Vicor's (VICR) CEO Patrizio Vinciarelli on Q2 2014 Results - Earnings Call Transcript

| About: Vicor Corporation (VICR)

Vicor Corporation (NASDAQ:VICR)

Q2 2014 Earnings Conference Call

July 22, 2014 05:00 PM ET

Executives

James Simms - CFO

Dr. Patrizio Vinciarelli - CEO

Dick Nagel - CAO

Analysts

John Dillon - D&B Capital

Jim Bartlett - Bartlett Investors

Operator

Good day, ladies and gentlemen. And welcome to the Vicor Earnings Results for the Second Quarter Ended June 30, 2014. My name is Sarah, 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 turn the conference over to James Simms, CFO and Dr. Patrizio Vinciarelli, CEO.

James Simms

Thanks Sarah. Good afternoon and welcome to Vicor Corporation’s conference call for the second quarter ended June 30, 2014. I am Jamie Simms, CFO and with me here in Andover is Patrizio Vinciarelli, Chief Executive Officer and Dick Nagel, Chief Accounting Officer.

As we always have, we issued a press release today summarizing our financial results for the second quarter. This press release is available on the Investor page of our website, vicorpower.com. We have also have 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 statements made during this call and you should not rely upon them after the conclusion of this call.

A replay will be available beginning at midnight tonight through August 6, 2014. The replay dial-in number is 888-286-8010 and the listener pass code is 49359584. In addition, a webcast replay of the conference call will be available on the Investor Relations page of our Web site, beginning shortly after we conclude today.

I will start this afternoon’s discussion with a review of our financial performance for the second quarter and the first half, and Patrizio will follow with his comments after which we will take your questions.

As set forth in this afternoon’s press release, Vicor recorded a net loss for the first quarter of $4.8 million, representing a net loss rounded up to $0.13 per share on revenue of $53.4 million. For the first quarter of 2014, we recorded a net loss of $5.4 million or $0.14 a share on revenue of $53.2 million. For the first half of 2014, we recorded a net loss of $10.2 million on revenue of $106.6 million while for the first half of 2013 we recorded a net loss of $9.6 million on revenue of $88.8 million. This increase in revenue represents year-over-year growth of 20%.

Consolidated revenue for the second quarter rose less than 1%, but there were meaningful shifts in the makeup of total revenue. In reporting $53.4 million, we actually exceeded our prior quarter’s guidance of $52 million. The Brick business unit recorded a 9.6 sequential increase in revenue with our legacy modules business increasing $2.1 million or 6.3%. Turns volume increased rising to 40.5% of total shipments for the quarter, consistent with recent levels.

Our Picor unit also recorded an increase in revenue of 34%, off of a small base of merchant business. Picor is building the effected momentum with its line of high performance PRMs and point of load regulators, which will be expanding this year and into the next.

For Q2, the anticipated decrease in shipments by our VI Chip unit to its largest customer offset the increased shipments from the BBU and Picor, VI Chip’s revenue declined by $4.4 million, reflecting the impact of the transition underway by our datacenter customer. As we have previously discussed, this customer is transitioning to our second generation solution for powering Intel server motherboards. This solution consist of a chip VTM and a SIP PRM.

As Patrizio will address in a moment during the second quarter we began to receive the first substantial volumes purchase order for this second generation solution.

Concluding on consolidated revenue. Recognized distribution revenue rose 8.1%, while international revenue declined to 6.8%, reflecting the decline in VI Chip shipments. Other than the decline in shipments to contract manufacturers of our datacenter customer, international revenue patterns by product and geography were within recent performance ranges. Vicor’s consolidated gross margin for Q2 was essentially flat, both on an absolute and a relative basis. Q2 gross margin as a percentage of sales was 42.5% compared to 42.8% for Q1.

The increased shipments from the BBU along with a slight increase in average selling price and a slight decrease in average unit cost contribute to an increase in the BBU’s gross margin, which rose 2.4 million for the quarter. BBU’s gross margin as a percentage of BBU sale rose to approximately 46% from approximately 45% for the first quarter. While Picor’s merchant volumes are in the early stages, we are pleased with the performance of Picor’s fabulous model, which recorded a gross margin of 54% for Q2. As the volume of Picor’s SIPs grow with our second generation datacenter solution, Picor’s relatively high gross margin should have a positive influence on our consolidated gross margin.

Unfortunately for Q2, the performance improvement of the BBU and Picor were offset by the further, although expected, decline in VI Chip shipments. With low VI Chip production volume, unabsorbed overhead cost precluded progress in our consolidated margin for the quarter.

