Vicor Corp (VICR) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vicor Corporation earnings results for the third quarter ending September 30, 2013 call.

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

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Jamie Simms, CFO of Vicor.

Please proceed.

Thanks, Denise.

Good afternoon, everyone, and welcome to our conference call for the third quarter ended September 30.

I am Jamie Simms, Chief Financial Officer, and with me, here, in Andover, Massachusetts is Patrizio Vinciarelli, CEO.

Today, we issued a press release summarizing our financial results for the third quarter.

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

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

Once again, I remind listeners this conference call is being recorded and is the copyrighted property of Vicor Corporation.

I also remind you, various remarks we 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 conference call is accurate only as of the date of the call.

We undertake 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 will be available at beginning at midnight, tonight, through November 6. The replay dial-in number is 888-286-8010, and the passcode is 17835749.

In addition, a webcast replay of the call will be available on our IR page, shortly upon the conclusion of the call.

I will start this evening's call with a review of our financial performance for the third quarter, and Patrizio will follow with his comments, after which we will take your questions.

As set forth in this afternoon's press release, Vicor reported an after-tax loss for the third quarter of $932,000, representing a net loss of $0.02 per share.

This compares to the second-quarter after-tax loss of $4.6 million, which represented a loss of $0.12 per share.

For both the second and third quarter, we used a basic share count of 38.538 million shares to calculate EPS.

Vicor's consolidated revenue for the third quarter increased 17.6% sequentially, to $55.1 million, from the $46.9 million recorded for the second quarter of 2013.

The third-quarter figure compares to revenue of $53 million for the third quarter of 2012, representing a year-over-year quarterly increase of 4.1%.

The Brick Business Unit, our largest, recorded a 5.3% sequential increase in revenue; coincidentally, the second-consecutive quarterly increase of 5.3%.

While VI Chip also repeated its prior quarter's performance, again, nearly doubling revenue, up 98% sequentially.

All of our businesses experienced improved revenue for the quarter, reflecting the rebound in bookings during the second quarter.

The third quarter's revenue came in slightly ahead of our own forecast.

Turns revenue, meaning orders booked and shipped within the quarter, declined again to approximately 38% of revenue for the third quarter, down from 41% for the second quarter, and 47% for the first quarter, the highest level in recent memory.

This decline largely affects the increase in VI Chip shipments of orders to be shipped across more than one quarter.

Given that we build to order and our lead times to delivery range by product from 3 weeks to 12 weeks, a lower dependency on turns revenue implies greater visibility in our forecast.

Backlog totaled $53.9 million as of September 30, of which, 71% was scheduled for shipment during the current quarter.

Recognized sell-through revenue for the third quarter, associated with shipments by our stocking distributors, increased over 44% to $2.1 million from the prior quarter's $1.5 million.

As I state every quarter, please keep in mind, for financial reporting purposes, we segregate customers by the address to which we ship.

With the exception of Vicor Japan, all of our subsidiaries sell in dollars, and all of our products, again, with the exception of those manufactured by Vicor Japan, are exported from the US.

International revenue rose to 61% of total revenue for the third quarter, up from 58% for the second.

The increase in VI Chip shipments, which primarily go to Asian contract manufacturers working for our domestic OEM customers, was the primary contributor to the increased percentage of total consolidated revenue represented by international activities.

BBU exports were flat sequentially, while the VJCL dollar revenue recovered from the second quarter's low point.

If VI Chip shipments to contract manufacturers are not considered, shipments across the Asia-Pacific region, excluding Japan, were unchanged or declined slightly from country to country, reflecting softer second-quarter booking patterns.

Our largest market in the region, China, inclusive of Hong Kong and Shanghai operations, experienced a 9% decline in shipments for the quarter.

As stated last quarter, our definition of Europe, going forward, for purposes of these conference calls includes Northern Europe, Southern Europe, and Eastern Europe, inclusive of Poland, Russia, and the Ukraine.

We are segregating Turkey and Israel, which had been included in Southern Europe when we discussed the region.

