Vicor Corp (VICR) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vicor earnings results for the second quarter ended June 30, 2014. My name is Sara and I will be your operator for today. (Operator Instructions) Just as a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to James Simms, CFO, and Dr. Patrizio Vinciarelli, CEO.

Thanks, Sara. Good afternoon and welcome to Vicor Corporation's conference call for the second quarter ended June 30, 2014. I am Jamie Simms, CFO, and with me here in Andover are Patrizio Vinciarelli, CEO, and Dick Nagel, Chief Accounting Officer.

As we always have, we issued a press release today summarizing our financial results for the second quarter. This press release is available on the investor page of our website, VicorPower.com. We also have filed a Form 8-K with the Securities and Exchange Commission in association with issuing this press release.

I remind 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 statements made during this call and you should not rely upon them after the conclusion of this call.

A replay will be available beginning at midnight tonight through August 6, 2014. The replay dial-in number is 888-286-8010 and the listener passcode is 49359584. In addition, a webcast replay of the conference call will be available on the investor relations page of our website beginning shortly after we conclude today.

I will start this afternoon's discussion with a review of our financial performance for the second quarter and the first half, and Patrizio will follow with his comments, after which we will take your questions.

As set forth in this afternoon's press release, Vicor recorded a net loss for the first quarter of $4.8 million, representing a net loss rounded up to $0.13 per share on revenue of $53.4 million. The first quarter of 2014 we recorded a net loss of $5.4 million, or $0.14 a share, on revenue of $53.2 million.

For the first half of 2014 we recorded a net loss of $10.2 million on revenue of $106.6 million, while for the first half of 2013 we recorded a net loss of $9.6 million on revenue of $88.8 million. This increase in revenue represents year-over-year growth of 20%.

Consolidated revenue for the second quarter rose less than 1%, but there were meaningful shifts in the make-up of total revenue. In reporting $53.4 million, we actually exceeded our prior quarter's guidance of $52 million.

The Brick Business Unit reported a $9.6 million sequential increase in revenue, with our legacy modules business increasing $2.1 million or 6.3%. Turns volume increased, rising to 40.5% of total shipments for the quarter, consistent with recent levels.

Our Picor unit also recorded an increase in revenue of 34% off of a small base of merchant business. Picor is building the expected momentum with its line of high-performance PRMs and point-of-load regulators, which will expanding this year and into the next.

For Q2, the anticipated decrease in shipments by our VI Chip unit to its largest customer offset the increased shipments from the BBU and Picor. VI Chip's revenue declined by $4.4 million, reflecting the impact of the transition underway by our data center customer. As we have previously discussed, this customer is transitioning to our second-generation solution for powering Intel server motherboards. This solution consists of a Chip VTM and a SiP PRM.

As Patrizio will address in a moment, during the second quarter we began to receive the first substantial volumes of purchase orders for this second-generation solution. Concluding on consolidated revenue, recognized distribution revenue rose 8.1% while international revenue declined 6.8%, reflecting the decline in VI Chip shipments. Other than the decline in shipments to contract manufacturers of our data center customer, international revenue patterns by product and geography were within recent performance ranges.

Vicor's consolidated gross margin for Q2 was essentially flat, both on an absolute and relative basis. Q2 gross margin as a percentage of sales was 42.5% compared to 42.8% for Q1. The increased shipments from the BBU, along with a slight increase in average selling price and a slight decrease in average unit cost, contribute to an increase in the BBU's gross margin, which rose $2.4 million for the quarter.

The BBU's gross margin as a percentage of BBU sales rose to approximately 46% from approximately 45% for the first quarter.

While Picor's merchant volumes are in their early stages, we are pleased with the performance of Picor's fabless model, which recorded a gross margin of 54% for Q2. As the volume of Picor's SiPs grow with our second-generation data center solution, Picor's relatively high gross margin should have a positive influence on our consolidated gross margin.

Unfortunately for Q2, the performance improvement of the BBU and Picor were offset by the further, although expected, decline in VI Chip shipments. With low VI Chip production volume, unabsorbed overhead costs precluded progress in our consolidated margin for the quarter.

Turning to Q2 operating expenses, legal fees were still at a high level because of the cost of defending against infringement accusations in preparation for trial later this year. However, even though during the second quarter we included our annual companywide merit adjustments to compensation, total operating expenses actually declined 2% sequentially.

