Vicor Corporation (VICR) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Vicor Earnings Results for the 3 and 6 Months Ended June 30, 2012 Conference Call. My name is Jody and I will be your operator for today. [Operator instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. James Simms, CFO of Vicor Corporation. Mr. Simms, please proceed.

Thank you, Jody. Good afternoon. and welcome to our conference call for Vicor Corporation’s Q2 ended June 30, 2012. I’m Jamie Simms, Chief Financial Officer, and with me here in Andover is Patrizio Vinciarelli, Vicor’s Chief Executive Officer; and Dick Nagel, our Chief Accounting Officer. Today we issued a press release summarizing our financial results for Q2. This press release is available on the investor page of our website, www.vicorpower.com. We also have filed a Form 8-K with the Securities and Exchange Commission 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 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 that the information provided during this conference call is accurate only as of the day 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 reply will be available beginning at midnight tonight through August 7, 2012. The replay dial-in number is (888) 286-8010 and the listener passcode is 37541014. In addition, a webcast replay of the conference call will be available on the investor relations page of our website beginning shortly after this call’s conclusion. Patrizio and I each have prepared remarks after which we will take your questions. Patrizio?

Good afternoon and welcome to our Q2 earnings call. As set forth in this afternoon’s press release, Vicor reported Q2 earnings of $0.01 per share, unchanged from Q1 earnings of $0.01 per share but a decline from the $0.07 per share we earned for Q2 2011. This quarter’s performance was in line with recent expectations given ongoing weakness in certain applications, markets, and geographies and slower than expected growth from new opportunities. As communicated in my remarks at our recent Annual Shareholders Meeting, we are staying as per the course [ph] despite headwinds as we believe current conditions are temporary and our strategy remains valid. Jaime will provide segment information as well as income statement and balance sheet specifics, so I will focus my remarks to updating listeners on where we stand with our growth-oriented new product initiatives. As I highlighted at our Shareholders Meeting, we have numerous new products in our pipeline. We made 2 product announcements this month, and we expect to be sampling other significant products later this year. Of particular note, we formally announced earlier this month at the Techo Frontier Conference in Tokyo our Direct 48 Volt dual [ph] processor, the achieved solution for datacenters, cloud computing and telephone markets. Compliant with Intel’s VR12 voltage regression specification, our PRM Regulator and VTM current multiplier delivered the most efficient power conversion solution for Intel processor applications from a 48 volt input source, yielding more than 5% greater overall efficiency in a package that is 3x smaller than competitive offerings. This efficiency gain can reduce per processor power loss by about 10 watts or upwards of 30%, which can yield annual electricity savings of approximately $500,000 across a datacenter with 30,000 onsite processors. This is a value proposition that goes beyond the typical cents per watt metric by which commodity power conversion solutions are traditionally measured. This PRM VTM capability, introduced for general viability at Techno Frontier, is at the heart of our previously disclosed design win in the datacenter segment. We anticipate initial production of this later this year, with volumes ramping in 2013. A week later, earlier this month, Vicor formally introduced the first product in its new line of I-integrated [ph] Cool-Power system in a package, or SiPS, point of load [ph] regulators. I have spoken frequently about Vicor’s silicon-centric strategy and am particularly pleased to see that the concerted effort of the Vicor Team has resulted in a compelling product capability that should significantly contribute to Vicor’s merchant product strategy. This initial family includes so called Buck or step down point of load regulators, integrating our proprietary 0-voltage switching control system. These 6 products, the only standard buck regulators on the market utilizing the unique switching technology, offer best in class density and up to 98% peak efficiency. Vicor’s initial regulator line provides significant performance advantages over larger and less efficient models offered from any of the established semiconductor manufacturers and vendors in the power management space. This initial commercial release of step down regulators will be followed in coming quarters by complementary step up or so called Boost and Buck/Boost regulators, all expected to set new industry benchmarks in conversion efficiency and power density. I regard the Cool-Power point of load strategy as a very important element of our overall growth strategy. These devices are general purpose standard products which are easy to use and offer very clear performance advantages. As mentioned, we anticipate more important product introductions in coming months and quarters. The design of the double chip VFM which was necessary to address certain limitations is nearing completion. Later this year we expect to be introducing a new PFM for the line including PFMs in so called power-molded chip packages as components of a broad and far-reaching [indiscernible]. Recall that the PFM is an isolated AC-DC power converter with power factor correction. Unlike low frequency AC-DC frontends using a PFC boost stage and a DC-DC down converter, the PFM converter provides isolation, voltage and submission [ph] and regulation in a single stage using an advanced high-frequency self-switching technology. The PFMs’ very thin profile liberates system architects from dimensional constraints of bulky power supplies. Its small size coupled