As a whole, European shipments declined 9% sequentially, despite continued double-digit expansion in Russia, which has quickly become a major market for us.

Historically important markets for us, such as the UK, continue to be weak, reflecting poor conditions in defense electronics.

After a brief disruption earlier in the year due to a transition in distribution partners, Israel recovered to customary levels and shows signs of sustained growth.

Turning to new orders, third-quarter bookings declined 6.7%.

However, recall bookings increased 24% and 26%, respectively, for the prior two quarters.

Second-quarter bookings included orders associated with a VI Chip design win in the data center space as well as a significant defense electronics order for the BBU.

If this single defense electronics order is not considered, all other booking activity actually increased approximately 5%, reflecting an increase in order flow for VI Chip's data center solution; continued growth in Russia; a recovery in bookings in key markets, notably China and Germany; and a 20% increase in orders from our stocking distributors.

The data center volumes are scheduled to be shipped well into the first half of 2014, based on current backlog, and the defense electronics order begins meaningful shipments in the first quarter.

As has been the case for some time, the BBU continues to experience varying demand for its modules and configurable products.

We hope macroeconomic conditions firm at some point, but we anticipate real recovery for the BBU will be based on new solutions enabled by the Chip modules Patrizio will be discussing in a moment.

Turning to the income statement, consolidated gross margin improved to 41.7% for the third quarter, up from 39.4% for the second.

The improvement was largely the result of improved capacity utilization and overhead absorption, notably in VI Chip, which recorded a record gross profit margin.

Total operating expenses declined 4.4% on an as-reported basis.

During the third quarter, we did not incur any notable or irregular operating expenses, in contrast to the prior quarter, during which we recorded $1.1 million of charges associated with the stock option exchange we completed in June, a training initiative, and an anomalous bad-debt charge due to a customer bankruptcy filing.

While commissions did increase this quarter, as expected with the rise in revenue, and we continue to expand our Asian footprint, with an office in Seoul, South Korea established during the quarter, other operating expenses, including legal fees, were steady for the period.

Total headcount stood at 993 as of September 30, compared to 997 as of June 30.

A year ago, total head count stood at 1,044.

Until we achieve robust profitability, we will continue to closely scrutinize discretionary spending; however, we are not going to find our way to profitability through expense reduction.

We have established a marketing and sales infrastructure capable of supporting significantly higher volumes of business, so there is a chicken-and-egg aspect to our cost structure.

While we can be prudent in assessing incremental expense, achieving profitability through cost reductions or cutting back investment in our future, would be the wrong tradeoff.

In addition, we continue to spend heavily on product development, given the opportunities presented by our product roadmap.

As such, the top line will drive profitability in the next year as we leverage our considerable long-term investment in our future.

Turning to taxes for the third quarter, we recorded an income tax benefit of approximately $406,000, based on our forecast for a full-year taxable loss.

I want to highlight the possibility, and I emphasize possibility, the Company, at some point in the coming quarters, may need to increase the valuation allowance we apply to the deferred tax assets we carry.

Increasing the valuation allowance would represent a non-cash charge to earnings, and given the circumstances, such a charge could be material.

We have a net federal deferred tax asset balance of approximately $11.3 million as of September 30.

We also have a valuation allowance, totaling approximately $11.5 million, the majority of which offsets state-level deferred tax assets, which have been fully reserved.

Significant management judgment is required in determining whether deferred tax assets will be realized in full or in part.

Every quarter, we assess the amount of the valuation allowance offsetting the value of these assets.

For the third quarter, our conclusion was, based on our assessment of all available evidence, both positive and negative, the Company met the more-likely-than-not standard regarding the likelihood sufficient profit would be generated in the future to utilize the net federal deferred tax asset carried.

Elements of this assessment include -- projected future taxable income; tax planning strategies; scheduled reversals of deferred tax liabilities, if any; and income in the carryback period.

Recall that when we went to this quarterly exercise for the fourth quarter of 2012, we concluded we would be able to utilize the net value of the federal deferred tax asset carried, but we determined we would not be able to use the state deferred tax asset carried, due to idiosyncrasies in the use of carrybacks and carryforwards at the state level.