Total headcount was 1,019 at the end of the quarter, up from 1,009 as of March 31. At the end of the second quarter of 2013, a year ago, total headcount was 997.

G&A expenses, including legal fees, declined 11.5% sequentially with the major contributor being the absence of fees associated with our year-end audit and Q1 filings. Marketing and sales expenses were essentially unchanged as reductions in several categories offset increased compensation. R&D expenses increased 3.8%, again largely due to annual merit-based salary adjustments and incremental new hires.

A few words about our Q2 tax provision. As discussed at length during previous calls, at year-end we fully reserved against our deferred tax assets, which resulted in a $9.4 million tax provision for Q4 2013. A consequence of this accounting treatment is a near-term inability to create additional tax benefits on a book basis from additional pretax losses we incur.

While we do have certain state and international taxes that factor into our reported tax provision, we are not showing in our GAAP income statement the type of tax provision one would usually associate with a quarterly pretax loss.

Turning to new orders, second-quarter bookings increased 14.6% sequentially. Total one year backlog stood at $45.7 million at the end of Q2, increasing 10% sequentially with 79% of this backlog scheduled for shipment during Q3. Cash flow from operations for Q2, despite the net loss, rebounded to a positive $2.3 million, up from Q1's deficit of $4.5 million due to a $4.3 million net decrease in working capital largely attributable to collection of receivables. Other current assets and liabilities were flat at quarter end.

Capital expenditures for the quarter rose slightly to $1.9 million from Q1's level of $1.6 million, reflecting increased activity around meeting our capacity needs for chip production. As I've stated before, earlier capital expenditure budgets have been refined and we expect the cumulative dollar investment and the investment for 2014 will be lower than originally expected. We have been successful in repurposing resources to meet expected 2014 chip capacity needs.

Turning to our consolidated balance sheet, our receivables portfolio remains in excellent shape with days sales returning to below 50 days, ending at 47 days. Consolidated inventories quarter to quarter were essentially unchanged with annualized turnover climbing to 4.25 times, representing a new high. There was no meaningful change to reserves.

Cash and short-term investments stood at $51.5 million at the end of Q2, up from $51 million at the end of Q1. This figure excludes investment securities with a par value of $6 million carried on our balance sheet at an estimated fair value of $4.9 million, representing roughly 82% of par.

Turning to our expectations for the third quarter, we are forecasting revenue of approximately $55 million for the third quarter, representing a sequential increase of approximately 4%. On a consolidated basis, we expect Q3 operating expenses, excluding legal fees, will be little changed. However, we are anticipating an acceleration of legal fees as we approach our expected October trial date.

Now I will turn the call over to Patrizio.

Thank you, Jamie. As Jamie said, Q2 was characterized by a significant reduction in VI Chip revenues caused by the transition from VR12 to VR12.5. However, we are hopeful of being on the verge of a sustained ramp in volume of chips and SiPs for VR12.5 applications and other systems.

We are making progress toward expanding our share of more level spend related to powering memory in addition to Intel processors. We believe this is an important development as it enhances our value proposition and competitive position.

We are also making progress with data center computing customers for our differentiated 48-volt system and our unique solution is gaining momentum with targeted prospects. Similarly, we are encouraged by the momentum building with customers across a range of industries and applications, notably in wireless communications, automotive and transportation where we have been concentrating our recent efforts. With the lease of new chips and SiP products, we are pursuing a critical strategic goal of diversifying our base of markets, applications, and customers.

I reaffirm the enthusiasm expressed at our recent annual shareholders meeting to achieve our strategic goal of leading a transformation of the industry toward modular solutions to power system requirements. With this intellectual property know-how and the arrival of cost-effective high-performance modular building blocks, Vicor is very well positioned to make the most of this multibillion-dollar market opportunity.

Turning to patent litigation, over the last 3 1/2 years we have been defending against meritless infringement accusations brought by a competitor whose predatory actions and intellectual dishonesty are involving claims to the Intermediate Bus Architecture, or IBA, that cost us tens of millions of dollars in lost business and legal expenses. We remain confident that Vicor will prevail on the merits, but we note with irony that the competitor's behavior and its threats of litigations that cause customers to migrate at a faster way away from IBA toward FPA, our proprietary power distribution architecture, which offers efficiency and density levels far exceeding the [inferior] (inaudible) of IBA.

