Vicor Corporation (VICR) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Vicor earnings results for the fourth quarter and year ended December 31, 2011. My name is Karis and I will be your coordinator for today. [Operator Instructions] At this time I would like to turn the conference over to your host for today, Dr. Patrizio Vinciarelli, Chief Executive Officer of Vicor, Mr. James Simms, Chief Financial Officer of Vicor, and Mr. Richard Nagel, Chief Accounting Officer of Vicor. Please proceed, gentlemen.

Good afternoon, and welcome to Vicor's earnings conference call for the fourth quarter and full year ended December 31. I'm Jamie Simms, CFO, and with me here in Andover is Dick Nagel, our Chief Accounting Officer, and joining us from Boston is Patrizio Vincarelli, our CEO. Today we issued a press release summarizing our financial results for the fourth quarter and the full year. This press release is available on the Investor Page of our website vicorpower.com. We also have filed a Form 8-K with the SEC in association with issuing this press release. I remind all of you today's 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 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 shortly upon its conclusion through March 8th, 2012. The replay dial in is (888) 286-8010 and the listener passcode is 68031223. In addition a webcast reply of the conference call will be available on the Investor Relations page of our website beginning shortly upon its conclusion. Patrizio and I have each prepared remarks after which we will take your questions. Patrizio?

Hello and welcome to our 2011 earnings call. As set forth in this afternoon's press release, Vicor reported fourth quarter earnings of $0.02 per share, down from the third quarter earnings of $0.03 per share. For all 2011, we reported $0.21 per share as compared to the 2010 earnings of $0.80 per share. On a pro forma basis, we earned $0.65 per share in 2010 reflecting certain non-recurring adjustments to deferred taxes. The markets we serve remain soft and our disappointing sales for the fourth quarter reflect this softness. However, we had experiencing a high level design activity and remain hopeful we will see improved results as this year progresses. The BBU, our Brick volume configure systems business, which serves defense electronics, industrial and transportation markets worldwide, experienced mix results for the fourth quarter as export shipments bounced back from a very weak Q3 while our North American shipments experienced a slight decline. Our part systems business focused on defense electronics had an encouraging quarter. However, our Westcor Division, which serves industrial market segments, saw its revenue decline. Overall, BBU revenue increased approximately 5% for the quarter. Bookings for the BBU were essentially unchanged, sequentially. V-I Chip experienced significant declines in bookings and shipments for the fourth quarter. A consequence for the cancellation where major super computer project reported in the third quarter. We discussed this cancellation of the several [ph] Blue Waters orders project at the University of Illinois on our last earnings call. All the flow for V-I Chip, while lower, came from a broader range of customers, some of which has recently designed V-I Chip solutions into the next generation products. Picor, our father [ph] subsidiary also experienced lower shipments for the fourth quarter. However Picor had a robust bookings quarter reflecting efforts to promote its merchant lines for silicon-centric merchant products. Micro-economic uncertainty has been a source of weakness across market segments and geographies. Another cause of lower than expected bookings and revenue has been delayed acceptance of our intermediate bus converter products. As discussed in the past our IBCs, our isolated converters for networking, computing and other segments in which [indiscernible] architecture has failed. Our IBCs offer essentially twice the power density and conversion efficiency of industry standard bus convertors for which they present incompatible replacements. Our IBC lies the same proprietary sine amplitude converters engine found in VI Chip BCM and the cam convertors. In the IBC implementation our sine amplitude converters engine delivers 98% peak efficiency nabbing performance space competitive advantages for OEMS. While our original expectations for IBCs have not been met, design wins reflect in the now widespread acknowledgment by the market of the superiority of solutions supports our expectations that we would be shipping, describing [ph] volumes to customers in enterprise networking. Despite our disappointing recent performance, we're looking beyond current business conditions and remain focused on our strategic vision. Microeconomics uncertainty aside, global trends netted feasibility cost and conception strongly favor our valuable position. We've invested heavily for many years in new technologies and manufacturing processes and most recently the front end of our business. Our transition as a company continues as we engage with global OEMs seeking the highest performance solutions to the power conversion needs. Vicor now has proud road map and the integration capabilities uniquely suited to meet the complex demands of the sophisticated customers. The most forward-looking of these customers already are designing Vicor products, via bricks, via chips, or Picor components or a combination thereof the next generation of products. We anticipate an acceleration of bookings and shipments in the second half of 2012 with a considerable design activity of late should yield production orders. Turning more specifically to these design activity, during the fourth quarter, we developed our first V-I Chip based solution to Intel based server designs. In the first quarter, we have received initial purchase orders from lead customers. We guard the ability to power processors using Intel's latest VI 12 specification. It's an important milestone and believe the broader enterprise service space represents a very promising market opportunity for us. Our V-I Chip solutions offer architectural benefits and market-leading performance for several OEMS. We expect shipments of the solutions to ramp in the second half of the year. Ultimately, the percent is sustained 8-figure revenue opportunity each year. Last quarter we announced the ease [ph] to mass production of our first ECM-based model, the DC-DC converter for datacom applications rated 470 watts and over 800 watts per cubic inch power density. With the 48 volt normally put this V-I Chip inside, VI Brick product will be followed by product variance capable of addressing growth market requirements, for input voltages ranging from 6 to 120 volts. We remain on schedule with an early adopter customer for production to ramp during the first half of this year. Also during the fourth quarter, we delivered both type units of very innovative V-I Chip solution to another multi volume for use for electric in hybrid vehicles. This VTM V-I chip will be the building block of 280 volts to 14.5 volts automotive power systems providing greater than 5-fold reductions in size and weight versus existing competitive solutions offered by traditional automotive electronics vendors. We're working closely with OEM customers interested in these products. We have several activities underway in the EV space and we're very encouraged by the pace at which developers are embracing micro capabilities [ph]. Turning to Picor. Picor has maintained its new product announcement momentum and was particularly busy at the recent APEC trade event in Orlando. We’re selling new products in our core [ph] power converter module, white power EMI filter and cool swap, out swap controller and circuit breaker power lines were introduced. Picor's position [ph] towards the merchants' salvage [ph] continues as we get closer to transaction [ph] of our most innovative expansion of the Cool-Power line of lower voltage, lower power management solutions. At the beginning of Q2, Picor expects to start sampling its first System in Package, silicone bags switching regulators, which will offer significant performance advantages over competitive offerings. Three highly differentiated power families based on the proprietary’s involved in switching technology are enabled by levering a core Zero-Voltage-Switching Architecture across so-called back boost and back boost implementations capable of operating efficiently from and to relatively high voltages. These [indiscernible] integrated power families will support unprecedented performance at a relatively low cost, enabling scaling of our technology to lower power, cost-sensitive point of load applications. Picor's step devices will complement and fully enable a vision of comprehensive solutions from the AC outlet all the way to the point of load. Before I turn the call over to Jamie who will discuss the financial statements, I want to highlight the announcement in January this year of a partnership with Digi-Key, a leading Internet-based distributor of electronic components. With this expansive Internet-based market reach, Digi-Key should be a strong complement to future electronics helping Vicor to expand its global message while increasing our presence in critical markets. As we expand the number of VI Brick Chip and Picor products, we can be stocked by our new distribution partners, we expect the distribution channel to become a meaningful contributor to our power revenue [ph]. Jaime?

