along with the development of a next generation platform that will further improve performance, while bringing down costs dramatically, and this is something that we are going to be able to pass along to customers, in terms of facilitating a decision where in effect we are going to have to make an agonizing decision between performance on the one hand, and cost or price on the other.

I think with our next generation chipset we are going to have the best of both worlds, particularly for 48 volt systems, but the program is going to be put into action later this year is actually based on the same building blocks that we have deployed successfully over the last few years in the server space with a leading company desk space.

These were not Intel processors, they were different kinds of processors, but it is the same kind of gear trips that would be applied later this year in an Intel socket, and so we are quite excited about that.

We are excited about the fact that far from being the last word on this front we are going to have the world we told to take performance to new levels, while at the same time making the cost and the price to the customer a good deal more attractive.

So to set this in perspective with the older generation of chips last year the chip realized the better part of a $50 million revenue year, and looking forward I think with those same chips we are going to be able to expand the revenue base, and with respect to new chips that they are currently in advanced stage of development to be able to expand the addressable market opportunity.

That is great.

So you expect to be able to expand the current markets you are in, and then with the new chips you can expand even further?

Yes.

The cost benefits that we are speaking of are going to be very substantial.

We are going to be able to take a key figure which is a percent of what one might, way down relative to the level of the first generation V-I Chips.

This is pretty incredible because I think the reason why you, one of the reasons you were successful in the first big opportunity, was because that processor has used so much power, but it is my understanding the Intel's do not use as much power or current, but you are still using the V-I chips, so that is a real coo for you.

Well, so it presents, we all read the stories about advances in technology that take the power consumption of processors down, and obviously that is the case, particularly in certain application environments, certainly for mobile computing.

But then there are other application environments in which next generation Intel chips will propose even more demanding requirements on the power system, in particular when it comes to attributes, such as peak loading as a measure related to average loading.

So we see evolving demands for our system solutions that can keep up with dynamic loads that particularly during certain timeframes of intense computing they can take their toll with respect to the capabilities of progressional solutions, based on traditional multi phase, back regular systems so our technology solution doesn't involve the multiplicity of interleaved, back regulators where traditionally as the current demands expand, more phases need to be added from two to three to four.

We can in effect address the high powered requirement with the single phase current multiplier engine, called VTM V-I Chip, and while the key attributes for VTM is that we can address power flow requirements very handily, without it having to be overdesigned in terms of incremental phases, and incremental power processing capabilities.

So we see this as technology has developed to that place to our sense.

It plays to the sense of factorized power, and V-I chips.

Excellent.

I read the article the I-Tripoli article that the IBM engineers wrote about the factorized power, and the article was absolutely compelling, and my question is Patrizio, is that the article is so compelling why haven't more server companies jumped on the band wagon, or why is it taking so long, because you are truly an enabling technology in the server space?

So we have been an enabling technology in the high-end of the server space with the engagement that you have referenced.

I think what is exciting about the Intel application is that there is going to be an entirely different application environment, and the fact that the valuable position of the V-I chips and factorized power.

In the future the value proposition of Vicor SIPs which are part of the next generation solution.

The more cost effective solution.

The fact that these are being designed in is an important step forward in terms of expanding the reach of factorized power, so we started to your point in a class of applications that was very demanding, and where our solutions with truly enabling.

It was technically a very compelling choice, but from a cost perspective it was not in effect that attractive.

The taking of demands took precedence in that particular application environment to the sense for what figure might, as we look at this next-generation solutions, what we are going to have is compelling performance coupled with a cost structure that will send apps to the competition in a very attractive way, so that will make the choice of leading server companies, more interesting than they might have been in the past.

I think up to this point it has been relatively easy for most to discount this capability, because its cost metrics were not close enough, but we are going to be in a ballpark that is very competitive from a cost perspective, while offering substantial performance advantages.

Okay.

That sounds goods.

So what you are doing is you are listening to the customer, and you are getting some push-back on price, so now you are coming out you are scaling your systems so you can give them both the performance and the price, and you feel very comfortable in, it sounds like you are getting design wins now on that, or you have design wins now with this new technology?

Yes.