As such, migration away from IBA has caused the IBA market segment, for which our superior bus converters stand accused of infringement, to shrink to the point it now represents an immaterial fraction of our total revenues. It is in this context that we look forward to our case going to trial at the end of September or early October.

This concludes my prepared remarks and Jamie and I will now take your questions.

(Operator Instructions) [John Dillon].

Patrizio and Jamie, congratulations on the bookings increase. That's a really nice bump up from last quarter.

Going forward, you gave us a little guidance on next quarter. I am just wondering; for the next two to four quarters, do you expect continued increase in bookings and also revenue growth?

Generally, yes. We are looking forward as we get in 2015 to a number of programs that we have been working on coming to fruition. One way of looking at it in terms of revenues, bookings, and overall financial performance, we think of this phase is represent the proverbial end of what's been a relatively long tunnel. We can see the light at the end of the tunnel.

But as suggested by Jamie, we're looking at Q3 of this year still being a loss quarter for us. As we progress from that into the fourth quarter and in 2015, we expect to be able to leverage our model, which I think as you know is very much dependent on incremental revenues in terms of profitability because of the fixed cost structure or largely fixed cost structure associated with a good deal of the enterprise.

So in terms of looking at the bottom line, we anticipate that the very high rate of legal expenses, which will be at its peak this quarter, to essentially subside to a relatively low level as of the end of the fourth quarter. That will make a significant difference for the (inaudible) in terms of the bottom line, but more importantly, the expansion in revenues with a significant share of debt dropping to the bottom line will get us into positive territory.

So the light at the end of the tunnel, it reminds me -- in a number of conference calls before we have been hearing that it's a couple quarters out. This time feels a lot different to me, in particular I think because you have a cost card that you haven't had before in the industry and the market is a lot bigger. But I really wanted to get your input on that.

Why is it different this time than the other times we talked about the revenue and bookings going up in a next couple of quarters? Can you give us a little bit more confidence on that?

I think we talked to some degree about these kinds of issues at the shareholders meeting, and I may be repeating myself to some degree here, but as discussed at the shareholders meeting, our VI Chip technology and the VI Chip products that have characterized Vicor's opportunity in terms of new customers, new markets, and the potential growth over many years, did not in terms of its cost structure support the broad market penetration that we were seeking.

What is different about today is that with the arrival of Chip products, and you have seen a growing rate of new product introductions and you would be seeing the rate further accelerating in early weeks and months to come, with those products we're achieving a cost structure measured in terms of cents per watt that is follower than we have had with our first-generation VI chips. So whether it's the central applications or the module applications or wireless applications or other kinds of applications, we're going to be able to leverage chips into more cost-sensitive applications while being able to enjoy margins that with first-generation VI Chips we weren't able to deliver.

We are beginning to see this with SiPs, as suggested by Jamie in his opening remarks, at the level already of mid-50s and I expect that rate to go substantially higher over the next several months as the rate of production of those products increases. Likewise, I see similar opportunities for chips in a variety of functions ranging from building blocks that span the AC SARs, DC SARs, high-voltage, low voltage at the variety of output voltages from front-end applications all the way to the point of load.

So we believe we are after having made a major investment that has characterized the life of the Company for the last 10 years in brand-new technology, packaging platform, control systems, base engines, all quite proprietary, we are well-equipped at this point to address cost-sensitive market needs with very high performance products that we will be able to address those cost-sensitive applications with [better] margins. And we are, frankly, very excited about that.

This excitement is supported by the reception we are getting from a growing multiplicity of customers in a multiplicity of end markets.

It seems to me, Patrizio, that the memory rail opportunity that you have won is really validation of everything that you have been saying, because what I think I'm hearing is you're winning an opportunity to power the memory in an x86 architecture, which in the past has really not been available to you because of the cost card. And now you are -- now you have got that opportunity.

Well, I think the proof has already been delivered with our powering the processors themselves, because the processors themselves in the competitive alternative of multi-face back regulator has been a commodity market for as long as I care to remember. So our ability to penetrate processors, intra-processing in particular, which are obviously very different type of devices from, let's say, the end processors [or the end] service characterized our first-generation VI Chip entry.

