Vicor Corp (VICR) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vicor earnings results for the third quarter ended September 30, 2014 conference call.

My name is Maya 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 introduce your host for today, Mr. James Simms and Dr. Patrizio Vinciarelli.

Please proceed.

Thank you.

Good afternoon and welcome to Vicor Corporation's conference call for the third quarter ended September 30, 2014.

I am Jamie Simms, CFO, and here with me in Andover are Patrizio Vinciarelli, CEO, and Dick Nagel, Chief Accounting Officer.

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

This press release is available on the Investor Relations page of our website, www.Vicorpower.com.

We 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 been 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 the call.

A replay will be available beginning at midnight tonight through November 5, 2014.

The replay dial-in number is 888-286-8010 followed by the pass code 61723940.

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

I will start this afternoon's discussion with a review of our financial performance for the third quarter and the first nine months 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 third quarter of $3.7 million, representing a net loss rounded up to $0.10 per share on revenue of $58.4 million.

For the second quarter of 2014 we recorded a net loss of $4.8 million or $0.13 per share on revenue of $53.4 million.

For the first nine months of 2014 we recorded a net loss of $13.9 million on revenue of $165 million while for the first nine months of 2013 we recorded a net loss of $10.6 million on revenue of $143.9 million.

This increase in revenue represents year-over-year growth of 14.7% with all business units showing improvement.

Consolidated revenue for the third quarter rose 9.4% sequentially, reflecting expected shifts in the makeup of total revenue.

Turns volume increased slightly but, reflecting the overall increase in shipments, fell to 38.1% of total shipments for the quarter from 40.5% for the second quarter, but well within the range of recent turns levels.

The Brick Business Unit recorded a 4% sequential decrease in revenue reflecting the expected end of a robust custom program.

Our legacy modules business was stable for the quarter.

VI ChiPs revenue increased to almost $5.8 million, more than doubling sequentially, reflecting the increased bookings of the prior quarter.

As we have previously discussed, a major customer in the data center space had been transitioning to our second generation solution for powering Intel server motherboards.

This solution consists of a ChiP VTM from VI ChiP and a SiP PRM from Picor replacing a solution comprised of earlier generation VI ChiP VTM and PRM modules.

The shipments of Picor SiPs also doubled for the quarter with total Picor revenue coming in at $2.5 million, a record high.

Recognized distribution revenue rose approximately 22% as long underway design in efforts by our stocking distributors have started to yield results.

Concluding on consolidated revenue, international revenue rose 9% reflecting the substantial increase in VI ChiP and Picor shipments to Asian contract manufacturers.

However, BBU exports fell by 5.9% as strength in China was offset by slower activity in certain regions of Europe.

Vicor's consolidated gross margin for Q3 improved both on an absolute and a relative basis, reflecting the production efficiencies afforded by the higher volumes of VI ChiP production as well as the larger contribution of Picor with its fabless model to the mix.

Q3 gross margin as a percentage of sales was 43.7% compared to 42.5% for Q2.

Turning to Q3 operating expenses, recurring research and development, marketing and sales and general and administrative expenses came in as expected.

However, the quarter was characterized by sustained high levels of legal fees associated with preparation for trial now expected to begin in January 2015, as well as charges we recorded for severance and related costs associated with the wind down of manufacturing in Sunnyvale, California totaling approximately $2 million.

While total operating expenses increased as reported by 7.2% sequentially, excluding legal fees and severance charges total operating expenses would have declined 2.4% and operating income would have been positive.

Total headcount was 1,043 at September 30, up from 1,019 as of June 30.

At the end of the third quarter 2013, a year ago, total headcount stood at 993.

The sequential increase for the quarter was largely made up of new temporary hires in manufacturing.

Calculation of our tax benefit for Q3 was uncharacteristically straightforward.

Reflecting the release of certain tax reserves to the satisfactory completion of an IRS audit, we recorded a benefit of $510,000.

As discussed during previous calls, we fully reserved against our deferred tax assets at year-end 2013, the consequence being a near-term inability to create additional tax benefits from additional pretax losses we incur.

Until we return to sustained profitability we will continue to report tax provisions accordingly.

Turning to new orders, third-quarter bookings increased 14% sequentially.

Total one year backlog stood at $52.5 million at the end of Q3 versus $45.7 million at the end of Q2, increasing 15% sequentially with 67% of this backlog scheduled for shipment during Q4.

