Vicor Corp (VICR) 2015 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, 2015 conference call.

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

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

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

(Operator Instructions)

I would now like to turn the conference call over to Jamie Simms, CFO.

Please proceed.

Thank you.

Good afternoon and welcome to Vicor Corporation's conference call for the third quarter ended September 30, 2015.

I am Jamie Simms, Chief Financial Officer.

And with me here in Andover are Patrizio Vinciarelli, Chief Executive Officer, and Dick Nagel, Chief Accounting Officer.

Today we issued a press release summarizing our financial results for the third-quarter and nine-months ended September 30.

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 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 Form 10-K file with the SEC on March 6, 2015.

Please note this information provided during the conference call is accurate only as of today, Tuesday, October 27, 2015.

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

A replay of today's call will be available beginning at midnight tonight through November 11, 2015.

The replay number is 888-286-8010 and the passcode is 11574949.

In addition, a webcast replay of today's call will be available shortly on the Investor Relations page of our website.

Unfortunately, we have been unable to recover an audio recording of the annual shareholders meeting which took place on June 19.

As I noted during last quarter's earnings call, the service provider experienced technical difficulties with the recording.

I will start this afternoon's discussion with a review of our financial performance for the quarter.

Patrizio will follow with his comments, after which he will take your questions regarding our business.

As set forth in this afternoon's press release, Vicor reported earnings of $0.06 per diluted share, representing a net profit for the third quarter of $2.5 million on revenue of $48.7 million.

For the preceding quarter, we reported earnings of $0.02 per diluted share, representing a net profit of $800,000 on revenue of just over $56.1 million.

In contrast, for the third quarter of 2014 a year ago, we recorded a net loss of $0.10 per share, representing a net loss of $3.7 million on revenue of $58.4 million.

This figure was heavily influenced by a charge of $2 million associated with severance accruals tied to the consolidation of Westcor's California operations into our Massachusetts manufacturing facility.

I should point out this consolidation has met expectations for cost efficiencies, as we have reduced manufacturing overheads by upwards of $1 million per quarter with the closure of the Sunnyvale facility.

Our after-tax net income for the third quarter of 2015 was heavily influenced by a gain of $5 million we recorded as a result of the redemption of nonvoting preferred stock we held in Great Wall Semiconductor, which was acquired by Intersil Corporation in September of this year.

100% of the gain flowed through our income statement, as we had written the value of our Great Wall investment to zero in 2008, at which point we stopped recognizing Vicor's proportionate share of GWS's ongoing losses, as required under the equity method of accounting for investments.

Note, however, we did not incur a taxable gain for income tax purposes, as we had not written down our investment for tax purposes.

I will address this transaction later in the call, but I should point out, absent the gain from the redemption, we would have recorded a net loss per basic share of $0.06 based on pro forma net loss of $2.5 million.

Turning to the quarter, consolidated quarterly revenue declined approximately 13% sequentially.

Revenue recorded by the Brick business unit declined 9.5%, while VI Chip and Picor experienced sequential revenue declines of 30% and 33%, respectively.

The BBU's revenue reflected the decline in bookings through the first half of the year.

We had reduced shipment across the US and Europe and Asia, ex-China, while shipments to China rebounded from the prior quarter's decline.

Revenue from VI Chip and Picor reflected the ongoing pause in shipments to the data center space, reflecting -- as was the case last quarter -- their vulnerability to customer concentration during this early phase of their development and market penetration of the new products.

As we have reported, shipments of our second-generation VI Chip and Picor SiP declined suddenly during the second quarter, due to supply chain inventory buildup.

Such shipments remained at a low level for the third quarter, while the aforementioned inventory buildup has been consumed in anticipation of a transition to VR13 during 2016.

International revenue, based on the location of the party to which we ship, fell roughly 14%, reflecting the overall decline in total revenue, but remained essentially the same as a percentage of total revenue at 57.3%.

