Bookings, Revenue And Earnings Take A Pause While Opportunities Continue At Vicor

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About: Vicor Corporation (VICR), Includes: NVDA
by: John Dillon
Summary

Last quarter, Vicor missed on earnings, revenue, bookings and their forecast.

New opportunities continue to build at a furious pace.

The plant expansion plans are intact.

The new GCM product is a game changer.

Vicor's 4th generation products are coming this year.

Vicor (VICR) missed on their 4th quarter, but they continue to innovate by releasing new products and they are winning new designs in substantial new markets. This is presenting an opportunity for investors with patience.

What happened?

Where did the incremental revenue go? What did I get wrong in my last Seeking Alpha article?

In my previous article, I predicted that the revenue Vicor would derive from Nvidia (NVDA) using Vicor's converters in their DGX-2, HGX-2 and SXM-3 products would be incremental, and that would drive Vicor's bottom line. So what happened? The Nvidia slowdown affected Vicor more than I thought. The Nvidia opportunities were not enough to move the needle on Vicor's revenue.

The revenue Vicor receives from Alphabet (GOOG), (GOOGL), who is Vicor's largest customer, has been lumpy. A soft order flow from Alphabet along with a low Nvidia number would explain Vicor's weakness. This is consistent with articles about a data center slowdown. I mentioned in my previous article that Nvidia coming up short was a risk, but I did not heed my own warning.

In the 4th quarter conference call, Vicor announced that the brick business was affected by the tariffs and the China slowdown. While the advanced products are the future, the brick business still accounts for 63% of Vicor's total revenue.

As a result of all of the above issues, bookings fell off a cliff from $91,100,000 in the 3rd quarter to $60,500,000 in the 4th quarter. It is now clear, that Vicor's advanced product customers like Alphabet and Nvidia had primed the pump with orders in the 3rd quarter, as was indicated by the record backlog at the end of Q3, and then they delayed taking product because of week demand caused by the data center slowdown.

The other sources of incremental revenue that I expected were from IBM (IBM), Pezy and Cray (CRAY). These collective opportunities did not produced enough revenue to contribute in a significant way to Vicor's top or bottom line. This does not mean these opportunities went away, as the supercomputer market is about as lumpy as they get. For example, Cray is planning on shipping it’s Shasta computer later this year to the National Energy Research Scientific Computing Center. The contract is valued at $146,000,000. A supercomputer of that size could use up to $10,000,000 or more of Vicor's converters.

Obviously from Vicor's Q4 numbers, no other major data center has yet to adopt 48V on a wide scale, so the conversion from 12 to 48V is slower than I expected. 48V will come, but it is still not widespread.

While the automobile market is bigger than the data center market, Vicor's opportunity in autos is still down the road. Patrizio Vinciarelli, CEO, stated it will be several years before Vicor will recognize substantial revenue from the automotive market.

The APLI, or Andover Parking Lot Indicator, which I describe in my previous Seeking Alpha article, was not accurate for the 4th quarter. I believe that's because Vicor uses Sundays to set up small preproduction runs for new customers. So the APLI is really more of an indicator of future opportunities.

So I apologize to my readers, as I was wrong.

Even though the quarter was not up to expectations, it should be noted that quarterly revenue increased 25.4% and EPS increased 425%. Vicor's highly leveraged business model was validated by Vicor generating operating cash flow of $13.3 million for the quarter.

Going forward, I believe that this is a great opportunity to buy shares if you have a longer-term horizon. Basically, my revenue and earnings forecast for Vicor was set back by three quarters. Nothing fundamentally has changed as new products will continue to drive new design wins that will lead to incremental revenue.

New Products

While others are trying to catch up to Vicor's original 10 year old VI Chip technology, Vicor introduced their new GCM, or Geared Current Multiplier.

In previous Seeking Alpha articles I describe how Vicor’s power supplies can accelerate XPU performance. The GCM is a game changer and it enables even more efficient and higher performance processors and systems.