Cash flow from operations for Q3, despite the net loss, totaled $3.7 million, up from Q2's $2.3 million, reflecting the $2 million non-cash severance charge recorded and a positive swing in working capital.

Note that severance will be paid out over the coming quarters on a biweekly basis beginning in 2015 based on the length of an employee's service with us.

Capital expenditures for the quarter declined slightly to $1.4 million from Q2's level of $1.9 million reflecting the completion of certain projects associated with ChiP production.

Turning to our consolidated balance sheet, our receivables portfolio remains in excellent shape with days sales following to 43 days from the prior quarter's 47 days.

Consolidated inventories quarter to quarter declined slightly with annualized turnover climbing to 4.35 times representing another new high.

There were no meaningful changes to either AR or inventory reserves.

Cash and short-term investments stood at $53.7 million at the end of the quarter, up from $51.4 million at the end of Q2.

This figure excludes investment securities with a par value of $6.0 million carried on our balance sheet at an estimated fair value of $5 million representing roughly 83% of par value.

After the close of the quarter we did receive an additional redemption at par value of $500,000.

Turning to our expectations for the coming quarter, we are forecasting a small sequential increase in revenue.

On a consolidated basis we expect Q4 operating expenses to be lower in part because we do not anticipate any further severance accruals.

In 2015 we look forward to a substantial reduction in legal fees following trial scheduled for January of IP claims by a competitor and of our counterclaims for misappropriation of confidential information and torturous interference.

Now I will turn the call over to Patrizio.

Thank you, Jamie.

As Jamie stated, Q3 was characterized by sustained order flow for our new 48 volt Factorized Power components, higher shipments of these products and margin improvement associated with higher volumes.

As I said last quarter, Vicor has begun a ramp in volume of ChiPs and SiPs for board level applications, notably for 48 volt applications powering Intel processors.

Our initial focus is on opportunities in data centers but we expect meaningful design in activity for other applications including processor memory [routes] to accelerate through 2015.

We are well along with applications for wireless infrastructure in (inaudible) electronics and are devoting resources to secure design wins in automotive, (inaudible) equipment, aerospace and micro-grids.

At the upcoming Electronica tradeshow we will be unveiling our first ChiP-based [BFM] flanked by other novel front end and next generation Brick products using BCM and DCM ChiPs.

In (inaudible) communications have (inaudible) are complementary (inaudible) strategy comprised of chassis mount or front end systems and board level component solutions.

Depending on the cash flow requirements the front end system can be AC to DC or DC to DC.

To address both Vicor will be introducing a range of sophisticated power platforms incorporating ChiPs with internally and mechanically adept packages that offer class leading performance and cost effectiveness.

Based on these reviews of these front end devices, which were christened VIAs, short for Vicor integrated adapters, we expect a rapid uptake.

We also expect that the combination of VIAs at the chassis level with ChiPs and SiPs at the board level will truly differentiated Vicor as a provider of comprehensive integrated solutions offering the highest performance of very compelling cents per watt metrics.

On our front end and next generation Brick products should revitalize our Brick business unit with its mass customization model based on a highly efficient and flexible manufacturing process.

Vicor has developed sophisticated online design and configuration tools for use with our new product platforms to enable customers to benefit from the same mass customization capability that continues to differentiate our legacy Bricks.

While the BBU's traditional Bricks remains [sturdy] contributors to Vicor's performance, customers will soon be offered new solutions with a state-of-the-art look and feel offering substantial improvement in efficiency, power density and scalability unmatched by legacy Bricks and similar offerings from Vicor's competitors.

VIA front end systems, ChiP modules and SiP regulators along with complementary product offerings will give Vicor a product range unequal in the industry, fully implementing our vision for a power system design methodology leveraging modular components to provide customers with a performance, cost effective solutions and a much faster time-to-market.

Once again I affirm my prior enthusiasm and commitment to achieving our strategic goal of leading a transformation of the industry toward modular solutions to power system requirements.

With our intellectual property portfolio, know-how and the arrival of cost-effective high-performance modular building blocks, Vicor is uniquely positioned to make the most of a multibillion-dollar market opportunity.

I am as confident as ever regarding our future.

This concludes my prepared remarks.

And Jamie and I will now take your questions.

Operator?

(Operator Instructions).

[Jim Bartlett].

Yes, could you give us an update on the litigation -- the movement from October trial to January trial?

