Vicor Corp (VICR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vicor earnings results for the fourth quarter and year ended December 31, 2013, conference call.

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

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

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

(Operator Instructions).

I would now like to introduce your hosts for today, James Simms, CFO of Vicor Corporation, and Dr. Patrizio Vinciarelli, CEO of Vicor Corporation.

Please proceed.

Thank you, Esteban.

Good afternoon and welcome to Vicor's conference call for the fourth quarter and full year ended December 31, 2013.

I'm Jamie Simms, CFO, and with me here in Andover is Patrizio Vinciarelli, CEO, and Dick Nagel, Chief Accounting Officer, or CAO.

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

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

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

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

I also remind you various remarks we may make during this call may constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Our forward-looking statements are subject to risks and uncertainties 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.

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

A replay of the call will be available beginning at midnight tonight through March 28, 2014.

The replay dial-in number is 888-286-8010 and the listener passcode is 88759524.

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.

I'll start this evening's call with a review of our financial performance for the fourth quarter and full year, 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 a net loss for the fourth quarter of $13.1 million, representing a net loss of $0.34 per share, compared to a net loss of $932,000 or $0.02 per share, for the third quarter of 2013 and a net loss of $4.8 million, or $0.12 per share, for the fourth quarter of 2012.

For all of 2013, our net loss was $23.6 million, representing a net loss of $0.60 per share, compared to a net loss of $4.1 million, or $0.10 per share, for all of 2012.

In calculating Q4 EPS, we used 38,539,000 shares as total basic shares, while for the full-year calculation we used 39,196,000, reflecting the influence of a higher Q1 share count prior to the completion of our two tender offers during Q2 of 2013.

As noted in today's press release, as well as earlier in the press release of March 6, we increased the reserve against all remaining net federal deferred tax assets on our balance sheet as of December 31 by approximately $10.2 million, which has been recorded on our income statement as an increase in our fourth-quarter tax provision.

The impact of this non-cash increase in our quarterly tax provision was to increase reported Q4 loss per share by approximately $0.26.

The other significant driver of our Q4 loss was a marked increase in legal fees.

For the fourth quarter, legal fees on a per-share basis exceeded $0.06.

As such, including the impact of the increase in the allowance against deferred tax assets and the increased legal fees, we operated near breakeven for Q4.

We had expected to be returning to profitability perhaps as soon as the fourth quarter as we had been forecasting a recovery in important markets and geographies that would have contributed to this return to profitability.

However, as reflected in our decision to take a full reserve against our deferred tax assets, we realized during the fourth quarter that these markets and geographies were not showing the improvement we had expected.

I will address these markets and geographies in a moment and I will return to our tax position and the decision to fully reserve our deferred tax assets at the end of my remarks.

Vicor's consolidated revenue for the fourth quarter of 2013 was essentially unchanged from the third quarter, increasing $167,000, or a third of a percent.

The Q4 total of 500 -- excuse me, of $55.3 million compares to revenue of $50.4 million for the fourth quarter of 2012, representing a year-over-year quarterly increase of 9.6%.

For the full year, consolidated revenue declined $19.4 million, or 8.9%.

This year-over-year decline largely is attributable to the weakness of certain domestic market segments, notably defense electronics.

For example, our custom systems business, which primarily serves military customers, saw sales decline over 20% for 2013.

International revenue rose to a record level of 64% of total revenue for the fourth quarter, up from 61% for the third quarter.

We report revenue based on the location of the customer to which our products are shipped.

The BBU's exports increased 11% sequentially, reflecting a welcome recovery in Japan shipments and strength in China, while North American quarterly sales declined approximately 12%.

This shift in BBU volume toward exports, along with the sustained level of VI Chip shipments to Asian contract manufacturers working for our domestic OEM customers, contributed to the record level of international activity for the quarter.

Turns revenue, meaning orders booked and shipped within the quarter, declined for the fourth consecutive quarter to approximately 31% of revenue for the fourth quarter, down from 38% for the third quarter and a peak of 47% for the first quarter of the year, the highest level in recent memory.

Generally, a lower turns percentage implies greater visibility of our customers and, in turn, our own forecasts.

However, given the weakness of bookings in Q4 and booking activity so far during the first quarter of 2014, we likely will see higher turns levels this quarter.

Recognized sellthrough revenue for the fourth quarter associated with shipments by our stocking distributors was flat from quarter to quarter at $2.1 million.

Consolidated gross profit margin rose slightly on a sequential basis, increasing to 42.4% for Q4 from 41.7% for Q3 and 39.9% for Q4 2012.

For all of 2013, our consolidated gross profit margin was 40.9%, down slightly from 41.9% for 2012.

Recent variability in our quarterly consolidated gross profit margin is attributable to VI Chip volume variances.

We are pleased to report VI Chip achieved improved gross margins for the fourth quarter, reflecting sustained production of VTM and half PRM modules for data center applications.

Consolidated operating expenses rose 11.2% sequentially and 8% on an annual basis, although the annual change reflects severance recorded earlier in 2013.