At the same time, we fully reserved against the value of these remaining state deferred tax assets, taking a non-cash charge of approximately $1.5 million.

Going forward, due to our consecutive quarterly losses and uncertainty regarding our timeframe to sustain profitability, we will closely evaluate the likelihood sufficient profit will be generated to fully utilize the net federal deferred assets -- excuse me, tax asset balance.

If we determine the more-likely-than-not standard will not be met, then the valuation allowance may need to be increased, and such an increase could result in a material non-cash charge.

Having said this, I should also point out that the valuation-allowance door swings both ways, in that sustained robust profitability could lead management to conclude some or all of the valuation allowance should be released, thereby creating a non-cash tax benefit which could be material.

Recall that during the third and fourth quarters of 2010, the Company recorded non-cash tax benefits of $5.2 million, or $0.12 per share, and $1.2 million, or $0.03 per share, respectively, due to the release of portions of our valuation allowance against deferred tax assets.

Turning to cash flow, cash flow from operations for the third quarter recovered to a positive $1.5 million from the second-quarter deficit of $2.5 million.

Despite the increase in shipments in production, we did not experience a meaningful swing in working capital for the quarter.

Capital expenditures for the quarter were steady at $1.5 million.

We still anticipate beginning the build out of our chip-production capabilities during the fourth quarter, but also anticipate the actual dollar investment for the quarter will be lower than the originally forecast $5 million, with more design and purchase order activity than actual spending, which will be recorded in Q1 and Q2 of 2014.

As earlier discussed, we expect our total investment for chip build out to exceed $10 million.

Turning to the consolidated balance sheet, our receivables portfolio remains in excellent shape, with day sales declining to 43 days from the prior quarter's 45 days.

Consolidated inventories, quarter to quarter, declined for the fourth-consecutive quarter, driving annual turnover to just over 4 for the first time in recent memory.

There were no meaningful charges or changes to reserves.

Cash at quarter end stood at $61.2 million, up from $60.8 million last quarter.

We also hold certificates of deposit, carried at their face value of $1.2 million, and long-term investment securities with a par value of $6 million carried, and an estimated fair value of $5 million, representing, roughly, 83% of par value.

Turning to our expectations for the fourth quarter, we are forecasting relatively little sequential change.

We do not anticipate reducing -- excuse me, we do anticipate reducing our net loss slightly, but based on current backlog, booking patterns, and expense trends, we will break even, at best.

We expect a further increase in revenue and steady margins, but we also expect any improved product-level results will be offset by a step up in resources and legal fees related to IP litigation.

We also are expecting increased R&D and engineering expenses as we roll out our new ChiP and SiP product lines.

This concludes my prepared remarks regarding our financials.

Now, I will turn it over to Patrizio.

Thank you, Jamie.

As Jamie has described, the third quarter was characterized by performance improvement in VI Chip, substantially doubling its manufacturing volume to a new record of production units.

This is very encouraging as we are confirming our VI Chip readiness options, which will be applicable to our new chip products.

The manufacturing of which leverages the lessons learned from first-generation VI Chips.

As a reminder, ChiP is an acronym for converter housed in package.

What we refer to as [molded] packages during development phase.

The power density, high efficiency, and scalability of ChiP modules make them attractive to market leaders seeking to differentiate their own next-generation systems.

We expect to be transitioning, during the second quarter of 2014, to production of ChiPs that will expand upon the first generation of VI Chips that provide the initial penetration of high-end servers and data center solutions.

While our first-generation solution consists of VI Chip PRMs and VTMs, our next-generation solution consists of SiP PRMs and ChiP VTMs, providing better efficiency and density at a considerably lower cost for the coming generations of Intel VR standards, beginning with VR12, which will be rolled out next year.

While our 2014 production efforts will be focused on expanding ChiP capacity, we will continue to produce first-generation VI Chips, as their use in certain applications continues.

While we do not have visibility into demand within the supercomputing segment, as federal funding remains quite uncertain, we have other applications for first-generation VI Chips.