with secondary side energy storage at 48 volts allows greater flexibility and creativity to design slim products with competitive advantages. Similarly we continued to make progress with an expanding range of DCM DC-DC converters. Recall that DCM began as did the PFM, essentially as a double chip converter. Our first commercial release of a DCM-based product announced in Q4 of 2011 was a 48 volt input VA brick for telecom applications. It was rated 170 watts [ph] and over 800 watts [ph] square cubic inch power density. In Q4 2012 we delivered prototype DCM units throughout multiple OEMs for use in pure electric and hybrid vehicles. This DCM solution will be the building block for 380 volt to 400 volt automated power systems providing a greater than five-fold reduction in size and weight versus existing competitive solution offered by traditional automotive electronics vendors. We have received strong interest from automotive OEMs and tier-1 automotive suppliers, and continue to work closely with the interested parties. During Q1 and Q2 we continued our development of a range of DCM variants capable of addressing broad market requirements for input voltages ranging from 6 volt to 430 volt. Our more recent efforts have been in exploiting the benefits of our latest innovation in packaging technology to maximize the potential of our DCM engine [ph]. As discussed during prior shareholders communications, we’re getting close to introducing our first models utilizing a new packaging technology which we previously referred to as power molding. In addition to attaining unprecedented levels of performance in terms of power density and high efficiency, panel molded modules should provide the manufacturing cost effectiveness needed to succeed in cost sensitive high volume [ph] applications. Panel molded DCM, VFM, VCM and VTM modules will be important contributors in the utilization of this strategy. Expect to see these products released to commercial production in the coming quarters. We anticipate these new products as well as complementary Picor products to begin to contribute to revenues starting in 2015 with robust growth anticipated for the following years. We will be selling power regulators and VI Chip converters as standalone products and along with other power management components, incorporating them into larger Vicor power systems. Remember that an important element of our overall value proposition is the value add to the customer of providing solutions ranging from standalone power conversion building blocks to complete turnkey power systems solutions, thereby expediting the design process and leveraging the [indiscernible] of Vicor’s VI Chip and core competencies. As I said before, these capabilities will expand our reach from relatively low volume/high mix applications to high volume OEM customers. With the performance and cost effectiveness of our new power components, we’re now putting in place a product offering that leverages the flexibility of our factorized power approach; and this will allow us to serve larger, higher growth opportunities with global OEMs. As stated in today’s press release, we remain confident that 2015 will be an improved year for us. The visibility we have into customers’ plans for uptake of existing and new products supports our confidence in the opportunities we’ve envisioned for some time, but our execution of these opportunities has been set back by a difficult economic environment; specifically, in the case of defense electronics government budget limitations, and in the case of our IBCs, baseless legal challenges. As I already indicated, expected growth has also been pushed out due to product development delays as certain products which were expected to make substantial contributions to revenues have been delayed, most notably the PFM. However, we are making progress and are well positioned for the market opportunities we’ve long anticipated. Having mentioned the IBC power lines, I should point out there have been no new developments on the legal front since we last addressed shareholders. Our Legal Team continues to focus on its initiatives within the Patent Trademark Office and has thus far succeeded in having all of Syncor’s asserted claims declared invalid on reexamination. While Syncor is expected to appeal the decisions of each of 4 different Patent Office examiners, it is our view that Syncor’s patent position is baseless and in any case not infringed by any of our products. To conclude my initial remarks, I reiterate my dissatisfaction with recent performance. However, I’ll also reiterate my confidence in a bright future. Some of the markets in which we historically focused are in recession and at least one -- defense electronics -- is suffering from budget constraints of unknown duration. The reasons for lower bookings and shipments are well understood and we’re seeking to address circumstances we believe we can influence. However, until capital spending in our traditional industrial test instrumentation, transportation, and defense markets recovers, we anticipate our core brick and configurable business will be flat. Given our understanding of softened demand in certain target markets for VI Chips, notably the supercomputing market, we also expect VI Chip revenues to be down through the balance of this year despite the potential impact of new orders from the datacenter computing customer we have highlighted. In terms of geographies, we’re monitoring European conditions closely. New order activity declined noticeably in Q2. Similarly we’re watching the Asia-Pacific region, particularly China, as many anticipate rising [ph] growth in that geography. To my fellow investors, I repeat my message of patience. Vicor is executing on its strategy albeit at a slower pace than ’04 [ph]. We are increasingly well positioned to take market share from competitors as we have a differentiated, compelling value proposition based on expanding range of superior products and solutions. I will now turn the call over to Jamie who will provide specifics for the quarter. Jamie?

