Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Vicor Corporation (NASDAQ:VICR)

Q3 2008 Earnings Call Transcript

November 6, 2008, 5:00 pm ET

Executives

Jamie Simms – VP, CFO and Secretary

Patrizio Vinciarelli – Chairman, President and CEO

Analysts

Ron Opel [ph] – Marston Capital

John Dillon – JB Associates

Richard Baxter – Ardour Capital Investments

Dick Feldman – Monarch Capital

Jim Bartlett – Bartlett Investors

Dan Gorman [ph]

Robert Katz – Senvest

Don McKenna – D.B. McKenna & Company

Operator

Good day, ladies and gentlemen, and welcome to the Vicor 2008 third quarter earnings result conference call. My name is Jerry, and I will be your coordinator for today. At this time, all participants are in a listen-only mode, and we will be facilitating a question and answer session towards the end of this call. (Operator instructions) I would now like to turn the presentation over to your host for today's call, Mr. Jamie Simms, CFO of Vicor Corporation. Please proceed, sir.

Jamie Simms

Thank you. Good afternoon everyone, and welcome to Vicor's quarterly conference call. I am Jamie Simms, Chief Financial Officer; and with me today is our Chief Executive Officer, Patrizio Vinciarelli, our Chief Accounting Officer, Dick Nagel, and our Treasurer, Mark Glazer. Earlier this afternoon, we issued a press release outlining our financial results for the quarter ended September 30, 2008.

The press release is available on the Investor page of our Web site, Vicorpower.com. We also have filed a Form 8-K with the SEC in association with issuing this press release. Before I begin, I remind all of you, today's conference call is being recorded and is the copyrighted property of Vicor Corporation. Any rebroadcast, reproduction or other transmission of this conference call in whole or in part without the prior written consent of Vicor is prohibited.

In addition, I also remind you various remarks we may make during this call about future expectations, trends, plans, and prospects for the company and its business constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are denoted by such words as will, would, belief, should, expect, outlook, estimate, plan, anticipate, and similar expressions that look toward future events or performance. These forward-looking statements merely reflect our current beliefs, expectations and estimates, which we share with you during our quarterly conference calls.

Forward-looking statements are based on current information that, by its nature, is dynamic and subject to rapid and even abrupt changes. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied in our statements. Such risks and uncertainties are discussed in today's press release as well as our most recent reports on forms 10-K and 10-Q filed with the SEC.

A replay of this conference call will be available beginning shortly upon its conclusion through November 21, by calling 888-286-8010 and using the pass code 63602476. In addition, a webcast replay of the conference will be available on the Investor Relations page of our Web site, beginning shortly upon its conclusion. However, the information provided during the call is accurate only as of the date of the call. Vicor undertakes no obligation to update any of the statements made during this call, and you should not rely upon them after the conclusion of the call. Patrizio and I have each prepared remarks, after which we will take your questions. Patrizio?

Patrizio Vinciarelli

Thanks, Jamie. Good afternoon everyone, and welcome to our third quarter conference call. As stated in the afternoon’s press release, despite the weakening global economy, consolidated revenues for the third quarter increased by 7.5% to approximately $51 million, compared to $47.7 million for the third quarter 2007. Sequentially, revenue increased 4% on a quarter over quarter basis from the $49.3 million generated in the second quarter of 2008.

On a year to date basis, nine months revenue for 2008 was 8.6% ahead of revenue for the corresponding nine months of 2007. The consolidated book to bill ratio for the third quarter of 2008 expanded to 1.2 to 1.0 as compared to essentially 1 to 1 for the second quarter 2008. Backlog at the end of the third quarter of 2008 was $56.4 million as compared to $46.3 million at the end of the second quarter.

As a caution before, our quarterly book to bill ratios and backlog levels are not necessarily accurate predictors of sequential quarterly performance. Nevertheless, we are pleased to have had relatively strong booking for the third quarter, up 24% quarter over quarter sequentially, which contributed to a healthy backlog at the end of the third quarter.

Allow me to turn to the third quarter performance and outlook for each of our business units. Revenue from our brick business unit, which represented approximately 90% of consolidated revenue for the third quarter decreased slightly sequentially and over revenue for the third quarter 2007. The brick unit experienced a 32% [ph] increase in orders for the third quarter, but once again, I caution listeners to not interpret this increase as an indicator of sustained revenue growth as some of the bookings contributed to the substantial increase were from certain customers placing single orders in the third quarter for volumes of product that we anticipated would be ordered in future quarters. So, over the next few quarters, we expect lower bookings from the same customers.