A picture is worth a 1,000 words. Below is a picture from Nvidia's website of the Nvidia V100 with conventional (not Vicor) power supplies. You can see the GPU in the middle and on both sides you see a total of 16 power converters.

Vicor replaced those 16 converters with three gold converters on the newer Nvidia SXM-3. Vicor also eliminated a 12V intermediate bus conversion step by going directly from 48V to the Point Of Load. The Vicor POL converters are placed directly on the processor package and Vicor’s solution is called Power on Package, or POP, as you can view below from a picture I got from Vicor's website.

Vicor Power-on-Package Supplies the World

Below is picture from the Pezy website of the Vicor POP, but this time powering a Pezy supercomputer's processor.

Notice how close the converters are to the processor. This may not appear to be relevant, but it saves considerable energy and frees up pins that allow greater I/O to the processor.

Now look at what's to come:

The GCM places a single converter that can handle up to 1,500 amps directly under the processor. This placement frees up real estate around the processor allowing space for high bandwidth memories and high density interconnects that can be used to increase the I/O performance of the XPU.

The Vicor product enables computers to be smaller, faster and more energy efficient. Once one high-performance computer or supercomputer company incorporates Vicor's GCM into their product line all others will be force to follow in order to stay competitive.

The GCM can reduce the interconnect power losses by up to a factor of 10. This saves considerable power losses and lessens the systems cooling requirements. The Vicor converters are competitively priced on a cents per watt basis.

Vicor announced that the 4th generation NBM and RFM products are coming soon. This next generation will reduce the size and cost of the converters, while adding performance. The NBM's should start generating meaningful revenue within a couple of quarters and the RFM's will follow.

The CEO, has mentioned several times that basically all the AI and supercomputer companies are working with Vicor. These opportunities will come to fruition. It is just a matter of time. Vicor products are protected with a portfolio of patents and their competitors are not even close.

Plant and Capital Expansion

On the last conference call and in their 10-K, Vicor announced that they are building an additional 85,000 square feet of manufacturing space. They are budgeting $12,000,000 for production equipment to be installed in the new space in two phases. By the end of 2020, Vicor expects the new space to be complete and filled with new machines. At that time, Vicor will have the capacity to generate up to $750,000,000 of revenue a year.

In addition to the above mentioned expansion plans, they invested $11,300,000 in new production equipment in the 4th quarter, and they have an additional $7,000,000 budgeted for the 1st half of 2019. Vicor expects a big sustainable revenue ramp later this year, and with the new equipment and space, they will be ready to ship that revenue.

Short interest

The shorts were busy covering, as the latest Nasdaq report indicated. But there are still 1.4 million shares that need to be bought.

Risks

Vicor has lost a lot of credibility with investors by missing their forecast in the 4th quarter. The transition to 48V in the data centers is slower than I anticipated. If Vicor's new products are delayed or have issues, this could affect forecasted revenue and earnings. While there appears to be no competition for their high-end POL products, this can always change. Vicor continually cautions that their bookings and revenue numbers can be lumpy.

Conclusion

Nvidia, Cray, Pezy and IBM chose Vicor's products for a reason. Vicor's products enable a higher performance computer and they are cost-effective. If the market looks ahead 6 months, Vicor's share price may move up shortly. There is very little liquidity either way for this stock, so the share price can move back as fast as it moved down. If the selling is exhausted, it will not take much to move the stock back up.

The CEO stated in the 4th quarter conference call that, "A feverish pace of new program activity is setting the stage for substantial growth in bookings, revenues, and profitability", and he expects bookings by the 4th quarter to be a record $100,000,000. Jamie Simms, CFO stated, "A definitive positive resolution of the uncertainty about additional tariffs may result in a resumption of vigorous order flow".

Vicor is in the early stages of a long-term secular growth phase and it is a strong buy.

Disclosure: I am/we are long VICR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Vicor is a volatile stock. Please do your own research and consult a financial advisor.