Vicor Corp (VICR) 2014 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, 2014, conference call. My name is Stephanie and I will be your operator for today. (Operator instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to your hosts for today: James Simms, CFO, and Dr. Patrizio Vinciarelli, CEO. Please proceed.

Thank you, Stephanie. Good afternoon, everyone, and welcome to Vicor's conference call for the fourth quarter and full year ended December 31, 2014. As mentioned, I'm Jamie Simms, CFO, and with me here in Andover are Patrizio Vinciarelli, CEO, and Dick Nagel, our Chief Accounting Officer.

Today we issued a press release summarizing our financial results for the fourth quarter and the full year. This press release is available on the investor relations page of our website, www.vicorpower.com. We also have filed a Form 8-K with the Securities and Exchange Commission in association with issuing this press release.

I'll now proceed with our customary safe harbor statement. I remind listeners this conference call is being recorded and is the copyrighted property of Vicor Corporation. I also remind you various remarks we make during this call may constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those explicitly set forth or implied in our statements. Such risks and uncertainties are discussed in our most recent Forms 10-K and 10-Q filed with the SEC.

Please note the information provided during this conference call is accurate only as of the date of the call. 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 of the call will be available beginning at midnight tonight through March 10, 2015. The replay dial-in number is 888-286-8010 and the passcode is 26564337. In addition, a webcast replay of the conference call will shortly be available on the investor relations page of our website.

I'll start this afternoon's discussion with a review of our financial performance 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 fourth quarter that we are characterizing as nil, representing $0.00 per share on revenue of $60.7 million. For the third quarter, we recorded a net loss of $3.7 million, representing a loss per share of $0.10 on revenue of $58.4 million.

Sequentially, revenue increased 4% and we reduced our operating loss from $4.1 million to $178,000 due in part to a quarterly decline in legal fees of approximately $1.6 million. During the quarter, a $3 million auction rate security was redeemed at par value and the associated reversal of the credit loss reserves accrued against this security was reversed, contributing to income. After income taxes and elimination of the portion of our results associated with subsidiaries in which we hold a minority interest, our net loss was de minimis.

For the full year 2014, we recorded a net loss of $13.9 million on revenue of $226 million. For 2013, we had a net loss of $23.6 million on revenue of $199 million. 2013 results were skewed by the over $10.2 million increase in our allowance against our deferred tax assets that was recorded in Q4 of that year.

2014 results were influenced by full-year charges of $2.2 million associated with the closure of our manufacturing facility in Sunnyvale, California, and by over $10 million of legal fees incurred as a result of intellectual property litigation. The year-over-year increase in revenue represents growth of 13.3%, with all business units contributing.

As mentioned, consolidated revenue for the fourth quarter rose 4% sequentially, reflecting a high volume of turns, which rose to represent 42% of total revenue. Given the scheduling challenges of Q4 holidays, this increase in turns volume is an indication of the strength and flexibility of our mass customization model, which allows us to quickly fill sometimes volatile customer demand.

The brick business unit recorded a 1.6% sequential increase in revenue, as higher shipments across entities within the BBU were offset by a decline in shipments of our custom systems. BBU bookings increased 6.4% with improvement across regions and markets.

North American shipments of our legacy modules improved and bookings for the region increased sharply, which we hope is an indication that uncertainty that has long influenced domestic customers in industrial transportation and infrastructure markets may be lifting.

European shipments declined, but activity was decidedly country specific, reflecting economic and political uncertainties. Booking patterns were also country specific, but increased over 5% sequentially, which, again, we hope is an indication of improving confidence in that region.

Asian shipments and bookings declined for the BBU. While the BBU experienced improved activity in markets such as Korea, Malaysia, Singapore, and Australia, shipments and bookings for China declined for the quarter. As stated last quarter, we believe the Chinese market for our DC-DC converters, which is heavily oriented towards transportation and infrastructure applications, has softened due to the well-publicized efforts of central planners to manage economic growth.

Japan has been steady in booking and shipments, but we have recorded dollar-based declines due to yen translation losses. Recall that Japan is the only foreign country in which we sell in a currency other than dollars.

The transition of Westcor manufacturing to Andover is now complete and we began building Westcor systems here in January. I'll take this opportunity to publicly thank the members of the Westcor and Andover teams from operations, IT, HR, and accounting, who orchestrated and completed a very successful transition process.

Turning to VI Chip, revenue increased 2.6% to $10.2 million for the fourth quarter, reflecting shipments in the data center space. The diversity of our VI Chip customer base improved, with a third of shipments to customers in test and measurement, industrial, and defense electronics markets.