Our terms volume for the third quarter was steady on an absolute basis, but increased from 36.4% the second quarter revenue to 42.8% of third-quarter revenue.

Concluding on consolidated revenue, recognized distribution revenue for Q3 declined approximately 16%.

Consolidated gross profit as a percentage of sales fell to 43.7% for the third quarter, down from 47.2% for Q2.

ASPs were steady, but lower volumes resulted in poor overhead absorption.

As addressed last quarter, we have made steady progress in reducing costs and identifying opportunities of efficiency improvement.

But these accomplishments were clearly offset in the third quarter by lower production volumes.

The combination of lower revenue and lower gross profit margin caused a 20% decline in the dollar amount of gross profit, which in turn causes us to record a consolidated operating loss of $2.2 million, despite sequential declines in operating expense of approximately 5% for R&D, 11% for marketing and sales, and 12% for general and administrative expenses.

Our quarterly consolidated income tax provision of $174,000 was straightforward, again reflecting income taxes due for subsidiaries in which we hold a non-controlling interest, state income taxes and international taxes.

I remind listeners we have a fully reserved domestic net deferred tax asset exceeding $25 million, which, in the event we establish a sustained trend of taxable profitability, represent approximately $10 million of potential value in sheltered taxes, if and when we begin to release the associated valuation allowance.

Turning to cash flow for Q3, operations generated $5.7 million, but $5 million of this amount was from the redemption of our GWS holdings, which was recorded as a gain.

Absent the GWS redemption proceeds, operating cash flow would have been $700,000, down from the second quarter's $7.2 million, which reflected a substantial favorable swing in working capital, notably in accounts receivable.

For the third quarter, modest changes in the components of operating working capital offset one another.

Capital expenditures for the quarter rose to $2.3 million from $1.8 million for the second quarter and $1.5 million for the first quarter, reflecting expansion of our manufacturing capacity.

As discussed, we have initiatives underway to expand capacity in our Andover facility.

These initiatives are intended primarily for the manufacture of VIA systems.

We expect capital expenditures to continue at their current level for at least the next two quarters.

Turning to our consolidated balance sheet, the quality of our receivables portfolio remains excellent with days sales slightly higher, rising 45 days from the prior quarter's 42 days.

Annualized turnover of consolidated inventories remain relatively high at 4.8 times, down from the prior quarter's 5.1.

There were no substantial changes to AR, inventory, warranty, or other reserves.

Cash and cash equivalents stood at $68.6 million at quarter-end, up from the prior quarter's $65.1 million.

This figure excludes one last auction rate security with a par value of $3 million, carried on our balance sheet at an estimated fair value of $2.6 million, representing roughly 88% of par value.

Employee headcount as of September 30th was 1,028, down 3 from June 30th.

I will now turn to bookings patterns and our outlook.

Total consolidated bookings for the third quarter increased 4.7% sequentially.

For the quarter, our consolidated book-to-bill ratio was slightly above 1-to-1.

BBU bookings increased 8%, with notable improvement in custom order activity, although some of this improvement is associated with last-time buy and buffer stock orders placed by customers in anticipation of our fourth-quarter consolidation of two custom subsidiaries and a divestiture of a third.

The BBU experienced reduced order flow across Europe and in Japan, with Asia ex-China, and China experiencing increased order flow.

The BBU ended the quarter with a book-to-bill ratio of roughly 1 to 1.1.

As we have emphasized before, we look at booking trends for the BBU, which serves a diverse customer base with a wide range of products using a mass customization model over many quarters.

As with revenue, bookings from BBU customers in certain market segments and geographies offset one another quarter-to-quarter.

Of late, the BBU's quarterly performance -- whether in terms of shipments or bookings -- has been characterized by the presence or absence of a few large volume projects or, in some instances, distribution stocking.