So there is a large number of motions pending with the Court and the Court decided that to properly address all of these motions it would need additional time.

Precisely until the end of October.

Because of that the schedule of trial was reset from an October -- an early October date to sometime in the month of January.

And what were these motions related to?

Were these your motions or SynQor motions or both?

They were motions from both.

And I think the key motions about which the Court heard from the parties, and this was weeks ago, related to a Vicor motion to find certain claims asserted by a competitor to be indefinite and such invalid.

Another motion to find the balance of the claims not infringed and a motion that was brought by SynQor to have our counterclaims dismissed.

What is happening to the SynQor Cisco trial?

The SynQor Cisco trial is progressing on a separate track because the cases had been severed.

And the other trial and the timing of trial will be set of the Court later this year.

So that is -- so there is no date on that?

Well, there is no date on either trial.

So we will await the decision of the Court with respect to both.

Also given all the news and what is going on with IBM, could you just review with us Vicor's business with IBM both with the data centers and their high-end servers, power architecture and where you stand and what -- with some of the changes IBM is going to go through how is this affecting Vicor?

Well, I think I can comment with respect to that which is in the public domain.

I think we've both seen a recent announcement that IBM to divest its semiconductor business.

That [fact] does not bear on IBM's leading role with respect to high-end servers, nor does it stand in the way of a continued opportunity for Vicor with Factorized Power solutions within IBM systems.

So, we look forward to further opportunities in the future to enable IBM to achieve levels of power density and efficiency in high-end servers that cannot be achieved with any competitive technology.

And how do you see their data center progress?

Well (multiple speakers).

Vicor's (multiple speakers).

I really can only comment in very general terms with respect to the fact that, as we all know, it is a complex landscape.

The nature of the kinds of solutions that have been provided to customers is changing.

We all know that more and more solutions are going to be -- and services are going to be provided through the cloud and IBM as others are moving into that space, as well as I think we can all imagine maintaining the traditional sense with respect to in the case of IBM supercomputing platforms.

All right, thank you.

[John Dillon].

First of all really congratulations on an awesome quarter.

Congratulations to the whole team actually because it really is pretty remarkable.

I wonder what you will say once we start making money again.

Well, the way I look at it, if you take away the one time piece you did make money.

And the cash flow was up substantially.

So that was really nice to see.

Your revenue was up, your bookings are up substantially, your gross margin's up, your gross margin as a percentage of revenue is up.

And without the legal fees and severance it looked like you had positive EPS.

Is that right, Jamie?

Did I read that right?

That is a reasonable inference.

So good job anyway.

So a couple things, just one question on the legal front.

What is the worst case that could happen here?

Is the worst-case you write a check and you save $3 million a month on legal fees or is there another worst case or --?

Well, there is a wide range of outcomes and I'm not going to get into specifics today.

But I will say that I am as optimistic as I have ever been with respect to a positive favorable outcome for Vicor given the facts and what has come out of our intensive discovery process.

I think our competitor sought to interfere with our business in the marketplace by bringing baseless claims.

Knowing that these claims are baseless he's got a high hill to climb to win against us.

And going the other way, we believe we have claims that have merit, particular counterclaims that have merit.

So, we patiently wait for justice to be done.

Okay.

That is the business aspect.

Do you expect your bookings will keep up in the next several quarters?

We think so, yes.

So do you feel like we are at the inflection point now that we have been waiting for?

We have had a recent gathering of our worldwide sales managers and the outcome of that gathering, which took place a couple of weeks ago, is a milestone that is within reach that is an early milestone to our three by five goal that we discussed in the past.

It is near-term goal that we feel high confidence of being able to achieve in the early part of 2016.

And as of that time, without mentioning the revenue level, I will say that we expect to be with high confidence of a revenue level that Vicor has never reached before and which will represent a breakaway level for us where in many respects we will be playing a different ballgame.

Not just in terms of the perception by the financial community, but more significantly in terms of the perception within the industry at large in terms of critical mass on a number of different fronts with a number of different customers and applications.

Okay.

And along those same lines, you talked about more expansion.

Can you talk about more capacity you want to bring on?

Are you talking about a different facility or you're just talking about more capital assets you're going to be spending on or --?

Well, we are going through a process of enhancing our focus and streamlining our operations where appropriate, where rational as a stepping stone to an expansion phase that will come once we have made greater utilization of our Andover facilities, within which we have significant room for growth.