We do not disclose the share of any particular market we compete in, but I can highlight that the brick business unit is doing virtually well domestically reflect in industrial and defense markets with a wide range of products. While, domestically we are doing well, our international business shows signs of weakness. European order flow, in particular, slowed early in the third quarter. Similarly, we are experiencing softening of order flow in Japan and China. While we also do not disclose profitability of our individual business units, I am pleased to say the bricks units’ gross margin as a percentage of revenue was stable sequentially, and on a year to date basis remained higher than the gross margin achieved through the third quarter of 2007. The increase in revenue and improved product mix, and the continuous improvement in manufacturing efficiency supported the bricks unit third quarter gross margin.

Everyone is aware of the impending state of recession and uncertainty in the global economy and the brick unit is not immune to negative economic trends. While Vicor should not be impacted directed by the credit crisis, as we are well capitalized with no need to borrow money, some of our customers are being affected by the lack of short term credit. However, our DSOs are steady and we have not experienced a meaningful change in the quality or aging of our receivables. To close on the brick unit, I remind listeners I've addressed during the earnings call for the last two quarters, our expectation of the brick revenue growth will be modest for the full year. While the third quarter performance of the brick unit was firm, we remain concerned about overall global economic conditions and stand by our earlier statement that full year revenue growth will be modest. The aforementioned increase in third quarter bookings may not necessarily translate into a proportionate increase in fourth quarter revenue. However, while the economy appears to have entered the recession, we do not anticipate a precipitous decline in revenue from our brick unit in the short term given our vast mix of business and well established market position.

Further, we don't anticipate a market decline in the bricks unit profitability as we have put in place a manufacturing model that allows us to adapt quickly to changing circumstances. As I hope listeners know well by now, Vicor does not pursue the commodity business that our competitors do. Their reliance on volatile markets makes their performance more vulnerable to having demand in their targeted markets. In contrast, we have a wide base of customers that count on us for advanced power solutions, not commodity power systems.

I will now turn to our V-I Chip unit, which continues to make good progress with component products in our Factorized Power Systems. I've discussed on the last two earnings call, the status of some high volume shipments that have been delayed by a major customer. The revenue ramp that we expected to start in mid-2008 has been pushed out into 2009, and our third quarter bookings reflect this push out. Nevertheless, V-I Chip third quarter’s product revenues increased about 38% sequentially and on a year to date basis, is a 157% ahead of the revenue generated through third quarter 2007. Based on the bookings trends so far in the fourth quarter, we anticipate V-I Chip’s revenue for the full year will fall short of the doubling I had referred to during our second quarter call, despite being ahead through three quarters, as V-I Chip had a relatively strong fourth quarter in 2007 and fourth quarter 2008 will not be as strong as we had earlier anticipated.

Of note, V-I Chip achieved a developmental milestone by generating a gross profit, its first, for the month of September. Please note, this gross profit includes the manufacture of V-I Chip for consumption by our brick unit in VIBricks, and as such does not reflect a customary GAAP presentation. However, we believe this milestone is representative of the effort made by the V-I Chip manufacturing team to reduce costs. While near term gross margin for V-I Chip may vary due to short term variance in customer and product mix, progress toward a sustained profitable manufacturing model is important. V-I Chip's initiative with our brick unit to design and market VIBricks accelerated during the third quarter. As we discussed, the VIBrick incorporates an innovative V-I Chip technology in a form factor that offers the mechanical and thermal management flexibilities of traditional bricks. In addition, a complementary circuitry can be added to the package to enable innovative high-performance integrated solutions while doing so in the smallest footprint developed. Engineering and marketing teams for brick and V-I business units have been identifying new opportunities for VIBricks, and we expect to be rolling out a range of innovative VIBrick products in 2009.

Turning to Picor, I'm pleased to report that it continued to make progress on the execution of its synergic strategy, while still in the early stages of evolving to a merchant supplier model, Picor is experiencing positive trends. Picor is rolling now new products that complement V-I Chip and early adopters of Vicor Power are seeing the advantages of incorporating fiber for management products into comprehensive solutions.

I want to conclude my formal remarks by stating that while in recent years, we’ve been able to invest nearly $30 million per year in new products and new markets without losing money. As Chairman and CEO, I am not satisfied with the complex [ph] current financial performance. We intend to make our investments more productive and our operations more efficient. We are concerned by the challenges likely to develop as a result of a weakening global economy. Our ability to return to robust profitability as quickly as we like may be constrained by softened demand in many of our markets. And this makes limiting our operating expenses a bigger imperative. However, Vicor remains well capitalized and is well positioned to weather the anticipated recession. Also with our efficient brick business model and the momentum we are seeing in these rapid technology products pioneered by V-I Chip and Picor, well positioned for long term growth and improved profitability.