Although we acknowledge certain market segments and regions are characterized by uncertainty, we actually see favorable trends for the BBU based on the early traction of new DC-to-DC converter and systems products introduced within the last year.

VI Chip and Picor bookings declined 13% and 11%, respectively, reflecting customer concentration in the data center space and the circumstances we have described for the past two quarters.

We continue to shift the second generation of the VTM3 and PRM3 solutions for VR12.5 motherboards.

However, due to the pending transition to VR13, orders and shipments for the second generation remain modest, although we continue to expect to be shipping the VR12.5 solution through the end of 2016, well past the mid-year ramp of VR13.

Turning to our expectations for the fourth quarter of 2015, we are forecasting increased revenue based on our current backlog and projected terms volume.

While the expected topline improvement will not reach our breakeven volume in Q4, it should improve overhead absorption.

Assuming no meaningful change in operating expenses, we are anticipating a net loss for the fourth quarter, albeit smaller than the pro forma net loss we incurred in the third quarter, when you exclude the gain from the redemption of our GWS preferred shares.

Now, I will turn the discussion over to Patrizio.

As Jamie has addressed, Q3 results largely reflect the expectations we communicated to you during our last earnings call, with the exception of the impact of the redemption of our investment in GWS.

My remarks today will be brief, as you have heard before the circumstances of the pending transition to Intel's VR13 processors and the gestation period of new products designing activities.

We remain focused on the expected 2016 volume ramp, and we may focus on serving a broader range of customers with state-of-the-art, cost-effective motherboard and frontend power system solutions.

I believe the recent decline in bookings in revenues is behind us, and that an expanding array of high performance, low cost solutions, spanning applications for virtually any power source to the point of load, will fuel significant revenue growth.

We are well-positioned to meet this demand with sales and applications resources and a scalable manufacturing capacity.

We are experiencing an unprecedented level of interest by existing and new customers in the many products we have introduced within the last year, as well as products in our near-term product roadmap.

We are seeing major design wins and are anticipating more.

In my recent visits to customers in the US and Europe, I confirmed a spreading and rising level of interest in our factorized power [48]-volt architecture, and are now a frontend solutions for automotive, data centers, high-performance computing, and defense electronics applications, among others.

Again, despite my confidence and enthusiasm, I must caution listeners regarding the gestation period of new design wins and applications.

Given the reality of these sales cycles, contributions to revenue from products introduced in 2015 likely will not occur until the second half of 2016.

I am sure we will have quite a few questions, so I will start taking them now.

Operator?

Operator?

Yes, I'm here.

Do we have any questions?

(Operator Instructions) Jim Bartlett.

Yes, Patrizio, you mentioned the expected ramp-up in the Intel VR13 chip in the third quarter of 2016.

Specifically, what is that processor that you are referring to?

And two, if that's their ramp-up, how does that affect the ramp-up in your orders and then revenues with products related to that?

So there are various SKUs of these processors that play a role in different applications.

And regarding the second part of your questions, as you might expect, the bookings lead shipments by about a quarter, so we expect to see a significant step-up in bookings in Q2 in anticipation of a significant step-up in shipments in Q3.

You also mentioned that in this hiatus, that you had made progress to -- and in your VR13 customer base and data centers, networking, high-end computer applications.

Does that mean -- do you have new data center customers ready to place or in line to place orders?

It means that we have seen a broadening of the customer base and the applications.

VR13 is expected to have significant longevity.

Some of these applications will turn on with some delay relative to the earliest to ramp.

So some of these broadening of customers' applications will have an impact in follow-on quarters past the start of the ramp, which will be more concentrated, but broader than what we have with the prior VR12.5 and the prior VR12.

All right, thank you.

John Dillon.

Hi, Patrizio.

You announced some bidirectional converters about a week ago.

I'm just wondering -- is this a brand-new area for you?

I don't remember ever seeing any bidirectional converters on your webpage or anything.

Yes, it is a brand-new capability.