Because of the significant VI Chip bookings in the third quarter, fourth-quarter bookings, while still very healthy and ahead of second-quarter bookings, actually declined. Listeners may recall I have cautioned against inferring much meaning from sequential bookings comparisons for VI Chip, as its lead times are longer than those of the BBU.

Picor enjoyed a strong quarter, with 57% sequential increase in revenue. Record third-party revenue of $3.9 million is representative of the successful ramp of Picor's merchant business based on its SiP regulators, many of which are sold side-by-side with ChiP modules as part of a power systems solution.

As was the case with VI Chip, Picor's bookings declined for the quarter, reflecting the high bookings of the third quarter. Recognized distribution for revenue for Q4 was flat sequentially after the 22% increase of Q3. Distribution revenue tends to slow during the holiday season, so this pause in growth was not a surprise. Our efforts to expand our volumes through traditional distribution channels continue.

Concluding on consolidated revenue, international revenue grew rose 9%, reflecting sustained volumes of VI Chip and Picor shipments to Asian contract manufacturers and the aforementioned balance of European and Asian volumes. Vicor's consolidated gross margin percentage for Q4 was off slightly, declining to 43% from 43.7%.

A volume-driven increase in product level profitability was more than offset by unfavorable manufacturing cost variances, notably those associated with the closure of Westcor. With the transition of Westcor manufacturing to Andover now completed, we anticipate meaningful improvement, possibly as soon as the second quarter of 2015, in product margins for the Westcor AC product line as we leverage our existing infrastructure for the manufacture of DC configurable products in Andover.

Turning to Q4 operating expenses, recurring research and development, marketing and sales, and general and administrative expenses declined 5.9%, driven, as mentioned, by lower legal fees. However, our operating model, excluding legal costs and the unusual costs associated with one-off occurrences, such as the closure of Westcor, is nearing a level of stability, as we believe we have the personnel and infrastructure in place to support our business plan.

As Patrizio has spoken to before, much of the research element of R&D is behind us and as such, our prototyping costs have stabilized and in some areas declined. R&D headcount has been stable for two years and R&D expenditure should remain close to current levels.

Similarly, marketing and sales expenses are expected to plateau soon as the global buildout of our sales and application support infrastructure is nearing completion. There will always be a variable element of marketing and sales expenses, namely sales commissions for our non-stocking channel partners, but an increase in such expenses is a problem we want to have.

Finally, regarding general and administrative expenses, the major driver of increased spending for 2014 has been legal fees associated with IP litigation. These fees, along with charges associated with the closure of Sunnyvale, have represented a significant majority of increases in our G&A for 2014.

Other expenses, such as those associated with the functions of finance and accounting, IT, and HR, are well managed and in some noticeable instances, declining.

Our number one expense is compensation. Total headcount was 1,014 at December 31, down a net 29 from 1,043 at September 30, reflecting closure of the Sunnyvale operation. At year end 2013, total headcount stood at 1,002. The sequential net increase for the year consisted largely of new hires in worldwide sales and marketing and VI Chip manufacturing in Andover.

Recently, our calculation of quarterly income taxes has been uncharacteristically straightforward. The Q4 calculation was especially so, as the very modest pre-tax income total for the quarter meant we needed little adjustment for Q4 to the Q3 calculation of our estimated annualized benefit.

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

Net operating loss carryforwards generated during 2014 have been added to our balance of deferred tax assets, but the allowance against these carryforwards has been increased to fully cover the value. Given our existing loss position in recent history, we do not foresee any change to how we are accounting for carryforwards in our fully reserved deferred tax assets. Until we return to sustained profitability, we will continue to report tax provisions in this current manner.

Turning to cash flow for Q4, operations generated $740,000, which is a somewhat misleading figure. While net working capital experienced an unfavorable $2 million swing, representing a use of cash, most of the change was not operationally driven, but due to a year end decline of $3.9 million in a mix of accrued compensation and accrued expenses.

Receivables and inventory didn't meaningfully change for the quarter and I'll return to both of those in a moment. Capital expenditure for the quarter rose to $2.3 million from $1.4 million for the prior quarter, largely reflecting the buildout of Andover manufacturing space to accommodate Westcor production and to expand line capacity for ChiP production.

We are not forecasting a meaningful change in the average level of recent capital expenditures for the coming several quarters. Manufacturing is now fully consolidated in Andover and our operational teams have proven to be quite skilled at capacity management, most notably in support of new products.