For the fourth quarter, operating expenses included legal fees -- excuse me, excluding legal fees, were up less than 2%.

This increase was largely the result of R&D and engineering charges associated with the relatively high number of new products in the final stages of design qualification.

We also experienced increases in certain international sales and marketing costs tied to our new offices in Shanghai, Seoul, and Bangalore, but these costs were largely offset by the benefits of expense reductions associated with the restructuring of certain of our international operations, notably in Europe.

Total headcount stood at 1,002 as of December 31, 2013, up from 993 as of September 30.

One year ago, total headcount was 1,046.

Turning to new orders, fourth-quarter bookings declined 18.9% to $46.3 million from $57.1 million for the third quarter.

While Q4 bookings were seasonably -- excuse me, seasonally soft both here and abroad, much of the decline was attributed to two expected transitions.

The first in Europe involves changes made during Q4 to our distribution model and the transition of customer relationships to our new distribution partners.

The second stems from a transition to our new ChiP platform, shipments for which we plan to begin later this year as our second-generation solution for powering Intel processors will utilize a chip-based VTM and a Picor Cool-Power SiP regulator.

Our major data center customer has begun planning the transition to the new solution, and in turn, its contract manufacturers have slowed their orders for the first-generation solution and are consuming inventories on hand.

As such, we are seeing reduced bookings for the first-generation VI Chip solutions so far in Q1 2014, and we are expecting a similar level in Q2, with bookings for the second-generation ChiP and SiP solution expected to begin in Q2 and accelerate in Q3.

One-year backlog fell to $44.7 million from the prior quarter's ending level of $53.9 million, a decline of 17%, again reflecting the weak Q4 bookings.

75% of this backlog was scheduled for shipment during the current quarter.

So far this Q1, our daily bookings rate has improved, and we anticipate bookings and backlog ending the current quarter ahead of Q4.

Cash flow from operations for the fourth quarter fell to a deficit of $2.4 million, largely due to an unfavorable $2.1 million swing in working capital.

Recall the increased deferred tax asset reserve was a non-cash adjustment to our tax provision.

Capital expenditures for the quarter increased slightly to $2.2 million, reflecting some of the initial investment in the expansion of our Chip production capabilities.

We have refined our budgets for 2014 expansion and currently expect the actual dollar investment for the year will be lower than originally expected, in the range of $4 million.

We have been successful in repurposing existing resources to meet expected 2014 Chip capacity needs.

Turning to the performance of our business units, the Brick Business Unit, our largest, recorded flat sequential revenue of 20 -- excuse me, $42.3 million.

This level represents a 2.6% decline from the $43.4 million recorded for Q4 2012.

For the year, BBU revenue declined $16.9 million, or 9.4%.

These revenue trends reflect continued weak conditions for the BBU in North America and Europe, while Japan has been steady.

In contrast, after a brief period of softness earlier in 2013, China showed growth, with rail and industrial applications picking up for the quarter.

Other developing markets continue to show impressive growth with demand across industrial, rail, and communications applications.

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

We are hopeful macroeconomic conditions improve at some point, driving demand, but we anticipate real recovery for the BBU will be based on new, highly differentiated solutions enabled by the ChiP modules Patrizio will discuss in a moment.

VI Chip's fourth quarter also was largely similar to the third quarter, with revenue increasing $243,000, or 2%.

Q4 2013 revenue at $12.2 million was more than twice the level of Q4 2012.

For the year, VI Chip reported revenue of $33.2 million, which was 6% lower than the amount recorded for 2012.

For 2013, VI Chip's production recovered during the second half of the year and was largely targeted at the data center market, where our 48-volt factorized power solution has been successfully deployed in high volume.

As I stated earlier, we are forecasting a transition during the first half of 2014, with a decline in VI Chip shipments anticipated in the second quarter as the transition from VI Chip-based solutions to solutions consisting of a chip VTM and a Picor Cool-Power SiP regulator begins for data center and communications customers.

We also are forecasting a diversification of customers for ChiP solutions that will begin in the second half of 2014.

However, we may experience lower gross margins in the near term as we will be ramping production of the new ChiP products initially in lower volumes and therefore absorbing less overhead.

Picor has been gaining momentum with its expanding line of Cool-Power SiP point-of-load regulators, with attractive sampling and design activity leading to encouraging new orders.

However, meaningful merchant revenue is at least two quarters away for Picor and if the volumes associated with these second-generation data center solution developed during the second half of 2014.

Returning to taxes, for the fourth quarter our income tax provision was approximately $9.4 million, reflecting a $10.1 million increase for the quarter in our valuation allowance against our remaining federal net deferred tax assets.

As I advised last quarter, we were aware then of the possibility the Company might need to increase the valuation allowance we applied to deferred tax assets we carry to reflect the conclusion that we more likely than not would not be generating sufficient taxable income to utilize the assets in the foreseeable future.

Until the fourth quarter, we had maintained a forecast calling for an earlier ramp in new product volumes, accompanied by an assumed recovery in North American and European markets.