I will now turn the call over to Jamie, who will address our P&L and balance sheet in some detail. Jamie?

Jamie Simms

Thank you, Patrizio. As Patrizio has addressed both consolidated and unit level revenue, I will focus my remarks on expenses, profitability, and our liquidity. Vicor’s consolidated gross margin was $21.9 million for the third quarter of ‘08, a sequential increase of approximately 4% from the $21.1 million total generated in the second quarter of ‘08. This $21.9 million total was 22% higher than the $17.9 million total generated for the corresponding period a year ago.

Gross margin, as a percentage of revenue was 42.7% for the third quarter, representing a 0.10% decrease on a sequential basis from the 42.8% for the second quarter. The third quarter gross margin of 42.7% was well ahead of the 37.5% realized for the third quarter of 2007. As Patrizio stated earlier when speaking to the performance of our individual business units, the brick units gross margin was stable from the second quarter to third quarter reflecting an increase in revenue, an improved mix of higher end products, improved manufacturing yields, and product quality resulting in lower scrap costs and lower warranty costs, as well as the continues efforts to improve manufacturing efficiency. Of note, brick productivity benefited in the third quarter from the full utilization of equipment investments made earlier in the year in our Andover plant.

Returning to the consolidated income statement for the quarter, we generated operating income of $399,000, an increase sequentially from second quarter’s operating loss of $765,000. Our operating profit was largely a consequence of the increased revenue for the quarter as many of our operating expenses do not vary meaningfully with sequential changes in revenue.

Research and development expense, which is largely associated with our V-I Chip unit, declined 3.5% sequentially from $8.1 million in the second quarter to $7.8 million in the third quarter, which represents less than 1.5% increase over the $7.7 million expense for the third quarter of 2007. As a percentage of consolidated revenues, research and development decreased from 16.2% for the third quarter of 2007 to 15.2% for the current quarter primarily due to the increase in revenues. We expect to spend a similar dollar amount on R&D in the fourth quarter.

Selling, general administrative expenses declined less than 1% sequentially from $13.8 million in the second quarter to $13.7 million in the third quarter. However, SG&A expenses for the quarter increased $1.4 million or 11.3% over the $12.3 million expense for the same period in 2007. As a percentage of consolidated revenue, SG&A increased to 26.7% for the current quarter and 25.8% for the third quarter of ‘07. Approximately 70% of the Q3 ‘07 to Q3 ‘08 increase in SG&A was associated with increased compensation costs. This increase was largely associated with new hires in our V-I Chip unit, certain Vicor integration architect subsidiaries and our Japanese unit.

Turning to interest income, cash returns on our investments for the third quarter of ‘08 totaled only $356,000, while such income for the third quarter of ‘07 was $983,000. In past years, our considerable investment portfolio yielded attractive returns due to both higher investment balances and higher interest rates. However, our balance of cash and equivalents, inclusive of cash investments classified as long term has declined in recent years and as we are all aware, interest rates have been, for some time, at historically low levels. As such, interest income has gone from being a strong recurring contributor to EPS and cash flow to relatively modest contributor.

Vicor generated cash from operations of approximately $1.3 million, down 65.8% from the $3.8 million generated in the second quarter of 2008. Capital expenditures for the third quarter totaled $2.4 million, which is roughly consistent with the CapEx from prior quarters. As Vicor paid a dividend during the third quarter, our cash and cash equivalents balance ended the quarter at $25.4 million. The company’s total cash inclusive of restricted cash and short term investments amounted to $28.3 million. When combined with our auction rate securities at their carrying value, our cash and investments totaled $64.8 million at the end of the quarter. We had no debt and believe that we have more than adequate resources and liquidity to fund our operations, while paying a recurring dividend.

I will now update listeners on our investments in auction rate securities. As has been well documented and discussed during the prior quarter’s call, Vicor has approximately $38.5 million at par value invested in auction securities that are currently illiquid as the broker-dealers through which the company invested in these securities stopped supporting the auctions of those securities in early February 2008. I invite listeners to review in our 10-Q the extensive discussion of these investments and the valuation thereof. For the third quarter, we impaired the value of these securities by a modest additional amount bringing the total impairment to approximately $2.3 million. I remind listeners that this is regarded as a temporary impairment and does not reflect a charge to our income statement, but is recorded as an unrealized loss. No taxes can accumulate at other comprehensive income or loss in the shareholders’ equity section of our balance sheet.