Turning to our consolidated balance sheet, our receivables portfolio remains in excellent shape, with days sales falling to 40 days from the prior quarter's 43 days. Consolidated inventory's quarter-to-quarter declined, with annualized turnover climbing to 4.6 times, representing yet another new high. Aside from the aforementioned Westcor inventory charge, there were no meaningful changes to either accounts receivable or inventory reserves.

Cash and short-term investments stood at $55.5 million, up from $53.7 million at the end of Q3. This figure excludes investment securities with a par value of $3 million, carried on our balance sheet at an estimated fair value of $2.6 million, representing roughly 86% of par value.

As mentioned, we received a full redemption at par value during Q4 of the only other remaining auction rate security we held. Since the 2008 financial crisis and the collapse of the auction rate securities market, our patience has paid off, as we have received approximately $40 million of redemptions, all at par value. During the period we held each of these securities, all interest was paid, sometimes at higher rates than otherwise available to us.

Turning to our expectations for the first quarter of 2015, we are forecasting higher revenue, which we expect to drive improved product level margins. As I alluded to earlier, our operating expense structure is largely established, so the primary variable impacting profitability for Q1 likely will be legal fees.

Since the trial date was postponed indefinitely, there has been little activity. As such, we are expecting our first-quarter expense profile to be somewhat like that of the fourth quarter. We do not expect any additional charges associated with the Westcor move nor do we anticipate any unusual transactions to influence results.

I must caution listeners regarding expected revenue levels over the first and second quarters of 2015. As of today, our backlog supports our forecast for the first quarter, but our shipping schedule is uncertain, as customers are asking for volumes scheduled for Q2 shipment to be accelerated into Q1. Accommodating these requests would raise Q1 revenue.

I have cautioned listeners for some time to be aware that our bookings can be irregular, with large volumes of long-horizon orders placed at one time followed by periods of low bookings. Now I am cautioning that shipment schedules may be irregular as well, at least for the foreseeable future.

Given the uncertain timing of transitions by server OEMs and their contract manufacturers from VR12.5 to VR13.0 and our footprint being expanded into certain applications to encompass memory rails in addition to processors, quarterly sequential revenue comparisons may be ripe for surprises.

Now I'll turn the call over to Patrizio.

Thank you, Jamie. As Jamie addressed, Q4 was characterized by rising shipments of our 48-volt ChiP VTM and CPRM solution powering Intel processors. Increasing contributions from VI Chip and Picor were complemented by steady results from the brick business unit.

While lower legal fees contributed to our breakeven Q4, I am pleased the quarter confirmed the leverage of our business model. Volume-related efficiencies are reaching a level at which incremental profits will flow through to pre-tax earnings. While quarterly performance will vary because of product mix, we are reaching a point with expanding production of our new products, at which our fixed costs will be sufficiently absorbed by revenue levels.

To gain additional momentum, Vicor is entering a phase that will be characterized by introduction of a comprehensive array of game-changing products. Throughout 2015, the pace at which we introduce these highly differentiated new products will accelerate.

These products will enable end-to-end implementation of factorized power solutions across a broad range of applications, requiring high power density, high efficiency, and improved market-leading design flexibility. Families of ChiP BCMs, NBMs, DCMs, and VTMs are scheduled for release, as are additional members of our family of market-leading SiP point of load regulators.

For chassis-mount front-end applications, upstream of the point of load, we will roll out next-generation system solutions, called VIAs, for Vicor Integrated Adapter, which we recently profiled [at electronica]. VIAs incorporate ChiPs within mechanically and thermally adept packages. Among the game changers in the VIA family are PFM-based AC-DC converters as well as BCM, NBM, and DCM DC-DC converters.

Architected with ease of use in mind, VIA front ends will provide attractive power system solutions across a multiplicity of markets and as I've [allowed] in the past, should contribute to the invigoration of our performance in the markets initially served by the brick business unit. We expect our now front end and brick-like products to revitalize the BBU, with its mass customization model based on highly efficient and flexible manufacturing.

I previously emphasized the effort we made in developing sophisticated online design and configuration tools for use within our new product platforms. These tools are particularly applicable to our mass customization capabilities, which are the core of the BBU value proposition.

BBU customers will be provided with new ChiP-based solutions with a state-of-the-art look and feel, offering substantial improvement in efficiency, power density, and scalability, unmatched by legacy bricks and/or competitive offerings.

During the fourth quarter 2014, we took further steps toward securing significant design wins for our ChiP and SiP system solutions for [bore matted] applications, notably in providing power for memory rails at the point of load. We also advanced the capabilities of our high input voltage ChiP front-end modules.