In addition, we had not anticipated the extent to which customers and prospective customers would be reluctant to place orders for bus converter products, due to their fear of becoming involved in litigation.

These factors, when incorporated into our forecast for 2014, along with our recent consecutive quarterly losses, led us to conclude it would be appropriate for us to fully reserve our federal net deferred tax assets as of year-end.

As I have stated before, 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.

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.

When we went through this quarterly exercise for the fourth quarter of the prior year, 2012, we had concluded we would be able to utilize the net value of the federal deferred tax assets carried, but we determined we would not be able to use the state deferred tax assets carried, so we recorded a non-trust -- excuse me, non-cash charge of approximately $1.5 million, or almost $0.04 a share, to fully reserve the value of these remaining state deferred tax assets.

However, in contrast, during the third and fourth quarters of 2010, we 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, which markedly increased our reported net income for those two quarters.

Turning to the consolidated balance sheet, our receivables portfolio remains in excellent shape with days sales steady at 43 days quarter to quarter.

Consolidated inventories quarter to quarter increased 6%, due to an increase in year-end inventories within VI Chip.

Despite the increase, annualized turnover only declined from 4.0, a recent high point, to 3.95.

There were no meaningful changes to reserves.

Cash and equivalents stood at 53 -- excuse me, $56.3 million at year-end, down from $61.2 million at the end of the third quarter.

We also hold investment securities with a par value of $6 million carried on our balance sheet at an estimated value of $4.8 million, representing roughly 80% of par.

Turning to our expectations for the first quarter, which is two-thirds over, we are expecting to meet our revenue target of approximately $52 million, which is sequentially lower due to the soft bookings for the fourth quarter.

As mentioned a moment ago, we expect bookings will end the first quarter slightly ahead of the prior quarter.

Because of the aforementioned transition to the second-generation solution, we expect VI Chip volumes will decline slightly sequentially, with a consequential impact on gross margin again due to less overhead absorption.

Any improvement in true operating performance likely will be offset by legal fees, which we are expecting will result in another quarterly loss.

We expect to consume cash to fund operations and for capital expenditures, but we have sufficient liquidity to meet our needs.

While we have many good things to share with you, which Patrizio will address, I will conclude my remarks by stating that our return to robust growth and profitability may likely be delayed until at least later this year.

Now, I'll turn the call over to Patrizio.

Thank you, Jamie.

As Jamie has described, the fourth quarter was characterized by steady shipments, but lower bookings.

Volumes fell short of the level we need to leverage our [bretty] model.

And putting aside the tax charge, we recorded a large use of substantial legal fees that we expect to continue until the trial is scheduled to take place in four months.

As I said in today's press release, fourth-quarter results and the [non-ofvercial] nature of significant differences on these results masked some important progress we made during the quarter with our new product initiatives, notably a ChiP platform.

As I discussed, Vicor introduced its converter housed in package for ChiP technology in March of 2013 to great acclaim.

The design concept, which integrates advanced magnetics, control [essex], and [personal] conductors within high density and technology substrates enables unprecedented power density, conversion efficiency, and time of performance.

With our ChiP platform, we are announcing a VI Chip value proposition, because the manufacturing chips is expected to be far less than what it costs to make earlier generation VI Chips, and the performance of ChiP modules is far superior.

In addition, our ChiP platform provides us greater flexibility and scalability in manufacturing a wide range of package sizes, much wider than with earlier VI Chips, thereby allowing for broader range of products offered and applications served.

In short, ChiP technology is a game changer for Vicor.

In December, we leased the production of our first ChiP-based product, a 1.2-kilowatt base converter.

In January, we formally introduced it to the public.

We are sampling the device across a range of markets.

Called the 6123 BCM, reflecting its dimension of 61 millimeter in length and 23 millimeter in width and its base converter function, the module has a DC input range of up to 410 volts and a nominal output of 48 volts.

It is based on our Sine Amplitude Converter topology, which, at over 1 MHz operating frequency, issues fast [access] response and low noise.

This module set best-in-class benchmarks for converter efficiency, up to 98%, and power density, up to nearly 2 kilowatts per cubic inch.

Ready for 1200 watts, this product can handle up to 1.5 kilowatts peak power, if applications requiring larger power levels and multiple BCMs can easily be used in power.

The 6123 BCM addresses the rollout of higher-voltage DC distribution in data center, datacom, telecom, industrial, and military applications.

For some time, we have been emphasizing the benefits of high-voltage power distribution, which reduces power consumption, operational costs, and infrastructure investment.

High-voltage distribution ranges from 270 volts in our space applications; to 380, 400 volts in data centers; to 600 volts, 800 volts for heavy industrial and military equipment.

We have been a pioneer in high-voltage conversion in all these market segments.

High voltage we see as being identified in a number of studies as the sweet spot of efficient power distribution, as it allows for lower distribution losses and/or less bulky copper cabling.

It removes complexity by eliminating unnecessary conversion stages and offers an increase in overall power system efficiency.