Disappointment associated with the state of the supercomputing business is more than offset by enthusiasm for the reception our ChiP modules and SiP regulators have received across a range of applications.

Design-in activity is exhilarating, with an expanding list of well-known, large-scale enterprise computing manufacturers, test and measurement vendors, communication OEMs, and defense electronic contractors.

ChiPs and SiPs have been designed to platforms that should ramp in the second half of 2014.

Our ChiP platform is expected to dramatically cut the manufacturing cost per watt of our modules, well below the cost of first-generation VI Chips.

Our version of a broad market for factorized power is predicated on breakthrough performance of the competitive cost, providing a compelling value position, especially for the high-volume OEM customers, which are critical to our growth strategy.

First-generation VI Chips were already differentiated, but the manufacturing cost limited their acceptance to specialty applications, where performance trumped costs.

Our vision is to enable a scalable, modular power system methodology, using ChiPs delivering high performance, at very compelling cents-per-watt levels.

Our near-term strategy is to establish Vicor and our ChiP- and SiP-based solutions with high-profile customers, while also driving broader market penetration.

A subsequent [penetration] phase will leverage a ChiP-inside strategy across the fragmented market segments that are traditionally being served by the BBU and its units.

We have developed a detailed plan, already being executed upon, to expand the VI Chip manufacturing line to accommodate ChiP production.

As Jamie mentioned, we earlier thought we would be spending upwards of $5 million this quarter on new equipment, but we have been able to expand near-term capacity through productivity improvements, thus providing additional time for previewing investments in capital equipment.

We still anticipate a subsequent [spatial] expansion, in 2014, requiring an additional investment of at least another $5 million.

Despite the enthusiasm we have for promising new opportunities, many challenges remain.

As Jamie addressed, we expect results to improve this quarter, but likely fall just short of profitability.

We have been pleased with the efforts to control our working-capital growth, particularly with increased shipments, and are pleased to have been generating cash.

While we make consume cash for capital expenditures, we have sufficient liquidity to fund our near-term needs.

At the risk of repeating myself, quarter to quarter, I am confident Vicor is on the right path to long-term success, as we have the vision, technology, and product roadmap to serve the needs of a power system marketplace seeking high-performance, modular, scalable, and cost-effective solutions.

We have redefined our go-to market infrastructure, expanded our worldwide capabilities, and have partnered with well-positioned distributors.

While we continue to face economic uncertainty, I see us delivering on the prior commitments that will enable and define our future.

This concludes our prepared remarks, and we will now take questions from listeners.

Operator?

(Operator Instructions)

Our first question comes from John Dillon.

Please proceed.

Patrizio, congratulations on a really good quarter.

In particular, it looks like your bookings and revenues were up pretty significantly.

I do have a question on next quarter.

It sounded like you're going to have, basically, a break even or slight loss.

How about the bookings and revenue, do you expect those to continue to go up?

Yes, we see a couple quarters of modest growth in the top line and corresponding levels of bookings.

We see a little bit of a lull period prior to a significant step up, starting, likely, in the second quarter.

This outlook is fluid dependent, as I mentioned earlier, on a good deal of design-in activity that could surprise us, potentially, in terms of earlier activity, and potentially, on the flip side, in terms of delays.

Have you recalled a lot of the people that were furloughed a while back -- for the increased shipments?

I'm sorry, but you are coming through with difficulty.

Would you mind repeating the question, we could -- neither Jamie or I could understand.

Sure.

Are you bringing back some of the people that were furloughed, the manufacturing people?

We have been running some additional shifts, but our focus has been primarily to increase productivity, as I mentioned earlier, and we've been able to make strides in that general area.

Obviously, the level of activity in the factory has increased substantially, as you can expect with VI Chip shipments doubling quarter to quarter for a couple of quarters.

We are obviously a lot busier than we were, only a few quarters ago, when some downsizing was realized, particularly in VI Chip operations -- just before a major step up in activity leading within the last quarter to a record number of units.

We are still, as explained in the past, with particularly VI Chip, and even more, so ChiP products, in an early phase where the business is not as statistical as we would like to be.