With Intel processor we already demonstrated that we can play in a cost-sensitive portion of the markets where the opportunity for growth is far greater if all the conditions are right. And those conditions involve a performance, measured in terms of efficiency and density, that delivers a certain valuable proposition for customers that is, in view of the high efficiency and density, still very mindful of the cost curve.

That's great. It sounds really good. I think we're pretty close; I think we are here and I will get back in the queue. Thank you.

Jim Bartlett.

Yes, Patrizio, you mentioned diversification. Could you address that a little bit more, how important it was, one, in getting more data center customers, which give us maybe some timeline on when the prospects for that will happen?

And then, two, I hadn't heard you mention -- you mentioned wireless and transportation and auto which I heard you mention wireless before and the transportation/auto I always thought was way out there. Could you address those two questions? Thanks.

So starting with the center applications, we are seeing the same level of motivation with other data center customers that are very cautious of their total operating costs, the energy costs, the efficiency that can be had with a 4K vault infrastructure with direct 48 to the point of load processor voltages and memory voltages. And the same compelling rationales are visible to a growing multiplicity of customers and potential customers.

Turning to other opportunities, we are beginning to get some meaningful traction in automotive in Asia with our DCMs. These are chips that we recently introduced and we are looking forward to being able to build on that with new DCM entries that are scheduled. They are in the works and scheduled to come out in the foreseeable future, which will further raise the performance bar and further reduce the cost card very significantly.

We have discussed in the past AC input products and specifically the PFM. Again, we have gotten traction with opportunities such as micro cells with our first transaction, PFM. We are on the verge of introducing next-generation PFMs that will increase the power capability while reducing once again the cost structure of the product significantly.

We are also combining that with the introduction of a system-level packaging technology that is going to be referred to as APT. It is a proprietary packaging technology to deliver complete system capability. And we, again, look at that as delivering the right combination of density efficiency and cost-effectiveness that will add momentum to the early traction and interest that we got in some of the markets you referenced.

The latter two with the auto and AC, is this the revenue for like 2016?

No, there is going to be some revenue in 2015. It's hard to assess a precise level for that, but it involves a multiplicity of competing companies in Asia. These are not ultrahigh volume applications. They are lower volume applications, but there is more than one of them and we will see as we get into next year what they will adapt to.

Would you expect more data center customers? Is that something that going to happen this year or in -b ?

It's not going to happen this year, but there are things in the works on a variety of fronts, so --. When it comes to, let's say, powering memory and (inaudible) [referenced it] earlier or powering other type of point-of-load devices, we are also making inroads on other fronts. Because the issues of the data center are really not unique when it comes to power systems; they are not unique to data centers.

So this is an opportunity, not just to go across the competitive landscape in that end market, but it's also an opportunity to grow across from that end market to other markets with similar kinds of issues and challenges. The market we were seeing for, I will say, the first time from very large potential customers a motivation, a strong motivation to adopt the kind of power component methodology that Vicor has uniquely advocated for many years, but for which we have not had the wherewithal in terms of having all the necessary building blocks. And, most significantly, having them with cents per watt figures that are attractive enough from a cost perspective.

Okay, one other issue. Could you just address -- you said the distribution was up 8%; I assume that is that Jamie mentioned.

Yes.

Did you just address where you are in this distribution strategy? It has perhaps been a little -- growing a little less than originally anticipated. Any changes in your thoughts about it or sort of the inflection point of when that might accelerate?

We put the infrastructure in place. I think there's been progress. I think in terms of an inflection point or accelerating the rate of progress, we are counting on new products from Vicor and VI Chip to make a major impact on acceleration and inflection with respect to the share of revenues that are going to be provided through distribution.

Because these products, unlike our earlier generation products, the Bricks and other kinds of legacy products, are extremely well-suited for distribution. Picor regulators being a prime example of that, but also a variety of chips, PFMs. So all of these type of devices lend themselves to a distributor or distributors acting as intermediaries to customers wishing to configure and to implement a power system or subsystem or complete system in a relatively short timeframe from devices that can be purchased from stock for overnight delivery.

So could you see that -- is this a 2015 event where you could see acceleration?