We are making good progress, by the way, even with the first generation, what I call the first generation of the chip technology we have had other design wins.

It is not that the landscape of server opportunities is limited to the example that you referenced.

We have had and are having other wins in Japan, and other parts of the world.

The key point going forward is going to be making the solution considerably more cost effective, and we have been working on that for quite some time, and we recognized all along that is an essentially part of being able to achieve significant market penetration, and that bulk of the market space takes cost so seriously, that the severe performance by itself will not get you this same way.

Okay.

Okay.

Alright.

And it sounds like you are very confident in the second half.

I mean we have heard a number of times that things are going to be better in the second half, but it sounds different this time, because I think what I am hearing is you have design wins now that back up your forecast for the second half.

Am I correct in that assumption?

Yes.

We have what our sales team regards as a conservative forecast showing progression through the year, and into next year as we discussed in the last conference call, we are working on a very ambitious multi-year plan to achieve what I think could be certainly characterized as dramatic growth, which with we haven't seen in a long time, and we put infrastructure in place.

We have now a very seasoned team in the front end that has complement the skills and capability is very comprehensive to address and penetrate the better of accounts that are a part of our business plan.

Great.

I have taken a lot of time, so I will jump back in the queue.

Thank you very much.

Thank you.

Line of Paul [Spett], please proceed.

Thank you.

Two questions Patrizio.

One is about the new power simulation tool.

How sophisticated is this thing?

Can I take a rack of boards and a switch or something and test its dynamics over varying loads, et cetera?

Hello?

Patrizio?

It appears we have lost Patrizio.

Ah.

The second one you can answer and that is in the Blue Waters, I don't know what happened there with IBM stepping out and the downscaling of the budgets, et cetera.

Let me put you on hold because Patrizio is dialing in on this other number trying to get back in.

Okay.

Thanks.

I will get back to you.

Hold on.

Okay.

We are back together now.

Okay.

Thank you.

Patrizio, there were two questions.

Yes.

I am sorry I got disconnected.

Please ask your question again.

Sure.

In the new power simulation tool.

Yes.

The level of sophistication of this thing just a sense.

Can I take a design, say a switch with the factorized power in it, and check the stability of the power source with the varying loads and exchanges?

Yes.

So let me explain the key benefit to a typical IBC customer of this tool.

What we have seen with customers in that general space for these kind of products, is a recurring difficulty in assessing what capability in terms of power delivery they could accomplish with an IBC product.

And to the sense that our products are much more capable than competitive products they are capable of delivering a good deal more power in the same space and the same footprint, what we wanted to accomplish with the simulation tool is to enable customers to very quickly simulate in particular how much power they could derive from our solution in their application environment.

So the customers that we told to model the load, the amount of power drone, the input voltage range over which the IBC product is to be operated, the customer can define the terminal environment, in terms of air flow and air temperature, and the simulator will in a matter of fraction of a minute, tell the customer what the operating temperature of the device will be, and to the extent how much power can be sent from the processor.

So this is the first in this space, we get a good deal of interest and positive comments, both from particular customers who found it to be very, very useful, and from the trade press which has been key to cover.

Now in addition to in effect solving the terminal problem.

It can also address a number of other questions but that may be a little bit too technical to address in this context.

Well, simply can it address load stability in a distributed power system?

So IBCs from a low stability perspective are particularly our IBCs, which are different from competitive IBCs, there are, our IBCs have stability attributes that make in effect their application a no-brainer.

It is absolute, so that has never been an issue with the customer.

What I have seen over and over again from various customers is a recurring question, a recurring theme of wait, so how much power can I give out of this, because generally speaking that space is all very keen on being able to get more power, because the way in which components in that space compete with one another is by delivering more functionality our of the line card, and generally speaking the power system can be a gating element to how much power and with that how much functionality the line card can support, so being able to quickly address that question and short circuit some of the aberration process by the customer is the key to success.

Thank you.

And the second question is in the Blue Waters process, was there a return of inventory and a restocking charge, or was there just inventory that you guys held that never got shipped?

How did that work?

No inventory right now.

No return of inventory, sorry.

So what was involved with that is a missed forecast, in effect we learned about the customer's decision to pull out of this major project in time, so as to in effect avoid any issues such as you described.