We don't have, yet, the broader customer base that we have historically enjoyed with our brick products.

It is only when we get to the level of increased penetration that will cause the revenues to be made, and I'm referring to the VI Chip revenues and Picor revenues.

We went up a substantial number of customers and substantial level of diversification that our rational needs and capacity needs will become more predictable.

I am delighted with the way with in which operations and all of the people contributing to the success of the VI Chip enterprise, in terms of margin capacity from a tier perspective and in terms of units raised, have been able to respond to the sudden increase in demand.

That sounds really good.

So, you are running -- were you running one shift initially and you changed to two shifts?

Or are you running three shifts now?

How many shifts are you running?

We are not running, generally speaking, three shifts, but the level of activity has increased considerably.

We still have capacity capability beyond requirements over the next couple of quarters.

And, as I mentioned earlier in the prepared remarks, through the productivity improvements, we've been able to take a little more time to make purchases of additional equipment, which we are getting close to make, particularly in support of ChiP production rates.

Great.

Congratulations on that.

On the last conference call, I think you mentioned there was an AC to DC opportunity with the PFM.

Is that still a viable opportunity?

Has that progressed, and are you seeing any revenue from the PFM now?

We have made significant strides, both in terms of a broad customer base in small-to-medium volumes, and more recently, with, in particular, a significant opportunity in Asia for our PFM product.

That's been based on an early generation PFM, that, as you might have heard me say before, is about to be significantly improved through a new generation of devices that raise the power, the efficiency, the density, and most significantly, reduce the cents per watt -- the cost metrics considerably.

I'm happy that the key attributes of density low-profile efficiency of the first-generation PFM are giving us traction.

Not just with less cost-centric customers, but to some degree, with more cost-centric customers.

And, I am looking forward to a near time frame in which the introduction of more advanced PFMs, that are based on our ChiP platform, will change our metrics in terms cents per watt and the density in the right direction, opening up the PFM market opportunity considerably.

It sounds, from the outside, that it looks like the PFM market is humongous.

Everything related to PFM there's just such a wide variety of products out there, where the costs are dispersion.

Do you have any forecast on what you may be able to do in that product line, alone, in the coming years that you would share with us?

We do have evolving forecast, and what I can say is that developments in the general area are becoming more and more exciting.

Again, because of early traction with the first-generation PFM, which frankly is based on first-generation VI Chip technology, is a relatively expensive proposition.

We are going to be able to change key metrics of performance and cost to a level where -- one way of looking at it, a key parameter of goodness will be doubling.

And then, we are now developing -- the first ChiP PFMs are approaching product introduction.

We are now developing a further generation of AC/DC capabilities that will further raise the bar, with respect to performance, efficiency, and most importantly, cents-per-watt cost reduction, that will get us into very much of the mainstream of AC/DC applications from a cost perspective.

John, to answer your question, yes, we have a forecast, but no, we are not going to share it with you.

Right.

Thank you, again, and I will get back in the queue.

Congratulations, it looks like things are really poised to take off here soon.

Thank you.

Our next question comes from Don McKenna.

On the Intel VR12, how many approved vendors are there, and -- if you know, and what percentage of the demand, that they are going to have, do you expect to be asked to fulfill?

I think a little bit of technical, but not so technical explanation is in order to give you a better sense of the market opportunity.

The lion's share of VR12 is to be expected.

The lion's share of VR12.5 applications are going to continue to be powered from a 12-volt bus.

That is not the area in which we play.

Our opportunity has to do with the factorized power system, where we first got significant traction in high-end server application, which had to do with different kinds of processors, not Intel processor.

Within the last couple of years, has expanded, now, to Intel sockets that have moved from 12-volt to 48-volt power distribution because of a number of performance advantages that result in a fundamentally lower TCO, or total cost of ownership, by data centers users.

This is a trend that is accelerating.

We are heavily engaged with major players that, in effect, make and use their own data center infrastructure, which are seeing the benefits of a 48-volt backbone.