Our focus has centered in expanding customer base of data center and server customers, utilizing a 48 volt bus architecture. However, we are also pursuing design wins for a broad range of other applications.

For example, I direct listeners' attention to the recent announcement by Advantis Corporation, recognizing Vicor with the Technology Innovation Award, reflecting Vicor's role as a strategic supplier of high-performance VIA ChiPs for Advantis's leading semiconductor test platforms. Test and measurement is an important market for Vicor and we play a key role with customers, such as Advantis, by providing power system solutions that enable state-of-the-art levels of performance into our cost of ownership.

Just like Jamie offers caution regarding the projection of our remarks, I also caution listeners regarding the revenue projections for the new products I have highlighted. Given design and cycle for sales, significant contributions to revenue from these products will occur starting in 2016.

Finally, as I mentioned last quarter, our discussions with potential licensees and partners for either market transaction or capacity expansion remain a priority. There are certain market applications for which a licensee model is preferred.

For example, the use of VIA ChiP modules in [subtle] applications requires this adaptation to achieve [additional ordaining] of circuits for use in other space. We have licensed our VIA ChiP technology for leading band or satellite electronics for use in space applications, from which we have begun to generate the royalty stream. We are pursuing similar opportunities in other vertical markets.

With regard to partnering for production or otherwise achieving scale faster than we would on our own, we also are awaiting a range of collaborative arrangements. We have the ability to scale up our own manufacturing capacity. And as Jamie addressed, we have proven quite adept at [identifying] sources or otherwise identifying opportunities for increased capacity and production efficiencies without major capital expenditures.

However, our business plan is based on rapid production of a vast array of new products and the forecast volumes imply we'll need to step up capacity in 2016 and 2017.

To conclude my prepared remarks, we are approaching our long-established goal of enabling a broad range of power system solutions for the power source to the point of load based on a combination of VIAs at the chassis level and ChiPs and SiPs at the bar level, establishing Vicor as a truly franchise vendor of comprehensive integrated power system solutions, offering the highest performance at a very compelling cost.

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

(Operator Instructions)

John Dillon

Hi, guys. Congratulations on a pretty good quarter.

Thank you.

In regard to the PFM, Patrizio, and your VIAs, can you talk to us a little bit about what kind of markets that you are going to be able to place those in? Are they -- is it going to be a specialty market or is this going to be wide-ranging markets?

So the initial traction is taking place to some degree in a particular market that is emerging. I will not define what that market is for competitive reasons, but we see a broadening range of opportunities for PFM products in the VIA package.

To be more specific, we are getting initial production orders for diversion of the PFM that was introduced some time ago as a double ChiP device in a brick package -- a more traditional type of brick, whose cost structure and power density levels are far surpassed -- the cost structure being lower, the density being higher -- with the VIA counterpart leveraging a ChiP type of device in a 6123 package.

So we expect that as we roll out new types of PFM VIA products that we are going to be able to build on the initial traction that we have already gotten with the other generation versions of the PFM, using more classic brick-type packaging.

I guess what I'm asking, though, is I know you talked about microcells before, but are you going to be able to place these in the switch market in telecommunications or are you going to be able to address the server market? Historically in the AC-DC, you've been very niche oriented. I'm just wondering are you cost effective enough now to hit a much broader market?

In the same line of questioning, I'm just wondering is this like a $2 million a year business or is this a $50 million a year business? Can you just give us some kind of color on that?

So safe harbors first on the issue of cost effectiveness. In answer to your first question, we are making a first significant step in the right direction in terms of further improvements in performance, a reduction in cost measure in terms of cents per watt.

With the first VIA PFMs that are about to be introduced -- both a 48-volt app within a 24 volt app with PFM leveraging, what's called a 6123 ChiP. This is saying that the 400 watt level -- 400 watts as compared to the 330 watt level of the earlier double ChiP PFM.

We are increasing the power capability while at the same time reducing the cost structure significantly. So that will broaden the market opportunity for the microcells and other types of applications, the key on achieving high power density, low profile, and certain other attributes of our PFM product strategy.

But these are further level events that is very far along in the making and which will raise the power capability will be on 400 watts, with a cost structure that will come down commensurately with the increases in power levels. That's going to have an even greater range.

So I think the answer to your question is layered and a function of generation of products and time. But our strategy with respect to AC-DC products is not a niche strategy; it's a broad-based strategy we believe we are going to have, as we do now, for instance, at the point of load in powering Intel processors, not just the best performance, but also the overall most cost-effective solution.

Okay. Do you think this might be a $2 million a year business or like -- ?