It's a new application of an engine that we have used for point and load applications.

Its current multipliers, in fact, are its power systems as well as bus converters of both high voltage and lower voltage pass converters.

It is a novel application.

This engine, not just in terms of its bidirectionality, which is becoming more and more a requirement in certain applications, but also because, by virtue of its nonisolated stature, it affords a greater level of efficiency and power density and cost-effectiveness measured in terms of sales per watt.

So, but the directionality as an attribute that is important in some applications, not all.

The cost-effectiveness is obviously important in many applications and that is a distinguishing attribute of this class of converters, as well as their power density and efficiency.

So, these devices are well above, by a large multiple, the closest competitive units in terms of density and efficiency as well as being by far the most cost-effective solutions of their kind.

So, they are also the most cost-effective solution?

Absolutely, yes.

So, relative to -- to quantify the statement, relative to an isolated alternative, these solutions are typically 25%, 30% more dense and more cost effective.

And it seems like that would be ideal for the electric car or hybrid car, because you have got to both recharge the battery and also you have to have electricity coming out of the battery to propel the car.

Is that correct?

Is that really your target market, vehicles?

Or is it --?

It is a variety of applications that leverage bi-directionality.

You mentioned some.

There are others to do with the whole green infrastructure, as well as other kinds of applications that leverage bi-directionality.

So, we have a unique position with this class of converters, with not just by far best-in-class products but also novelty intellectual property.

When do you expect to start seeing some production revenue out of these products?

Well, so, these are cold shower with respect to these.

Given the nature from the date of introduction, and we have been sampling some of these devices now for a little while, until they come to fruition in terms of significant revenues, we are dealing with the sales cycle that was referenced in the earlier remarks.

So, 12, 18 months completed sales cycles.

Sure.

And will that all be incremental revenue, since you have never had a product like this?

Anything -- I mean this is --?

Actually, it's another dimension to our multidimensional power component methodology.

And I think the value proposition here is more than merely incrementing individual opportunities, individual applications.

I think there is a different perspective on it, which has just to do with complementing the array of modular functionalities that, in the aggregate, enable a comprehensive power system methodology.

So, in the analogy using the path of making things like little Lego blocks, you can imagine that it takes a few different shapes and types of Lego blocks to enable to erect a particular structure or architecture.

And that is making an analogy to what goes on in the power system industry, with respect to architecting power systems.

So this novel, nonisolated, bidirectional bus converters can generate their own individual opportunities, but they can also play in combination with other building blocks that we have or are about to introduce, that synergistically enable more advanced power system solutions.

Not only will it be bringing you knew revenue, but it will also be complementing the existing customer base you have and allow that to be stronger and grow also?

It's more than an issue of the customer basis.

It is an issue of overall system functionality.

So, in addition to generating their own revenues for the sales of those specific products within this new class, they will also be generating companion sales or companion modules that, in combination with NBMs, can perform the balance of the power system requirement in specific customer applications.

And you referenced the VIA capital buildout last conference call and you mentioned it again today in this call, and I'm just wondering when will we see an impact from that?

When do you expect to see more significant impact from the VIA products?

Are we going to see that this quarter, next quarter?

We have significant design wins.

We have been working feverishly to establish automated manufacturing capacity.

There has been good progress to that end.

There is equipment coming in, factory floors, they have been prepped for it.

And we are going to have a turn-on in the very near future in anticipation of volume ramp in Q1 of next year.

This will start with modest volumes, but we are already seeing very high-volume applications for this new class of products.

As I've discussed in the past, they provide typically frontend power system solutions that once again complement the motherboard point of load, factorized power solutions that we have seen getting more and more traction, in particular into the center spaces.

So, part of the strategy with these kinds of products is to enable end-to-end solutions where customers can come to Vicor as a single stop shop for their complete power system, from the wall plug or the power source, whatever it might be, to the point of load.