In a factorized power solution, we're, in effect, we are enabling a significant reduction in footprint in the motherboard, the elimination of bulk capacitors at the point of load, significant improvement in total efficiency and total system efficiency.

All of this results in significant savings for companies that get to pay the electricity bills year after year.

That's a valuable position that is gaining traction.

We've been able to establish it with first-generation VI Chips, which I suggested over and over again, are relatively expensive devices.

We are going to be, essentially cutting the cost in half, in terms of cents per watt, with chip-based solutions and Picor-based SiP-type solutions.

And, as you can imagine, that will greatly expand the market opportunity for these devices.

In a universe of Intel applications, again, that is still going to be largely dominated by 12-volt systems, where we don't play.

But, the good news, for us, is that there is a great growth opportunity in the 48-volt portion of this market, which is rapidly growing because of significant performance and cost benefits.

Yes, I recently read that 10% of the US consumption of electricity is in those data centers.

I actually think it's greater than that.

Yes.

Obviously, there's a lot of talk about taking our own responsibility with respect to a greener world, but significantly, the greenback element, in terms of actual operating cost and cost savings, is a driving factor.

As you can imagine, the profitability model of large data center users is dependent from being able to achieve lower operating costs.

Sure.

Could you speak a minute to the increased litigation expenses you anticipate next quarter of --?

We anticipate a significant step up in litigation expenses.

We recently retained an additional team of six lawyers working on the case and are making investments necessary to ensure we are going to prevail.

Is this to defend yourself on suits that have been issued against you?

Or, is it to still go after some of the patents that you always questioned?

This is to defend ourselves against a suit that has been brought against us with fundamentally baseless allegations of infringement and the questionable allegations of validity.

We believe that the patents that have been asserted against us are neither valid nor, in particularly, infringed of our technology, which is fundamentally different, fundamentally superior.

Unlike the earlier case in which the plaintiff was able to successfully assert claims against a large contingent of Asian companies with tradition of copying American technology.

In our case, the products, at a glance, are fundamentally different, fundamentally superior, and we believe they do not come close to infringing any valid claim of patents that this company holds.

The reality of the situation is that the plaintiff was able, in a first round of litigation against Asian knock-off companies, for lack of better words, to establish a momentum in a Texas district court, which they were then able to carry through to the federal circuit.

And more recently, they were able to carry through from the federal circuit to the Patent Board in successfully getting an examination by one of the Artesyn defendants, a defendant in the earlier litigation.

They were able to reverse the findings of the examiner agreed -- one of four different examiners were agreed that the patents were invalid and without merit.

This has been, what you might call, a domino effect, in that the plaintiff has cleverly corralled a group of helpless copycat companies, and they've been able to leverage their action of two-successive wins at different levels.

We are intending to stop their progression, and I think we have merit on our side and the resources to ensure that it happens.

Historically, you have drawn the line in the sand a few times with some success, with some failures, but you really feel confident on this one?

I think we've had a great deal of experience litigating IP as a plaintiff against defendants, and we, generally speaking, won on asserting claims against defendants on [those] patents.

This case of patents are really without merit.

And in any case, even if they were valid, are not infringed by our products, which again, are fundamentally different, fundamentally superior.

I think a layperson could readily ascertain that.

I think it is a very fundamentally different situation from the one faced by the Artesyn defendants, and we are equipping ourselves to deal with it.

Thank you.

(Operator Instructions)

Our next question comes from [Alane Hicks].

Good afternoon.

I had a question about Picor and how that business is doing?

Also, how does that complement the rest of your business?

I will say Picor is doing very well.

I think execution there has been stellar.

There is a very comprehensive wave of new products.

I think they played an instrumental role with respect toward data center -- first data center customer win.

They are playing an instrumental role with additional data center applications migrating to 48 volts.

Their role is to provide a more silicon-concentric part of our factorized power system solution, where their successfully integrated regulator to a device that is smaller, more efficient, and a lot more cost effective than our first-generation VI Chip.

It's a good match for certain of our engines and building blocks, particularly regular blocks.