Sorry. Previously answered your question. Obviously, our solution at the point of load is far, far greater than that. And likewise, I expect similar opportunities in the AC-DC area. And you should bear in mind that that is actually a very, very large market. One way of looking at the -- one way of characterizing the total system market -- the biggest market.

And that's exactly why I am asking the question. So this seems like it could be a game changer for Vicor, but I just want to make sure I'm not reading something into it that I shouldn't. So you're --

Game changing claims are obviously, to some degree, presumptuous assertions to make and we don't make them lightly. We believe that for both point of load solutions, we are gathering significant traction, as already reflected in major revenue generation and in these others classes of applications, with product capabilities and technology that are equally revolutionary that we have a corresponding opportunity.

These are all in effect part of a very, we think, well-orchestrated strategy that's adds a common denominator team, enabling modular solutions and modular power component methodology for power systems, such that customers in all major end markets are going to be able to address their power system requirements with modular building blocks that's have the requisite scalability, performance, and cost effectiveness. And that entails the combination of AC-DC solutions at the point of load, AC-DC solutions in the front ends, and in between those two.

And the PFM, when do you expect that to be out? The VIA --

[We've had] them out as a double ChiP PFM for some time. As I mentioned, we are making good progress with that with a number of customers. And we are going to be making announcements very soon with respect to two new VIA products that are PFM based.

Great. Okay. Jamie, I got a question for you. It sounded like you are cautioning us that this quarter may be better than we, expect, but then on the other hand, I heard Patrizio say that cautioning us that it will take until 2016 for some of these new products to really hit a growth spurt.

Can you give me a little more clarification on what exactly you are trying to relay to us in those two statements?

So let me address that. My comments of a month ago regarding the new products being introduced this year not generating significant revenues until next year did not in any way negate earlier suggestions regarding the opportunity for revenue growth this year, because that's predicated on products that we've been working on or way introduced last year or have been recently introduced.

So I think what should be noted is that because of the fact that the -- our portion of our R&D major effort, in which we've invested a quarter of $1 billion over a long time frame, is essentially behind us and it will now [tramaly] development phase. The rate on new product introductions is accelerating -- has already accelerated -- and is going to continue to accelerate as we harvest the fruits of an effort that has been in the making for quite some time

And it sounds like from Jamie's comment, we are pretty well into the first quarter. It sounds like you are going to have a pretty good first quarter. Is that what I heard, Jamie?

I think what's good is -- to some extent the function of expectations. I don't want to get pinned down with respect to that, but I think you heard earlier our comments and we mean what we say.

So you are cautioning us that it could -- what I think I heard -- I just want to make sure what I heard -- what I think I heard --

I think you heard that we expect growing revenues in Q1.

Okay. All right. Thank you. I'll get back into queue.

Jim Bartlett, Bartlett Investors.

Given the question that John just asked, in the last conference call, Patrizio, you gave a level of confidence in 2016 of achieving a milestone of something like 50% in the first quarter and 90% in the second. Would that change now?

No. We are on track to achieving the key milestone that I think we characterized loosely as breakaway revenue levels with that same confidence level in the same time frame. There's been no change with respect to that. Things are propelling along without slippages in support of that growth.

You also mentioned on the SynQor litigation that the trial had been delayed indefinitely. What's behind that?

This has been a fairytale of sorts. I think that the fairytale that comes to mind is the Emperor that wears no clothes. I think what's been happening in Texas with the Texas district court -- and by the way, more recently with the 5th Circuit Court of Appeals in Washington, we see is that they come to realize that the Emperor wears no clothes.

What I mean by that is there are no valid patents that Vicor could possibly infringe. Beyond that, I will say that the naked Emperor is an ugly character that should be punished for his past abuse of power in the judicial system. So I think those kinds of realizations underline what may be going on with respect to things getting put off.

And is there also a new judge appointed? Would he have something to do with it or not?

I can't comment with respect to that. I think the fact that the summary judgment phase has taken as long as it has and caused the postponements last year is indicative of the complexity of the issues and the fact that the magistrate judge has seen -- the plaintiff's seen in a new light.

Just going to another subject, when you were talking about the first-quarter revenues maybe being more because the customer pulled forward some requirements from the second quarter. Is this one large customer doing this? Or is this several customers?

I think in some instances, we are seeing pull ins or the desire for pull in. Obviously, we are dealing with a very large [multiplicity] customer, so we're all -- so I think the fact that some are pulling in doesn't imply that they are all pulling in.