Therefore our sales for the customer.

Thank you.

Next question comes from the line of Don [Makenna].

Please proceed.

Jamie, you mentioned earlier I think earlier that we are entering the quarter with protected or backlog that was shippable this quarter of $40 million versus roughly $45 million the previous quarter.

And with the indicating that sales continue to be soft, are you projecting a loss for this current quarter?

And based on the plans that you have in place now, do you see that as being the end of the downturn and we are looking upwards from there?

Don first of all we don't provide guidance, so I am sorry I can't give you a direct answer.

Our current forecast--

Well, met me ask you this.

Would you think if I came to that conclusion that would be out of line?

Well, as we have discussed we are disappointed with the current forecast, and booking trends indicate that our improvement that we expect should occur in the second half.

Having said that though, I want to emphasize something else that I included in my remarks, and that was that the decline in V-I chips specifically was related to a rescheduling that will in fact be shipped this quarter.

So it does not imply one thing or the other as to what conclusion you might draw, but what it does do is say that revenue is still there, and it is attractive revenue at an attractive margin, and that will be recognized in the first quarter.

That was already identified as part of the backlog?

Yes.

It was, the backlog was moved.

Yes.

Alright.

It is important to note that suggesting the opening remarks that the first half of this year is going to be soft, and we should recognize that and so we are very focused on these activities that are going to make for a good progression starting towards the middle of the year.

Okay.

I have noticed too, on your website for the indirect labor, and what I would call the skilled area that you have a significant number of open app, job opportunities for folks.

Higher than what I have seen in years and years and years.

Have you put those on hold, or is that in anticipation of the ramp-up in the second half?

Well, let me answer it this way.

We are in what one might call the investment phase, so I think last week on Monday in the lunch line, I met two new people that had just joined on that day, one in sales, one in application engineering, and this is reflective of what we are investing in, and expecting to be able to accomplish.

We think that with the product capability, with the technology, with the differentiation, and with a front-end capability that makes the most out of that general opportunity that we are going to be seeing a good return on our investment, but in the short-term our focus is not to minimize the [breading] expenses, as much as it is to maximize revenue growth, the design wins, bookings growth, leading to revenue growth as this year progresses, and into next year.

We are not in effect managing the Company from the perspective of short-term profitability.

We think that is a secondary consideration to the opportunities outstanding.

I understand that, too and I hope you understand the frustration for some of us, that when we saw long-term in terms of years that we have been anxiously waiting to move from that R&D phase, to what you now refer to as the investment phase, to the day when we finally reach the profit phase, and we are getting frustrated on this end, too.

Yes so.

No, I appreciate that.

I am I guess at the very top of the list of frustrated people, and I want to be clear with respect to that, and it is inappropriate to make excuses, but I think it is fair to say that aside from a general softness that the industry at large experienced in the second half of last year, there have been two unique circumstances that have really affected our short-term performance, turn down in the defense space and the Blue Waters cancellation.

Were it not for those two developments, we wouldn't be having the particular discussion we are having now, again, there are no excuses.

It is what it is, but our focus is on making sure that we spare no effort in projecting our capabilities in a very comprehensive superior product line, with front end resources that can get designed into large customers and the industry at large, in new markets that we have identified that we are very targeted on, and for which we have I think a very well focused strategy.

So it is now investment in the front-end of the business as distinct from investment of earlier years in the technology platform.

So as you I think may have calculated for yourselves from, it being a long time shareholder we have invested approaching $20 million in the V-I Chip and next generation pipe of technology to date.

There has been a big investment in product capabilities that set us apart.

The incremental investment that we are now making with respect to projecting these capabilities in the marketplace, is relatively speaking there are lots more of them there, and it is highly leveraged in terms of in effect making the most of the opportunities that we invested a lot in thinking about.

Well, thanks.

I will continue the patience and I appreciate the comments.

I will, too.

Okay.

And your next question comes from the line of John Dillon, please proceed.

Patrizio, I want it make sure I heard something clearly.

I think I heard that in the second half of this year we will see production orders for IBCs, is that correct?

Yes.

Okay.