So, they have sampled to key customers, the advance regulator -- PRM-type regulator products.

They've also sampled a [finished pro] line of ZVS buck products, which are step-down regulators.

They will soon have boost regulators, an expanding product family of very compact and cost-effective and high-performance products that leverage our proprietary ZVS and ZCS engines.

So, they play a very key complementary role to the ChiP activities.

As you might imagine, for certain of the building blocks, of our factorized power system, a more complex packaging technology is needed to give them, just from a functionality -- it's not a functionality, there's the need to be integrated within the package.

The divide-and-conquer strategy that we have with Picor has to do with implementing certain functions, in particularly, regulator functions through a system and a package -- packaging technology that is mainstream and majorly available.

The value proposition with Picor is the very high silicon content within a common denominator SiP package that has to be differentiated from the ChiP and VI Chip portion of the challenge, which has to do with other engines that require a much higher level of [buck on point] integration with magnetic and other types of functionality.

It is still a negligible part of your business.

What's going to take --?

It won't be negligible all that long, because, as we get into the middle of next year with design wins that have taken place, they are going to be shipping very substantial quantities of SiP regulators.

As we look at the second half of next year and entering the beginning of 2015, Picor will be in double digit in terms of millions of dollars per year.

Do you expect that to gain traction by the second half of next year?

There is going to be a big step up, starting in the middle of 2014, and further growth as we progress into the [latter part] of 2014 and 2015.

I had a question on -- a couple questions, one, what are your prospects in the supercomputing business, and also, the auto industry?

We are making progress in the supercomputing business with other customers.

And we are seeing, generally speaking, increased adoption of our 48-volt infrastructure in supercomputing platforms made by customers other than our original customer in that space.

Again, this has to do with the total cost of ownership perspective that is becoming more prevalent, not just with companies that make and operate their own data centers, but also with computing product makers and supercomputing product makers.

We are getting significant penetration at least two other accounts in that space that represent tremendous opportunity for us in years to come.

On the auto industry?

On the auto industry, as I have warned in the past, that is a long haul, as we all recognize, but we are actively pursuing opportunities that will result in significant revenues.

We all need to be very patient with respect to that.

That is not a near-term opportunity.

To give you a little bit more flavor with respect to that, the density, efficiency, and cost attributes of ChiP modules is a match made in heaven for automotive applications.

We are refining our product offering in that space to advance the performance and cost attributes and make the chip inside solution for automotive power systems, particularly electric and hybrid vehicles, a very compelling solution.

This is a long-term play.

Okay.

It sounds like you're back on a growth curve, and thank you very much.

You're welcome.

Our next question comes from John Dillon.

Patrizio, you have talked a number of times about how your design wins were up.

I'm wondering if you can give us some metrics -- are they up 10%, 20%?

Can you give us a rough estimate of what you're talking about there?

I'm not going to give you a number.

I can tell you that if I look at major customers, the major customers that I have been personally visiting, let's say, in California on the west coast, in the southern states, Texas, have been growing at an exponential rate.

There is greater and greater interest in our technology because of its differentiated capabilities, particularly regarding the benefits of factorized power in 48-volt infrastructure and the [power] multiplication to the point of load.

And that's gaining traction, not just in computing, but also in communications applications.

Excellent.

An exponential interest, that's big, that's a lot.

I think we are happy with the level of interest that we are getting.

I don't think we could ask for more in terms of appeal of the products.

Products that we been shipping as well as products we have shown to key customers that are on our product roadmap.

You've mentioned a couple times about a big step up in the second half of next year.

Again, what does a big step up mean?

Can you put any kind of metrics to that?

I am not going to try and quantify it because of the uncertainties I was referencing earlier.

Let me put it this way, given the visibility that we have, we anticipate that over the next couple of years we should break past the ceiling of revenues that have capped our historic performance.

I think as that happens, it should get very exciting.

We see the interest in the products, the applications, and the opportunities to support this [progression].

And again, we have now, for the first time, a sales and marketing infrastructure as well as the operational infrastructure to support some exciting growth that, frankly, we have not seen in a long time on average.