Turning to Q2 operating expenses. Legal fees were still at a high level because of the cost of defending against infringement acquisitions in preparation to trial later this year. However, even though during second quarter, we included our annual companywide merit adjustments to compensation. Total operating expenses actually declined 2% sequentially. Total headcount was 1,019 at the end of the quarter, up from 1,009 as of March 31st. At the end of the second quarter of 2013 a year ago, total headcount was 997.

G&A expenses, including legal fees, declined 11.5% sequentially with the major contributor being the absence of fees associated with our year-end audit and Q1 filings. Marketing and sales expenses were essentially unchanged as reduction in several categories offset increased compensation. R&D expenses increased 3.8%, again largely due to annual merit based salary adjustments and incremental new hires.

A few words about our Q2 tax provision. As discussed during previous calls, at year end we fully reserve against our differed tax assets which resulted in a $9.4 million tax provision for Q4 2013. As a consequence of excuse me eight consequences this accounting treatment is a near term inability to create additional tax benefits on a book basis from additional pretax losses we incurred.

While we do have certain statement international taxes the factor into our reported tax provision we are not showing in our GAAP income statement the type of tax provision one would usually associated with a quarterly pretax loss. Turning to new orders, second quarter bookings increased 14.6% sequentially. Total one year backlogs stood at 45.7 million at the end of Q2, increasing 10% sequentially with 79% of this backlog scheduled for shipment during Q3.

Cash flow from operations for Q2 despite the net loss rebounded to a positive $2.3 million up from Q1 deficit for $4.5 million due to a $4.3 million net decrease in working capital, largely attributable to collection of receivables. Other current assets and liabilities were flat at quarter end. Capital expenditures for the quarter rose slightly to $1.9 million from Q1’s level of $1.6, reflecting increased activity around meeting our capacity needs for chip production.

As I have stated before, earlier capital expenditure budgets have been refined and we expect the accumulative dollar investment and the investment for 2014 will be lower than originally expected. We have been successful in repurposing resources to meet expected 2014 chip capacity needs.

Turning to our consolidated balance sheet, our receivables portfolio remains in excellent shape with day sales returning to below 50 days ending at 47 days.

Consolidated inventories quarter-to-quarter were essentially unchanged, annualized turnover climbing to 4.25 times representing a new high. There was no meaningful change to reserve. Cash in short term investment stood at $51.5 million at the end of Q2 up from $51 million at the end of Q1. This figure excludes investment securities for the par value of $6 million carried on our balance sheet and estimated fair value of $4.9 million, representing roughly 82% par.

Turning to our expectations from third quarter, we are forecasting revenue of approximately $55 million for the third quarter, representing a sequential increase of approximately 4%. On a consolidated basis we expect Q3 operating expenses excluding legal fees will be little changed. However, we are anticipating in an acceleration of legal fees as we approach our expected October trial date.

Now, I will turn the call over to Patrizio.

Dr. Patrizio Vinciarelli

Thank you, Jamie. As Jamie said, Q2 was characterized by a significant reduction in VI chip revenues caused by the transition from VR12 to VR12.5. However, we are hopeful of being on the verge of a sustained ramping volume of chips and fix (ph) for VR12.5 applications and other [indiscernible]. We are making progress towards expanding our share of board-level spend related to powering memory in addition to Intel processors.

We believe this is an important development; this is in absence of value proposition and competitive position. We are also making progress with datacenter computing customers for a differentiated 48 volt system and our unique solution is gaining momentum with targeted prospects.

Similarly, we’re encouraged by the momentum building with customers across the range of even the SiPs (ph) and applications. Now that we’re in wireless communications, automotive and transportation; where we would be in concentrating our recent efforts. With the release new chips and SiP (ph) products, we are pursuing a critical strategic goal of diversifying our base of markets, applications and customers.

I reaffirm the enthusiasm expressed of our recent Annual Shareholders Meeting to achieve our strategic goal of leading a transformation of the industry toward modular solution to power system requirements; with this intellectual property knowhow in the arrival of cost effective high performance modular building blocks. Vicor is very well positioned to make the most of this multibillion dollar market opportunity.

Turning to [indiscernible] over the last three and a half years, we have been defending against [indiscernible] infringement of accusations rolled by a competitor was territory actions and [Indiscernible]. Evolving claims to the [indiscernible] or IDA at cost of thousands millions of dollars in lost business and [indiscernible]. We remain confident that Vicor would prevail on the merits but we note with irony that the competitors behavior in excess of litigations that cost customers to make it a faster rate away from IDA and towards FDA our proprietary power distribution architecture, which are first efficiency industry levels far exceeding the fear of this figures for IDA.