And will they also be in the eight figure domain?

I think for this year based on our current visibility, they are likely to be shy of that, but I think as we look into next year they will also be in that ballpark.

Okay.

And we have talked about Blue Waters a couple times.

I am just wondering have you been able to replace that $20 million hole in bookings with some of these new programs?

Not in the very short-term.

I think that development as I mentioned a moment ago is impacting our short term performance, and I think the way forward isn't one of immediate replacement of that business.

Obviously we are pulling on the stops to make the most of other opportunities, but what I think about the fact that if there is any activity that our expanded sales force is engaged in it is one that unfortunately carries with it the characteristic cycle times of the industry.

And so we expect that in the future we are going to be less exposed to a Blue Waters-like development, not because there isn't going to be some other Blue Waters, but because we expect to have lots of waters of different colors across a variety of key customers in a variety of different markets.

So the key to minimizing that kind of exposure is having a more diversified customer base and a larger portfolio of programs that contribute to the revenue base.

So fundamentally it would be a chip in the early going, which I know is an early going that took quite a bit of time, but nevertheless in the early going we have been very dependent on a relatively small concentrated customer base, with the kind of unique program exposure.

Going forward we are looking at a V-I chip business plan, and bookings plan, and revenue plan going out several years, that will make dependency on any single customer, single application, much, much smaller and thus the key to avoiding these kind of upsets.

Sure.

So you are getting enough design wins and enough different opportunities, in enough different markets, that hopefully this will be prevented in the future because--?

Yes.

That has really been the characteristic of your big business model in earlier years, so with V-I chip early adopter made a big difference for the better, and temporarily for the worse, but I think it is again to expect soon to more opportunities in the future.

Can you tell us what the intent of your dividend is?

I mean I know you can't tell us if you are going to give us a dividend until the Board of Directors signs off on it, but what is the plan, because it seems to be kind of catch as catch can all over the place at times?

Well obviously the payment of dividends as you know quite well, is dependent on a number of considerations, ranging first of all with the past profitability of the Company, the near term prospects capital equipment needs, and the overall cash flow, and so for a company of our kind at this phase in our development, it is to be expected that the dividend policy is kept to be not very flexible and adjustable as a function of circumstances.

I think it's safe to say that these are unlikely to be dividends in the very near-term, given the near-term prospects and hopefully as things progress in the right direction, we are going to be looking to something that to your point can be more predictable.

Okay.

And along the same lines, with all of these opportunities out there, and everything that you are doing and your stock price staying so low, I am surprised we are not seeing you buying back any of your shares?

Well again, there is a lot going on and we have been focused on those things that make the most difference in terms of our business prospects, but under the right circumstances we will notice the date as we have done in the past to step in so.

Alright.

Thank you.

Thank you.

Thank you very much, Patrizio.

Bye now.

And your next question comes from the line of Dick Feldman, please proceed.

Thanks for taking my calls.

I have two questions.

One in earlier calls you had made reference to new packaging for the V-I chips improving your competitiveness, and on this call you didn't mention that, but you also talked about new developments in the V-I Chip to improve its competitiveness so that you can open up broader markets.

Could you comment on these issues?

Yes.

So to your point, the two are very much intertwined.

I think I may have said in the power poll that the new package development is coming to fruition.

We have actually within the last couple of months have shipped initial units to a lead customer using the new package, and the customer is very, very attracted to the package and the overall performance of this product, it is going to be a point that we have referenced in prepared our remarks, it is the DCM for automotive electric and hybrid applications.

That is to be followed as this year progresses by a number of other entries that leverage the new packaging technology, so we have a number of different platforms that they follow along, both for AC input products and DC input products, for bus converter applications, as well as the DCDC converter applications, and all of this is part of the salvaging generally referenced earlier, with respect to making performance compelling performance, be a lot more cost effective, so that customers can in effect have the best of both worlds.

How much improvement let's say from a year ago, if we were to look out let's say 12 or 18 months do you think you can make in terms of price performance?

