Vicor Corporation (VICR) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Vicor Earnings Results Quarter 3 and 9 months Ended September 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 take this time to turn the conference over to your host for today, Mr. Jamie Simms, CFO; and Dr. Patrizio Vinciarelli, CEO of Vicor Corporation. Please proceed, sirs.

Thank you, Jody. Good afternoon, everyone, and welcome to our conference call for the third quarter ended September 30. I'm Jamie Simms, Chief Financial Officer and with me here in Andover is Patrizio Vinciarelli, Vicor's Chief Executive Officer. Today we answered a press release summarizing our financial results for the third quarter. This press release is available on the investor page of our website, vicorpower.com. We also filed a Form 8K with the Securities and Exchange Commission in association with 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 constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those explicitly set forth or implied in our statements. Such risks and uncertainties are discussed in our most recent forms 10-K and 10-Q filed with the SEC. Please note the information provided during this conference call is accurate only as of the date of the call. Vicor undertakes no obligation to update any of the statements made during this call and you should not rely upon them after the conclusion of the call. A replay of the call will be available beginning at midnight tonight through November 7. The replay dial-in number is (888) 286-8010, and a listener pass code is 36807908. In addition, a webcast replay of the conference call will be available on the IR page of our website. Patrizio and I have each prepared remarks and after which we will take your questions. Patrizio.