Thank you Patrizio. I'll now review our quarterly performance providing some background and business unit specifics. Consolidated bookings for the fourth quarter totaled $50.1 million, a decline of approximately 12% from the prior quarter. Total 1 year backlog, at year end, stood at $54.2 million, a decline of approximately 14% from the prior quarter. Backlog scheduled for shipment in Q1 at the end of Q4 totaled $40.4 million, or 74% of total backlog, down from $45.7 million of backlog scheduled for shipment in Q4, at the end of Q3, which represented 73% of total backlog. BBU bookings were stable, quarter-to-quarter, with a decline in Japanese bookings offset by an increase in Vicor Andover bookings. As commented on last quarter, we believe the decline in Pentagon spending, on the types of communications solutions we power, an important driver of North American BBU demand, has ebbed. We do not anticipate a return to the levels of 2009 and 2010 in the foreseeable future, but we expect the current level of activity to be sustained given, again, the nature of the programs we support. As should be the case with many of the BBU products targeting industrial and transportation applications, we expect future growth in defense electronics will be the result of the use of our advanced V-I Chip and Picor technologies in meeting the high performance requirements of next generation applications. As Patrizio mentioned, V-I Chip bookings were off sharply, as cancellation of the Blue Waters supercomputing project, took a big bite out of our bookings forecast for 2012. However, our perspective on VI Chip’s 2012 bookings and revenue is brightened by recent developments in the Intel-based server space that Patrizio spoke about a moment ago. Picor's bookings increased 19% sequentially, reflecting the uptake of new products announced during the year, notably quiet power filters. With several new product announcements recently and the planned roll out of SiP-based regulators, we anticipate continued momentum for Picor. Turning to revenue, Vicor, as stated, recorded consolidated revenue of $58.6 million for the fourth quarter, the same level we recorded for the third quarter. We did experience a slight shift in mix for the quarter. BBU revenue increased 5.1% sequentially, based on improved shipments from the Vicor Andover modules business, our largest, and our Vicor Custom Power entities. V-I Chip revenue declined 12.4%, reflecting the rescheduling of certain shipments from the fourth quarter to the current quarter. Picor revenue declined almost 39% quarter-to-quarter, due to an inventory correction undertaken by a contract manufacturer for Picor's largest customer. We do not anticipate a recovery of this volume in the near term, but do expect increasing shipments of new products throughout the year. As previously discussed, we have adopted a multi-channel distribution strategy and announced our relationship with Digi-Key, this quarter. With the new Digi-Key relationship, and a maturing Future Electronics relationship, we expect our financial statements will reflect increasingly higher sales through these stocking distributors. However, for the fourth quarter, our newly established relationship with Future Electronics generated only modest sell through. Our mix of North American and export revenue was consistent, quarter to quarter, with international revenue representing 53.7% of Consolidated total revenue, down slightly from the 55.8% share in the third quarter. Fourth quarter shipments to Asia Pacific, which excludes Japan in our definition, recovered and would have been much higher but for the decline in shipments by V-I Chip and Picor to Asian contract manufacturers working on behalf of our large customer. The Asian industrial markets, and in particular, the Chinese railway market, appear to have caught their breath in the second and third quarter of 2011 and have now recovered. We are hopeful their current relative strength will be sustained. Consolidated gross profit margin as a percentage of revenue for the fourth quarter was 41.8%, essentially unchanged from the prior quarter. The change in product mix was reflected in a slightly higher margin for the BBU, and a slightly lower margin for the VI Chip, reflecting volume-related changes in overhead absorption. Consolidated operating margin as a percentage of revenue for the fourth quarter was 2.1%, down sequentially from the third quarter figure of 2.9%. The expansion of our marketing and sales effort, again, was a driver of higher spending, as our SG&A expenses increased 5% sequentially. Higher legal fees associated with our SynCor litigation also contributed to the fourth quarter increase. R&D expenses, predominantly compensation, declined 2% sequentially, but this was largely because of the relatively high stock option expense included in the Q3 total. Quarterly pre-tax income, including interest income and the net effect of accounting for certain changes in the value of our investment portfolio, totaled $1.2 million, representing 2.1% of revenue, in contrast to the third quarter pre-tax income of $1.7 million, representing 2.9% of revenue. Our effective tax rate for the fourth quarter was 36.9%, but for the full year was 33.7%, reflecting the methodology by which we calculate a full year provision and adjust our calculation of the incremental quarterly tax due based on a comparison of our original pre-tax forecast to actual results. Cash flow from operations totaled $4.7 million for the fourth quarter, up slightly from $4.6 million for the third, reflecting a net reduction in working capital for the period. Our net capital expenditures remained at the maintenance level of $1.2 million for the fourth quarter, the same level as the prior quarter. While we anticipate the need to add production capacity, we are focused on enabling capacity expansion that minimizes incremental CapEx. Turning to the consolidated balance sheet, our receivables portfolio remains in excellent shape with day-sales at 46 days up slightly quarter-to-quarter from 44 days. Consolidated inventory's quarter-to-quarter declined very slightly and our annualized inventory turnings stood at 4.1, a slight decline from 4.2 for the Third quarter. At December 31, we had $71.9 million of cash and equivalents, as well as long-term investment securities carried at a book value of $9.6 million. Included in this total are auction rate securities with a par value of $9.1 million that are carried at a book value of $7.5 million. I'll now turn the call back over to Patrizio for a few closing remarks before we take your questions. Patrizio?