The Picor regulators have been, to some degree, a 2014 event. I think as we approach the latter part of this year there's going to be new major product introductions from Picor that greatly extend the range of capabilities of our unique ZVS regulator [pro] line with back boost, boost, and back entries over time coming out, different power levels. Again, these are well aligned with distribution channels as an effective way to get products to customers.

And as I suggested earlier, we are on the verge of introducing a 6123 PFM chips in adaptive packages. Those, again, are prime candidates for distribution as an effective means of getting the product into the marketplace.

Thank you.

John Dillon.

Patrizio, I'm trying to get a little sense of the total of the salable market to you and I know that's really difficult. But one example is Intel came out with their numbers and they said their processor numbers for their servers, their data centers was about $35 billion. So I'm wondering what percentage would be available to Vicor.

Like, for every $1 of processor is it $0.10 for power supplies? Is it $0.20 or is there a rule of thumb or a ballpark you could give us?

Well, it depends on what share of the power system we have. I think, as earlier discussed, we are working to expand that share. And so I think --.

Let's say, just for argument, just the processors. If you are just powering the processors would it be $0.10 on the dollar? Would be $0.20 on the dollar, just a rough number?

Why don't we talk about it in terms of just dollars per processor? And I'm going to be purposefully vague because, to state the obvious, I don't want to give a target to competitors to show them.

Just as (inaudible) investment, which would be by definition off one way or the other by a factor of 2 or 3, just to give you sort of an order of magnitude estimate which I believe is what you are looking for. For a processor, depending on the kind of processor, the power system solution could be, let's say, at the ballpark of $20.

Okay. So $20 per processor, and that's just as a ballpark. And that's not the memory rails either?

Well, now you're trying to pin me down and I just I'm not going to go there. I'm just going to give you (multiple speakers) just to assess as an order of magnitude opportunity.

What's more significant with respect to this in terms of the actual opportunity is the ability to penetrate across, suggested earlier, a multiplicity of customers in a multiplicity of end markets. We are executing on a strategy to accomplish that with robust designs that are going to enable a larger multiplicity of customers to leverage our solutions.

There is a great deal of interest in the marketplace for a number of good reasons ranging from performance to other reasons for customers to embrace a solution. And as you can imagine, we are working and partnering with leading companies in that space to facilitate, to reference designs the adoption of our power system type of solution. We may have announcements with respect to developments on this general front later this year.

Are you teaming with Intel where they are actually promoting your product because you have got the best solution for powering their chips?

I can't comment with respect to any specific company or initiative.

And I can't remember if I asked this question already, but your gross margins as a percentage of revenue going forward, do you expect to see those continually step up? I think I heard the opening comments you expect next quarter to be up because of Picor stuff, but do you expect it to continually go up here for the next several quarters?

At the risk again of stating the obvious, having invested $0.25 billion, in round numbers, in developing a technology at the foundation of chips and SiPs we want to see a return on that investment. We are very focused on that and that gets measured, first of all, in traction with customers, revenue growth, but significantly a margin level, a profitability level that is commensurate to the lower investment we made in the technology.

So the good news in this regard is that we finally, with SiPs first and chips second, got into power platforms that can support the low cost structure that enables our customers to have the competitive pricing they seek, while at the same time enabling us to achieve a return investment by way of a healthy margin. And that's the making of a win-win situation for our customers and for ourselves.

So you do expect to gross margins, as a percentage of your revenue, to continue to go up for the next several quarters?

Let me answer it this way, I know I'm repeating myself, but in the early days of our Brick power component paradigm -- I'm now going back to the '80s and early '90s -- Vicor enjoyed margins in the 60%, 65% range routinely. To develop the Pro line we didn't spend nearly as much as we have invested in every way. It's not just dollars, but inventive sweat, whatever you want to call it, to develop the technology, power platforms, intellectual property that is the foundation of SiPs and chips.

So we would definitely expect to see with our investment measured in terms of margins is at least as good in time as we've seen historically with our Bricks.

Sounds great, thank you very much. Looking forward to better results. This sounds great. Thank you.

It looks like there are no further questions in queue.

Thank you. We will be talking to you in approximately three months. Have a good day.

Okay, this concludes today's conference. You may disconnect and have a great day.