Good afternoon, and welcome to our third quarter earnings call. As set forth in this afternoon's press release, Vicor reported third quarter net income of $191,000, essentially breaking even on a per share basis, versus $220,000 which rounded out to $0.01 per diluted share for the second quarter of 2012. For the third quarter 2011, we end $1,080,000 or $0.03 per diluted share. Third quarter performance was in line with recent expectations and consistent with last quarter's results deflecting ongoing witness in certain markets and geographies and slower than expected growth from new initiatives and new opportunities. As I communicated throughout the year in prior earnings conference calls and at our annual shareholders meeting in June, we are committed to our strategy despite economic challenges that have led to our 4 consecutive quarters of essentially breakeven performance. We're staying at strategic costs as we're confident our sanctions are correct and present headwinds are temporary. In the interim, our financial performance has been supported by the stability of our traditional BRICK business, which is driven by diverse global customer base and a highly efficient [indiscernible] for manufacturing costs. The third quarter was similar to the second quarter in that incremental progress was made with major new OEM customers in terms of finalizing new design wins and for some OEMs for which the new product designs are progressing and we’re sharing supply agreements. We have received the initial orders associated with the first Intel VF12 [indiscernible] opportunity and expect to start shipping these products in volume starting in 2013 when other volumes should begin a sustained ramp. This VF4K volt to processor, we achieve [ph] solution, consisting of a PRM regulator and a VTM car [ph] multiplier, delivers the most efficient power conversion solution for Intel processor applications from a 48-volt [ph] intrasource [ph], yielding more than 5% greater overall efficiency in a package 3 times smaller than comparative solutions. We expect this application to be a meaningful source of revenue for 2015 and to pave the way for similar solutions involving other customers. Concerning the activity as we shared with other new products now that we’ve [indiscernible] convertors is picking up and other business development activities in new markets, such as communications, automotive and lighting, gained momentum within the quarter providing confidence in forecasts for improved bookings and shipments starting in 2015. During the quarter, we added personnel and infrastructure to our new footprints in Shanghai, China and Bangalore, India. [indiscernible] and particularly in China and India is difficult [ph] for [indiscernible] strategy and we’re focusing resources across the region. Also in the quarter, we made progress toward the release of status-growing [ph] important new products and anticipating important announcements through the coming months and quarters. Our push to complete development of new AC-DC products using a double chip VFM is approaching closure. We called it a double chip VFM. It’s actually a convertor with bar-factor correction, and an early entry in our long term for our strategy to provide a [indiscernible] performance from the [indiscernible]. While we suffered setbacks in bringing this first AC-DC bar component to market, we have made progress with other TFMs in power-molded chip packages and are confident of the long-term value position of our highly anticipated AC-DC power line. We also continue to make progress with an expanding range of VCM DC-DC convertors addressing both [ph] market requirements for input voltages ranging out to 430 [ph] volts. I spoke then to the opportunity in [indiscernible] electric [indiscernible] which Vicor remains enthusiastic with a very heavy industry team focus on OEMs and their tier 1 suppliers. We’re also pursuing development of a multiple BCM platform variance using a new power modeled packaging technology, [indiscernible] the performance and application across our new target markets as well as our established markets including industrial and transport [ph] production. Speaking of power modeling, we have provided engineering [ph] samples of VCM V-I Chips in this new packaging technology and are aggressively pursuing completion of development of large and small platforms supporting VFM, VCM, VTM and DCM functionalities. As it appears we have added our multi-packages, enabled our [inaudible] and also performance in terms of both power density and high efficiency while providing a level of manufacturing cost effectiveness necessary for Vicor to succeed ecosense and [indiscernible] applications. Furthermore the VCM, VFM, DCM and VTM designs would be important contributors to the satisfaction of our strategy. Vicor had an exciting quarter, creating market awareness and initial momentum for its first product line of silicon-based, point of [indiscernible] regulators. Industry publications have given the new cool power system in a package, or SIP regulators, extensive power given the substantial performance of this application. Our distribution partners are receiving some interest in these products, which are standard products and are well suited for this distribution channel. At the Accounting Electronic Official [ph] held in Munich this November, Vicor anticipates introducing its next wave to gather products in the core power line, which we expect to be expanded throughout 2015. Vicor’s point of growth [ph] strategy is a very important element of our overall growth strategy for selling fiber regulators, [indiscernible] chip convertors, [indiscernible] products as well as incorporating them into complete power-system solutions. We believe an important element of our overall value proposition is the value add to the customer, providing solutions ranging from standalone power conversion building blocks to complete turnkey power system solutions, thereby expediting the design process and leveraging Vicor V-I Chip and Vicor performance associations [ph]. To conclude my prepared remarks, I asked investors to take the same technology perspective I have regarding VFM performance. Vicor is positioned, from a strategy-focus for serving relatively less cost-sensitive low-volume [indiscernible] applications to market-sensitive, high-volume OEM applications. With the low-cost structure of the new power components while deploying a growth capability that leverages the flexibility of our unique power system methodology and [indiscernible] high-growth opportunities. This will take time to come to fruition. When we first decided a new strategy cost for Vicor, we understood that there would be market challenges as we sought to establish ourselves with new customers in new markets. We knew core development would take longer than planned as innovative technologies and manufacturing processes were developing but not without risk. Yes, we have traction in these new markets but we have not yet generated the bookings we have expected. We have experienced some delays in new-product introduction and given the sales cycle of new products, these delays have caused us to miss certain opportunities. However, these disappointments have largely been the consequence of generally soft economic conditions globally and the baseless [indiscernible] claims of a competitor, which has inhibited the growth of one of our most promising family of new products. IBC is using Vicor applications. Weak demand across markets and geographies is likely to continue to handicap near-term performance. We have the technology, the products and the [indiscernible] roadmap necessary to serve the needs of our targeted customers [indiscernible] or go to market infrastructure, expand the [indiscernible] capabilities and bargaining with well-positioned [indiscernible]. Jamie will share numbers with you [indiscernible]. Unfortunately, we have encountered some economic headwinds just as we start to expand the [indiscernible] course. We remain confident 2013 will be an improved year for us supported by the visibility we have in 2012 for our take with existing new products. I’ll now turn the call over to Jamie who will provide specifics for the quarter. Jamie?