We have recently received a settlement proposal from UBS through which Vicor had purchased $18.3 million of auction rate securities. The terms of the settlement are described in our press release and 10-Q, so I won’t go into them here. Management, advised by company counsel, is considering the proposal which expires on November 14. The remaining $20.1 million of auction rate securities in our portfolio are held with Bank of America. On September 10, 2008, Bank of America issued a press release announcing an agreement in principle with the Massachusetts Security Division under which Bank of America would offer to purchase at par auction rate securities held by certain of its customers. The press release indicates that under the terms of the agreement in principle, the repurchase program applies to businesses with account values up to $10 million. As such, Vicor with $20.1 million does not appear to be eligible and has not received an offer to participate in the announced repurchase program and has not otherwise received a proposed liquidity solution from Bank of America to date. We hope to resolve the status of these investments in the near future.

This concludes management's prepared remarks, so we are happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) You have a question from the line of Ron Opel [ph]. Please proceed.

Ron Opel – Marston Capital

Yes, Patrizio, earlier this year you commented on anticipated product introductions, scheduled product introductions for VIBricks, including one fairly – one or two fairly major ones that I believe include AC to DC conversion. I wonder if you could comment on the progress of these introductions and related to dine-in [ph] activity.

Patrizio Vinciarelli

So we've had some delays with that product development, motivated by achieving certain levels of functionality and performance. The cause of these delays, the scheduled introductions have moved into a timeframe which, at this point, we expect to be early 2009.

Ron Opel – Marston Capital

There are no unforeseen difficulties that represent possible roadblocks – serious roadblocks, are there?

Patrizio Vinciarelli

No, no roadblocks. They have to do with refining certain functionalities. And we are going through the sequence of steps necessary to achieve closure.

Ron Opel – Marston Capital

Does potential customer interest in these products remain high based on what you are seeing?

Patrizio Vinciarelli

Yes. There is extremely high interest, both directly and indirectly through our licensee. So we are very focused on this development, both as V-I Chip product and as a VIBrick product, and that was the basis for your question. It is the highest priority project in the business, and it’s getting all the necessary resource of cash, and it is progressing along well. Unfortunately it's taking longer than expected to bring it to fruition.

Ron Opel – Marston Capital

Okay. And my second question concerns the order pattern, since the overall order pattern since the beginning of the fourth quarter and particularly in the last few weeks, would you call, would you describe it as a dramatic fall off in the order patter or a more moderate decline?

Patrizio Vinciarelli

Well, I think at this time last quarter, when we had the corresponding conference call, I made reference to the fact that as of that time the third quarter bookings outlook look very promising. It turned out to be that way because we were substantially ahead of where we had been of the corresponding time in the second quarter. I think this time around the order pattern in the first month looks softer by a similar percentage in the opposite direction. So, and we believe that’s reflective of what is going on around the world and brakes being applied in various industries with various customers with respect to projects and programs.

Ron Opel – Marston Capital

Thank you.

Operator

You have a question from the line of John Dillon. Please proceed.

John Dillon – JB Associates

Hi, Patrizio. I'm wondering if you can give us a status update on the LCD market.

Patrizio Vinciarelli

Well, to some extent, I’ve answered that question earlier in answering Ron Opel's question because that opportunity relates to the AC to DC product that he asked about. So, as indicated a moment ago, there is tremendous interest coming from different sources, directly and indirectly. And the gaining element at this point is shooting closer, which is back to this particular V-I Chip.

John Dillon – JB Associates

Will this affect the launch kind of some of the LCD TVs?

Patrizio Vinciarelli

Well, as we understand it, we are a factor with respect to win the opportunity in 2009. And based on the discussions [ph] of meeting the latest schedule, this schedule is consistent with being factored into production in the second half of 2009.

John Dillon – JB Associates

Okay. You'll still see the introduction as you expected. You expect to be there by the second half of ‘09 with production-type products and production quantities?

Patrizio Vinciarelli

That is our current expectation.

John Dillon – JB Associates

And do you still expect license revenue this year?

Patrizio Vinciarelli

Well, not from that particular source. But, as I mentioned in an earlier phone call, we have been deriving some licensing income. The accounting treatment is such that it doesn't flow into the income statement, but on a diluted basis over a long timeframe just because of how the accounting of it works out.