So we got a complex [relationship] when it comes to that. But net net in terms of the revenues for the quarter, the push is for the revenues to rise above our forecast level -- our internal forecast revenue.

One final question. There is obviously an awful lot of publicity about the data center space -- Amazon and Microsoft and others. Could you just give us some of your insights into new developments in the data center world? How that's affecting you?

Well, I think that we are seeing a broadening interest with respect to the benefits of a 48 volt backbone or 48 volt infrastructure. As I am sure you are familiar with, a classic [custom] type perspective to these, with early adopters and other companies that are in effect less willing to be on the forefront of an initiative that is worthwhile, but follow developments by the early adopters and want to capture similar benefits.

So we are seeing that happening and things again [are crowding along] in that general sense with a number of companies that are major internal users of large data centers.

Thank you.

John Dillon

Patrizio, in regard to the data centers again, I know you've got the one big data center that you've talked about. And then I know you have been talking to a number of others. How close are we to a second data center customer coming on board or are you under contract with another data center?

I think that we are going to see a multiplicity of opportunities with the VR13, which is, as you know, the next generation of Intel processors going into production in 2016.

So can I infer from that that you've got the one data center customer and you'll probably stay with that one until 2016, where you will pick up some additional data center customers?

I think that's too granular a statement for me to be able to make. I think I've gone far enough in suggesting that we see the data center space transitioning more and more to a 48 volt system because of its benefits.

I would say on a related front, the front-end portion of the power system infrastructure -- there, too, we see a growing trend towards high-voltage DC buses, which also fits very well within our total power system strategy. So at the point of load or close to the point of load -- and when I say the point of load, in terms of direct 48 to 1 volt for memory or 1.8 volt for processor type applications -- we see a growing trend because of its benefits.

We've been working closely with a variety of key partners -- both users of these kinds of systems as well as the makers of the components that get sold in terms of processor and memory solutions [between all of the] systems. So there is progress on that general front and likewise, we are making progress in the front-end space in terms of bridging the gap from the power source to the point of load with a very comprehensive and integrated strategy.

So on the front end, are you talking about 400 volts down to 48 volts? Is that what you are referring to?

Yes. We are talking about both AC conversion, as we talked at the beginning of the question-and-answer session, as well as 380 volt distribution as a stepping stone to 48 volt.

So there could be an AC-DC to solution for data centers? Is that what I am hearing?

There is obviously AC-DC solutions in the data centers today.

Yes. But for Vicor.

But we see what is [dell] centers or other types of systems. In communications, as an example, we are seeing and we are partnering with leading companies in that space that have their own infrastructure, which is going to be starting to use a 380 volt bus in the not-too-distant future.

Okay. And do you have any additional large server companies -- OEM server companies that you are supplying to now?

We are making progress with companies that are in the server business as well, but I am not prepared to make any definitive statement today with respect to that. Bottom line, that which works for the confidence of vertically integrated in terms of data centers also works for our comprehensive manufacturers of servers in one form or another.

Thanks. Okay. And you used the term in the press release saying NBM. I've not heard that term before. Can you tell us what an NBM is?

Yes. So this is a proprietary device for which Vicor holds intellectual property, which has to do with a fixed ratio conversion without isolation. And with a non-isolated bus modules -- that's what NBM stands for.

What we can do is raise further the bar with respect to efficiency of power density. So we have an additional initial device that I am about to introduce that will bring the power capability of a device 61 millimeter by 20 millimeters all the way up to 2.4 kilowatts with unprecedented efficiency and power density and cost effectiveness. So the ability of these devices to process power very efficiently, very cost effectively, is enhanced by a non-isolated architecture.

We have already established with some key customers the fact that fixed ratio conversion can be successfully deployed without isolation. And we are about to roll out the first two products that perform that function, again with an unprecedented level of efficiency, density, and cost effectiveness, because in effect, as we raise the bar on the power capability of a chip of a given size, we can at the same time reduce the cost per watt -- the cents per watt in inverse proportion.

So case in point, we have two new BC amps that are about to be introduced -- K14 to K16 -- which are in the 1,500 watt range. The K15 and K13, which are non-isolated counterparts, raise the bar all the way up to 2.4 kilowatts, with a cost structure that is very comparable. So the cents per watt goes down inverse proportion and the efficiency gets up to 98.4%, 98.5%.

And what type of markets will that be going into?

Communications. Once again, they could play a role in data centers. For some of them, automotive -- K13, in particular.

Excellent. Okay. And regarding automotive, can you give us an update on how you are doing with automotive?