Thank you, Patrizio. As disclosed, Vicor's consolidated revenue for the third quarter decreased to $53 million compared to $55.5 million for the second quarter, representing a sequential decline of 4.5%. The third quarter figure compares to a revenue of $58.6 million for the third quarter of 2011, representing a decline of 9.6%. International revenue increased 2.9% quarter-to-quarter as an increase in BBU exports of modules, primarily to Asia, was offset by lower V-I Chip shipments also to Asia. International revenue represented just over 52% of total revenue, up from 48.4% for the second quarter. We experienced another sequential increase in recognized sell-through revenue associated with shipments by our stocking distributors, future electronics and digit key. The absolute figures are relatively small, but the trend continues to be positive. Recognized sell-through revenue totaled $745,000 for the third quarter, compared to $367,000 for the second quarter, a sequential increase of over 100%. Consolidated gross margin at 43.4 was essentially unchanged sequentially compared to 41.7 for the third quarter of 2011. The year-over-year increase reflects a shift in relative mix made up of a higher percentage of higher-margin bricks as V-I chip shipments declined. As we've discussed, V-I chip has increased efficiencies and lowered material costs, contribute to potentially higher product gross margins at sustained high volumes. However, at current low volumes, overhead absorption is weak and higher incremental material costs is reflected in V-I chips margins. With the anticipated volumes of Q4 and 2013, we expect V-I chip gross margins to improve somewhat. In addition, our new panel molded packaging process should begin contributing to improved V-I chip [indiscernible] gross margins in late 2013 when volumes of panel molded products are expected to begin to ramp. Consolidated operating expenses for the third quarter declined sequentially. Largely reflecting lower variable costs associated with lower revenue. Compensation, by far our largest expense, increased on a year-over-year basis reflecting the added hen count and activity in marketing and sales, but actually, was lower sequentially due to a reduction in stock option activity and associated compensation charges. Total headcount at 1,044 was unchanged quarter-to-quarter. Audit tax and related fees increased largely due to the timing of these efforts. As earlier reported, net income for the third quarter was $191,000 compared to $220,000 for the second quarter of 2012. Due to rounding, the third quarter figure rounded down to $0.00 while the second quarter figure rounded up to $0.01. The fully diluted share count at quarter end was $41 million, 815,000, up slightly from the prior quarter's $41 million, 812,000. Total one-year backlog at the end of the third quarter was $42.9 million compared to $42.2 million at the end of the second quarter. Backlog scheduled for shipment in Q4 at the end of Q3 totaled $33.5 million or 78% of the total, in contrast to the comparable second quarter figure of $32.9 million also representing 78% of total backlog. BBU bookings were flat sequentially with improved orders in modules and activity in Japan offset by a decline in custom systems. Our Vicor custom power business continues to experience uncertain and irregular order flow as a result of Pentagon budget issues. Europe represents another area of weak references as the economic conditions in the region are now being felt in our order flow, which had been relatively resilient to the bad news coming out of the region. V-I chip bookings for the third quarter recovered somewhat improving 33% over the very low second quarter figure. Bookings remain under the average quarterly level of 2011 reflecting the absence of orders from the cancelled Blue Waters project and continued delays in orders associated with other super computer projects reliant on uncertain government funding. We did receive some long awaited orders from customers in the enterprise server in defensive electronic fields during the quarter. Picor had 27% higher bookings for the third quarter. But activity remains slow as Picor's existing merchant offerings have often been sold side by side with V-I chip products. Given the strong reception of the cool power line of point of low regulators with potential customers and the trade press, we are expecting bookings for these products to increase considerably in the new year. Quarterly pretax income, including interest income and the net effect of accounting for certain changes in the value of our investments totaled $366,000 representing 0.07% of revenue versus the second quarter's $791,000, which represented 1.4% of revenue. Our consolidated effective tax rate for the third quarter fell below the statutory level to 23.5% for the quarter. It was 48.3% for the year-to-date period ended September 30. The calculation of our tax provision and the derivation of our effective tax rate is made complex by our organizational structure. We calculate each quarter's book provision for income tax expense on a year-to-date basis reflecting our assumptions for the full year pretax income. As of the second quarter, we were projecting higher full year income, which drove the second quarter tax provision much higher. We have reduced our forecast for the full year based on current performance and have factored this into our new book calculation. I should note, the calculation does not include 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 do so before year end. To date, we estimate the loss of this credit has reduced our 2012 net income by approximately $200,000. The quarterly cash flow from operations fell to $1.4 million from the prior quarter's $5.4 million reflecting a net increase in working capital associated with an increase in accounts receivable. Capital expenditures remain largely at the maintenance level of prior quarters, but did increase from $1.5 million to $2.1 million. We do not anticipate a meaningful change in our CapEx in the coming quarters. Cash increased by $2.5 million for the quarter. Turning to the balance sheet, our receivables portfolio remains in excellent shape. Although day sales did increase to 51 days, up from the second quarter's level of 46 days. However, this DSO increase was associated with a customer specific accommodation, not with the deterioration of our overall receivables portfolio. Consolidated inventories quarter-to-quarter were stable increasing only $32,000 reflecting current booking and shipment activity. Annualized inventory turns stood at $3.9, down slightly from $4.2 for the second quarter. As of September 30, we had $84.8 million in cash and equivalents. We also hold long-term investment securities carried at a book value of $6.9 million. Included in this long-term total are option rate securities with a par value of $6.1 carried at a book value of $5.1 million representing 82.8% of par. During the third quarter, we received redemptions at par totaling $3 million but we have reduced our holdings of auction rate securities down to just 2 issues. To date, we have received over 32 million of redemptions at par value. And are confident the remaining balance will in time be also redeemed at par value. In the meantime, we received interest at rates more favorable than we would otherwise obtain in the open market. I'll conclude with a brief update on our insurance litigation, which has come to a close. After the third quarter ended in early October, Vicor settled its lawsuit against its insurance carriers. And we received $1.975 million in cash in exchange for releasing carriers from further claims. This amount will be recorded as a gain from litigation related settlement in the fourth quarter of the year. This concludes our prepared remarks and now we'll take questions. Operator, Jody.