Thank you. I’ll now review our quarterly financial performance providing some background and business unit specifics. As disclosed, Vicor’s consolidated revenue for Q2 decreased to $55.5 million compared to $59.7 million for Q1, representing a sequential decline of 7%. The Q2 figure compares to revenue of $65.4 million for Q2 2011 representing a decline year-over-year of 15.2%. Both sequentially and year-over-year, revenue declines were spread across all business units. International revenue fell 15% quarter-to-quarter, primarily due to the lower shipments of VI Chip and Picor components to Asian contract manufacturers utilized by our significant supercomputing customer. International revenue represented just over 48% of total revenue down from 53% for Q1. We experienced another sequential increase in recognized sell through revenue associated with shipments by our stocking distributors Future Electronics and DigiKey. The absolute figures are relatively small but the trend is positive. Sell through revenue totaled $367,000 for Q2 compared to $281,000 for Q1, an increase of 31%. Consolidated gross margin increased to 43.5% for Q2 compared to 41.0% for Q1 and 41.8% for Q2 2011, reflecting a shift in relative mix made up of a higher percentage of higher margin bricks as VI Chip shipments declined. As we have addressed, VI Chip has made much progress in increasing efficiencies and lowering material costs contributing to higher product gross margins. However, at low volumes, overhead absorption is weak and higher incremental cost is reflected in VI Chip’s margins. With the anticipated volumes of late in the year 2012 and into 2013, we expect VI Chip will recover. In addition, the improved manufacturing cost effectiveness of our new panel molding process should begin to be seen in VI Chip gross margins in 2013 when volumes of panel molded products ramp. Consolidated operating expenses for Q2 declined sequentially, largely reflecting the fact that we incurred higher audit and reporting expenses in the first quarter of the year. Legal fees were flat sequentially. On a year-over-year basis, higher expenses associated with increased headcount and activity in marketing and sales were offset largely by lower expenses in G&A. Net income for Q2 was $220,000 compared to $326,000 for Q1 of 2012, both representing as discussed $0.01 per share. Net income for Q2 2011 was $3.1 million or $0.07 per share. Total backlog at the end of Q2 was $42.2 million compared to $45.8 million at the end of Q1 and $54.2 million at the end of 2011. I should point out the decline in backlog is exaggerated by the magnitude of individual purchase orders associated with our VI Chip supercomputer products. These large orders increased backlog in prior periods and the push out of new order flow has contributed to a steeper decline in recent quarters. At the same time, our consolidated turns volume, meaning those orders booked and shipped within the same quarter, has increased over the past few quarters. Backlog scheduled for shipment in Q3 at the end of Q2 totaled $32.9 million or 78% of total backlog in contrast to the comparable Q1 figure of $33.4 million or 73% of total backlog. BBU bookings increased almost 6% sequentially with notable recovery in custom activity. VI Chip bookings for Q2 fell back to the level of Q4, again reflecting the absence of orders from the cancelled Blue Waters project and delayed order flow associated with other supercomputer projects. Picor had slightly higher bookings for Q2 but activity remains slow as Picor’s merchant offerings have often been sold side-by-side with VI Chip. Quarterly pretax income including interest income and the net effect for accounting for certain changes in the value of our investment portfolio totaled $791,000 representing 1.4% of revenue versus Q1’s $517,000 which represented 0.9% of revenue. Our consolidated effective tax rate for Q2 rose well beyond the statutory level, but recall that our quarterly booked provision for income tax expense is calculated on a year-to-date basis reflecting our assumptions for full-year pretax income. This higher than statutory rate, 69.2% for the quarter and 55.3% on a year-to-date basis, results from a combination of variables in a complex booked tax calculation. The primary and most simple reason for the unusually high effective rate is the low dollar level of full-year expected pretax income as the denominator in the calculation which exaggerates the impact of a relatively high tax provision as the numerator. In part, this relatively high tax provision reflects the complexity of our organization. Year-to-date state taxes have contributed to the higher provision as profits within one part of the organization may not be offset by losses in another in certain state income tax calculations. In addition we have not incorporated in our 2012 calculations any assumed benefit from current year Federal Research and Development tax credits as Congress has yet to renew this credit for 2012 as has been the pattern in prior years, and we cannot be certain Congress will actually do so before year end. Another contributor to the high effective tax rate is the lower than expected consolidated pretax income for 2012. For quarterly reporting, GAAP requires that companies annually estimate their effective tax rates for the year based on the forecast level of taxable income for the year. While we’ve revised our full-year 2012 forecast to reflect currently weak performance, reflecting lower full-year pretax income than originally expected, the very involved calculation of our interim tax provision resulted in the exaggerated effective tax rate we have reported. Cash flow from operations totaled $5.4 million for Q2, down from Q1 $7.5 million, reflecting a net reduction in working capital that was s$2 million lower than that experienced in Q1. Capital expenditures remained at the maintenance level of prior quarters totaling $1.5 million. We do not anticipate a meaningful change in our capital expenditures in the coming quarters. Cash increased by $4 million for the quarter. Turning to the consolidated balance sheet, our receivables portfolio remains in excellent shape with days sales at 44 days, up slightly from Q1’s level of 44 [ph]. Consolidated inventories quarter-to-quarter declined $759,000, reflecting management of raw materials in light of reduced bookings. Annualized inventory turns stood at 4.0, down slightly from 4.2 for Q1. As of June 30, we had $82.2 million in cash and equivalents, up from Q1’s figure of $78.3 million. We also hold long-term investment securities carried at a book value of $9.6 million. Included in this long-term total are option rate securities with a par value of $9.1 million carried at a book value of $7.7 million, representing 84.5% of par unchanged from Q1. Since the failure of the auctions by which these securities were priced in February of ’08, we have received over $29 million in redemptions at par and are confident the remaining balance will in time be redeemed at par. In the meantime we receive interest at rates more favorable than we would otherwise obtain in the open market. A final note, an update on insurance litigation: as disclosed last quarter on March 16, 2012, the US Court of Appeals vacated a 2009 judgment in our favor associated with our lawsuit against certain of our insurance carriers with respect to the Erikson settlement. We had been awarded approximately $16.5 million in the original ruling which the insurers appealed. The Appeals Court has remanded the case for a new trial. We continue to evaluate circumstances and alternatives available to us. This concludes management’s prepared remarks and we’ll now take questions from the listeners. Jody?