So with the products enabled by the new packaging platform, it depends on the particular part type, in some cases the multiplier is bigger than others, but in some cases can be over a factor of 2 in terms of the sense per what a figure that the cost reduction can be over factor of 2, for some application environments, so this is a major step forward in terms of cost sensitivity of the market, and addressable market because to the extent that at a certain price level, a fraction of the market is open, I think we can all have a good sense of the impact of taking the price or cost benchmark down by a factor of 2, in some cases more than that.

So that is part of the vision that we have been working on for many years, and with major investments human and [catted] investments to make the power component cost of the mainstream cost in the marketplace.

It tends to have the cost attributes that make cost not the stumbling block that it has been historically.

Are there other things beyond the packaging that you are intending to introduce?

And roughly what could their impact be, and what type of timing is there?

Well, it is a very insightful question.

So to the extent that we may have talked or hinted about these other developments in the past, so implicit in some of these questions that we have had with respect to upcoming pipe power interactions, so impliciting that your suggestion that we have a new and much more advanced serial platform control architecture, that is much more highly integrated, and this is part of the general cost reduction strategy coupled with performance improvements.

Now the packaging technology by itself in some cases even with our mature control chipset, control salvaging based on in effect the early generation V-I chips, is capable of a factor of 2 and more than that in certain cases when you capital it to the more advanced control system, which is highly integrated, that is being rolled out with fiber products on the forefront of that effort, there can be other opportunity greater than that, particularly for certain classes of products.

So the key developments are packaging technology on the one end and serial integration on the other end, and these two play in combination with one another.

So at the same time if this strategy is effective, you hope to expand the addressable market, and would it also be the case that you hope to improve on your profit margins?

Yes.

I think that off the gate, I think Picor products would be commanding margins at levels as high, and possibly above the best margins Vicor has ever had, and they are going to be able to accomplish that while at the same time diluting solutions that measure in terms of performance, power capability, are better than what we have ever had now, these are addressing applications at lower power levels, but to the extent that they open up a significant portion of the market, so it is your point, this is not just wanting to make the cost of our products more attractive to customers.

Obviously a key component is doing all of that while improving our margins, and I think we have a strategy for accomplishing both.

Could we begin to see some of this margin improvement in the second halfof this year?

So I would expect that again as we look at the component of our revenues that can be tagged to Picor products and power moded V-I Chips, which is a new packaging platform, we are going to see that as those components become meaningful in terms of the aggregate revenues.

There won't be an instant impact on the margins overall.

Those are going to be predominantly driven in the short-term by being able to amortize our fixed cost structure over growing revenues, but as we look at the usual component with the visibility with the type of revenue component, or the V-I China component, particularly the one that is tied to our new package, I think we can clearly see significant opportunity in margin expansion in those areas.

And those are going to work their way up into system products, and brick products that leverage a V-I chip and Picor inside strategy, but all of this realistically is going to take some time.

We all have to be very patient with respect to the once, the longest want to be patient, need to appreciate the way, there is not going to be a magic wand that changes the margin picture overnight, but I think we have the ingredients in place with seeding progression and packaging technology, and unique proprietary engines that have a clearly superior performance attributes to accomplish all of that.

One last question.

And that is how much, let me rephrase this.

Do you see a major change in Picor's mix between what they provide for V-I chips, and what they provide for outside customers looking out over the next 12 to 18 months?

Yes.

Absolutely.

So in the Intel server application that was referenced earlier, as we look at the other part of this year with the first implementation of that, which is V-I Chip based, the type of content will be an inside content, meaning they play a role in terms of providing the control chips that are used within V-I chips, as we look at next year's implementation, there is going to be a Picor SIP playing with a next generation VTM V-I Chipas the system solution.

So they will garner a significant fraction of the revenue opportunity directly, and the margin opportunity with greater opportunity for all of us.

As discussed in the past, there is a lot of contracting interference where in effect with a lot cross-selling and incremental beneficial opportunity that arises out of playing these capabilities in tandem with the V-I Chip and Picor, and also in combination with the Vicor system capability.

We have that large server customer in 2011 that we have it today, and we are going to see more of that in other applications with other customers.

Okay.

Thank you.

Thank you.

And at this time, there are no further questions in queue.

Thanks very much.

Talk to you in a few months.

And ladies and gentlemen that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.