John Dillon – JB Associates

So, this is in a different market then on the LCD?

Patrizio Vinciarelli

That’s correct.

John Dillon – JB Associates

Can you say what market that’s in?

Patrizio Vinciarelli

No.

John Dillon – JB Associates

Is there any activity in the gaming market? At one time that seemed to be a target for you guys.

Patrizio Vinciarelli

Not at this point in time.

John Dillon – JB Associates

Okay. I will get back in the queue. Thank you.

Patrizio Vinciarelli

Thank you.

Operator

You have a question from the line of Richard Baxter. Please proceed.

Richard Baxter – Ardour Capital Investments

Thank you. I would like to just hear some of the visibility that you have into some of your different market with customers, how some are more of a month to month and other ones are more of a contract basis and how those play into your sales? Thank you. Just roughly. I mean, just – and how some customer segments you're able to see farther in, such as maybe industrial or military markets versus consumer.

Patrizio Vinciarelli

Yes. So we have markets and applications that afford the greater visibility. And that’s for different reasons. In some cases that's to do with the fact that the programs that have a long gestation period with a high degree of visibility, which is factored to that. In other cases it’s the nature of the products themselves. And that results in high visibility with respect to certain elements of the total mix. As you might imagine, given the current economic environment with respect to other significant elements, there is not the same level of visibility. And let’s say, in a very averse environment, to a different degree, everything can suffer. Even programs where we would like to think there is greater visibility, but take capital equipment as an example, given the current environment, the level of investment the companies are likely to make in capital equipment is bound to be revised. Even in instances we were given the (inaudible) of the capital equipment, would like to think this rationale is different, but exceptions are rare. And generally speaking, we should expect to see a softening demand across many markets.

Richard Baxter – Ardour Capital Investments

Thank you.

Operator

You have a question from the line of Dick Feldman. Please proceed.

Dick Feldman – Monarch Capital

Patrizio, I’ve got two questions. First about the surge in booking in the brick business, you indicated that those orders would extend over a longer than normal period of time. What was the motivation for your customers to do that?

Patrizio Vinciarelli

I can't read their minds. I think that the most logical explanation would be that there is certain element of randomness to that. Let’s say, at this time last quarter the trend was very strong in spite of an environment that was already gloomy and deteriorated. We do know that orders that came in – significant orders that came in for bricks in the third quarter were book ahead of their schedule date, because customers ended up placing these orders ahead of when they were expected to place them, I think for reason that I don’t believe we really understand.

Dick Feldman – Monarch Capital

The other question I had relates to the AC to DC brick. Does that have immediate applicability outside of the LCD TV market?

Patrizio Vinciarelli

Yes. This is a general purpose power capability that was catalyzed by a unique set of requirements in thin flat-panel displays or extra-thin flat-panel displays, I should say. But has broad applicability wherever a very high density, high efficiency, particularly thin power system is needed and given that the world goes around largely in AC power sources, you can envision a lot of different opportunities for these kinds of products, both in consumer markets, industrial markets, and other kind of markets.

Dick Feldman – Monarch Capital

But your highest priority would be getting it into the TV market first?

Patrizio Vinciarelli

Yes. For reasons that we’ve discussed in the past. So, the product development has been strictly driven from the specifications and unique requirements of the thin large panel display applications that have been targeted in concert with our partner and licensee. But as it happens, that product development isn't only leveraged with those applications. It's really broadly applicable to many other types of applications. And so these are common denominator capability that we intend to leverage to the fullest, both as a V-I Chip capability and as a VIBrick capability.

Dick Feldman – Monarch Capital

In past calls you have talked about the potentials in the laptop market. Would this still be a logical market for these products?

Patrizio Vinciarelli

For lower-powered versions of that class of product. The original product that we've been developing was targeted for 300 watt, 330 watt capability. In mobile applications, the power requirement is significantly lower than that. But the derivatives of that product that are applicable are lower power levels.

Dick Feldman – Monarch Capital

Okay. Thank you.

Patrizio Vinciarelli

Thank you.

Operator

You have a question from the line of Jim Bartlett. Please proceed.

Jim Bartlett – Bartlett Investors

Yes, could you address both the server market and ATE market, what is happening there as well as anything in the military area.