And we are making great advances in every decision, not just by having complementary products that can play in the frontend as well as the point of load, but also by scaling these capabilities up and down in terms of raw power.

So, you'll be seeing, next year, new products that enable very cost-effective similar efficiency and high performance solutions at power levels where Vicor historically has not played.

And those products again play a role in a comprehensive capability that enables customers to meet their power system requirements end-to-end.

So, can we count on the revenues getting bumped up the first quarter of 2016 as a result of shipments of these and other new products, but with a real ramp coming Q3 for shipments?

Is that a reasonable assumption or --?

Well, as suggested in the opening remarks, from my perspective, given the visibility we have, I think we have seen the bottom in bookings and shipments.

I think the trend that we have suffered from over the last year is reversing.

I think having touched the bottom, the near-term outlook is now a dramatic step-back obviously reflecting in a book-to-bill ratio of the last quarter being just modestly above 1.

I think we will be building on that, and I expect the buildout for the forecast supports the buildout that should be steady in the next couple of quarters, and picking up a faster pace as we get -- as suggested earlier in 2Q, and Q3 of next year.

From a bookings perspective, with revenues lagging by about [one quarter].

Great, thank you.

I am going to get back in the queue.

Alan Hicks.

I am not an engineer, so I am just trying to get clear on the VR13.

It works with the new Skylink Intel processor.

Is that correct?

So, VR13 is a class of processors.

It is a class of processes and it is processors that, in many respects, represent a significant step-up in performance relative to the earlier class, which is VR12.5.

Now, this can be potentially a little confusing, because as you follow Intel's introductions with respect to the many different flavors of these devices, some of them play in the space where now we do not play.

And other ones are targeting particular to IRN, data center, more intensive -- computing-intensive applications.

And those are the ones that are relevant to our revenue opportunity.

So you need to wait for Skylight to come out for server versions and higher-end computing applications?

Generally speaking, we are coupled into those flavors that again go into either supercomputing or data center type applications.

And those are based on the visibility we have.

Going to be going into production in Q3 of 2016.

This is scheduled over the last several quarters has been changing.

The latest change, as far as we know, has been actually going the right direction, meaning moving a little bit.

But it's still far enough away that I imagine there can still be potential for some minor change.

But obviously we are getting close -- closer, and the latest change we are aware of has actually been coming in as opposed to going out.

So, these new class of processors dramatically reduce power.

Is that the main advantage?

Well, the processors actually consume more power, which is good for us since we are the provider of the power in the right form to enable the processors to function.

The benefit of these processors is that while consuming more power, they deliver a lot more computing capacity and capability.

So they are -- they leveraged it for customers in that they provide more computing capacity.

The trend we generally see in the industry, except for certain class of applications, the mobile applications that are particularly dependent on low power consumption in other realms, the trend that we see is for more power-hungry processors, more power-hungry ASICs.

We see more and more applications that are extending their requirements up to several-hundred ampoules.

And that is good news for our products, because our products at the point of load excel in being able to provide very efficiently and very densely, very high current and very dynamic loads.

The current requirements can rapidly change and achieve very high peaks of, as I mentioned earlier, it's a lot of amps.

So the main flavors of these kinds of processors don't get past, I think, for this generation, a couple-hundred amps.

But there are again other kinds of loads that we're beginning to power that extend beyond that.

Okay, what I am trying to get at is your -- this new version will dramatically lower power, so data center is the obvious application.

Could there be a cycle where the advantages are so big that they will replace a lot of the servers that are out there?

It would be a big upgrade cycle in addition to new products being sold?

Again, the power is not going down.

The measure of the industry, the measure of our collective dependency on more and more computing power in every facet of -- in our life, from home, from data centers, in Vegas, in the office, power consumption in terms of reliance on computing capacity is not going down.

It is going up.

And the car is a prime example that electric power in cars keeps going up at a very fast pace.

So, I wouldn't worry about power going down.