We are making progress with relatively small scale, but still significant in terms of early penetration. Wins that are approaching initial production this year. We have, as you have heard in the past, developments in the works that raise the bar on density efficiency and cost effectiveness that are going to be opening up more opportunities.

The traditional requirement in that space that has been an area of great focus has involved high voltage, such as the (inaudible) volt bus down to 12 volt, but there are greater and greater requirements for some of the modern systems that involve lower voltage conversion, from a 48 volt type of bus to 12 volt. While the NMBs plays potentially an important role with respect to that, because of its extremely high density efficiency and cost effectiveness, with or without companion PLMs or [pre gather] modules -- either unidirectional or bidirectional type of systems.

Great. Thank you.

[Don McKenna]

Patrizio, I've read about both Microsoft and Apple developing the solar farms to power their data centers. Does that have any implication for you at all? Would it be a net positive opportunity, negative, or just a neutral?

We are not directly involved at this time with that -- with any of that. But I think generally speaking, trends, such as the one you are pointing to, only go into the action of expanding the opportunity for advanced modular solutions to power system requirements. In that scenario, we are investigating, but it has not been part of our focus of effort.

What is your capacity utilization right now in Andover?

Our capacity utilization at the factory -- [to] reviewed just within the last week. And our capacity utilization is expanding, but capable of significantly greater expansion. We have suggested in the prepared remarks various degrees of freedom with respect to significant further expansions.

There's some opportunity for ChiPs production rates as we get from 2015 to 2016 to undergo a multiple of 3; potentially greater than that -- 3X. And we know how to accomplish that in a variety of ways. We are diligently pursuing a competitive strategy to accomplish that.

And is the multiple of 3X -- is that before you do your additional, as we talked about in the last quarter, expansion? And maybe even a need of a capital raise to do that overseas?

Well, so we are looking at a variety of options. And the options involve further expansion, to your earlier point, of our total capacity within the main factory in Andover, where we have 250,000 square feet, where we have the ability to add additional floor space because we have high bay areas within which we can add floors.

We have seven SMD lines, but there is an example. We have the opportunity to partner with outside vendors who supplement our SMD lines, because there are portions of manufacturing floor that can be relatively easily be contracted out to the right kinds of partners.

And we have the opportunity to add capacity in a variety of ways with respect to those portions of the manufacturing process that are what you may call key to chipmaking that were a much higher level of proprietorship in the processes in some of the equipment. Again, we can do that within the (inaudible) facility -- the 350,000 square feet facility in Andover. And in medium to long term, we are going to be doing that elsewhere as well.

Okay. Thank you. One --

[Allen Six]

Good afternoon. Congratulations on the good progress you are making on all fronts.

Thank you.

My question is on the server market, it sounds like you have one big customer and it can be lumpy from quarter to quarter. Where are you in the penetration of that market and within that particular customer also?

I think I have answered to some degree your question earlier. I maybe repeating myself to some extent, but with respect to an early adapter, we are making progress with respect to further expansion or opportunity with next-generation Intel processors and memory slots.

We are also penetrating other key players in that channel space. Companies that have vertically integrated center [stashers] and it's more than one that is involved at various stages of engagement. As I suggested earlier, we are also making progress with respect to companies that manufacture servers, but they don't have their own data centers.

So the summary of it is that the value proposition in terms of high efficiency, higher density, lower total cost of ownership, greater scalability, the ability to address escalating requirements with next-generation Intel processors that may demand much higher [fee con] than past generation devices did, for which our unique proprietary technology is extremely well suited, unlike the competitive alternative.

All of these factors are drivers in the regulation in terms of motivating a multiplicity of customers, other users, or manufacturer of servers to adopt our solution.

Okay. So it sounds like you have a multiyear opportunity for penetrating that market quite a bit more.

Yes. We see it as a key market for us. We are more and more focused on it and are staffed internally to make the most of the opportunity has been expanding and become more focused. It is not the only market we are pursuing, but we are certainly putting a spotlight on it because we see tremendous opportunity in that market.

Okay. And then communications -- would you say you are very early in penetrating that market again?

We are making progress. I think we are going to be seeing a greater opportunity, I think, as this year progresses into next year. And it's not to take away from other markets -- industrial markets, transportation markets -- where we are also -- or the test marketing, which we're also making progress. Or defense markets, for that matter.

Yes. It sounds like your traditional markets are picking up. What about -- one of the wildcards would be like supercomputer market. I know you've had some big orders in the past. Is that still an area you are looking at?