As such, migration away from IDA excludes the FDA market segment for which our superior bus converters standard choose [ph] the infringement to shrink to the point in our percents and meet the fraction with our revenues. It is in conference that we look forward to our case going to trial at the end of September or early October.

This concludes my prepared remarks. And Jimmy and I will now take your questions. Operator?

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from John Dillon.

John Dillon - D&B Capital

Patrizio and Jimmy, congratulations on the bookings increase, that’s a really nice bump up from last quarter. Going forward you gave us little guidance on next quarter. I am just wondering to like in the two to four quarters, do you expect continued increase in bookings and also revenue growth.

Dr. Patrizio Vinciarelli

Generally, yes, we are looking forward as we get into 2015 to a number of programs that we’ve been working on coming to position. And one way of looking at it in terms of revenues bookings and overall financial performance we think of this phase as sort of [indiscernible] and what’s been a relatively long tunnel. We can see the light at the end of the tunnel. But as suggested by Jimmy, we are looking at Q3 of this year still being a last quarter for us. As we progress from that into the fourth quarter and into 2015, we expect to be able to leverage our model which I think as you know is very much dependent on incremental revenues in terms of profitability because of the fixed cost structure or largely fixed cost structure associated with the good [Indiscernible] price.

And so in terms of looking at the bottom line we anticipate that the very high rate of legal expenses which will be at its peak at this quarter to essentially subside to relatively low level as of the end of the fourth quarter that will make a significant difference for the balance in terms of the bottom line. But more importantly the expansion in revenues with a significant share of that drop into the bottom line will get us into [Indiscernible].

John Dillon - D&B Capital

So I think the light at the end of the tunnel that reminds me on a number of conference calls before we’ve been -- its’ couple of quarters out. This kind of feels lot different to me and in particular I think because you had cross card that you haven’t had before in the industry in your markets are lot bigger. But I really wanted to get your input on that. Why is it different this time than the other times can you talk about that that revenue and bookings are going up and in a couple of quarters can you give us still more confidence on that?

Dr. Patrizio Vinciarelli

I think we talk to some degree about this kind of issues of the shareholders meeting and I maybe repeating myself so some degree. But as discussed at the shareholders meeting VI Chip technology and the VI Chip products that have characterized Vicor’s opportunity in terms of new customers, new markets and potential growth over many years did not in terms of this cost structure support the broad market transaction that we were seeking. And what is different about today is that with the arrival of chip products and you’ve seen a growing rate of new product introductions and you’ll be seeing that rate further accelerating in the weeks and months to come.

With those products we are achieving a cost structure measure in terms of sense for what that is follower than we’ve had with our first generation VI Chips. So whether it’s the center applications or the modular applications or wireless applications or other kinds of applications we’re going to be able to leverage chips into more cost sensitive applications while [Indiscernible] being able to enjoy margins that with first generation of VI Chips, we were unable to deliver. We’re beginning to see this with SiPs as suggested by Jamie in his opening remarks of the level or idea of mid 50s and I expect that rate to go substantially higher over the next several months, as the rate of production of those products increases. And likewise I see similar opportunities for chips in a variety of functions ranging from building blocks that span the AC source, DC source, high voltage, low voltage of the variety of upper voltages from front end applications all the way to the point of low.

So we believe we are after having made a major investment that has characterized the life of the Company for the last 10 years in brand new technology packaging platform, control systems, base engines all quite propriety. We are well equipped at this point to address cost sensitive market needs with very high performance products that we would be able to address - discuss plenty of applications with better margins. And we’re frankly very excited about that. This excitement is supported by the reception that we’re getting from a growing most of this year customers in a multi this year end markets.

John Dillon - D&B Capital

It seems to me Patrizio that the memory real opportunity that you’ve won is really a validation of everything that you’ve been saying because with what I am second hearing is that you are winning an opportunity to power the memory in an x86 architecture, which in the past is really not been available to you because of the cross card and now you’ve got that opportunity?

Dr. Patrizio Vinciarelli

Well, I think the proof as I said has been delivered with powering the processors themselves because the processor themselves in the competitive alternative of multi phase backed regulator, has been the commodity market for as long as, I get to remember. So our ability to penetrate processors, Intel processor in particular, which are obviously very different type of devices from, let’s say the end (ph) processors [indiscernible] servers that characterized our first generation VI Chip entry.

With Intel processor, we already demonstrated that we can play in a cost sensitive a portion of the market where the opportunity for growth is far greater if all the conditions have rise and these conditions involve performance measure in terms of efficiency and density that delivers a certain value proposition for customer that is in view of the high efficiency and density is still very mindful of the cross card.