Patrizio Vinciarelli

Okay. Well, in the server market, we are seeing progress with – in terms of expanding to fully factorized power system type applications with an early adopter of factorized power, as well as broadening opportunities with other server OEMs. In the test equipment market, there is a great interest in the US, in Japan. As you might know, or I am sure you know the test market nowadays is essentially dead. There is not – in terms of current productivity, much going on given what has been going on with the semiconductor market and given how that test equipment market works as is in effect a derivative of the semiconductor market. So, all of the activities relating to test equipment has to do with new programs, scheduled for future introduction. I think you also asked about the defense market, and the defense market is going relatively strong.

Any further questions?

Operator

We have a question from the line of Dan Gorman [ph]. Please proceed.

Dan Gorman

Yes. I was wondering if you could give us an idea of the size of the market that might be available from all companies in the server market. Is it a $20 million or $50 million or what size would you characterize it?

Patrizio Vinciarelli

It's much larger than that, but it will take time to develop.

Dan Gorman

Thank you.

Operator

You have a question from the line of John Dillon. Please proceed.

John Dillon – JB Associates

Patrizio, I am wondering how the market acceptance for the smaller one-half V-I Chip, how is that chip received in the market?

Patrizio Vinciarelli

We have a lot of interest. There hasn't been really a lot of time. But generally speaking, we know from customers that for quite a lot of applications the half-size chip is generally speaking, a better fit to typical requirements. So, the larger chips that are being part of first generation V-I Chip products, typically tend to have a power capability or a current capability that goes beyond the requirements of typical applications. They were developed first for combinational reasons because, first of all, our level of (inaudible) integration as first-generation chips did allow – did not enable a fraction devices. So, we were dependent on fiber completing a second generation chip set to enable the fractional chips, which is now in place. And with that I think there is an expanding set of opportunities with half-size PRMs, half-size BTMs and BCMs. Some of these products had been recently introduced. There is a lot more coming in future months and quarters.

John Dillon – JB Associates

With these new fractional-size chips, will they address a much – I mean a substantially higher quantity market and will you be able to be price competitive in that market with those chips?

Patrizio Vinciarelli

They expand the market opportunity because they represent a better fit. So case in point, if somebody needed a solution at the point of load at a bigger number, 100 watt, let’s say, 50 amperes and could only choose from a full, big capability at 200 watts or 300 watts and higher current rating than needed for the particular application, you would be in effect, handicapped in two respects; first of all, from a cost perspective, you’d have to pay for a full chip where a half chip would otherwise do. And obviously that’s a significant cost handicap. But also from a performance perspective, you wouldn't be deriving all of the benefits of density and to some extent even efficiency that the half chip enables. So, for applications that tend to be more typical at lower power and current levels, we believe the availability of half chips is going to represent a major step forward in terms of expanding the market reach and the cost effectiveness of factorized power solution.

John Dillon – JB Associates

I would think that this – I mean, it sounds to me like then you should be able to get into like lower end server type markets or not quite as high end as you are now, and also possibly some smaller LCD type markets. Is that the target? Is that what you're shooting for those types of things?

Patrizio Vinciarelli

We – let’s not get ahead of ourselves. We need to take one step at a time, and it begins with getting the product development done and having products that are qualified and ready to be introduced and once that happens that enable us to take the next set of steps, and I think we're all going to have to be patient with respect to these kinds of cycles and gestation periods. Unfortunately, they are long getting in. The good news is that once they're done they also tend to last for a long time.

John Dillon – JB Associates

What about with the stock price so low? Are there any plans for buying back your stock?

Patrizio Vinciarelli

Well, as I have commented in the past, we historically have been active. We’ve repurchased well over $100 million worth of stock. You might recall this kind of question being asked of us as recently as three or six months ago with the price of stock usually higher than where it is today. And I'm sure we might have gotten criticized for not acting at that level. Obviously we didn't know what was about to happen in the financial markets and in Main Street. I'm glad that we were cautious and kept our palette dry at that point in time. I am still cautious with respect to what is going on around us. But I think you can expect that at the right point in time, as we’ve done in the past, we are not going to hesitate to get aggressive with respect to buying back stock.

John Dillon – JB Associates

Great. Great. One other question. What market was the Picor win in?

Patrizio Vinciarelli

Well, Picor strategy is broad based. It’s going after strategic accounts as well as general accounts. And they will obviously take some time to develop because Picor is further behind V-I Chip in terms of its stage of development. So, there again, we will need to be realistic in terms of expectations, and conservative. But, having said that, I have great expectations with respect to the technology product and market opportunity of Picor.

John Dillon – JB Associates

Right. But didn't you announce a win for Picor in the –

Patrizio Vinciarelli

Yes, Picor has recently achieved a very significant design win that will result in very significant revenues for Picor, about a year, year and a half out.