[Operator instructions] And our first question comes from John Dillon [ph].

Patrizio, I’ve got a question on the Intel-VR opportunity. I was wondering if you could just give us a little more color on that. You said you’ve got some initial bookings on that. Was that for production units, and was that in last quarter or did that come in, in October? And how do you see this going forward, a little more granularity on that if that’s possible?

We expected to start ramping early in 2013. I think we’re still in the initial phase. I don’t know if I can characterize it as full production, it’s not. I think it’s pre-production. But full production is expected to start relatively soon.

Okay, good. And on the IBCs is there anything new on the lawsuit. You said they were picking up again. Can you give us just a little more color on that?

In the patent office, I believe at this point all of the Syncor patents have been asserted against us have been rejected. It’s effectively valid by each of, I think, 4 different examiners. Some of these patents are already coming up for appeal by Syncor, and their appeal will be heard by the patent board in due course. There has been some power developments involving defendants in the earlier litigations [indiscernible] action. The Philips [ph] circuit has taken on a review and is held in our argument regarding the appeal from the earlier case, the Syncor [ph] court case. So there’s a lot of moving pieces, but to boil it down to the key points, we’re confident that all of the Syncor patents will be found to be invalid, as all of the examiners that have been involved in each of 4 different [indiscernible] have found them to be. You know we’re very powerful arguments, stronger than the arguments that were advanced by the earlier defendants, and we believe that on the side of those arguments that there will not be any balance left.

Okay, and it sounded like you said in your opening remarks that the IBCs are picking up, so I guess does that mean you’re still getting new designs for them? That they have gone into production? Is that what we can draw from that?

We have had growing level of production, it has been muted by Syncor’s concerted efforts to confuse and scare customers across the globe in this country, Europe and in Asia. We are documenting this evidence and in due course we are going to bring it to bear with respect to the damages caused to us. So the effect has been a significant delay with respect to converting a strong interest in products through [indiscernible] and clearly different [indiscernible] and superior in a respect efficiency, density, the key attributes. So the competitor, Syncor, has been using a portfolio patents that really boil down to a common denominator, specific action which did not project the capabilities they are now claiming. They are asserting it in a way that we believe is totally inappropriate, but in spite of that, in part I believe because of their initial preliminary success against others, they have been repeatedly [ph] effective in scaring off some customers. But as we discussed in power polls with the passage of time, I think more and more customers are seeing that the Emperor has no clothes and their pressing needs for density and efficiency are driving them to our different [ph] solutions.