John Dillon - D&B Capital

So that’s great. It sounds really good, I think we’re pretty close, I think we hear and I’ll get back in the queue. Thank you.

Dr. Patrizio Vinciarelli

Thank you.

Operator

All right. Great. Our next question comes from Jim Bartlett.

Jim Bartlett - Bartlett Investors

Yes. Patrizio, you mentioned diversification could you address that a little bit more and how important like, one in getting more datacenter customers, which give us may be sometime line on when the prospects for that will happen? And then two, I haven’t heard you mention, you mentioned wireless and transportation auto, which I heard you mentioned wireless before in the transportation auto, I was thought was way out there. Could you address those two questions? Thanks.

Dr. Patrizio Vinciarelli

Yes. So accessing with the center applications, we are seeing the same level of motivation in without the datacenter customers that they are very cautious of their total operating cost, the energy cost, the efficiency that can be have with 40 volt infrastructure with the x48 to the point of load processor voltages and memory voltages. And the same compelling rationales are visible to growing multiplicity of customers and potential customers.

Turning to other opportunities, we are beginning to get some meaningful traction in other mode within Asia with our VCMs and these are chips that we recently introduced. And we’re looking forward to being able to build on that with new cemeteries that are scheduled in the works and scheduled to come out in the foreseeable future, which will further raise the performance bar and further reduce the cost curve very significantly. We’ve discussed in the past AC in put products and specifically the PFM and again we got an traction with opportunities such as microcells with a first generation PFM. We’re on the verge of introducing next generation PFMs that will increase the power capability while reducing once again the cost structure of the product significantly. We’re also combining that with introduction of a system level packaging technology that is going to be referred to as APT is proprietary packaging technology to deliver consistent capability. And we again look at that as delivering dry combination of thus the efficiency and cost effectiveness that will add momentum to the early traction and interest that we get and in some of the markets you referenced.

Jim Bartlett - Bartlett Investors

One of the latitude with the auto ACM, is this revenue for like 2016?

Dr. Patrizio Vinciarelli

No, there is going to be some revenue in 2015 it’s up to assess a precise level for that but it involves a multiplicity of competing companies in Asia. These are not ultra volume application they are lower volume applications that is more than one of them and we’ll see as we get into next year what the world after.

Jim Bartlett - Bartlett Investors

And would you expect more datacenter customers, is that something can happen this year or in 2015 (ph).

Dr. Patrizio Vinciarelli

Sorry, and too often this year but there are things in the works on the variety of fronts. And when it comes to let’s say powering memory and those are first as I said earlier or powering other type of points of low devices we’re also making new role jump on other fronts because the issues of the datacenter really not unique when it comes to power systems they’re not unique to datacenter. So, there is an opportunity not just to go across the competitive landscape in their end market but there is also an opportunity to grow across from their end market to other markets with similar kinds of issues and challenges.

And the market we’re seeing for I will say the first time from very large potential customers a multinational somewhat [indiscernible] to adopt the kind of power conform methodologies the Vicor is uniquely advocated for many years. But for which we have not have the world we go in terms of where being all the necessary building blocks and most significantly having them with sense for what so you have some merit [indiscernible] that are attractive us from a cost perspective.

Jim Bartlett - Bartlett Investors

Okay, one other issue. Did you just addressed I guess piece of the distribution is up 8% I assume that’s sequentially Jamie pension?

James Simms

Yes.

Jim Bartlett - Bartlett Investors

Did you just addressed and where you are in this distribution strategy it’s for us and [indiscernible] less than originally anticipated and any changes and your thoughts about it or sort of these inflection point of when that might accelerate?

Dr. Patrizio Vinciarelli

So we put infrastructure in place I think there has been progress I think of the in terms of inflection point or accelerating the rate of progress we are counting on new products from Vicor and VI Chip to make major impact on acceleration and inflection with this factor to the share revenues they’re going to be provided through distribution because this products unlike our earlier generation products that breaks other kinds of legacy products are extremely well suited for distribution. Picor regulators being a part of example of that but also a variety of chips PFMs. So all of these type of devices land themselves to a distributor or distributors acting as intermediaries to customers wishing to configure and implement a power system or subsystem or complete system in a sharp time frame from devices that can be purchased from stock for overnight delivery.

Jim Bartlett - Bartlett Investors

So could you see that just in 2015 even where you could see acceleration?