[Operator Instructions] Your first question comes from Jim Bartlett from Bartlett Investors.

Hi. Yes, can you give us some indication of the level of your defense business now; and on a relative base what is happening so far this year and in comparison to last year?

I will not quantify the percentage but in relative terms it has been under pressure, and that pressure is not about to relent until there’s a solution to the budget constraints in particular related to this whole cliff that is forthcoming [ph]. So we don’t see any near-term relief; likely not until sometime after the upcoming elections.

And in that regard, the outlook for new defense electronics orders, that might help out with some of your defense business. What is the outlook there either later this year or early next year?

Well, until the general cloud that I referenced lifts, and presumably it will have to lift given the ramifications of that constraint, it’s hard to have a specific forecast. I think in general terms we are continuing to do well in terms of penetration with our traditional bricks, early generations of products which have a very pervasive acceptance in the defense market. We’re also doing well with VI Chip designing activity. We won some significant programs using high density, high efficiency VI Chip-based solutions and that activity is ongoing. So it is hard for us obviously to predict the evolution of the market, in particular in the very short term, but from a different perspective, with respect to market share I would say that our market share is expanding particularly as we more and more effectively deploy next generation solutions leveraging the more vast technology of VI Chips and eventually Picor products.

Could you give us some sort of size of the Buck regulator market, of what kinds of opportunity this is and where you might hope to sell Buck regulators, both earlier and later; and the type of products that you would be displacing?

Yes, so that opportunity is very substantial. It is quite substantial, let’s say on the scale of Vicor as a whole. It is particularly substantial when you look at the aggregate opportunity that goes beyond the specific reference you made to Buck regulators. You will recall that the complete and comprehensive [ph] offering that Vicor is executing on and about to deliver involves more than Buck regulators. It involves Buck devices as the 60 watts that were recently introduced, Boost devices, Buck/Boost devices; and it involves entries with voltage capability beyond the voltage capability of the initial family of products that were very recently introduced. So as we look at that whole capability at lower voltages, higher voltages with the ability to regulate up, down, and sideways, and the differentiation of these products and their objective figures are met [ph] and the ability to compete against the established competitors like Elien Technology [ph], TI and others who have historically played a major role in this market, we see tremendous opportunity. We see the opportunity further enhanced by the ability to deliver a tall [ph] solution that goes beyond the point of load where these kinds of regulators typically operate, because unlike the competitors I referenced we will have a wherewithal expense [ph], the power processing requirements from the wall plug to the point of load. And that’s a very unique value proposition to customers.

[Operator instructions] At the present time, you have no more questions.

Very well, thank you very much. We will be talking to you in 2 [ph] months. Have a good day.

Ladies and gentlemen that conclude today’s conference. Thank you for your participation. You may now disconnect, have a great day.