But we are beginning to look beyond the capacity of (inaudible) 250,000 square foot facility in Andover.

Okay, and again along the same lines, there were some ads in the (inaudible) for temporary workers for first, second and third shift.

And I heard temporary mentioned also in your prepared remarks.

Is that because you see a spike in the business and you expect that to kind of taper down some?

Or why are these workers temporary I guess is what I'm asking?

Well, with ChiP manufacturing, as you can imagine, we're still in a phase where we are going through a significant ramp at a steep slope over a relatively short time frame.

Our efficiencies in terms of equipment and automation are still short of what they're going to be.

So as we deploy some additional key pieces of automation and tools that increase operational efficiency, the demand for labor content per unit will go down.

Just earlier today we got an update with respect to some of these initiatives having been completed.

So as you can imagine, it is a balancing act in terms of doing what we need to do in terms of supporting the capacity requirement while at the same time making sure that we are doing it over time in the most cost-effective and efficient way possible.

Great.

So what I think I'm hearing from all the remarks and everything is that you expect your revenue to continue to grow, but because of productivity improvements you (inaudible) be able to either keep the same number of employees or actually trim down a little bit and just improve your efficiency?

Yes, we expect our efficiency to improve as we get a little further along with the ramp.

That is outstanding.

Great.

All right, congratulations again.

I'm going to jump back in the queue and let someone else ask some questions.

Thank you.

[Don McKenna].

Patrizio, you mentioned hitting revenue levels that Vicor has not seen before.

But I don't remember hearing the time frame on that.

When did you expect that that might happen?

Well, what I said is that we expect to be at a level (inaudible) above the level that we have ever reached, that it will be perceived not just by the financial community but more significantly by the market in which we operate as critical mass.

And --.

(Multiple speakers) 2015 (multiple speakers)?

I'm not going to say what the level is, I didn't earlier.

I will confirm that this is expected to happen at the beginning of 2016 with a very high confidence level.

Is that 2-0-1-6?

Yes.

Thank you.

I also wanted to ask you too, going back to the legal issues, have you guys gone through a mediation process required by the Court?

Yes, we did.

Okay.

I wanted to -- I am sure you aware John Dillon put out a little research report on the Company and my experience over the years is that people that do do that typically run that by the Company first.

Not necessarily for total concurrence by the Company, but the Company would typically identify if they thought the person doing the research report was way out of line.

Did that process take place?

No.

Okay.

Nice try.

I'm sorry.

Nice try, Don.

Yes, we are not --.

Well, I wasn't asking you to agree with it, I was asking if he had run it by you first.

No.

John knows better.

How about -- can you give us a quick little update too on the 4A filings that all went through today?

What does that all shake out to mean?

That you weren't quite able to do all the options that you had originally did last year?

Well, that actually captures it.

It was 2013 that we had mistakenly awarded to the three individuals, myself included, for which we have the amended form 4s.

So we took care of the paperwork over the last couple of days to set the record straight as to what options were in fact awarded.

Okay.

And if I could ask one more before I jump back in the queue too.

On -- I see a lot about the government allowing military sales to foreign countries now.

So folks like Raytheon are able to ship some of their Patriot missiles and what have you.

Is that going to benefit you?

Well, I think historically we have had significant reliance on defense business.

You appreciate that our strategy over the last several years has been to diversify away from defense.

That is not to say we are abandoning defense, we are continue to be a major player.

And of course the density, efficiency, scalability of ChiPs/SiPs make our products and solutions particularly attractive in applications that are challenged in terms of lightweight density, which is a characteristic requirement of defense applications.

So we are continuing to be a factor there, but we are also very much focused on expanding our business across different markets, markets that may not suffer from the kind of cycle that we've see in defense in recent times.

So we are keen on having a very diversified customer and market base.

We are very keen on leveraging our unique technology to achieve not just high-performance but extremely cost-effective solutions that can power not just IBM processors but Intel processors and memory circuits that are very costly even, but which very, very large quantities get deployed.

We think that's key to long-term success in the power system business.

And that business over time is going to involve a lot more electronics in automobiles in particular than defense applications.

Okey-doke, thanks.

[Alan Hicks].

Good afternoon and congratulations on a good quarter.

It's better than I expected.

My question is in the last dozen years or so, correct me if I'm wrong, but you've spent roughly $500 million on R&D for the various new products you have been developing.