John Dillon – JB Associates

And what market is that in? What market?

Patrizio Vinciarelli

It’s in the server market.

John Dillon – JB Associates

Great. Great. Thank you, Patrizio. And by the way, congratulations on the bookings. That's awesome.

Patrizio Vinciarelli

Thank you.

Operator

We have a question from the line of Ron Opel. Please proceed.

Ron Opel – Marston Capital

Thank you. In the ATE, automatic test equipment, we know that it's dead at this point, and it’s usually either a plus or a zero. Does that condition apply to not only to orders but also to design-ins or are you seeing continuing design-ins progress in the ATE market?

Patrizio Vinciarelli

We are seeing a lot of design-in work. And the strange thing or some peculiar thing relating to the test equipment market is that paradoxically when the level of activity goes down in terms of production volumes for obvious reasons is a time when these companies need to – the ones who can afford it need to invest a lot in new products and new capabilities. So, the designing activity is going on at high pace, while on the other hand the level of business activity is fortunately low.

Ron Opel – Marston Capital

And the level of order activity or not in the server market, that's not as – that doesn't have as extreme swings as the ATE market. Does it?

Patrizio Vinciarelli

Well, I guess time will tell. But case in point, if buyers of high-end [ph] servers include banks, at some point given what is going on, I wouldn't be surprised if the level of capital equipment investment might be somewhat diminished relative to earlier expectations.

Ron Opel – Marston Capital

With respect to Vicor's own capital expenditure pattern, have there been – have you made any changes recently in your budget for either this year or next year?

Patrizio Vinciarelli

Not yet. But as suggested in the prepared remarks we are taking a closer and closer look at posturing ourselves all around, particularly when it comes to operating expense levels, to make sure that we are well prepared for what is coming our way. And being conservative about it in terms of the range of scenarios that maybe taking place in the next year or so, without compromising the longer-term opportunity to any degree.

Ron Opel – Marston Capital

Right. Thanks very much.

Patrizio Vinciarelli

Thank you.

Operator

You have a question from the line of Robert Katz. Please proceed.

Robert Katz – Senvest

Hi, Patrizio. Congratulations on a good bookings quarter. I have a question, how much of your revenues were turns business versus previous orders that you were shipping into for the quarter?

Patrizio Vinciarelli

I don’t think there was any fundamental change in the third quarter. We’ve entered the fourth quarter with somewhat higher fill just because the bookings were stronger in the third quarter. So, we expect to have, in effect, less fill within the fourth quarter than we had in the third.

Robert Katz – Senvest

You were mentioning that bookings in the fourth quarter have been trending almost down 20% versus up 20%. Is that right?

Patrizio Vinciarelli

Yes, I think, this time last quarter, they were up around 30%. They’ve been down about 20% relative to the third quarter within the month of October.

Robert Katz – Senvest

Okay. That doesn't mean – you don't think that would translate into revenues being down 20%. I know you are not giving –

Patrizio Vinciarelli

I think, the best expectation for revenues for the fourth quarter would be best characterized as essentially flat. It could be slightly up.

Robert Katz – Senvest

Okay. For next year you're more cautious, and which leads me to my next line of questioning. You're roughly a few hundred million dollar company a year in revenues, and kind of thinking around break-even, what can you do to change that, especially in light if your revenues could be trending down in '09 if economic situation –?

Patrizio Vinciarelli

I think that there is a two-prong answer to that question. So the first part has to do with getting from 200 to substantially greater number. And obviously we are focused on that. The short term vagaries of the economy notwithstanding, that has to do with the investment in products and new markets and strategic sales opportunities, growing the range of opportunities that we can reach. I believe that there is significant growth opportunity for V-I Chip for the brick business unit in time leveraging V-I Chip inside strategy and for Picor. And that’s obviously the best way to bring about better financial performance by growing the top line substantially. The second component has to do with operating expense limitations. We’ve been running as high as 42%, 43% of top line in terms of revenue expenses with a healthy component of R&D. Obviously the best way to bring operating expense levels down, again, is by growing the top line. But we also suggested in the prepared remarks, we are looking at all other options to contain operating expense levels, particularly now that the environment is potentially is difficult as it might be for a while.

Robert Katz – Senvest

Last year you ran your OpEx as low as $18.5 million to $20 million. Are you looking at basically – is there a range you are looking to achieve?