While challenging a well-established stand that [changes] can be difficult, using longstanding practices at entrenched vendors, a measure offset with the adoption of high-voltage power distribution in tele-centers has been the availability of enabling components, specifically those addressing the large stepdown from a high-voltage [path] to the low voltage necessary for servers, routers, and the like.

Condition of this sine converter topology is a handicap, but the physical size and lower conversion efficiency, making the implementation of high-voltage distribution a challenge.

We targeted our regional VI Chips at this market opportunity.

But they proved compelling only in less cost [selsia] applications, like supercomputing.

However, our 6123 BCM, along with similar products on our roadmaps, provides very high stepdown ratios with unmatched levels of efficiency and power density at an attractive price point.

One industry analyst wrote in the February issue of Electronic Design that the 6123 BCM represents the missing link necessary to break down the remaining buyers to evolve this distribution in data centers.

Given the very [active file] of worldwide data center infrastructure to meet the demands of cloud computing and universal mobility, we believe our pioneering position of all distribution is to Vicor in the sweet spot of this exciting market opportunity.

We believe our high-voltage BCMs, complemented by our POL regulators with Power-Cool SiPs and the [POR card] multipliers with ChiP-based VPNs give us a highly differentiated competitive advantage in the promising high-voltage distribution market.

We expect to extend our leadership in this emerging market in the next month or so with the introduction of a 1750-watt bus converter in the same 6123 package.

I encourage listeners interested in our technology and propositioning to view our Web-based presentations, which describe the considerable advantages of our voltage DC distribution.

We are very pleased to have our data center partners participating in these presentations, including HP, Emerson, and Universal STARLINE.

Germany's Fraunhofer Institute is involved as a partner, focusing on high-voltage micro [breathes] in commercial buildings and industrial facilities.

The U.S. Army also is participating as our partner, reflecting the applicability of our high-voltage distribution solution to 270-volt distribution defense applications.

Our high-voltage BCM roadmap is also applicable to bidirectional battery backup in charging of up to 800 volts in heavy commercial and military equipment in which high-voltage distribution enables hybrid power systems and provides energy-saving features.

We are also targeting senior bidirectional applications in renewable energy where batteries need to be charged after discharge in a closed loop.

This spring, we also plan to release our ChiP-based BCMs, which are high-voltage regulated DC-to-DC converters applicable to a wide range of market end uses.

We are planning for our BCM portfolio to grow rapidly, with other [menu] specification, design, qualification, test, and [dellasheet] directional tools coming online through 2014 to bring Vicor's mass customization capabilities to the new BCM ChiP platform.

As has been the case with our traditional line of [vig] modules, customers will soon be able to design online a specific configuration within a broad input range of 12 to 425 volts, inputs, with outputs from 12 to 55 volts and with power levels per module from 50 to 600 watts, and to have that product delivered in [lease] status within weeks of request.

We believe high-voltage BCM engines, when used in terminally adept packages containing filtering and communications telemetry circuitry, will then be [great] our traditional big markets as this device will offer market-leading efficiency and power density.

These package units are also expected to have broader applicability to high-volume [weair] applications for which our traditional bricks have not been cost-effective solutions.

Our first samples of these new products have been manufactured, and we are very excited about the prospects for this trial line in traditional big applications with the industrial, rail, and aerospace military markets, and new opportunities for us to further penetrate market segments which we have had limited success with bricks, such as high-volume communications infrastructure.

We are also making good progress with our approach to the AC side of the market.

Our next measured release will be the AC input 400-watt PFM with both 24- and 48-volt outputs, samples of which have already been shown to customers.

This new product range will give us a highly differentiated capability in the largest segment of the power conversion market and should generate important cross-selling opportunities.

Available in the 6123 ChiP format and the new system-level high-density thermally adapt package, the PFM represents a complete qualified, certified, drop-in solution for a broad range of customers in the telecom, instrumentation, test, and the industrial process control and automation segments.

And for Vicor, it is shorter time to revenue than in the DC-DC segment of the power conversion market.

Our existing direct 48-volt two-processor solutions also continued to gain adoption.

Following the success of the Intel VR12 Sandy Bridge x86 solution, we have recently achieved full compliance between Intel's VR12.5 Haswell x56 specification.

The VR12.5 compliant 1523 VTM chip and Picor Cool-Power [parcoo] SiP regulator are expected to begin shipment in volume in April and will be in greater volume production in the summer.

As Jamie indicated, we expect a temporary dip in the volume of shipments to our primary data center customer as their [contra] manufacturers shift production from Sandy Bridge to Haswell architectures.

We are pursuing a broader presence under the center mother boards with new 48-volt input VDS bus converters that will allow [prefer] rails [in order to be] memory to be powered directly and efficiently from the 48-volt rail.

Picor powertrains for the 250-watt [CM5] graphics processors and new DDR4 memory are in step with Intel's release schedule.