The need for cycles is obviously brought about by the ongoing increase in dependency on computing capacity for a variety of purposes.

And obviously, the industry is geared to support those kinds of needs with generations of chips, processors, ASICs that continue to expand their capabilities at the expense of, in most instances, greater power consumption and more challenging power system needs.

But was that your products to your customers that could not take advantage of the new processors from Intel?

Is that correct?

No, I think that would be too radical a statement.

I think the balanced statement that would be there is always a way to get power to processors, ASICs.

Some approaches may have handicaps that -- most approaches have handicaps that our solution does not have.

So, fundamentally, what sets us apart is that we have the highest density, meaning we take up the least bar space.

We can get the closest to the processor.

We can reduce the distribution losses in delivering power to the processors.

We can -- you have other processors with the power needs, while generating far less noise, which enables greater signal noise immunity.

So we have a number of distinguishing attributes that make our products very appealing, particularly in demanding applications.

But there are other ways to power these processors.

But we are seeing more and more this is a grassroots development that is spanning more and more of the industry, is an interest in requirements for our products, because of this distinguishing attributes.

It is not that you cannot do it any other way.

It is just that our way of doing it is a lot better than the alternatives.

Yes, you do have a competitive advantage over anyone else.

We have a competitive advantage in density, efficiency, overall cost-effectiveness, lower noise, which means greater signal integrity.

Those are some of the key advantages we have that set us apart, in some instances by a large advantage, relative to any competitive alternative in point of load applications, which are the type of data center applications we have been referencing in this discussion.

Okay.

So, data centers are your first target market?

Is that correct?

It's one; it's one we have been talking quite a bit about, but I wouldn't say that in the long-term is -- represents our largest market.

We have some great opportunities and we are gaining traction in other types of applications that I think will represent the very significant revenue contributors in years to come.

So, as mentioned earlier, a variety of frontend power systems are in that category.

And these are frontend power systems that play -- can play a role in data centers, but also play a role in automotive applications and other types of applications.

So how are you -- what kind of progress are you making in telecom?

Should we let somebody else maybe ask a couple?

Thank you.

Okay, go ahead, yes.

Don McKenna.

Hi, Patrizio.

You have already answered some of my questions where you distinctly said you thought the bottom had already been in from a revenue standpoint.

Could you take the last three announcements on products?

And I know you talked about the gestation period, but what kind of revenue would you see those collectively generating, let's say, three or five years down the road?

I don't know if these are $10 million deals or if they are $50 million deals.

Well, it depends on which particular one we are talking about.

And --

Why don't you take them as a group?

I don't know that I want to make a one-to-one association with specific revenue contributions, but I think it is fair to say that the array of products that have been introduced and the products which are about to be introduced, for which the development cycle has ended and where we are very close to new product introductions, in the aggregate, these products are more than capable of supporting the 3x5 revenue growth goal that we have set for ourselves, and with respect to which we have suffered delays.

But to answer your question, I can say that the complement of products that have been in development and have been introduced, and are about to be introduced, support a significant multiple of our current revenue level -- 3X, possibly more than that.

Thank you.

And Jamie, if I'm reading this right, or getting this right, the cash per share is about $1.50 now, then the deferred tax credit is about $2.50 for [four]?

I assume that you are (technical difficulty) equipment?

You are simply dividing the -- if you are just dividing the cash balance as reported in the deferred tax asset as reported by the share count, I can't do that in my head but that seems reasonable.

Okay.

And plant and equipment and net, is that -- where would you see that in relation to market value?

Boy, that really is a hypothetical.

I don't think anyone is planning on liquidating any assets here, so I don't know that --

Yes, we are planning to use them to generate the revenues that we were referencing earlier, so.

Yes, it is a more complex, nuanced answer than is appropriate for this conversation.

I mean, we own all of our real estate.

We have no debt.

We have very strong balance sheet.