We've gone up, we've gone down because of certain setbacks.

We've had some recovery, but frankly, going up and down -- a lot more on a roller coaster ride is not the kind of excitement that we are looking for.

We are looking to get to new levels and build on those.

And, we think that the $200 million-plus investment we made in ChiP technology and Picor SiP technology will pay off big time.

Great.

Okay, so what I think I'm hearing is -- sometime in the future, near future, starting in the second half, sometime after the second half of next year, you expect record revenues and then sustained growth on top of that?

I hesitate to give you a precise roadmap with respect to record revenue levels and the like.

I think I repeat in different words what I just said, which is our visibility with respect to products, customers, and applications supports levels of revenues that we've never achieved in the past and continued growth beyond that.

And, that's what we are very much focused on.

And that continued growth is more of a -- a little bit more steady than we have seen in the past, more of a (multiple speakers)?

I think the steadiness will come about as a result of diversifying the customer base.

Absolutely.

We are, as I mentioned over and over again, not delighted with the fact that with our new products and our new technology platform, in the early going, we have had, if you will, excess dependency on a -- really a few customers.

But, that is changing.

There is more and more motivation in the marketplace for going factorized power and that's a very positive development for us.

Also, as I mentioned earlier in answer to a question regarding AC/DC products, with ChiP technology, we are enabling much more cost-effective solution to provide a level -- a percent of connectivity from the AC wall plug all the way to the point of load by way of 48-volt bus.

Through proprietary engines and proprietary power distribution architecture that I think addresses the demands of the power system marketplace striving for better solutions.

You've mentioned 48 volts a number of times.

What about -- you had some luck with 350 or 380 volts, are you also seeing new applications in that arena?

Yes, we are seeing applications in that arena.

We are also seeing applications in AC power systems.

Again, we are uniquely equipped to -- I like the analogy of airlines, because in effect, enabling a power system is a little bit like taking people from destination A to destination B, by way, in some instances, of intermediate stop.

And that may make sense for a variety of reasons, depending on unique power system requirements.

We believe to be in and aligned with unique capabilities in terms of connectivity from any source to any load by whatever midpoint is appropriate given the unique requirements of that particular power system

Congratulations.

It sounds like it's pretty exciting there, so thank you very much.

Thank you.

Our next question comes from Don McKenna.

Following up on some of those questions, back at the end of 2011 or beginning 2012, I'm not really sure when it was, that you have had a goal of tripling the size of the Company in five years.

And, I know this was not intended to be a straight-line effort, but it seemed like we got off to a little bit of a slow start on that.

But with what's going on now, do see you see that as a possibility again?

It's more than a possibility, that's what we're focused on achieving.

To clarify for the audience, the fact that we had setback with respect to the timing of that objective.

As you might recall, as I'm sure you recall, there were two specific developments that handicapped us for a while.

One was a setback with supercomputing applications, particularly the cancellation of the Blue Water project, which cost us tens of millions of dollars in revenues.

Also, what has been going on in the defense market.

Historically, Vicor has had significant dependency on defense applications, and I will tell you what's been happening in that channel space.

This has been a perfect storm of sorts that hit us, over the last year, in particular, and as we have managed to do in the past, I go back to a time of the bursting of the telecom bubble, where we had 70% dependency on communications applications with the AC/DC converter bricks, and we had to (inaudible) and [reappraise] all of -- where we would go from there.

We have been through a similar evolution of late, and that's why you've heard us talk about application environments that are not part of our historical makeup -- supercomputing, data center applications, high-end servers, Intel sockets.

Intel sockets are getting more and more cost-effective, as well as penetration of test equipment, other computing applications, automotive as low as that is going to be.

We are looking broadly at the universe of electronic systems, focusing on those markets that align with our unique modular power component capability and leveraging that capability with a near-term goal of three by five, and longer-term goals that go beyond that.

Great.

Thank you.

At this time, we have no further questions.

Thanks very much, and we will be talking to you in three months.

See you next quarter.

Bye.

This concludes today's conference.

You may now disconnect.

Have a great day.