We have high hopes these complementary products, which [should] now be value proposition for motherboard designers seeking efficiency and smaller powertrain footprints, will allow us to broaden our customers' base with a compelling full solution.

Finally, we have been busy announcing our advanced online tools.

In addition to those mentioned involving the contest of a DCM rollout, including improvements and expansions of our power bench application, having a whiteboard, and simulation to suite to accelerate that confidence in signing activity, we see these online tools as an important element of our competitive strategy.

To conclude, we have experienced microeconomic headwinds that have continued far longer than expected.

We have also experienced lower demand than anticipated for bus conversion solutions, due to the uncertainty injected into the market by the unfounded claims of a competitor.

While our financial performance has lagged and losses have continued, we have never lost sight of our longer-term strategic goal of repositioning Vicor as a highly differentiated vendor of complete high-performance cost-effective AC to load and high-voltage DC to load solutions.

Our major power portfolio is nearing completion.

We have our front-end sales and marketing infrastructure in place and we are confident as ever we will succeed.

Despite our emphasis for success, challenges remain.

As Jamie addressed, we expect to fall short of profitability again this quarter, as any operational improvements are likely to be offset by legal fees.

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

(Operator Instructions).

[John Dylan], [D&B Capital].

I am wondering if you can comment a little bit more, give us a little bit more on the color about bookings.

It sounds like they are slightly ahead, running slightly ahead of last quarter, and when might you see those start turning up?

So as I mentioned and Jamie mentioned earlier, the temporary depression in bookings has a lot to do with transitional issues in terms of our motherboard solution for Intel processor applications in data centers.

We are going to see a ramp with next-generation products starting in the middle of the year.

I think we're going to see bookings growth in the second half of the year, but I think from a variety of VI Chip and the Picor SiP opportunities.

In the case of VI Chip, it is going to be both from new chip products, based on the new packaging platform, as well as from older what you might call classic VI Chips that have been in a design phase with certain customers over past years with programs in the defense area and other end markets that are finally coming to fruition later this year into next year.

So, we expect a broadening of the customer base for VI Chip.

We expect a broadening of the customer base for Picor, which should begin to see substantial revenues as the first major program goes into production in the second half of the year.

And last but not least, we have our eyes very much focused on the fortune of our Brick Business Unit, where historically we have had products that relied on early [directional] technology, which had been in need of refreshing for quite some time, with the availability of a range of chip products, including BCM DC-to-DC converters, PFM AC-DC converters, BCMs of various kinds.

There's going to be in the near future an opportunity to, within brick and power systems, implement what you might call a chip in size strategy that will bring that part of our business to new levels of performance and cost effectiveness.

When do you think that will start, when the BBU will start coming out with new products with the chip inside technology?

The Company is scheduled to start coming out in the June/July timeframe.

It sounds like a lot is coming together in the June/July timeframe, then.

Well, in various ways, very strong.

I mean, we have ramps of new products, new products being introduced.

There is going to be a lot of activity in terms of new product introduction taking place literally over the next several weeks and months with scalable capabilities of PFMs, bus converters, BCMs, so there's a lot of action that is going on.

In regard to the contracting manufacturers, I understand that completely, but I am wondering.

Don't they want to put their orders in a little bit early for the new chips so that they can make sure that they get their deliveries on time?

Or are you promising them a quick turn and is that why they are holding back on giving you new orders for that?

Well, so essentially what has happened on that [trial] front is that last year as we ramped with our older VI Chip base solution, there was concern with respect to capacity and our ability to step up to burst demand.

We demonstrated that the capacity concerns are misplaced and we performed (inaudible) with respect to the ability to address growing needs on the VI Chip front.

And recently, the mindset has shifted from concern with respect to availability of product to concern about obsolete inventory as [we south] of transitioning requirements.

So I think that is the phase we are in that accounted for softness in booking with VI Chip in recent months.

I think we are getting through that phase, and with this customer's customers and other VI Chip customers suggested earlier we are going to see an expansion of significant demand as the year progresses.

We are already forecasting VI Chip bookings liable to set new records in the next 12 months.

Okay.

So that's good.

So the VI Chip should have revenue booking -- revenue shipments within the next 12 months?

We are expecting the VI Chip bookings to achieve new records in the next 12 months, and thus accounting for the fact that some of the VI Chip business in the sample applications is going to be converted to Picor business for Picor SiPs, which obviously [backs] from historical base on which we are building.

That sounds great.

One last question and I will get back in the queue.

Will we see a spike in bookings when the contract manufacturers initially place orders with you, then?

That has happened before and it could happen again.

Let's wait and see what happens.

Okay.

I'll get back in the queue.

Thank you.

Don McKenna, D.B. McKenna.

Patrizio or Jamie, whoever wants to answer it, on the recent announcements of the new distributor relationships, is that just a change in the way you are trying to get the product on out there, or is it where you are getting rid of your internal salespeople and giving it over to distributors, or is it new territories that you are addressing?

We have been expanding our sales capability in a variety of ways and a variety of avenues, I think as I am sure you are aware.