We just happen to have written most of our assets over time through depreciation down to modest levels.

And we are very focused on operational performance as the revenue levels get beyond historical peaks.

And that has really been the logic behind various initiatives that we have taken over the last year and a half, in terms of consolidating manufacturing activities.

Also give you a flavor with respect to this, it is more than an issue of focus and cost-effectiveness.

It is also motivated by visibility with respect to how we see our power system methodology evolving and where we see customers being interested in years to come in terms of addressing the power system needs.

So, the focus we've had with respect to VIA products and other kinds of frontend products, coupled with the motherboard, the point of load solutions, have led us to realign some of our capabilities to best support these kinds of needs from the components type of solutions that were the focus of our activities 10 or 20 years ago.

Dick Feldman.

Thanks for taking my question.

Would it be fair to say that the outlook for the fourth quarter and the early part of 2016 would be one of moderate progress based upon some of the frontend and VI Chip applications that is not associated with the data center, and that later in 2016, you should see a broader based acceleration?

I will phrase it in my own words, but I think it generally aligns with what the picture you are painting.

Again, as implied by a book-to-bill which was very close to 1 in the past quarter, we are not about to see this quarter or next quarter from what visibility we have at this point.

Any large revenue growth I think it's going to improve, but initially improve at a relatively slow pace.

And it will take and gain momentum as we progress through the middle of next year, starting with again bookings leading revenues in the second quarter of 2016.

I think as we get beyond that, the mix of products, the mix of applications, the mix of customers, will expand.

And -- but it is far enough away that I think it would be premature to set any concrete expectations beyond the general statement that, from my visibility, I am very bullish with respect to the medium to long-term.

Near-term, there is still going to be, I think, a little bit of a struggle, as suggested by Jamie.

This quarter is likely to be a small net loss.

So we are not about to get too excited about near-term performance.

But I am quite excited with respect to performance looking a couple of quarters out.

And as the VI Chip and Picor recover from their depressed levels, I would assume that should have a very beneficial impact on your gross margins?

Yes.

I think, generally speaking, is true of all of our products were, as you probably know, very much dependent on aggregate revenue levels in terms of absorbing -- well, will actually] fix costs.

And our margins in all of these products, that we achieved Picor products as well as BBU products, benefit greatly from increased volumes in better capacity utilization.

But specifically with respect to both VI Chip products and Picor products, we see great margin opportunities as we leverage the capacity that we have in place for these products with new customers and a broader range of applications.

With the new capacity that you're bringing on, has that materially raised the breakeven point?

No.

I think if anything, the initiatives we have taken over the last year, year and a half, in terms of consolidating some of the manufacturing operations and refocusing some of our satellite entities, in terms of aligning our capabilities with a more comprehensive product vision going forward, all these initiatives have gone in the right direction in terms of reducing our fixed costs.

But again, our primary motivation in taking these steps was not as much a reduction of the fixed costs, which is always a good thing, but more significantly, having greater control and greater focus with respect to those products that are really are going to contribute in a major way to the Company's future growth.

It makes no sense for us to be involved in products or custom capabilities that are not as scalable as other capabilities that we have now put in place.

And so, the focus on those represents great opportunity in terms of topline growth, while at the same time reducing our fixed cost and actually improving our margin leverage going forward.

One last question, if I may, and that is, could you give us an update on the legal proceedings with SynQor?

Well, so we are waiting for further developments in the patent office.

I think you might know that thus far we gathered in general terms two out of four patents.

Totally over and largely bi-dated.

We are waiting for the other two to follow suit.

In the interim, not much has happened in terms of the case in Texas.

Summary judgment motions are still pending and not much likely of a case going to trial in the very near-term.

So we will expect to see decisions coming down from a particular -- the patent trial, an Appeal Board that we expect to be favorable to us.

Okay, that's all I've got.

Thank you.

Thank you.

John Dillon.