Long term listeners know our quarterly communications sales highlighted for some time the transitions underway within Vicor. We've invested substantial amounts in the development of innovative power technologies in highly differentiated products. Recently we accelerated an investment, taking these technologies and products to market. Unfortunately, we are currently experiencing soft demand in some our serve markets just to the point at which a valuable position is achieving recognition in the market place. The markets we're focused on are coming to terms with the realities of a world becoming more and more dependent on electronic products that must be small, light and efficient. Defining characteristics of Vicor products conversion power density and efficiency have become customer priorities. Not just for the high end applications we have traditionally served but for the broader range of applications in our customers. Our valuable position is well-suited for today's increasingly power-conscious market and we have changed the strategy in our organization to address these market opportunities. As customers seek high performance with a lower total cost of ownership, Vicor is uniquely equipped to fill a considerable void in the competitive landscape. With our 3 aligned business units, Vicor is capable of providing different shaded, integrated power system solutions to enable customers to achieve competitive advantages leading to power system performance. Vicor's evolution will continue in the years to come as we achieve the side [ph] bricks with a percent, a larger percentage of the BBU's revenue while V-I Chip and Picor enjoy growth enabled by their advanced power component paradigms. Our power offering continues to expand as do the range of our applications served and the breadth of our customers’ base. I am therefore pleased with the progress Vicor's made in recent years. While I am certainly disappointed with recent financial results, I remain enthusiastic about Vicor's future. This concludes our prepared remarks. So we'll now take your questions.

Operator?

[Operator Instructions] And you have a question from the line of Jim Bartlett.

Yes, Patrizio, could you give us a little more understanding on IBC of what kind of shipments might expect this year? And give some idea of breaking that down in terms of from Cisco and from other potential vendors? And again talking about the hesitation in the market and the incur [ph] of suits that have stymied the market.