We have elevated our performance in terms of the sales and marketing infrastructure in recent years.

We have also realigned our strategy in terms of how to address markets in Europe, in Asia, globally, and in the US.

And that's involved new distribution relationships and novel ways of expanding our market opportunities.

So that is very much in keeping with a strategy that we have been focused on to bring about very substantial growth in years to come.

And (multiple speakers)

(multiple speakers) also account for the -- that change, does that address to the reserve for severance that I saw in the financials?

That was associated with something very early in 2013.

Yes, it is a year older, pretty much.

That was a different --

Okay.

The second question I had for you, on the design tools that you have on the -- the web-based design tools, is that unique to the industry, and do you measure the usage of it and can you give us an idea of what kind of usage you are seeing?

Yes.

So we see growing usage and it is rather unique because Vicor has a unique vision of how the power system marketplace is going to evolve, based on the power [conformance] methodology.

So these capabilities are not ones that you can readily buy because there hasn't been a development that can effectively address the unique tools and capabilities that we need in order to advance our unique power conformance methodology.

So it is something that we have invested in considerably for quite some time.

We have a large internal group that has been focused on this development, and they have been able to make great progress in terms of a variety of tools that are highly dependent, that are architected from the perspective of a customer having a power system need and that customer being able to, in time, address it with a complement of building blocks that we are uniquely equipped to make.

Don, I would add that everybody has selection tools, sophisticated online catalogs that allow you to screen for products based on their capability.

Many companies, from -- particularly in the semiconductor area, have very sophisticated online tools.

What we're trying to do is for the power business, as Patrizio described it, offer the customer something that really enhances and highlights the advantages of our products and our recommended architectures.

Well, from the perspective of the customer being able to find the [multiness] solution to their power system needs.

Right.

So it benefits from a vision of how to best address power system requirements that is really customer-centric, but leveraging the breadth of capabilities that Vicor uniquely has in terms of our ability to support any power distribution architecture and doing it with engines and modular power components that have highly differentiated advantages and efficiencies that in many instances is multifold to that of the competition, particularly when it comes to density.

Okay, and one last question for you, too.

The R&D right now is running about 20% of revenues, and if I remember right, you said most of that is in house.

Do you expect to maintain that kind of a ratio going forward or do you see now that you have finally got some of these coming onstream that that expense will decrease?

The way I like to look at this is both in terms of percentage and absolute dollars.

And what I would expect to happen is that the absolute dollars are going to stay relatively constant over time.

They will grow somewhat, but at a rate far lower than the revenue growth.

And as that happens, the percentage that you're referencing will come down to a level in the mid-teens which I think historically would be adequate for us to continue to be the kind of Company we are, highly innovative, very focused on advancing to serve the art.

So temporarily, it is at a -- the level that is higher than we like.

It obviously hurts us in terms of short-term financial performance, but we view it as an important investment in the future.

Thanks.

Jim Bartlett, Bartlett Investors.

Yes, 48 volt seems to be using a hub in data centers and the large public cloud vendors seem to be going that way.

Could you talk about your advantage in 48 volt, what you offer them, and when do you expect to get traction with more than one data center customer?

So to your point, there was an early adopter, a company with a good deal of vision that saw the benefits of a factorized power system solution for Intel processors -- from our Intel processors.

As you can imagine, everybody in the industry looks over the shoulders of their respective competitors, and they have all taken notice of the advances that this pioneer has been able to make in terms of efficiency, operating efficiency, with optimum results in lowering the cost of running a data center, which is obviously a [hap] pattern for the industry as a whole.

So you should expect, to your point, that others are following, that there is quite a detraction with respect to a 48-volt distribution bus, which is a factorized bus driving point of load core multipliers for server boards.

What that will entail is a broader penetration by building blocks.

Up to this point, there has been limited to powering the processor, but over time it is going to power processor memory and ancillary loads because, I suggested earlier, we are bringing to market more granular solutions both in terms of point-of-load core multipliers that can cost-effectively address power requirements and core requirements at a fraction of that of a main processor, so well suited to memory rails and also, with Picor SiP products, lower power requirements.

So we are going to have as this year progresses, the complement of building blocks to enable a complete solution for a whole power system for server board, based on a unique capability to power the front 48 volt.

And the benefits of that are greater density, considerably greater efficiency, several points of efficiency gains that are very meaningful to somebody who wants a data center.

Anyway, you expect traction in terms of getting some new data center customers to be seen this year?

The activity is gaining momentum.

I think if we look at how long it has taken for us to go from concept to fruition with our first key customer in that space, that took a little over a year.

It is a fraction of what it took us with high-end servers, which took longer than that, reflecting the reality that in this space, things move faster because systems are relatively simpler, lower power levels, and with a faster turnaround in terms of design activity.

But when it comes to infrastructure change in terms of going to 48 volt, there's more than the motherboard design.

There is, in effect, a mindset change that has to take place over some period of time.

But we are seeing it happen and we expect that we are going to start benefiting from it as 2015 comes along.

Thank you.