Patrizio, with the push-out of the VR13 processes for servers, is there any indication of a VR12.5 bump from your current data center customer?

Possibly.

So, obviously there is any for capacity in general that, if not satisfied -- I am talking about computing capacity -- if not satisfied by the next generation of processors, needs to be satisfied by the existing one.

We will have to wait and see with respect to that.

I think the point here is that any fine-tuning of the scale with respect to VR13, will have ramifications with respect to the level of business on VR12.5.

And needless to say, that cuts both ways.

Right?

If VR13 it's accelerated, we will be selling fewer of the VR12.5.

And conversely, if it were to be further delayed, we will sell more of the older one but we would like to see the new ones come about sooner than later.

Right, because you have more customers for the newer ones, it sounds?

Because we have more opportunities for the new ones, yes.

Yes.

And you talked about that in your statements here.

Can you give us a little bit more color on the design wins that you have in different VR13 applications, the new design wins that you won this quarter?

I am not going to pinpoint applications and customers beyond saying that we are spreading our coverage suggesting the past two applications other than processors.

We are expanding our coverage applications of VR13 other than the data centers.

And the level of interest in our solution across a different place in the industry is rising considerably, because it's not a mystery that the early adopters have done well with our solution.

And they have achieved good success in terms of improved performance and capabilities.

And you talked about this before, but I haven't heard it for a while is, with all this big ramp that you are expecting in the second quarter of next year, how are you going to meet the demand?

Are you ramping your capital now for this?

Are you going to outsource some?

Are you going to be building --?

To be clear, not to potentially create confusion, the ramp that we are talking about in the second quarters, the bookings ramp, is distinct from shipping.

I'm sorry, I meant second half.

Yes, you're right, exactly.

I meant second half.

And so, as suggested earlier, we are looking at the actual ramp in shipments to -- for VR13 to start in Q3.

We have a good level of capacity in place and we expect to be able to reach production rates well above past peaks with capacity that we already have in place.

For that reason, as suggested in earlier parts of this discussion, our focus over the last six months has been to actually expand capacity in the VIA space.

We are starting from very little and we need to bring about significant capacity before we take the next step with respect to a particular chip manufacturing capacity, which is at the core of point of load, the processor type applications, as it is with respect to other kinds of applications in frontends and other areas.

We think we've got still a bit of time to take the next step.

With respect to Picor products, that is an established model that has got a good deal of scalability built in.

So, we think we are well-covered over the next few quarters with respect to, in particular, data center type of applications.

And any supercomputer bumps that you may see in the next quarter or two on the horizon?

I think that would also be VR13, so I think the timing is unfortunately the same.

Okay.

Thank you.

And just to be clear, the VR13, there is no slippage from Vicor.

It is strictly the slippage at the Intel processor.

Correct?

That is correct.

We have had --

You are ready.

-- divided solutions for quite some time now.

So, in fact, we have been advancing the capabilities beyond that which was already cable enough, literally six months ago.

Thank you very much.

I appreciate it.

I think if there is one more question, we will take it and --.

All right.

Your last question comes from the line of Don McKenna.

Please proceed.

Guys, I got cut off before I really made my point.

And what I was trying to do was to say that with the $1.50 in cash, and with $2.50 what I think is about right in the tax benefit going forward, there's only left about $5 in change from the current market price, as the value of your technology and future earnings power, which I thought was significantly undervaluing what you see as the future.

And that was the point I was trying to make.

I think you've got a believer in me.

We've invested nearly [$200 million] in being about this capability and I do expect to see a very large return on that investment, so.

Terrific.

I am a patient fellow, so.

(laughter)

Me too.

Thanks, guys.

Thanks a lot.

Thank you, Don.

So with that, we will conclude.

Talk to you next year.

Yes, talk to you all next year.

Take care.

Ladies and gentlemen, that concludes today's conference.

You may now disconnect.

Thank you for your participation and have a great day.