To your point and in discuses in prior calls, last year, the trends from SynCor in a variety of forms directing and indirectly impacted the rate of progress in design wins with a number of customers. I would say early in the year with most customers as the year progressed, we were able to, for a variety of reasons ranging from objective differences of products which customers can very quickly relate to owing to their performance, to positive advances in the litigation against the SynCor and a variety of fronts, we're able to make progress. And at this point I would say that the SynCor threat is no longer a factor. The emperor is being seen as having no clothes by a number of customers, not all. There's still some that have some concern, but I would say at this point, looking at 2012, we don't anticipate that, that being a significant factor in terms of designing activity. What would it has done, it has in effect delayed the start of the penetration. To the extent that the penetration was delayed, the level of revenues got all pushed to the right into the future in that designing activity was stalled for a good part of last year. But at this point in time, as I look at major customers in the US and outside of the US, I see in particular with, let’s say one customer who shall remain nameless, but a very significant customer, pervasive designing activity which promises to turn into very significant business over the next several years. I think this year we'll still suffer from the impact of the delay that take [ph] last year. As we get into next year, we expect very significant contributions from our distributors [ph] but there's going to be ramp up through this year and growing into next.

Would you see some of that ramp in terms of revenue by the fourth quarter?

I don't want to give you, for a variety of reasons, a figure, but I was sitting over lunch today with 2 key executives discussing the [indiscernible] opportunity on the Brick Business side and we were communicating with each other regarding how significant the opportunity is on a variety of fronts. We're very focused on this. Again, we have products that are so superior to the competition, to all the competition in terms of advances in efficiency that the opportunity is there to be had. And again, the legal, all that is no longer a significant factor except for delayed start. So I can say in general terms that one major account, we've seen the design active spread across a variety of programs. We're going to have a very pervasive presence of that account. And that's 1 of 4 or 5 where there's been a good deal of design activity. So, I think this year it would be significant as we get to the second half of the year and should be more significant the next year.

In the same line, could you talk about when you would start seeing momentum from both future and Digi-Key, in term of having more, a significant impact on revenue? Could that happen as early as the third quarter of this year or fourth quarter? When do you start seeing something meaningful there?

I think the targets for this year, for the trial contribution is still, for obvious reasons, relatively modest. We're obviously dealing with an industrial product. I'm now referring to our entire power line, marketed through the channel. Getting designed into customers where historically we haven't had a reach, but signifying [indiscernible] design in cycles of, let's say, industrial products that typically take 12, 18, sometimes 24 months to come fruition in terms of a level of production revenue. So, I think we need to be very [indiscernible] and passionate with respect to that. It's one of many initiatives that are being carried forward, in power. We're not looking at any one of these initiatives by themselves, to make a very substantial difference. We're looking at the aggregate of a large multitude of initiatives. With products, with the distribution channel, with greatly expanded cells in marketing teams, with much deeper structure, to reach and detach customers, that historically we've had very little access to.

And your next question comes from the line of John Dillon.

I've got a question on the Intel server based opportunity that you talked about. And I just want to make sure, did I hear correctly that that's an eight figure revenue opportunity?

That's being projected as an 8-figure revenue opportunity, yes.

So that spend of tens of millions of dollars, am I doing my math right?

I think that's what those figures mean, so.

And is that on a yearly basis or is that what you expect this year?

That is on a yearly basis, we're expecting to start ramping in the second half of this year.

Okay, okay. Is this with a new server company or is this one of the existing server companies you're working with?

Well, this is, a development that has been in the making since last year. It's secretly developed, and I cannot categorize in any detail, the company's very sensitive about it. And, so, I told you pretty much all that I can say about it.

Okay. And have you had any new server companies sign on your, architecture, your factorized power architecture?

Yes, yes. I think we've, we've seen progress, you know, commodity, driven by the recession [ph] by some customers, of benefits of the architecture. Particularly in application environments, where the power source, for a variety of reasons, wants to be 48 volts, instead of 12 volts. When the power system architecture demands 48 volts, we have a level of superiority in terms of density efficiency that is very compelling. We're also well one [ph] with the development of a next generation platform that will further improve performance, while bringing down cost dramatically. And this is something that we're going to be able to pass along to customers in terms of [indiscernible] position where in effect we have to make an agonizing decision between performance on the one hand and cost or price on the other. I think with our next generation chip set that we're going have the best of all worlds, you know, particularly for 48 volt systems. But the problem has been we took an action later this year is actually based on the same building blocks that we've deployed successfully over the last few years in the service space with a leading comp and [indiscernible] space. Those were not Intel processors. They were different kinds of processors but it's the same kind of V-I chips that will be applied later this year in an Intel socket. So, we're quite excited that. We're excited about the fact that far from being the last word on this front, we're going to have the world we told to again, take performance to new levels, while at the same time making the cost and the price to the customer a good deal more attractive. So to set things in perspective with the older generation V-I chips, last year V-I chip realized the better part of a $50 million revenue year. And looking forward, I think, with those same chips we're going to be able to expand the revenue base and we expect that with new chips that are currently in advanced stage of development, to be able to expand the addressable market opportunity.

That's great. So you expect to be able to expand the current market you're in and with the new chips you can expand even further.

Yes. The cost benefits that you're speaking are going to be very substantial. We're going to be able to take a typical MEG [ph] which is the set of what [indiscernible] way down, relative to the level of first generation V-I chips.

This is pretty incredible because I think the reason why you were, one of the reasons, one of the reasons you were successful in the first big opportunity was because the processors use so much power. But it's my understanding Intels do not use as much power or as current. And so you, but you're still using the same V-I chips, so that's, that's a real coup [ph] for you.

Well, so processors, we all read the stories about the advances in technology that take the power consumption of processors down and obviously that is the case, particularly in certain application environments, certainly in for mobile computing. But then there are other application environments in which next generation Intel chips will pose even more demanding requirements on the power system, in particular when it comes to attributes such as peak loading, as a measure related to average holding. So we see evolving demands for power system solutions that can keep up with dynamic flows that, particularly during certain time frames of intense computing can take their toll with respect to the capabilities of commercial solutions, based on traditional multiphase back regulated systems. Our technology solution doesn't involve a multiplicity of interleaved back regulators where it traditionally as the current demands expand and more phases need to be added from 2 to 3 to 4. We can, in effect, address a high power requirement with a single phase current multiplier engine, so called VTM V-I Chip. And one of the key attributes for VTM is that it can address possible [ph] requirements very handily without having to the overdesigned in terms of incremental phases and incremental power processing capabilities. So, we see this as a technological development that plays to our sense. It plays to the sense of factorized power in V-I Chips.

Excellent. I read the article, the IEEE article that the IBM engineers wrote about the factorized power. And the article was absolutely compelling. And my question is PB is, Patrizio, sorry Patrizio. The article is so compelling, why haven't more server companies jumped on the bandwagon? Or why is it taking so long? I mean, because you're truly an enabling technology in the server space.

We've been an innovative technology in the high end of the server space with engagement you referenced. I think what’s exciting about the Intel application is that there's going to be an entirely different application environment. And the fact that the valuable position of V-I Chips and factorized power in the future, the valuable position of the Picor SiPs, which are part of the next generation solution, the more cost-effective solution. The fact that these are being designed in, is an important step forward in terms of expanding the reach of factorized power. We started, to your point, in the past applications that was very demanding and where our solutions were truly enabling. It was technically a very compelling choice but from a cost perspective, it was not in effect that attractive. The technical demands took pressure in that particular application environment, to the cents-per-watt figurement [ph] . As we look at these next generation solutions, what we're going to have competitive performance coupled with a cost structure that will stand up to the competition in a very attractive way. So that will make the choice of leading server companies more interesting than they might have been in the past. So I think at this point, it’s been [indiscernible] for most to discount capability because its cost metrics were not closing but were going to be in a ballpark that is very competitive from a cost perspective while all things of substantial performance advantages.

Okay that's sounds good. So what you're doing is you're listening to the customer and you're getting some push back on price so you're scaling your systems so you can give them both the performance and the price and you feel very comfortable in and it sounds like you're getting design wins on that now on that or you have design wins now with this new technology?

Yes, we are making good progress by the way, even with the first generation, what they call first generation V-I Chip technology we've had out of the design wins. It's not that the landscape of several opportunities is limited to the example that you referenced. We've had and are adding other wins in Japan and other parts of the world. The key point, though going forward is going to be making the solution considerably more cost effective and we've been working on that for quite some time and we recognize all along that that's an essential part of being able to achieve significant market penetration. The bulk of the market space takes cost so seriously that severe [ph] performance by itself will not get you design win.

Okay. Okay. All right and it sounds like you're very confident in the second half. I men we've heard a number of times how things can be better into the second half but it sounds different this time because I think what I'm hearing is you have design wins now that back up for forecast for the second half. Am I correct in that assumption?

Yes, we have what our sales team regards as a conservative forecast showing progression through the year and into next year. As we discussed in that last conference call we're working on a very ambitious multi-year plan to achieve what I think can be a conservative categorized as dramatic growth which we haven't seen in a long time. And we put the infrastructure in place. We have now very seasoned team in the front end that has a complement of skills and capabilities that is very comprehensive to address and penetrate the better accounts that are part of our business plan.

And your next question comes from the line of Paul Smith [ph].

Two questions, Patrizio, one is about the new power simulation tool. How sophisticated is this thing? Can I take a rack of boards and a switch or something and test its dynamics over varying loads, et cetera?

Patrizio? It appears we have lost Patrizio.

Ah. Well, the second one, you can answer. And that is, in the Blue Waters, I don't know what happened there with IBM stepping out and the down scaling of the budgets, et cetera...

Oh, let me, let me put you on hold because Patrizio's dialing in on this other number trying to get back in. So. [Technical Difficulty]

Sure. In the new power simulation tool, the level of sophistication of this thing, just a sense, can I take a, a design say, a switch with the factorized power in it and check the stability of the power source with the varying loads and changes in the...

Yes, so... Let me explain the, the key benefit to a typical IBC customer of this tool. What we've seen with customers in the trial space for these kinds of products is a recurring difficulty in assessing what capability in terms of power delivery they could accomplish with IBC product. And to the extent that our products are much more capable than competitive products, they are capable of delivering a good deal more power in the same space, in the same footprint. What we want to accomplish with the simulation tool is to enable customers to very quickly simulate, in particular how much power they could derive from our solution in their application environment. So the customer is going to be told to model the amount of the load of the power drawn the input voltage range of which the IBC product is to be operated. The customer can define to thermal environment in terms of airflow and air temperature. And the simulator will in a matter of fraction of a minute tell the customer what the operational temperature of the device will be and to the extent how much power can be set from the power. So, this is a first in this space. We get a great deal of interest and positive comments both from particular customers who found it to be very, very useful from the trade press was being keen to carve it. Now in addition to, in effect, solving the thermal problem, it can also address a number of applications questions but that may be a little bit too technical to address in this conference.

Well simply, can it address load stability in a distributed power system?

So, IBCs from a low stability perspective our IBCs which are different from competitive IBCs. They have, our IBCs, have needed [ph] stability attributes that make in effect their application a no-brainer, usability. It's absolute. So that's never been an issue with a customer. What I've seen over and over again and those customers is a recurring question, a recurring theme of, "Wait, so how much power can I get out of these?" because generally speaking that space is all very keen on being able to get more power because the way in which companies in that space compete with one another is by delivering more functionality of a line card and generally speaking, the power system can be a gating element to how much power with that how much functionality the line card can support so being able to quickly address that fundamental question and short circuit some the evolution process by the customer is key to success.

And the second question is in the Blue Waters process, was there a return of inventory and a restocking charge or was there just inventory that you guys held that never got shipped? How did that work?

No inventory right now. Sorry. So what was involved with that is a mis-forecast, in effect. We learned about the customer’s decision to pull out of this major project in time, so as to, in effect, avoid any issues such as you described, either for ourselves or for the customer.

Our next question comes from the line of Don McKenna.

Jamie you mentioned, I think, earlier, that we're entering the quarter with projected -- or backlog that was shippable this quarter of $40 million, versus roughly $45 million the previous quarter, and with you indicating that sales continued to be soft, are you projecting a loss for this current quarter? And based on the plans that you have in place now, do you see that as being the end of the downturn, and we're looking upwards from there?

Well Don, first of all we don't provide guidance. So I'm sorry I can't give you a direct answer. Our current forecast...

Well, let me ask you this. Would you think that if, I came to that conclusion that I would be out of line?

Well, as we've discussed, we're disappointed with the current forecast, and booking trends indicate that the improvement that we expect should occur in the second half. Having said that though, I want to emphasize something else that I included in my remarks, and that was that the decline in V-I chips, specifically, was related to a rescheduling that will, in fact, be shipped this quarter. So it does not imply one thing or the other as to what conclusion you might draw. But what it does do is say that, that revenue is still there, and it's attractive revenue at an attractive margin, and that will be recognized in the first quarter.

So that was already identified as part of the backlog?

Yes. The backlog was moved.

But I think it's important to note, as suggested in the opening remarks, that the first half of this year, it is going to be soft. We should recognize that. So we are very focused on those activities that are going to make for a good progression, starting towards the middle of the year.

I've noticed too, on your website, for the indirect labor and what I would call the skilled area, that you have a significant number of open job opportunities. Higher than what I've seen in year and years. Have you put those on hold? Or is that in anticipation of the ramp up in the second half?

Well, let me answer this way. We are, in what one might call the investment phase, so I think the less we can mandate in the launch line. I met 2 new people that had just joined on that day, one in sales, one in application engineering. And this is reflective of what we are investing in, and expecting to be able to accomplish. We think that with the product capability, with the technology, with the differentiation and with a front-end capability that makes the most out of the general opportunity, that we're going to be seeing a good return on our investment. But, in the short term, our focus is not to not to minimize operating expenses, as much as it is to maximize revenue growth. Design wins, bookings growth, leading to revenue growth, as this year progresses and into next year. We’re not in effect, managing the company from the perspective of short term profitability, we think that's a secondary consideration to the opportunity that is outstanding.

I understand that too, and I hope you're, you understand the frustration for some of us, that what we saw long term, you know, in terms of years that we've been anxiously waiting to move from that R&D phase, to what you now refer to as the investment phase, to the day when we finally reach the profit phase, and, we're getting frustrated on this end, too.

Yes, so, no, I appreciate that. You know I'm, I guess, at the very top of the list of very frustrated people. And, you know, I want to be clear with respect to that. And it's inappropriate to make excuses, but I think it's fair to say, that aside from a general softness that the industry at large experienced in the second half of last year, there have been 2 unique circumstances that impacted our short term performance, turn down in defense space and the Blue Waters cancellation. Were it not for those developments, we wouldn't be having, the particular parts of discussions we're having now. And again, there's no excuses; it is what it is. But, our focus is on making sure that we spare no effort in protracting our capabilities in a very comprehensive superior power line, with front-end resources that can get a design win into large customers and the industry at-large. In new markets that we identified, that we're very targeted on and for which we have, I think, a very well-orchestrated strategy. So, it's now investment in the front-end of the business, as distinct from the investment of earlier years in the technology platform. So, as you, I think, may have calculated for yourself, from it being a long time shareholder, we've invested approaching $20 million in V-I Chip and next generation Picor technology, to date. That's been a big investment in prior capabilities that set us apart. The current investment we're now making, with respect to projecting these capabilities in the market placed, is, relatively speaking, a lot more than that. And is higher leverage, in terms of, in effect, making the most of the opportunity that we invested a lot in bringing it back.

And your next question comes from the line of John Dillon.

Patrizio, I want to make sure I heard something clearly. I think I heard that in the second half of this year we'll see production orders for IBCs, is that correct?

Yes.

Okay. And, will they also be in the 8-figure domain?

I think for this year, based on our current visibility, they're likely to be shy of that. But, I think as we look into next year, that they would also be in that ballpark.

Okay. And, we talked about Blue Waters a couple of times, and I'm just wondering have you been able to replace that $20 million hole, in bookings, with some of these new programs?

Not in the very short term. I think that, that development, as I mentioned a moment ago, is impacting our short-term performance and I think the way forward isn't one of immediate replacement of that business, obviously we're pulling out the stops to make the most of other opportunities. But we're realistic about the fact that, designing activity that our expanded sales force is engaged in, is one that unfortunately carries with it, the characteristic cycle times of the industry. And so we expect that in the future we're going to be less exposed to a Blue Waters like development, not because, there isn't going to be some other Blue Waters, but because we expect to have lots of waters of different colors, across a variety of key customers in a variety of different markets. So, the key to minimizing that kind of exposure is having a more diversified customer base and a larger portfolio of programs that contribute to revenue base. So, it fundamentally would be a chip in the early going which I know is an early going that took quite a bit of time but nevertheless, in the early going we have been very dependent on relatively small concentrated customer base with the kind of unique program exposure. Going forward, we're looking at V-I Chip business plan and booking plan and revenue plan going out several years that will make dependency on any single customer, single application much, much smaller and that's the key to avoiding these kinds of upsets.

Sure. So you're getting enough design wins and enough different opportunities and enough different markets that hopefully this will be prevented against in the future because you're diversifying your customer.

[indiscernible] characteristic of our Brick [ph] business model in earlier years, right? So with V-I Chip, early adopter made a big difference of the better and temporarily for the worse but I think it's again, a stepping stone to more opportunities in the future.

Can you tell us what the intent to your dividend is? I mean you can’t tell us if you can give us the dividend until the Board of Directors goes off on it. But what's the plan because it seems to be kind of catch us, catch can, all over the place at times.

Well obviously the payment of dividends as you know quite well is dependent on a number of considerations, ranging first of all with the past [ph] for the ability of the company, the near term prospects capital equipment needs and the overall cash flow. And so for a company of our kind, this phase in our development is to be expected that the dividend policy has got to be not rigid but very flexible and adjustable as a function of circumstances. I think it's safe to say there's unlikely to be dividends in the very near term, given the near term prospects and over the years as things progress in the right direction we're going to be looking to something that to your point can be not predictable.

Okay. And along the same lines, with all these opportunities out there and everything that you're doing and your stock price being so low, I'm surprised I'm not seeing buying back any of your shares.

Well, again, we've been -- there's a lot going on and we've been focused on those things that make the most difference in terms of our business prospect. But under the right circumstance we will not hesitate as we've done in the past to step in.

And your next question comes from the line of Dick Feldman.

I have two questions. One, in earlier calls you've made reference to new packaging for the ViI Chips, improving your competitiveness. On this call you didn't mention that but you also talked about new development in V-I Chip to improve its competitive so you can open up broader markets. Could you comment on these issues?

Yes, so to your point the two are very much intertwined. I think I may have said that in the prior call that the new package development is coming to fruition. We've actually within the last couple of months have shipped initial units to a lead customer using the new package and the customer is very, very attracted to the package and the overall performance of this product. It's going to your point of do we reference in preparing marks is the DCM for automotive electric and hybrid applications. This to be followed as this year progresses by a number of other entries that leverage the new packaging technology. So we have a number of different platforms that they follow on, both for AC input products and DC input products, for bus convertor applications as well as the DC-DC converter applications. And all this is part of the strategy journey [ph] referenced earlier with respect to making compelling performance, be a lot more cost effective so that you know customers can in effect have the best of both worlds.

How much improvement, let's say from a year ago if we were to look out, let's say 12 month or 18 months, do you think you can make in terms of price performance?

So with the products enabled by the new packaging it depends on the particular part type. In some cases the multiplier is bigger than others but the in some cases can be over-factor too in terms of the cents per watt figure might, the cost reduction can be over-factored to for some application environments. So this is a major step forward in terms of cost sensitivity of the market and addressable market because to the extent that at a certain price level a fraction of the market is open, I think we can all have a good sense of the impact of taking the price or cost benchmark down by a factor to, in some cases more than that. So that's part of the vision that we've been working on for many year with major investments and new one in [indiscernible] investments to make the powerful point constant a mainstay concept in the marketplace it has to have the cost attributes that make cost not the stumbling block that it has been historically.

Are there other things beyond the packaging that you're intending to introduce and roughly what could there impact be and what kind of timing is there?

Well that’s a very effective [ph] question. So I don't know what extent we may have talked or hinted about these other developments in the past but. So implicit in some of these captions we've had with respect to upcoming [indiscernible] introductions, so implicit in that is a suggestion that we have a new much more advanced silicon platform control architecture that is much more widely integrated and this is part of the general cost reduction side of the [indiscernible] do with performance improvements. So the packaging technology by itself in some cases, even with our mature control chip set, control strategy based on, in effect, the early generation VI chips, it is capable of the factor of the modern day in cases when you couple it to the more advanced control system, which is highly integrated, that is being rolled out with Picor products on the forefront of that effort, there can be other opportunity, is greater than that particularly for certain class of products. So the key developments are packaging technology on the one end and serial integration on the other end. And these 2 play in combination with one another.

So at the same time if this strategy is effective you hope to expand the addressable market and would it also be the case that you hope to improve on you profit margins?

Yes, I think that off the gate, I think the pack of products would be commanding margins at levels as high and possibly above the best margins Vicor has ever had. They're going to able to accomplish that while at the same time delivering solutions that measure in terms of performance, a par capability, are better than what we've ever had. Now these are addressing applications at lower power levels but to the extent they open up a significant portion of the market. So to your point this is not just wanting to make the cost of our products more attractive to customers. Obviously a key component is doing all of that while improving our margins and I think we have a strategy of accomplishing both.

Could we begin to see some of this margin improvement in the second half of this year?

So I would expect, again, as we look at the component of our revenues that can be tagged to Picor products. And [indiscernible] modeled V-I Chips which is a new packaging platform, we're going to see that as those components become meaningful in terms of the aggregate revenues. There won't be an instant impact on the margins, overall. Those are going to be primarily driven in the short term by being able to amortize a fixed cost structure over growing revenues. But as we look the usual component with visibility of, say, the type of revenue component or the V-I Chip component particularity the one that tied to a new package. I think we can clearly see significant opportunity in margin expansion in those areas. And those are going to work their way up into system products and Brick products that leverage a V-I Chip and Picor inside that strategy. But all these, realistically, is going to take time. We all have to be very patient with respect to that. Once, as long as we want to be patient, need to appreciate for what it is. There's not going to be a magic wand to the changes, the margin picture overnight. But I think we have ingredients in place with significant [ph] integration and packaging technology and unique proprietary engines that have clearly, superior performance attributes to accomplish all that.

One last question and that is how much do you -- let me rephrase this. Do you see a major change in Picor's mix between what they provide for V-I Chips and what they provide for outside customers looking out over the next 12 month, 18 months?

Yes, absolutely. So in the self-server applications that we referenced earlier as we look at a large part of this year with the first implementation of that which is V-I Chip based, the type of content will be inside [ph] content, meaning they play a role in terms of providing the control chips used within V-I Chips as we look at next year's implementation, there's going to be Picor ship [ph] playing with the next generation we can [ph] via trip [ph] as the systems solution. So they will garner a significant fraction of revenue opportunity directly and the margin opportunity with greater opportunity for all of us. As we discussed in the past, they use a lot of contractive interference were in effect. There's a lot of cross selling and incremental penetration opportunities arises out of playing these capabilities in tandem between V-I Chip and Picor and also in combination with the Vicor system capability. We bed that at the large server castanet in 2011 and we have it today and we're going to see more of that in other applications and with other customers.

And at this time there are no further questions in queue.

Thanks very much. Talk to you in a few months.

And ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.