Patrizio Vinciarelli

Yes, my target is to get from the low 40s down – first target to something around 30%. And to get there we will probably want to count on a substantial increase in top line. So that will take some time to happen, particularly given the short term outlook in the markets. But part of it is going to be not just top line growth. It's going to be discipline with respect to operating efficiencies.

Robert Katz – Senvest

Do you expect your top line to grow in 2009 or especially in the first half of 2009?

Patrizio Vinciarelli

Well, it’s hard to make forecasts given the current environment and how abrupt change may be taking place, given the current environment, which is really impossible to forecast. So, because of that it would be foolish of us to stick our neck out with respect to that. Had it not been for what is currently happening, we would have seen a significant step up in the top line in 2009. Given the current environment we will have to just withdraw that expectation and see what happens. And it could come out to be better than one might fear at this point. But it would be risky to ignore what is going on.

Robert Katz – Senvest

So, in the short term you are going to take down your OpEx regardless, just be more conservative.

Patrizio Vinciarelli

We want to take a very hard look at what options we have to improve our operational efficiencies with respect to reengineering ourselves to advantage.

Robert Katz – Senvest

Is there any other opportunities on the gross margin side to get a better mix for, like, the V-I Chip with a higher margin, condition your customer base to better margin shift?

Patrizio Vinciarelli

When it comes to V-I Chip, the biggest factor in margins in the short term is going to be volume. After that comes cost reduction with respect to, in particular, the material, the billing material. So as indicated in the prepared remarks, we’d be making progress with respect to getting the cost of V-I Chips down and the team ought to be congratulated with respect to that. I would like to see a greater rate of progress which is purely [ph] dependent on volumes at this point.

Robert Katz – Senvest

Okay. Good luck and I’ll be waiting for some of these new opportunities to materialize. We'll just have to wait a few more quarters.

Patrizio Vinciarelli

Thank you.

Operator

You have a question from the line of Don McKenna. Please proceed.

Don McKenna – D.B. McKenna & Company

Patrizio, I wanted to address the R&D issue also and ask what percentage of that expense is in-house versus contracted out?

Patrizio Vinciarelli

Well, it’s mostly in-house.

Don McKenna – D.B. McKenna & Company

The last time we had a significant down turn, if you don’t mind me saying, you are quite paternalistic about the approach to staffing and going back to even shortened workweeks and alternating times and keeping everybody's benefits afloat waiting for the economy to come back. It sounds like you are taking a bit different approach this time around, is that right?

Patrizio Vinciarelli

Well, I guess we should all learn from past experiences. So we obviously want to do what is best for the business and that’s the best thing for not just shareholders, but employees, long term employees in particular.

Don McKenna – D.B. McKenna & Company

Thank you.

Operator

We have a question from the line of Jim Bartlett. Please proceed.

Jim Bartlett – Bartlett Investors

Just to understand the 32% increase in orders in the book business, was that heavily weighted toward VIBricks or what area was that in?

Patrizio Vinciarelli

There was one significant VIBrick order, but there were other factors, as suggested in the prepared remarks, including some classic bricks where certain customer orders that had been forecasted to take place in the fourth [ph] quarter, for some reason get moved into the third. And as indicated earlier, we don’t have enough visibility to tell what’s behind that. The best guess would be that for some reason the program got moved in. That happens from time to time. But it would be dangerous to read too much into it, particularly given what is going on around us.

Jim Bartlett – Bartlett Investors

And what is the outlook for VIBrick in 2009?

Patrizio Vinciarelli

There's positive developments in terms of an expanding several opportunities. I think that the major area of opportunity is in expanding VIBrick offerings to provide a more package options that leverage in particular half chip, more functionalities, both in terms of point-of-load devices and AC to DC solutions.

Jim Bartlett – Bartlett Investors

And those AC to DC solutions should be available in early ‘09?

Patrizio Vinciarelli

Yes. Those are the ones that as I answered in – as a comment in answer to an earlier question, were unfortunately delayed because of a V-I Chip development slip. But we believe we are making good progress and that we are converging on a product that meets all the requirements and we expect that we will be able to bring that to fruition in the first quarter of ‘09.

Jim Bartlett – Bartlett Investors

And if you did, what is the lag time between orders on that product?

Patrizio Vinciarelli

Well, it depends on what kind of application. So, as suggested earlier, there are opportunities in flat panel displays in second half of ‘09. There are other kinds of opportunities with different gestation periods.

Jim Bartlett – Bartlett Investors

Thank you.

Operator

Showing no further questions at this time.

Patrizio Vinciarelli

Thank you. Talk to you in few months.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Vicor Corporation Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts