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Vicor Corporation (NASDAQ:VICR)

Q4 2013 Results Earnings Conference Call

March 13, 2014 05:00 PM ET

Executives

James Simms - Chief Financial Officer

Dr. Patrizio Vinciarelli - Chief Executive Officer

Analysts

John Dillon - D&B Capital

Don McKenna - D.B. McKenna

Jim Bartlett - Bartlett Investors

Operator

Good day, ladies and gentlemen. And welcome to the Vicor Earnings Results for the Fourth Quarter and Year Ended December 31, 2013 Conference Call. My name is Esteban, and I’ll 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 introduce your hosts for today James Simms, CFO of Vicor Corporation and Dr. Patrizio Vinciarelli, CEO of Vicor Corporation. Please proceed.

James Simms

Thank you, Esteban. Good afternoon and welcome to Vicor’s conference call for the fourth quarter and full year ended December 31, 2013. I am Jamie Simms, CFO and with me here in Andover is Patrizio Vinciarelli, CEO and Dick Nagel, Chief Accounting Officer or CAO.

Today, we issued a press release summarizing our financial results for the fourth quarter and full year. This press release is available on the Investor page of our website, www.vicorpower.com. We have 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 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 any of the 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 28, 2014. The replay dial-in number is 888-286-8010 and the listener pass code is 88759524. In addition, a webcast replay of the conference call will be available on the Investor Relations page of our website, beginning shortly upon its conclusion.

I’ll start this evening’s call with a review of our financial performance for the fourth quarter and full year and Patrizio will follow with his comments after which we will take your questions.

As set forth in this afternoon’s press release, Vicor reported a net loss for the fourth quarter of $13.1 million, representing a net loss of $0.34 per share, compared to a net loss of $932,000 or $0.02 per share for third quarter of 2013 and a net loss of $4.8 million or $0.12 per share for the fourth quarter of 2012. For all of 2013, our net loss was $23.6 million, representing a net loss of $0.60 per share, compared to a net loss of $4.1 million or $0.10 per share for all of 2012.

In calculating Q4, EPS we used 38,539,000 shares as total basic shares, while for the full year calculation we used 39,196,000 reflecting the influence of a higher Q1 share count, prior to the completion of our two tender offers during Q2 of 2013.

As noted in today's press release as well as earlier in the press release of March 6, we increased the reserve against all remaining net federal deferred tax assets on our balance sheet as of December 31, by approximately $10.2 million, which has been recorded on our income statement as an increase in our fourth quarter tax provision.

The impact of this non-cash increase in our quarterly tax provision was to increase reported Q4 loss per share by approximately $0.26. The other significant driver of our Q4 loss was a market increase in legal fees.

For the fourth quarter, legal fees on a per share basis exceeded $0.06. As such including the impact of the increase in the allowance against deferred tax assets and the increased legal fees, we operated near breakeven for Q4.

We had expected to be returning to profitability perhaps as soon as the fourth quarter, as we have been forecasting the recovery in important markets and geographies that would have contributed to this return to profitability. However, as reflected in our decision to take a full reserve against our deferred tax assets. We realized during the fourth quarter that these markets and geographies were not showing the improvement we had expected. I will address these markets and geographies in a moment and I will return to our tax position and the decision to fully reserve our deferred tax assets at the end of my remarks.

Vicor’s consolidated revenue for the fourth quarter of 2013 was essentially unchanged from the third quarter increasing $167,000 or a third of a percent. The Q4 total of $55.3 million compares to revenue of $50.4 million for the fourth quarter of 2012, representing a year-over-year quarterly increase of 9.6%. For the full year consolidated revenue declined $19.4 million or 8.9%. This year-over-year decline largely is attributable to the weakness of certain domestic market segments notably defense electronics. For example our custom systems business which primarily serves military customers saw a sales decline over 20% for 2013.

International revenue rose to a record level of 64% of total revenue for the fourth quarter, up from 61% for the third quarter. We report revenue based on the location of the customer to which our products are shipped. The BBUs exports increased 11% sequentially reflecting a welcome recovery in Japan shipments and strength in China, while North American quarterly sales declined approximately 12%. These shifts in BBU volume toward exports along with the sustained level of V*I Chip shipments to Asian contract manufacturers looking for our domestic OEM customers contributed to the record level of international activity for the quarter.

Turns revenue meaning orders booked and shipped within the quarter; declined for the fourth consecutive quarter to approximately 31% of revenue for the fourth quarter, down from 38% for the third quarter and a peak of 47% for the first quarter of the year, the highest level in recent memory. Generally a lower turns percentage implies greater visibility of our customers and in-turn our own forecast. However given the weakness of bookings in Q4 and booking activities so far during the first quarter of 2014 we likely will see higher turns levels this quarter.

Recognized sell through revenue for the fourth quarter associated with shipments by our stocking distributors was flat from quarter-to-quarter at 2.1 million. Consolidated gross profit margin rose slightly on a sequential basis increasing to 42.4% for Q4 from 41.7% for Q3 and 39.9% for Q4 2012. For all of 2013 our consolidated gross profit margin was 40.9% down slightly from 41.9% for 2012.

Recent variability in our quarterly consolidated gross profit margin is attributable to V*I Chip volume variances. We are pleased to report V*I Chip achieved improved gross margins for the fourth quarter reflecting sustained production of VTM and half PRM modules for data center applications.

Consolidated operating expenses rose 11.2% sequentially and 8% on an annual basis although the annual change reflects severance recorded earlier in 2013. For the fourth quarter, operating expenses excluding legal fees we are up less than 2%. This increase was largely a result of R&D and engineering charges associated with the relatively high number of new products in the final stages of design and qualification. We also experienced increases in certain international sales and marketing costs tied to our new offices in Shanghai, Seoul and Bangalore, but these costs were largely offset by the benefits of expense reductions associated with the restructuring of certain of our international operations notably in Europe. Total headcounts stood at 1002 as of December 31, 2013, up from 9093 as of September 30th. One year ago, total headcount was 1046.

Turning to new orders, fourth quarter bookings declined 18.9% to $46.3 million from $57.1 million for the third quarter. While our Q4 bookings were seasonably, excuse me seasonally soft both here and abroad, much of the decline was attributed to two expected transitions.

The first in Europe involves changes made during Q4 to our distribution model and the transition of customer relationships to our new distribution partners. The second stands from a transition to our new ChiP platform, shipments for which we plan to begin later this year, as our second generation solution for powering Intel processors will utilize a chip-based VTM and a Picor Cool-Power SiP regulator. Our major datacenter customer has begun planning the transition to the new solution and in turn its contract manufactures have slowed their orders for the first generation solution and are consuming inventories on hand.

As such, we are seeing reduced bookings for the first generation V*I Chip solutions so far in Q1 in 2014 and we are expecting a similar level in Q2, with bookings for the second generation ChiP and SiP solution expected to begin in Q2 and accelerate in Q3.

One year backlog fell to $44.7 million from the prior quarter’s earning level of $53.9 million, a decline of 17%, again reflecting the weak Q4 bookings. 75% of this backlog was scheduled for shipment during current quarter. So far this Q1, our daily bookings rate has improved and we anticipate bookings in backlog ending the current quarter ahead of Q4.

Cash flow from operations for the fourth quarter fell through a deficit of $2.4 million, largely due to an unfavorable $2.1 million swing in working capital. The quality increased deferred tax asset reserve was non-cash adjustment to our tax provision.

Capital expenditures for the quarter increased slightly to $2.2 million, reflecting some of the initial investment and the expansion of our ChiP production capabilities.

We have refined our budgets for 2014 expansion and currently expect the actual [volume] investment for the year will be lower than originally expected in the range of $4 million. We have been successful in repurposing existing resources to meet expected 2014 ChiP capacity needs.

Turning to the performance of our business units, the Brick business unit, our largest recorded flat sequential revenue of $42.3 million. This level represents a 2.6 decline from the $43.4 million recorded for Q4 2012.

For the year, BBU revenue declined $16.9 million or 9.4%. These revenue trends reflect continued weak conditions for the BBU in North America and Europe, while Japan has been steady. In contrast, after a brief period of softness earlier in 2013, China showed growth with rail and industrial applications picking up for the quarter. Other developing markets continue to show impressive growth, with demand across industrial, rail and communications applications.

As it’s been the case for some time, the BBU continues to experience varying demand for its modules and configurable products. We are hopeful, macroeconomic conditions improved at some point, driving demand, but we anticipate real recovery for the BBU will be based on new highly differentiated solutions enabled by the ChiP modules Patrizio will discuss in a moment.

V*I Chip's fourth quarter also was largely similar to the third quarter, with revenue increasing $243,000 or 2%. Q4 2013 revenue at $12.2 million was more than twice the level of Q4 2012. For the year, V*I Chip recorded revenue of $33.2 million, which was 6% lower the than the amount recorded for 2012. For 2013, V*I Chip's production recovered during the second half of the year and was largely targeted at the data center market where our 48 volt Factorized Power Solution has been successfully deployed in high volume.

As I stated earlier, we are forecasting transitioning during the first half of 2014, with the decline in V*I Chip shipments anticipated in the second quarter as the transition from V*I Chip-based solutions to solutions consisting of a ChiP VTM and a Picor Cool-Power SiP regulator against for data center and communications customers. We also are forecasting a diversification of customers for ChiP solutions that will begin in the second half of 2014.

However, we may experience lower gross margins in the near-term as we will be ramping production with the new ChiP products initially lower volumes and therefore absorbing the less overhead.

Picor has been gaining momentum with its expanding line of Cool-Power SiP point-of-load regulators with attractive sampling and design activity leading to encouraging new orders. However, meaningful merchant revenue is at least two quarters away for Picor as the volumes associated with the second generation data center solution develop during the second half of 2014.

Returning to taxes, for the fourth quarter, our income tax provision was approximately $9.4 million, reflecting the $10.1 million increase for the quarter in our valuation allowance against our remaining federal net deferred tax assets.

As I [advised] last quarter, we were aware then of the possibility the company might need to increase the valuation allowance we applied to deferred tax assets we carry. To reflect a conclusion that we more likely than not would not be generating sufficient taxable income to utilize the assets in the foreseeable future, until the fourth quarter we had maintained a forecast calling for an earlier ramp in new product volumes, the company by and assumed recovery in the North American and European markets.

In addition, we had not anticipated the extent to which customers and perspective customers would be reluctant to place orders for bus converter products due to their fear of becoming involved in litigation. These factors were incorporated into our forecast for 2014 along with our recent consecutive quarterly losses, led us to conclude it would be appropriate for us to fully reserve our federal net deferred tax assets as of year-end.

As I’ve stated before, significant management judgment is required in determining whether deferred tax assets will be realized in full or impart. Every quarter we assess the amount of the valuation allowance offsetting the value of these assets.

Elements of this assessment include projected future taxable income, tax planning strategies, scheduled reversals of deferred tax liabilities, if any, and income in the carry back period. When we went through this quarterly exercise for the fourth quarter of the prior year 2012, we had concluded we would be able to utilize the net value of the federal deferred tax assets carried, but we determined we would not be able to use the state deferred tax assets carry, so we recorded a non-cash charge of approximately $1.5 million or almost $0.04 a share to fully reserve the value of these remaining state deferred tax assets.

However in contrast, during the third and fourth quarters of 2010, we recorded non-cash tax benefits of $5.2 million or $0.12 per share and $1.2 million or $0.03 per share respectively due to the release of portions of our valuation allowance against deferred tax assets, which markedly increased our reported net income for those two quarters.

Turning to the consolidated balance sheet, our receivables portfolio remains in excellent shape with day sales steady at 43 days quarter-to-quarter. Consolidated inventories quarter-to-quarter increased 6% due to the increase in year-end inventories within V*I Chip. Despite the increase, annualized turnover only declined from 4.0 a recent high point to 3.95, there were no meaningful changes to reserves.

Cash and equivalents stood at $56.3 million at year-end, down from $61.2 million at the end of the third quarter. We also hold investment securities with a par value of $6 million carried on our balance sheet and estimated value of $4.8 million, representing roughly 80% of par.

Turning to our expectations for the first quarter which is two-thirds over, we are expecting to meet our revenue target of approximately $52 million which is sequentially lower due to the soft bookings for the fourth quarter.

As mentioned a moment ago, we expect bookings will end the first quarter slightly ahead of the prior quarter. Because of the aforementioned transition to the second generation solution, we expect V*I Chip volumes will decline slightly sequentially with the consequential impact on gross margin again due to less overhead absorption.

Any improvement in true operating performance likely will be offset by legal fees which we are expecting will result in another quarterly loss. We expect to consume cash to fund operations and for capital expenditures but we have sufficient liquidity to meet our needs. While we have many good things to share with you which Patrizio will address, I will conclude my remarks by stating that our return to robust growth and profitability may likely be delayed until at least later this year.

Now, I will turn the call over to Patrizio.

Dr. Patrizio Vinciarelli

Thank you, Jamie. As Jamie has described, the fourth quarter was characterized by steady shipments but lower bookings. Volumes fell short of the level we need to leverage our operating model, and putting aside the tax charge, we recorded to a loss due to substantial legal fees that we expect to continue until the trials continue to take place for months.

As I said in today’s press release, fourth quarter results and the non-operational measure of significant differences on these results [masked] some important progress we made during the quarter with the new product initiatives, notably our ChiP platform. As I have discussed, Vicor introduced its converter housed in package or ChiP technology in March of 2013 to get a claim. Design concept which integrates advanced magnetic, control ASICs and power semiconductors, within high density interconnected substrates enables unprecedented power density, conversion efficiency and thermal performance.

With our ChiP platform, we are announcing a V*I Chip value preposition, because the manufacturing chips is expected to be far less than what it costs to make earlier generation V*I Chips and the performance of ChiP modules is far superior. In addition, our ChiP platform provides us greater flexibility and scalability in manufacturing at wide range of package sizes, much wider than with earlier V*I Chips thereby allowing for a broader range of products offered in application served.

In short, ChiP technology is a game changer for Vicor. In December, we released the production of our first ChiP based product, a 1.2 kilowatt bus converter and in January we formally introduced to the public. We are sampling the device across a range of markets. Called the 6123 BCM, reflecting its dimension of 61 millimeter in length and 23 millimeter in width and its bus converter function. The module is a DC input range of up to 410 volts and the nominal output of 48 volts. This is based on our Sine Amplitude convertor topology, which over one megas, operating frequency issues fast time response and low noise. This module sets best in class benchmarks for converter efficiency up to 98% and power density up to nearly 2 kilowatts per cubic inch. Ready for 1200 watts, this product can handle up to 1.5 kilowatts peak power, if applications requiring larger power levels and [multiplicity] of BCMs can easily be used in power.

The 6123 BCM addresses the roll out of higher voltage DC distribution in data center, datacom, telecom, industrial and military applications.

For some time, we’ve been emphasizing the benefits of high voltage power distribution which uses power consumption, operational cost and infrastructure investment. High voltage distribution range is from 270 volts in aerospace applications to 380, 400 volts in better centers to 600 volts, 800 volts for AV industrial and military equipment.

We have been a pioneer in a voltage conversion in all these market segments. High voltage DC has been identified in number of studies at the [sweet spot] or efficient power distribution as it allows for lower distribution losses and less bulky copper cabling. It removes complexity by eliminating unnecessary conversional stages and offers an increase in overall power system efficiency.

While challenging it was (inaudible) can be difficult due to outstanding practices in (inaudible) a major obstacle to the adoption of high voltage power distribution in data centers has been the availability of enabling components specifically those addressing the large step down from a high voltage but to the low voltage necessary for servers, routers and the like.

Traditional DC-DC converter topologies are [handicapped] by their physical size and lower conversion efficiency, making the implementation high voltage distribution a challenge. We targeted our regional V*I Chips at this market opportunity. But if you compare only in less cost sensitive applications like supercomputing, however our 6123 BCM along with similar products on our roadmaps provides very high step down ratios with a match levels of efficiency and power density at an attractive price point.

One industry analyst wrote in the February issue of Electronic Design that the 6123 BCM represents the missing link necessary to breakdown the remaining values to high voltage distribution in datacenters. Given the very high profile, a worldwide datacenter infrastructure to meet the demands of cloud computing and universal mobility, we believe we’re positioned high voltage distributions to Vicor in the sweet spot of this exciting market opportunity.

We believe our high voltage BCMs complemented by our POL regulators with Vicor Cool SiPs and the POL current multipliers with ChiP based VTMs give us a highly differentiated competitive advantage in the promising high voltage distribution market.

We expect to expand our leadership in this emerging market in the next month or so with introduction of 1750 watt bus converter in the same 6123 package. I encourage listeners interesting in our technology and for our positioning to view our web-based presentations which describe the considerable advantages of high voltage DC distribution.

We are very pleased to have our data center partner participating in these presents actions including HP, Amazon and Universal Starline, Germany’s Fraunhofer Institute is involved as a partner progressing on high voltage microwaves in commercial buildings and industrial facilities. The U.S. Army also is participating our partner, reflecting applicability of our high voltage distribution solutions to 270 volt distribution defense applications. Our high voltage BCM roadmap is also applicable to by directional battery backup in charging of upto 800 volts in heavy commercial and military equipment in which high voltage distribution enables hybrid power systems and provides energy saving features.

We are also targeting similar by directional applications in renewable energy where batteries need to be recharged after discharging a close loop. This spring, we also plan to release our chip based DCMs which are high voltage regulated DC-DC converters applicable to wide range of market end users.

We are planning for DCM portfolio to grow rapidly with all the major specification, design, qualification, test and [data sheet] generation tools coming online through 2014 to bring Vicor’s mass customization capabilities to the new DCM chip platform. As has been the case with our traditional line of big modules, customers will soon be able to design online a specific configuration within broad input range of 12 to 225 volts inputs with outputs from 12 to 55 volt and with power levels per module from 50 to 600 watts, and that therefore deliver [with least errors] within weeks of request. We believe high voltage DCM when used in thermally-adept packages containing filtering and communications [extremities] occurring within the grade of additional big markets. As this device will offer market leading efficiency and power advantage. These package units are also expected to have broader capability to (inaudible) for which a traditional bricks and not being cost effective solutions.

Our first samples of these new products have been manufactured. And we are very excited about the prospects for this product line in traditional brick applications with the industrial, rail and aerospace military markets. And new opportunities for us to further penetrate market segments in which we have had limited success with bricks such as a volume communications infrastructure.

We are also making good progress with our approach to the AC side of the market. Our next major release will be the AC, (inaudible) PFM with both 24 and 48 volt samples, some of which have already been shown to customers. This new product range will give us a highly differentiated capability in the larger segments of the power conversion market and should generate important cross-selling opportunities.

Available in the 6123 ChiP format in a new system level high density thermally-adept package, the PFM represents a complete (inaudible) certified drop solution for a broader range of customers in the telecom instrumentation tests and in the industrial process control and automation segments. And for Vicor, it’s shorter time to revenue than in the AC-DC segment of the power conversion market.

Our existing direct 48 volt to processor solutions also continued to gain adoption. Following the success of the Intel VR12, Sandy Bridge, x86 solution, we have recently achieved full compliance to Intel’s VR12.5, Haswell x86 specification. The VR12.5 compliant 1523 BCM Chip in Picor-Cool Power buck-boost SiP regulator are expected to begin shipment in volume in April and would be in greater volume production in the summer.

As Jim indicated, we expect a temporary dip in the volume of shipments to our primary data center customer as their contract manufacturers shift production from Sandy Bridge to Haswell architectures. We are pursuing a broader presence on data center market motherboards with new 48 volt input [VDS] back converters that will allow peripheral rails now that the memory to be powered directly and efficiently from the 48 volts rails.

Vicor power trains for the 250 watt CM5 graphics processors in new DDR 4, memory (inaudible) with Intel’s release carrier. We have a high (inaudible) complementary products which enhance the value preposition of motherboard designers seeking efficiency, smaller power train footprints will allow us to broaden our customers base with a compelling full solution.

Finally, we’ve been busy announcing our advanced online tools, in addition to those mentioned above in the contest of our BCM rollout including improvements and expansions of our PowerBench application having a white board and simulation tool suite, to accelerate our confidence in selling activity. We see these online tools as an important element of a competitive [establishment].

To conclude, we have experienced macroeconomic headwinds and they are continued for longer than expected. We also experienced lower demand anticipated for bus conversion solutions due to uncertainty injecting to the market by the unfounded plans of other competitors.

While our financial performance has lagged, and losses have continued, we have never lost sight of a our longer terms strategic goal while positioning Vicor as a highly differentiated vendor of complete, high performance, cost effective, AC to load and high voltage DC to a load solutions.

Our major product portfolio is nearing completion. We have our front end sales and market infrastructure in place. And we're confident as ever we will succeed.

Despite our emphasis for success, challenges remain as Jamie addressed, we expect to fall short of profitability again this quarter, as any operational improvements are likely to be offset by legal fees.

This concludes our prepared remark and we will now take questions from listeners.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from John Dillon with D&B Capital.

John Dillon - D&B Capital

Hey Patrizio and Jamie. I'm wondering if you can comment a little bit more, give us like a little bit more color about bookings. It sounds like they are slightly ahead, running slightly ahead of last quarter and when might you see those start tuning up?

Dr. Patrizio Vinciarelli

So as I mentioned and Jamie mentioned earlier, the temporary pressure in bookings has a lot to do with transitional issues in terms of our mother power solution for Intel processor applications in data centers. We’re going to see a ramp with next generation products starting in the middle of the year. I think we’re going to see bookings growth in the second half of the year arising from a variety of VR Chip and the Vicor SiP opportunities. In the case of VR Chip it is going to be both from new chip products based on the new packaging platform as well as from older we may call classic VR Chips that have been in the design phase with certain customers over past years with programs in the defense area and other end markets that are finally coming to fruition later this year into and year.

So we expect broadening of the customer base for VR Chip. We expect the broadening of the customer base for Vicor which should begin to see substantial revenues as the first major program goes into production in the second half of the year. And last but not least we have our eyes very much focused on the fortune of our brick business unit where historically we’ve had products that relied on early generation technology which had been in need of refreshing for quite sometime with the availability of a range of chip products including DCM, AC DC converters, PFM AC DC converters, BCMs of various kinds; there is going to be in the near future an opportunity to within bricks and power systems implement what you might call a chip inside strategy that will bring that part of our business to new levels of performance and cost effectiveness.

John Dillon - D&B Capital

When do you think that will start when the BBU will start coming out with new products with the chip inside technology?

Dr. Patrizio Vinciarelli

They are currently scheduled to start coming out in the June-July timeframe.

John Dillon - D&B Capital

Okay. Sounds like a lot is coming together in the June-July timeframe then.

Dr. Patrizio Vinciarelli

Well in various ways on various fronts, I mean we have ramps of new products, new products being introduced, there is going to be a lot of activity in terms of new product introduction taking place literally over next several weeks and months with scalable capabilities of PFMs, bus converters, DCMs. So there is a lot of action that’s going on.

John Dillon - D&B Capital

In regard to the contract manufacturers I understand that completely, but I am wondering don’t they want to put their orders in a little bit early for the new chips so that they can make sure that they get their deliveries on time or are you promising of a good turn, is the weather holding back on getting the new orders for that?

Dr. Patrizio Vinciarelli

Well, so essentially what has happened on the trial front is that, last year as we ramped with our older V*I Chip-based solution, there was concern with respect to capacity and our ability to step-up to [worse] demand. We demonstrated that those capacity concerns are misplaced and we performed [precipitations] with respect to the ability to address growing needs on the V*I Chip front. And recently the minds have shifted from if a concern with respect to availability of your product to concern about inventory as a result of transitioning requirements. So, I think that’s the phase we’re in that accounted for softness in booking with V*I Chip in recent months.

I think we are getting to that phase and with discounts from our customers and other V*I Chip customers suggested earlier we are going to see [redemption] of significant demand as the year progresses. We’re already forecasting V*I Chip bookings level to set new records in the next 12 months.

John Dillon - D&B Capital

Okay. So that’s good. So the V*I Chip should have revenue booking, revenue shipments within the next 12 months?

Dr. Patrizio Vinciarelli

We are expecting the V*I Chip bookings to achieve new records in the last 12 months and that’s accounting for the fact that some of the V*I Chip business in the central applications is going to be converted to Picor business for Picor SiPs, which are the facts from historical base on which we're building.

John Dillon - D&B Capital

Okay. That sounds great. And one last question and I’ll be back in the queue. Will we see a spike in bookings when the contract manufacturers initially place orders with you then?

Dr. Patrizio Vinciarelli

That has happened before and it could happen again, let’s wait and see what happens.

John Dillon - D&B Capital

Okay. I’ll get back in the queue. Thank you.

Dr. Patrizio Vinciarelli

Thank you.

Operator

Our next question comes from Don McKenna with D.B. McKenna. Please proceed.

Don McKenna - D.B. McKenna

Patrizio or Jamie, whoever wants to answer it, on the recent announcements of a new distributor relationship, is that just a change in the way you are trying to get the product down out there or is it a -- or you’re getting rid of your internal sales people and giving it over to the distributors or is it new territories that you are addressing?

Dr. Patrizio Vinciarelli

We have been expanding a self capability in a variety of ways and variety of avenues, I think as I’m truly aware, we’ve elevated our performance in terms of the sales and marketing infrastructure in recent years. We’ve also realigned our strategy in terms of how to address markets in New York, in Asia, globally and in the U.S. And that's evolved new distribution relationships and other ways of expanding our market opportunity.

So, that's very much keeping with a strategy that we have been focused on to bring about a very substantial growth in years to come.

Don McKenna - D.B. McKenna

Does that also accounts for that change, does that address to the reserve for severance that I saw on the financials?

James Simms

That was associated with something very early in 2013.

Dr. Patrizio Vinciarelli

Yes. That is three old...

James Simms

That was a different.

Don McKenna - D.B. McKenna

Okay. Second question I had probably on the designing tools that you have on the web-based designing tools. Is that unique to the industry and do you measure the usage of it and can you give us an idea of what kinds of usage you are seeing?

Dr. Patrizio Vinciarelli

Yes. So we see growing usage and it is rather unique, because Vicor has a unique vision of how the power system marketplace is going to evolve based on the power [component] methodology. So these capabilities are not ones that you can readily buy, because they haven’t been a development that can affect the other assets, the unique tools and capabilities that we need in order to advance our unique power [component] methodology.

So it is something that we’ve invested in considerably for quite some time. We have a large internal group that has been focused on this development and have been able to make great progress in terms of variety of tools that are highly dependent that are architected from the perspective of a customer having a power system need and that customer being able to in time address it with a complement of building blocks of the world, uniquely equipped to make.

James Simms

Don, I would add that everybody has selection tools, sophisticated online catalogs that allow you to screen for products based on their capabilities. Many companies from particularly in semiconductor area have very sophisticated online tools. What we’re trying to do is for the power business, as Patrizio described it, offer the customer something that really enhances and highlights the advantages of our products and our recommended architectures.

Dr. Patrizio Vinciarelli

So, from the perspective of the cash being able to find the (inaudible) solution to their power system needs. So it’s the benefits from a vision of how to best address power system requirements that is really customer centric, but leveraging the breadth or capabilities that Vicor uniquely has in terms of our ability to support any power distribution architecture and doing it with engines and the modular power components that has highly differentiated advance density and efficiency that in many instances is multi-fold level of the competition particularly when it comes to density.

Don McKenna - D.B. McKenna

Okay. And one last question for you too is the R&D right now is running about 20% of revenues and if I remember right you have said most of that is in-house. Do you expect to maintain that kind of a ratio going forward or do you see now that you have finally got some of these coming on stream that that expense will decrease?

Dr. Patrizio Vinciarelli

So the way I like to look at it is both in terms of percentage and absolute dollars and what I would expect to -- that the absolute dollars are going to stay relatively constant, overtime they will grow somewhat, but at rate far lower than the revenue growth. And as that happens, the percentage that you are referencing will come down to a level in the mid-teens, which I think historically would be adequate for us to continue to be the kind of company we are highly innovative, very focused on advancing to sell DR.

So temporarily these are the level that is higher than we like, it obviously hurts us in terms of short-term financial performance, but we view it as an important investment in the future.

Don McKenna - D.B. McKenna

Thanks.

Operator

Our next question comes from Jim Bartlett with Bartlett Investors. Please proceed.

Jim Bartlett - Bartlett Investors

Yes. The 48 volt seem to be using a hub and data centers and the large public cloud vendors seem to be going that way. Could you talk about your advantage in 48 volt what you offer them and when you expect to get traction with more than one datacenter customer?

Dr. Patrizio Vinciarelli

So to your point there was an early adopter company with a good deal of vision that saw the benefits of factorized power system solution for Intel processors, from early Intel processors. As you can imagine everybody in the industry looks over the shoulders of the respective competitors and they’ve all taken now this of the advances that this pioneer has been able to make in terms of efficiency, operating efficiency which ultimately results in lowering the cost of running a datacenter which is obviously (inaudible) for the industry as a whole.

So, you should expect to your point that others are following, there is going to be traction with respect to a 48 volt distribution bus, so which is a factorized bus driving point of load current multipliers for several volts. What that will entail is a broader penetration by building blocks. Up to this point it has been limited to powering the processor, but over time it is going to power processor memory and ancillary loads because as suggested earlier, we are being into market more granular solutions, both in terms of point of load current multipliers that can cost effectively address, power requirements and current requirements as a fraction of that of main processor. So well suited to memory rails and also with the Vicor SiP products lower power requirements.

So we are going to have this as year progresses the complement of building blocks to enable a complete solution for whole power system for a server board, based on a unique capability, (inaudible) from 48 volt. And the benefits of that are whether density considerably [gather] efficiency several points of efficiency gains that are very meaningful to somebody who runs a datacenter.

Jim Bartlett - Bartlett Investors

And you expect a traction in terms of getting new datacenter customers to be seen this year?

Dr. Patrizio Vinciarelli

The activity is gaining momentum. I think if we look at how long it is taken for us to go from [constant to fruition] with our first key cast in that pace that took a little over year. It’s a fraction of what it took us with high end servers, which took longer than that reflecting the reality that in this pace things move faster, because systems are relatively simple, lower power levels and with a faster turnaround in terms of design activity. But when it comes to the [processor] change in terms of going to 48 volt, this is more than the motherboard design, there is in fact a mindset change that has to take place over some period of time. But we’re seeing it happening and we expect that we’re going to start benefiting from it as 2015 comes along.

Jim Bartlett - Bartlett Investors

Thank you.

Operator

Our next question comes from John Dillon with D&B Capital.

John Dillon - D&B Capital

Hey Patrizio. How many shifts are you running now?

Dr. Patrizio Vinciarelli

Well, it depends on which particular version it is, but in some 3 shifts, in others less than that. Just to give a little bit more sense with respect to capacity utilization, at this time, we’re not [stretched] far from it, with respect to V*I Chip capacity but we are leveraging that the lolling activity relating to the transition that I was outlining earlier to expedite completion of variety of different products which have been in the pipeline. So, to some extent the stars are aligning from that perspective, because if you were more challenged from a capacity perspective in terms of must production of particular products with that less flexibility with respect to doing as much as we’ve been able to do of late, with respect to completing development of products that have been in the pipeline. So that’s been the focus. And because of that we’ve worked the fact very hard even though production, mass production requirements have temporarily subsided.

John Dillon - D&B Capital

Okay. So, anyway you’ve got the production to go forward and you’re running 3 SiP on certain segments but not all of them.

Dr. Patrizio Vinciarelli

That’s correct.

John Dillon - D&B Capital

Okay. And what I think I heard you say just a couple of minutes ago was not only will you be powering a processor but in future servers powering the memory and also other parts of it. And so that would indicate to me you’ll get higher revenue per server, Vicor will achieve higher revenue per server, is that correct?

Dr. Patrizio Vinciarelli

Yes, that’s the goal. And we think that just the memory rails would bring about essentially a factor to increase in the value proposition per server board so that’s going to be an important step.

John Dillon - D&B Capital

And do you have design wins already in for this?

Dr. Patrizio Vinciarelli

Let me just say that the products that are needed in order to support that capability if be working on the bench, these are smaller chips just to give you a little flavor. You’ve heard earlier reference to 6123 chip which is a pretty big chip of (inaudible) introduced at 1200 watts and our product about to be introduced as 1750 watts. This is a representative of a relatively large chip, not the largest but the relatively big one. For the several peak actions we have been referencing with sample customers with a 1523 chip so you can refer from 1523, 15 is lot smaller than 61. So, it’s much smaller chip. We have chips that are a fraction of the 1523 in the world. So, the 1523 is well suited for the processor applications, its capability, DC capability up to about 90 amps, the capability up to 180 amps, we have smaller chips that are well suited for memory applications that are in early demonstration capability and we have even smaller chips in the world.

So and all this is enabled to buy our new generation of controllers the progress developed in the last several years which was being our capability for this type of products in terms of density, granularity or lower power levels and cost effectiveness to presented levels.

John Dillon - D&B Capital

And with this new chip technology and products that you have got, your design wins, are they going up, they are going down and your design activity, how is that going?

Dr. Patrizio Vinciarelli

So as I mentioned earlier, we see the customer make up and the customer differentiation that should land a combination of business goals which are diversification in the customer base and significant revenue growth happening in the next 12 months. As mentioned earlier, as we look at the [multimedia] customers that have embraced or are embracing ChiP-based solutions and SiP solutions, we see just for V*I Chip record bookings and record revenues in the next 12 months.

John Dillon - D&B Capital

So your design activity must be way up?

Dr. Patrizio Vinciarelli

Our design activity is up.

John Dillon - D&B Capital

Yes great. And one last question on the new [PSE] module and you’re talking about a shorter time to market. When do you expect to see revenue and what kind of -- I mean are you talking about like on a yearly basis, do you expect that to be significant part of your revenue, $10 million line or $5 million line more or less?

James Simms

We expect it to be very significant. In other way, without even waiting for the new ChiP-based, the 6120 ChiP-based PFM with our older PFM, which was a double chip V*I Chip in the old packaging technology. We have been getting all traction with that despite the fact that in terms of its cost effectiveness and performance it is far inferior to the new V*I Chip-based product.

But with the older V*I Chip, we’ve gotten significant design wins which should result in major contribution to bookings not just in terms of the PFM building block, but also suggested earlier in terms of cross selling opportunities, because we view the PFM as if you will a conversion stage that looked customers from AC power sources, which are obviously everywhere to what we referred to in an earlier question, the 48 volt hub, which is really our hub.

I guess if I were to use airline analogy depleting of a hub that serves a particular purpose of a major airline in terms of taking the traffic from a power source such as the AC volt plug 248 volt, so that we can then take it from 48 volt to the point-of-load through direct conversion by way of height, K factor kind of multiplier [BCMs]. That 48 volt hub is also useful in high voltage AC distribution because with recently introduced BCMs taking 400 volts down to 48 volt, again we can support any power source into the 48 volt hub and from there to the point-of-load.

So, the difference going back to the part of your question, play an important role in terms of the revenue contribution, as well as supporting a comprehensive vision of taking customers from any place, meaning any power source to any other place meaning any point-of-load requirement by way of the 48 volt hub, which is gaining traction more and more in all major electronic markets as the most efficient way of doing business.

John Dillon - D&B Capital

It sounds great. Thank you, Patrizio. I appreciate it.

Dr. Patrizio Vinciarelli

Thank you.

Operator

We do have more questions if you would like to take them? Our next question comes from Don McKenna with D.B. McKenna.

Don McKenna - D.B. McKenna

Guys, you didn't address the litigation at all and if you could from two standpoints; one is my memory serves me right that if you were successful that it would open the door to market potential that might be as large as something like a $100 million a year. Could you confirm that? And secondly, can you give us an update on the timeline; has the court date been set so on and so forth?

Dr. Patrizio Vinciarelli

So, we expect to be successful because our products do not infringe any of the [asserted] claims. The case is going to trial in July, so stay tuned. We expect to at a finding on non-infringement. And on best ramp reopen a market, there has been far close that buy a good deal of the interference from a competitor that just getting a chance that goes beyond, the legitimate rise of intellectual property. So, that's just matches the -- at this point in time.