John Dylan, D&B Capital.

Hey, Patrizio, how many shifts are you running now?

Well, it depends on which particular [version] it is, but in some, three shifts.

In others, less than that.

Just to give you a little bit more sense with respect to capacity utilization, at this time we are not stretched, far from it, with respect to VI Chip capacity, but we are leveraging the [lolling] activity relating to the transition, as I was aligning earlier, to expedite completion of a variety of different products which have been in the pipeline.

So to some extent, the stars are aligning from that perspective because if you were more challenged from a capacity perspective in terms of mass production of particular products, we would have less flexibility with respect to doing as much as we have been able to do of late with respect to completing development of products that have been in the pipeline.

So that has been the focus.

And because of that, we have worked the factory hard, even though production -- mass production requirements have temporarily subsided.

Okay.

So, anyway, you have got the production to go forward, then.

You are running three shifts on certain segments, but not all of them (multiple speakers)

That's correct.

Okay.

And what I think I heard you say just a couple of minutes ago was not only will you be powering a processor, but in future servers, you will be powering the memory and also other parts of it.

And so, that would indicate to me you will get higher revenue per server, Vicor will achieve higher revenue per server.

Is that correct?

Yes, that's the goal.

And we think just the memory rails would bring about essentially a factor to increase in the value proposition for server [volume].

So that is going to be an important step.

And do you have design wins already for this?

Let me just say that the products that are needed in order to support that capability have been working on the bench.

These are smaller chips.

Just to give you a little flavor, you have heard earlier reference to a 6123 chip, which is a pretty big chip.

Power range, we use a 1,200 watts and our product about to be introduced is 1,750 watts.

This is representative of a particularly large chip, not the largest, but a relative big one.

For the server applications we have been referencing, we sample customers with a 1323 chip, so you can infer from 1323, 13 is lots more than 61.

So it's a much smaller chip.

We have chips that are a fraction of the 1523 in the works.

So the 1523 is well suited for the processor applications capability.

They see capability up to about 90 amps, peak capability up to 180 amps.

We have smaller chips that are well suited for memory applications that are in early demonstration capability and we have even smaller chips in the works.

And all this is enabled by our new generation of controllers that Picor has developed in the last several years, which will bring our capability for this type of products in terms of density, granularity of lower power levels, and cost effectiveness to presented levels.

And with this new chip technology and products that you've got, your design wins, are they going up, are they going down?

And your design activity, how is that going?

So, as I mentioned earlier, we see the customer makeup and the customer differentiation that should land a combination of business goals which are diversification in the customer base and significant revenue growth happening in the next 12 months.

As mentioned earlier, as we look at the multiplicity of customers that have embraced or are embracing ChiP-based solutions and SiP solutions, we see just for VI Chip record bookings and record revenues in the next 12 months.

So your design activity must be way up.

Our design activity is up, yes.

Great.

One last question.

With the new PFC module and you are talking about a shorter time to market, when do you expect to see revenue?

And what kind -- I mean, are you talking about -- on a yearly basis, do you expect that to be a significant part of your revenue?

A $10 million line, a $5 million line, more, less (multiple speakers)

We expect it to be very significant, and by the way, without even waiting for the new ChiP base, the 6123 chip base PFM, with our older PFM, which was a double chip, VI Chip, in the old packaging technology, we've been getting a lot of traction with that in spite of the fact that in terms of its cost effectiveness and performance, it's far inferior to the new VI Chip, ChiP-based product.

But with the older VI Chip, we're getting significant design wins which should result in a major contribution to bookings, not just in terms of the PFM building block, but also, suggested earlier, in terms of cross-selling opportunities.

Because we view the PFM as, if you will, a conversional stage that will take customers from AC power sources, which are obviously everywhere, to what has been referred to in an earlier question the 48-volt hub, which is really our hub.

I guess before, to use an airline analogy, be thinking of a hub that serves the particular purpose of a measured airline in terms of taking the traffic from a power source, such as the AC wall plug, to 48 volt so that we can then take it from 48 volt to the point of load through the [DI] conversion by way of high K factor core multiplier VTMs.

That 48-volt tab is also useful in high-voltage [decision] distribution, because with the recently introduced BCMs taking 400 volts down to 48 volt, again, we can support any power source into the 48-volt hub and from there to the point of load.

So the PFMs, going back to the core of your question, play an important role in terms of their own revenue contribution, as well as supporting a comprehensive vision of taking customers from anyplace, meaning any power source, to any other place, meaning any point of load requirement, by way of the 48-volt hub, which is being -- which is gaining traction more and more in all major electronic markets as the most efficient way of doing business.

This sounds great.

Thank you, Patrizio.

Appreciate it.

Thank you.

We do have (multiple speakers) some questions, if you would like to take them.

Don McKenna, D.B. McKenna.

We didn't address the litigation at all, and if you could from two standpoints.

One, if my memory serves me right, that if you were successful that it would open the door to market potential that might be as large as something like $100 million a year.

Could you confirm that?