Is that correct?

That's somewhat high.

We are talking about an order of magnitude which is in that ballpark.

But I think as of last count is somewhere between $250 million and $300 million.

Okay, thank you.

So going forward do you expect to keep expending at this high level and continue to grow the R&D?

Yes.

Our business model is not one of a company that traditionally has operated in the power space with minimalistic investments in R&D.

We are not a company that copies other companies' products.

We invent, we innovate and on that basis we command the margins that go with from fundamental innovation and invention.

So that is at the heart of our business model.

That is what has made us successful at various levels at different points in time.

But fundamentally going forward we see that model as the winner in terms of high margins and a high level of profitability as we achieve critical mass in terms of revenues and can benefit from the economies of scale that come with that.

So our business model boils down to being able to deliver a high value proposition to customers more and more by way of not just high-performance but a growing level of cost effectiveness with products that can afford relatively high margins while at the same time support an ongoing investment -- significant investment in R&D at the level of 15%, 16%, 17% at the top line.

You have also made comments in the past about growing revenues, I think it was three times in five years.

Yes.

Which would roughly put you in the range of $600 million or so.

What kind of -- if you are able to achieve that what kind of gross margins and operating margins would you -- what range would you expect?

Well, let's put it this way, with some of our new products we are achieving margins at levels considerably higher than any Vicor product ever achieved.

And I go back to the early going of Vicor with its innovative Bricks in the 1980s and 1990s and we routinely achieve margins in the 60% to 65% range.

We have products, novel products which represent a tremendous value position to customers, very cost-effective and yet support margins considerably above the level.

That is an essential part of our business model going forward.

We made the kind of investment you alluded to earlier, lower than that, but [$250 million].

We have 140 or so patents, we have a tremendous technological capability and the measure of that ultimately is high-margin and high profitability.

I know back in the -- I believe it was the late 1990s you achieved over 20% operating margins.

Do you think that is achievable again?

Yes.

Obviously (inaudible) seen the sales mature a lot since those days and today, as you know, competition in many ways is a lot tougher than it used to be.

And many companies have a difficult time, they struggle with that, they don't know how to deal with it.

That is not the case for Vicor.

We've always known how to compete, we've always known how to leverage our own ingenuity to give us a competitive advantage.

And I think where we focused more and more over the last several years with investment we made is in realizing a win-win proposition with our customers where we enable them to leverage tremendous performance, cost effectively while enabling us to recapture a reasonable return on our investment.

Okay, well thank you very much.

And congratulations on the progress you have made.

[Dick Feldman].

I hope the progress can continue.

I have a couple of questions.

The first is you made reference to new customers and new applications in your written remarks.

I wonder if you could flesh that out a little bit more.

Well, I am not going to name names, but let me give at the general level some example of recent progress.

So we had a team just come back from Asia, what they reported design activity with design wins for VTMs and PRMs and Factorized Power solutions in powering Intel processors in applications involving new customers and new kinds of opportunities.

So that is an example of progress where early wins are paving the way for more design wins.

Another area is micro cells, we have a number of opportunities in that general area.

I made reference to automotive customers in the past.

We have activity going in that general space.

So where we are at now is we are harvesting the effort of many years in developing revolutionary new products.

These products are coming out and they are enabling customers to take power systems to a new level of density, efficiency and cost-effectiveness.

And with that we see tremendous opportunities.

And we see the opportunity over the next five years to really make a difference in terms of changing the way the industry, the power system industry has traditionally operated.

We are seeing it from a number of different fronts.

You said you are okay on capacity right now as far as the ChiP business is concerned, VIA ChiP.

How much spare capacity do you have and at what point must you look at adding capacity?

And as you add capacity can it be added in small increments or -- and give us some idea as to the expenditures involved?

So, capacity can be added in increments that will typically represent a significant percentage of existing capacity.

That is the logical way of doing it.

So a logical increment would be a double-digit increase in capacity, not -- a few percent, to be clear.

I think that high level of capacity can be brought about, based on past experiences, in a time frame that is consistent with the visibility that we have with a growing [multiplicity] of customers who we're doing business with.

So six months to nine months is a typical timeframe for deploying a significant incremental capacity, 30%, 40%, 50%.

More and more we are focused on the scalability of the equipment, the processes and the ability to in effect step and repeat with a quick [gather] approach what is being deployed in terms of the basic cells that make up (inaudible).

To the extent possible these are pieces of equipment that are standard and can be procured from our vendors.

Less and less they are unique, but we do have some fraction of the equipment on the line that, given the unique attributes of our packaging technologies, are needed to enable us to manufacture the product with no or minimal operator intervention.

So to the extent possible we focus on standard equipment.

Obviously for (inaudible) assembly we use standard [SND] assembly equipment (technical difficulty) cells.

We use other kinds of standard equipment, but where necessary we do not shy away from the need to have -- to work with vendors to make available unique equipment that can be scaled up in terms of copies of those particular equipment choices.

And this is all done with scalability in mind.

So we have, I would say, a level of maturity in our manufacturing operations that has grown over the years.

I am particularly proud of it.

We have been able to accomplish a lot particularly with the last year with the ability to step up to capacity challenges or process challenges.

And do what is necessary to address the business need.

That is I think part of the (inaudible) of the Company at this point in time; it is not just one of unique power processing technology, novel power processing engines.

I think significantly it has to do with the ability of the enterprise to deal with the many facets of the challenge.

And I think it is that overall capability that gives us the confidence that we have with respect to the growth in years to come.

I wonder if you could give us any kind of guidance as to the financial commitment needed to expand capacity.

Is yours a capital spending like model?

Well, that is something else that we have gotten better at over the years.

I remember with our international products that the relationship between the level of capital equipment needed to support a certain increment of yearly revenues and those revenues -- that percentage being a lot higher than we have been seeing with our new generation of products.

In other words, we're getting better at driving the equipment cost and the cost structure in terms of depreciation down to levels that make for a really short ROI proposition.

So we are not concerned with respect to our ability to finance the growth in terms of capacity over the next couple of years.

I think depending on what happens in 2016 and beyond I can foresee -- we can foresee scenarios where we might want to come to the capital markets to finance the next level of growth.

But we are still far away from having to take that (inaudible).

Yes, Dick, it's not like we are going to build a wafer fab.

We don't have billion dollar commitments to increase our capacity in a step function.

We have -- I wouldn't use your term capital-light, but I think it is not inaccurate.

If you look at our capital expenditures over the last several years, well, we have established significant capacity for our new ChiP platform spending no more than $2 million a quarter in CapEx.

Right.

I agree.

That is what I was thinking about and I was thinking that it would not be inconceivable that you could experience both a rapid ramp in volume and at the same time you start throwing off lots of free cash.

Yes.

But I think we should also be prepared for a scenario where it might be time to establish a manufacturing presence outside of Massachusetts with a large incremental capacity, essentially an alternate source factory possibly in Asia.

And that step might be aligned with an opportunity in the financial markets to raise substantial capital.

One last question and that is a question that you raised in the answer to mine.

And that is do you have any issue with customers as to the fact that at the moment the product is unique and you are the sole source?

It is an issue with some customers, it is not an issue with most customers.

We are approached frequently by companies looking to play a role with respect to that, take a license, provide an alternate source.

So we are very much tuned into the issue you are alluding to.

And over time as our unique components get more and more traction in the ideal end markets, particularly with certain and markets, an alternate source, at least an alternate manufacturing facility would be a must, we will be addressing that issue.

So this is something that is very much on our radar screen, it is on the radar screen to your point of some of the customers.

Okay, thanks for answering my questions and I will give someone else a chance.

Jim Bartlett.

Patrizio, you said you had a very high confidence level of that 2016 meeting, whatever that critical volume is.

Is that -- did you give us some insight in why you have such a high confidence level?

Is that pipeline, customers that are queuing up, did you see this coming?

And another -- a shorter term part of that, given everything -- all the momentum you seem to have, I'm sort of surprised that the guidance for only a small sequential increase in revenues in the fourth quarter.

Well, so the fate of the fourth quarter is largely driven by the bookings of the third quarter and leading up to the third quarter.

So we are in a certain phase.

And I think when it comes to the earlier part of your question relating to where does the confidence level come from, I am going to in effect reference the input I received from the team that gathered to address this issue just a couple weeks ago.

And their conclusion was predicated on the engagements we have with existing customers, with new customers, design in activity, products that have been introduced and are about to be introduced.

So it is that combination of inputs that led them to a forecast with respect to the [current] revenue level that is being referenced.