Don McKenna - D.B. McKenna

Are the products affected with remembering that the market for those kinds of products was somewhere in the $100 million in annual revenue?

Dr. Patrizio Vinciarelli

Well, so I think that the competitor that we are referencing is to some extents, managed to, if not heal impact of the golden goose as it were. In that the market opportunity for IBA has significantly shrunk as they felt of the trust that we made to customers that intended to use that our system solution and but that were then in many senses compelled to find alternatives because of the traps and the lack of viable competition.

So we are -- the situation has changed, we have suffered from what has happened unjustly and we can’t recover in that regard and then obviously while the opportunity is going to be upon our win to access a significant share of that market as it reopens for us.

Don McKenna - D.B. McKenna

Thank you.

Operator

Our next question comes from Jim Bartlett with Bartlett Investors.

Jim Bartlett - Bartlett Investors

I guess you’ve mentioned in earlier question the chip inside strategy rolling out for the BBU unit this summer. Given that roll out, when would you expect to start seeing traction in terms of bookings and then revenue from BBU?

Dr. Patrizio Vinciarelli

So I guess the bad news in that regard is that in our business given that our products are used within OEM products, there is a design cycle that sense in between the availability of an exciting new product and significant revenues. The good news is that when it comes to this class of products, they fall in terms of gestation period into different category relative to let’s say the point of load solutions with [PRMs and VTMs] that we were discussing early in the contest of the center applications or other such applications.

The BBU type of product opportunities, the chip inside are primarily in the category of front end systems that bolt-on to a chassis or provide functionality within a customer power system typically of size of the motherboard and because of that the time to market tends to be relatively shorter. And so because of that we anticipate the cycle time from product introduction to revenue to be shorter but again to keep our feet on the ground, it is still going to be a significant gestation period. So with products introduced middle of this year, we should expect to see revenues next year at the growing rate and part of that opportunity is going to be to take certain customers that have designed in relatively costly solutions using earlier VR chip product or the early VR chip PFM taking them to a chip based solution that will offer them significant cost benefits with performance improvements.

Jim Bartlett - Bartlett Investors

Thank you. Could you also address the traction you are getting with other potential higher end server companies?

Dr. Patrizio Vinciarelli

Yes. And what is the question in that regard?

Jim Bartlett - Bartlett Investors

What you had mentioned I believe in the last conference call that you are working with some of these higher end server companies and just wondering where you are in that process?

Dr. Patrizio Vinciarelli

Well, there has been progress and we expect to see revenues starting in the fall with chip based solution, that has been sampled to customer and the customer is very, very happy with its performance. So, we are -- as I mentioned earlier, working hard to diversify the customer base because we’re all cognizant and mindful of peoples of being dependent on a small customer base. Fortunately, with VI Chip yearly growing, we are an early adopter that dominated our demand and obviously that was welcomed in many respects, but not desirable from others and we are very much focused on having a significant mix of customers and applications and we’ve been able to make a good year of progress with respect to that, suggested earlier it is going to come out of other high end servers, it’s going to out of and so these are companies that make OEM products that get sold to third parties, in the central space, other big users that in fact design and build their own data centers. So that’s a different kind of market opportunity, again for Chips and then defense applications for VI Chips and ChiPs. So all of these are complementary initiatives that to a large degree we use the same technological foundation of our engines, our control systems, our packaging technology.

Jim Bartlett - Bartlett Investors

Yes, you mentioned since -- if I remember correctly, there was a potential for a large radar based order at some point coming out of…?

Dr. Patrizio Vinciarelli

Yes, that’s due to grow into very significant volume in 2015, I think over $10 million per year.

Jim Bartlett - Bartlett Investors

Starting in ‘15?

Dr. Patrizio Vinciarelli

Yes.

Jim Bartlett - Bartlett Investors

Okay, right. And one final question.

James Simms

(Inaudible) with budget.

Jim Bartlett - Bartlett Investors

Could you give some…

Dr. Patrizio Vinciarelli

This one application that as far as I understand has not suffered from those constraints.

Jim Bartlett - Bartlett Investors

The future DigiKey distribution numbers, were they this quarter? And that’s progressed, I think more slowly than originally planned, what is the outlook there?

Dr. Patrizio Vinciarelli

I think from my visibility, DigiKey has got a magic formula for connecting the supply such as Vicor with the world at large. It is the go-to place for designers to, one, avail themselves of what is possible. And when it comes to our building blocks, it’s a very good fit. I expect we are going to see DigiKey contributing directly to our ability to penetrate applications and markets worldwide.

James Simms

And we’re working hard to load it with content to make sure that they…

Jim Bartlett - Bartlett Investors

Yes. And how much, was it a couple of million dollars this quarter, you usually give out that number?

Dr. Patrizio Vinciarelli

Yes, a couple of million dollars.

James Simms

Yes. It was flat, we talked about that in the remarks that was just quarterly flat.

Jim Bartlett - Bartlett Investors

Flat, okay. Thank you.

Dr. Patrizio Vinciarelli

If there is one more question, we can take it.

Operator

There are no further questions.

Dr. Patrizio Vinciarelli

Thanks a lot then. Talk to you soon. Bye, bye.

Operator

That concludes our conference. Thank you for your participation. You may now disconnect. Have a great day.

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