And secondly, can you give us an update on the timeline?

Has the court date been set, and so on and so forth?

So we expect to be successful because our products do not infringe any of the asserted claims.

The case is going to trial in July.

So stay tuned.

We expect to have a finding on noninfringement, and, on that strength, reopen a market that has being foreclosed by a great deal of interference from a competitor that has got an agenda that goes beyond the legitimate rights of intellectual property.

So, that is as much as I can say at this point in time.

Are the products affected?

Am I right in remembering that the market for those kinds of products was somewhere in the $100 million annual revenue?

Well, so, I think that the competitor that we are referencing has, to some extent, managed to, if not kill, impact the golden goose, as it were, in that the market opportunity for IBA has significantly shrunk in -- as a result of the [traps] that we made to customers that intended to use that power system solution (multiple speakers) and -- but they were then, in many instances, compelled to find alternatives because of the traps and the lack of viable competition.

So, here we are.

The selection has changed.

We have suffered from what has happened unjustly and we can't recover in that regard, and obviously while the opportunity is going to be upon a win to access a significant share of that market as it reopens for us.

Thank you.

Jim Bartlett, Bartlett Investors.

Yes, you mentioned in an earlier question the chip inside strategy rolling out for the BBB units -- BBU unit this summer.

Given that rollout, when would you expect to start seeing traction in terms of bookings and then revenue from BBU?

So I guess the bad news in that regard is that in our business, given that our products are used with [orien] products, there is a design cycle that stands in between the availability of an exciting new product and significant revenues.

The good news is that when it comes to this class of products, they fall in terms of gestation period in two different categories related to, let's say, the point-of-load solutions with [peerance] and [mediance] we were discussing earlier in the context of the center application or other such applications, in that the BBU type of power opportunities with a chip inside are primarily in the category of front-end systems that bolt on to a chassis or provide functionality within a customer power system typically outside of the motherboard.

And because of that, the time to market tends to be relatively shorter.

And so, because of that, we anticipate the cycle time from product introduction to revenue to be shorter, but again, to keep our feet on the ground, it is still going to be a significant gestation period.

So, with products introduced middle of this year, we should expect to see revenues next year at a growing rate.

And part of that opportunity is going to be to take certain customers that have designed in relatively costly solutions using our earlier VI Chip products, the early VI Chip PFM, taking them to a chip-based solution that will offer them significant cost benefits with performance improvements.

Thank you.

Could you also address the traction you are getting with other potential high-end -- higher-end server companies?

Yes.

And what is the question in that regard?

You had mentioned, I believe, in the last conference call that you were working with some of these higher-end server companies, and just wondering where you are in that process.

Well, there has been progress and we expect to see revenues starting in the fall with a chip-based solution that has been sampled to a customer.

The customer is very, very happy with its performance.

So, we are, as I mentioned earlier, working hard to diversify the customer base because we are all cognizant and mindful of the pitfalls of being dependent on a small customer base.

Fortunately with VI Chip yearly growing, we had an early adopter that dominated our demand, and obviously that was welcome in many respects, but not desirable from others.

And we are very much focused on having a significant mix of customers and applications, and we have been able to make a good deal of progress with respect to that.

So just the earlier, it is going to come out of other high-end servers.

It is going to come out of -- and so these are companies that make OEM products that get sold to third parties.

In the center space, other big users that, in effect, design and build their own data centers, so that's a different kind of market opportunity, again for chips.

And then, defense applications for VI Chips and chips, so all of these are complementary initiatives that, to a large degree, we use the same technological foundation of our [entrants], our control systems, our packaging technology.

Yes, you mentioned defense.

If I remember correctly, there was the potential for a large radar-based order at some point coming out of (multiple speakers)

Yes.

That's due to go into very significant volume in 2015.

I think over $10 million per year.

Starting in 2015?

Yes.

Okay, great.

And one final (multiple speakers)

You may (multiple speakers) problems they are having at the Pentagon with budgets.

Could you give us (multiple speakers)

This one application that, as far as I understand, has not suffered from those constraints.

The future Digi-Key distribution numbers, what were they this quarter?

And that's progressed, I think, more slowly than originally planned.

What is the outlook there?

I think from my visibility, Digi-Key has got a magic formula for connecting a supply such as Vicor with the world at large.

It is the go-to place for designers to, one, avail themselves of what is possible, and when it comes to our building blocks, it is a very good fit.

I expect we are going to see Digi-Key contributing greatly to our ability to penetrate applications in markets worldwide.

And we are working hard to flood it with content, to make sure that they (multiple speakers)

Yes, and how much was it?

Was it a couple million dollars this quarter?

You usually give out that number.

Yes, a couple million dollars.

Yes, it was flat.

We talked about that in the remarks.

It was just quarterly flat.

Flat, okay.

Thank you.

If there is one more question, we can take it.

There are no further questions.

Well, thanks a lot, then.

Talk to you soon.

Bye-bye.

That concludes our conference.

Thank you for your participation.

You may now disconnect.

Have a great day.