Back to the question of, you’re still seeing new designs then even with this?

Yes, we’re getting new designs and some of the design activity that have been going on earlier on that was put on hold is converting into programs that are going into production. So we’re expecting to see a significant pickup in activity in 2013. Unfortunately 2013, that could have been 2011, in terms of level of revenues and profits derived out of this call [ph].

Your next question comes from the line of Don McKenna.

I wanted to ask you. I have been hearing what I thought was 2015, then Jamie was using 2013. Patrizio am I misunderstanding you? Were you talking of 2013, 1-3, in your prepared remarks?

2013, yes. Apologies for the Italian accent.

That’s okay, it’s my ears. The other thing I wanted to ask too was in one of your press releases it looked like you were preparing something with Emerson. Is Emerson a partner now? I always saw them as a competitor?

I don’t know that we’d characterize this activity in any particular way other than, there was a collaboration for a specific purpose that generated significant interest of a recent shop.

Are they a customer?

I’m not going to say anything more than what I just said about that.

Your next question comes from the line of Jim Bartlett.

Just getting back to John’s [ph] question on the IBCs, if there’s one very large customer with that product, where do they stand?

Well, I think potentially there is a multiplicity of very substantial customers. I’m not going to provide any detailed information with respect to any one of them beyond giving you an overall perspective on IBC power line. The revenues to date have been very disappointing for the reasons that we’ve discussed. However, with the delay caused by the issues that I’ve summarized earlier in this call, we are seeing growing traction and we’re expecting, I think with the delay of a couple of years to start seeing the ramp that we anticipated beginning in 2011. So this will have obviously measuring impact with respect to the value and the position in terms of revenues and bottom line. Because, as we all know revenues defer, this is more than the impact of the revenues at a particular time. It has the effect of shifting the whole revenue curve to the right. So it’s been a significant impact in terms of what we expected to be able to accomplish. But at least with a significant delay we are now seeing it beginning to get accomplished.

On the Intel VR12 you have one customer there. What are the chances of getting more customers for that product?

The chances are very good. I think it’s a compelling solution that has a significant advantage in terms of reduction in energy cost, and overall cost effectiveness accounting for all of the key considerations. It’s a high performance solution. It’s a solution that enables efficient power distribution within [indiscernible] that can be achieved using a 4k vault pass, which is much more efficient than lower voltage busses. We have seen a great deal of interest in it. There’s been a great deal of effort internally to scale it down [ph] in terms of projecting it to other customers in Asia and other parts of the world. So we see a significant long-term opportunity in that general direction.

You also mentioned the opportunity in automotive and hybrids, and some initial, I think trial shipments. Could you sort of expand on the potential there and the timing?

So we are in a phase to contract with our customers having gone through phase one. We have a lot of interest by other customers, and potential customers. We’re also having discussion with suppliers to automotive reamps [ph]. So it’s multifaceted activity that involves a group, a team effort in the front end of the business as well as in terms of engineering activities with respect to taking BCMs as the building blocks of the power system into a complete power system for use in particular vehicles. Also there’s ongoing activity with respect to refine the performance of the car, BCM building blocks. So we invest a significant effort in this initiative because we see a tremendous opportunity with it. This is an area where our solution is differentiated in a number of key attributes including [indiscernible], scalability, density, efficiency and overall cost effectiveness. So given those attributes, it represents a compelling alternative to traditional power systems that are anchored in older technology custom developments that tend to be very bulky, not scalable, more predictable in a variety of ways. So we’re taking it to new potential customers and looking to build momentum over the next 6 to 12 months.

Would there be anything meaningful in terms of orders or revenues in 2013, or is this more 2014?

I think this is more of a 2014, and to be more specific about that probably second half of 2014.

[Operator Instructions] At this present time, gentlemen, we have no further questions.

Very well. Thank you very much. Talk to you in a few months.

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