Absolutely. So those opportunities have not gone away. They may be changing shape and the companies involved may be changing and expanding to some degree, but then again, the value proposition, if anything, for us has grown because what we have to offer, again in terms of the key attribute that sets a power system apart from a competitive alternative -- density efficiency, transitive response, power capability, and cost effectiveness -- those value attributes have grown for us at a rate that has exceeded the competitive alternative.

Okay. And can you give an update on your progress in the auto market?

I think I may have answered the question a little earlier. So we are making progress. There are some initial opportunities. They are not huge volume, but they are [real] production requirements that are coming up this year.

And I think, as I mentioned earlier, with some of the new products that are in the pipeline -- some very close up, like the first NBM. Some of them are third-generation PRMs -- the combination of the two for [Walter] systems and our two-stage DCMs -- we see growing opportunities in that market.

It's a market that's been one we focused on that we have targeted as being very strategic. From a number of years ago, I think we cautioned everybody to be very patient with respect to it, because while it moves faster than it used to, it's still a market has got a very long gestation phase.

Okay. And I had a question on -- do you still own the building in the San Jose area? [West corner]?

Yes. We are about to actually to list and derive some pretty nice income.

Okay. Good. And one last question -- Picor looks like revenue has quadrupled from the first quarter. What do you expect going forward from here?

I expect it to keep regressing in the right direction. I think Picor is at some initial product introductions. They have been primarily focused on some key opportunities and you're beginning to see some of the manifestation of that focus in early revenues and early progression of revenues.

But there is very broad range of very exciting products -- 48 volt input products that perform all the classic regulator functions, but boost backend boost, with very unique attributes of density efficiency and cost effectiveness. They are coming up as part of the same strategy with respect to enabling modular solutions to power systems -- in this particular case, using a packaging technology, which is, in and of itself, is not proprietary, but leveraging within it a control system and a power conversion topology that is very proprietary. So we see growing opportunities for our SiPs under the Picor umbrella and there's more of those coming -- a lot more -- in coming months.

Okay. Again, congratulations on all the progress you are making. Thank you.

Jim Bartlett, Bartlett Investors.

-- conference call, you were talking about your optimism that you could get back to a 20% operating margin. Would that be compatible with a number, since you also were talking about now how near term, long term it was 15% R&D? Or would 20% be closer to 10% in investment in R&D?

So let's start with gross margins. I think you heard me in the past say and I repeat today that with our new products, we expect to achieve -- and in some cases, we are already achieve -- margins that are greater than the margins that we achieve in the 55%, 60%, 65% area, with bricks in the early going the 80%s and 90%s. These new products being as differentiated as proprietary and as high performance as ever.

Given the high level investment we made in them, deserve to achieve margins -- gross margins that are up there to reflect, again, the level of innovation and value they deliver to customers.

So starting with that, the operating model needs to take into account the high level of investment we made and are continuing to make in R&D. You made reference to a 16% level.

That's a good number to think of in terms of our typical R&D budget. We intend to keep it up there, even though I suggested earlier, because of the fact that we are, at least for the foreseeable future, the last of the R to be done and just a lot more D.

We think we can accomplish that for quite some time without expanding R&D resources at a rate that's commensurate with expansion in the top line. So there may be an opportunity to take the R&D operating expenses down a little bit as the top line grows.

And likewise, you were [I think, trammy], such as when it comes to the sales and marketing infrastructure that we have a corresponding opportunity. Because we've led the growth in revenues by building up that infrastructure to pursue customer engagements in front of products and opportunities. And at this point has achieved a level of structure and capability that supports considerably higher levels of revenues.

So all of that to your point should before too long drop to the bottom line at levels so that we'll escalate as we bring the center of gravity of our product mix to higher margins. Again, a lot of that, when it comes to the VIA ChiP products, is really one of capacity utilization.

As you heard me say in the past, that's a business model that has got a high fixed-cost option, because the packaging technology and manufacturing processes are like the ones for Picor and SiPs -- the ChiP for our platform in terms of packaging technology is very proprietary.

So we have a large contingent of resources that has been focused on enabling the packaging technology. And we are going to be seeing over the next few years that investment bear fruit by bringing the unit cost down, leveraging the fixed cost to a much higher top line.

So obviously, as I suggested earlier, as we look at the manufacturing rates for ChiPs next year growing by a large multiple, that's going to have a very beneficial effect in terms of unit costs and margins for those products as well.

So in summary, we are looking for margins going up, while operating expenses come down. And the combination of the two will lead to a healthy bottom line that should expand over time.

Sounds good to me. Thank you.

And with that, thank you. And we look forward to talking to you in a month and a half or two. Take care.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.