Dr. Patrizio Vinciarelli

The Picor regulators had been to some degree a 2015 I think as we approach the product part of this year there is going to be new major point of actions from Picor that greatly sent the range of capabilities of [indiscernible] where you have a product line with boost and buck entries overtime coming out different part of levels again these are well aligned with distribution channels as an effective way to get products to customers and as we suggested earlier we are on the verge of introducing 6123 the FM chips of asset packages and those again from a [indiscernible] distribution as an effective means of getting the products into the market place.

Operator

All right. We do have another question from John Dillon.

John Dillon - D&B Capital

Hi Patrizio I’m trying to get a little sense of the total available market here and I know that’s really difficult but one example is Intel came out with their numbers and mix of their processor numbers for their servers, data centers was about $35 billion so I’m wondering what percentage would be available to Vicor like for every dollar of processor $0.10 the power supplies is a $0.20 or a rule of thumb or ballpark you could give us.

Dr. Patrizio Vinciarelli

Well, it depends on what share of the policy spin that we have and I think as early this cash we're working to expand this year

John Dillon - D&B Capital

Let say this for argument (ph) just the processors if you’re just powering the processors would it be $0.10 on the dollar would be $0.20 on the dollar just the rough number?

Dr. Patrizio Vinciarelli

Well we talk about it in terms of just dollars for processor and I’m going to be purposefully big because to say obvious I don’t want to give a target to competitors to share, it’s just as not the money of estimate which would by definition of one world to the other by a factor of two or three I just to give you sort of in order of magnitude estimate which I believe what you’re looking for.

John Dillon - D&B Capital

Yes, for process of the event of

Dr. Patrizio Vinciarelli

[Indiscernible] solution could be let say are the more factor of $20.

John Dillon - D&B Capital

Okay. So $20 per processor and that’s just the [Indiscernible].

Dr. Patrizio Vinciarelli

Well not just [indiscernible] I’m not going to go there

John Dillon - D&B Capital

Okay.

Dr. Patrizio Vinciarelli

Just to asses as not the many of you put into the.

John Dillon - D&B Capital

Okay.

Dr. Patrizio Vinciarelli

Customer significant with respect to these in terms of the actual opportunity, the ability to finish rate across as suggested earlier multiplicity customers’ multiplicity around markets and we are executing on a strategy to accomplish that toward the science that going to enable larger multiplicity of customers to leverage our solutions. There is a gradual interest in the market place for a number of good reasons ranging from performance to other reasons for customers to embrace our solution and as you can imagine we are working and partnering with leading companies in that space to facilitate to reference designs the adoption of our process and power solution.

And we may have announcements with respect to developments on the trial front later this year.

John Dillon - D&B Capital

Are you teaming with Intel where they’re actually promoting your product because they’re the best solution for powering your chips?

Dr. Patrizio Vinciarelli

I can’t comment with respect to any specific company or initiative.

John Dillon - D&B Capital

I can’t remember if I ask this question already, your gross margins at the percentage of revenue going forward, do you expect to see those to continually step up I think I heard in opening comments you expect next quarter to be up as Vicor is up, do you expect continually to go up for the next several quarters?

Dr. Patrizio Vinciarelli

Well, at this again I say obvious, I think invested the quarter $1 billion there a round numbers being technology of the foundation of chips and [indiscernible] we want to see a return of that investment well they follow us on that and that gives measure for us in traction with customers revenue growth but significantly a margin level, profitability level that is commensurate (ph) to the level of investment we have made in the technology. So the good news in this regard is that we are finally with SiPs first and chips second getting to 12 platforms that can support the low cost structure that enables our customers towards the competitive pricing they seek while at the same time enabling us to achieve return on investment that by way of healthy margin and that’s the making of [indiscernible] for our customers across us.

John Dillon - D&B Capital

Fairly good expected. Second gross margin as a percentage of revenue to continue to go up in the next several quarters?

Dr. Patrizio Vinciarelli

Let me answer in this way I am, I know I’m repeating myself but in the early days of our big power consumption project I am now going back to the 80’s early 90’s. Vicor enjoyed margins in the 60% to 65% range routinely. To develop the different line with this spend nearly as much as we have invested in every way not just dollars but invented [indiscernible] whatever you want to call it is to develop the technology, top platforms, intellectual property this of the foundation of SiPs and Chips.

So, we would definitely expected to see a very investment measure in terms of margin at least this is good in time as we are seeing [indiscernible].

John Dillon - D&B Capital

Sounds, great. Thank you very much for comparative better results, this sounds great. Thank you.

Dr. Patrizio Vinciarelli

Thank you.

Operator

Alright, and it looks like there are no further questions in queue.

Dr. Patrizio Vinciarelli

Thank you. We will be talking to you in approximately three (ph) months. Have a good day.

Operator

This concludes today’s conference. You may disconnect and have a great day.

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