And that is a level that was characterized to be 90% confidence as of Q2 of 2016 with a 50% confidence level, being able to achieve it by Q1 of 2016.

And again, this is a milestone that represents a major step forward toward the achievement of the three by five that we've been discussing in the past.

Just on -- it has always been difficult for me and I think others when you make new product introductions and when you started generating revenue from that.

And I was taken by your comments on VIA of a very rapid uptake.

And I don't know that I have heard you say that before.

Could you give us some more insights into VIA and why a very rapid uptake and a little better understanding you say in the -- now that you have that in the chassis level to go along with the board level?

So, that is I think an insightful question.

And (inaudible) the answer has to do with the fact that let's take as an example the design in cycle for Factorized Power solutions in the past let's say it with the [hand] servers.

That was a process that lasted literally years, two, three years.

And I think we all understand why it takes that long because a customer designing in a board level solution, particularly one that is utilized on a novel product distribution architecture, has got a lot of work to do and it takes a lot of vision, it takes a lot of guts and it takes a lot of time to implement.

So some of our products, the ones that are in a way most advanced, particularly board level products, have [inevitably] a relatively long gestation period in terms of design in cycle from early engagement to volume production.

The VIA products that we're referencing are in a different category because of the fact that these are essentially chassis mount products, they get bolted down on a chassis for mechanical (inaudible).

They interface with the rest of the power system by very simple cables, an input cable and an output cable that may distribute 40 volt or some other (inaudible) voltage to the motherboard.

By their nature front end systems of this kind, VIA products, have a much shorter gestation because in particular when customers have a need because their existing solution doesn't work or because their solution may not provide the level of power or [complement of] outputs that they need, they can add on themselves of a chassis mount solution with a much shorter cycle time than designing a whole board based power system.

So having a VIA product capability with the level of density, efficiency and cost-effectiveness that our new platforms provide gives us a new way to engage customers in a complementary solution to the power system requirements, which has (inaudible) shorter design in cycle times.

It also plays synergistically with the motherboard point of load solutions in that with the combination of VIA products and PRMs, VTMs, either in ChiP form or SiP form, customers can for the first time address their total power system requirements from the wall plug or the battery, from whatever power source they happen to be operating with, to the point of load with a level of synergy and integration that no other power -- no other company operating in our space (inaudible) to offer, either from an intellectual property perspective or from the perspective of having the product.

And your introductions by rapid uptake then for VIA, that product line is introduced and you should start seeing revenue from -- reasonable revenue from it when?

Well, I think we are going to be seeing some of these new VIA products go into volume production as early as nine months from now, which for our industry is on the short side of the design in cycle.

And I am referencing applications where we already have inroads with our earlier generation PFM which is not a VIA product and which is relatively costly.

And which has relatively lower performance than the new PFM based VIA product that we are going to be introducing at Electronica.

So we already have interest by some of these customers in that new product.

Just on one other product, your second generation data center product, which one customer is ramping up on that.

I would think this would be a major enticement for another data center customer in the same -- for the same product set.

How soon do you think that could be?

It depends on the particular customer and application.

But let me put it this way.

Just within the last two weeks I have seen two different customers with activity involving the same ChiPs that we are scaling out production with the center application that you are referencing.

Sounds good.

Thank you.

We might take a last question if there is one.

Don McKenna.

Jamie, if I did my numbers right it was looking like incoming orders last quarter were in the range of about $65 million for about a 1.12 book to bill.

You mentioned that 67% of the backlog is shippable in this particular quarter.

Is that typical?

It is not atypical, I don't mean to hedge.

We actually have had a transition.

As you may recall, it is for VI ChiP products, it has been a much longer lead time then we have had with our Brick Business.

And that lead time has been shortened, continues to shorten and we are looking at a great deal of demand such that we have had pull ins for the quarter.

So the number will actually be better than the 67% reported.

But it is common.

Turns business is an important part of any of electronics manufacturer's month -- quarterly revenue stream.

Thank you.

And finally too if I may, I know Liam Griffin is a Board member and he is also with Skyworks which is a very successful Company.

Do you have a business relationship with Skyworks?

All I can say is that Liam is on our Board.

You can ask him.

Okay, thank you very much.

Oh, and good going too, I really am happy to hear what I heard today.

Thank you.

We will talk to you and the next few months.

Bye-bye.

And ladies and gentlemen, that concludes today's conference.

You may now disconnect.