Vicor Corporation

Good day and welcome everyone to the vicar earnings results for the fourth quarter and year ended on December 31st, 2021 call. My name is Matthew and I'm your operator today. During the presentation, I will remain on listen only. If you need assistance at any time, please press star zero on your telephone and the coordinator will be happy to assist you. During the call, you will have the chance to raise questions. However, please kindly remember to limit yourself to one question and the follow-up. I would also like to advise all parties that this call is being recorded for replay purposes. And with that, I would like to hand it over to your host, James Sims, Chief Financial Officer. Please proceed.

Thank you, Matthew. Good afternoon and welcome to Vicor Corporation's earnings call for the fourth quarter and the year ended December 31st, 2020. I'm Jamie Sims, Chief Financial Officer, and with me here in Andover are Patricio Vinciarelli, Chief Executive Officer, and Phil Davies, Vice President of Global Sales and Marketing. After the markets closed today, we issued a press release summarizing our financial results for the three-month and 12-month periods ending December 31st. This press release has been posted on the investor relations page of our website, vicorpower.com. We also filed a Form 8-K today related to the issuance of the press release. I remind listeners this conference call is being recorded and is the copyrighted property of I-Corps 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. Except for historical information contained in this call, the matters discussed on this call, including any statements regarding current and planned products, current and potential customers, potential market opportunities, expected events and announcements, and our capacity expansion, as well as management's expectations for sales growth, spending, and profitability, are forward-looking statements involving risks and uncertainties. In light of these risks and uncertainties, we can offer no assurance that any forward-looking statement will, in fact, prove to be correct. Actual results may differ materially from those explicitly set forth in or implied by any of our remarks today. The risks and uncertainties we face are discussed in item 1A of our 2019 Form 10-K, which we filed with the SEC on February 28, 2020. We presented certain updated risk factors regarding the COVID-19 pandemic and our current construction project in our Form 10-Q for the third quarter filed with the SEC on October 30, 2020. Both of these documents are available via the EDGAR system on the SEC's website. I remind listeners that the results announced today are preliminary as they are subject to the completion of annual audit procedures by the company's independent registered accounting firm, KPMG. As such, these results are unaudited and subject to revision until we file our Form 10-K for the 2020 fiscal year, which we expect to occur by the filing deadline of Monday, March 1st. Please note the information provided during this conference call is accurate only as of today, Thursday, February 25th, 2021. FICOR undertakes no obligation to update any statements, including forward-looking statements, made during this call, and you should not rely upon such statements after the conclusion of this call. A replay of the call will be available beginning at midnight tonight through March 12th, 2021. The replay dial-in number is 888- 286-8010, followed by the passcode 33109701. This dial-in and passcode are also set forth in today's press release. In addition, a webcast replay of today's call, along with a transcript, will be available shortly on the Investor Relations page of our website. Let me begin this afternoon's discussion by providing some color regarding my decision to step down as my course chief financial officer effective June 30 2021. As noted in today's press release, I have informed patricio and the board of my intent to pursue other interests and different types of challenges during the next phase of my career. i've had a remarkable run as CFO of my core, but I feel the time is right for me to look for other opportunities and forms of personal enrichment. As stated, we have kicked off a search for our next CFO, and I will be focused on a smooth transition to the leadership of my successor. I will be leaving behind a highly talented team, a strong balance sheet, and a clear roadmap for future success. Now I'll turn to a review of our Q4 financial performance, after which Phil will review recent market developments, and Patricio, Phil and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly change for the P&L and balance sheet items and refer you to our press release or our upcoming Form 10-K for year-over-year comparisons. As stated in today's press release, VICOR recorded total revenue for the fourth quarter of $84.3 million, up 7.9% from the third quarter total of $78.1 million. For the full year, 2020 revenue totaled $296.6 million, up 12.8% from $263 million for 2019. Quarterly advanced product revenue rose 10.4% sequentially, reflecting the continued ramp of shipments of our lateral power solutions for AI acceleration. Demand for our 48-volt direct-to-CPU solutions and the first volume shipments of our new satellite solutions. Brick product revenue rose 6.1% sequentially, reflecting a broad resumption of shipments to our North American customers after the pandemic-related trough of the second and third quarters. This increase offset a sequential decline in shipments to China, with those export volumes of brick products returning to trend from Q3's high level. Shipments to stocking distributors also rose sequentially. Turns volume was essentially unchanged sequentially. For the full year, advanced products revenue for 2020 totaled $106.1 million, up 41.5% from $75 million for 2019, while brick product revenue for 2020 totaled $190.3 million, up 1.3% from $187.8 million for 2019. Exports for the fourth quarter declined sequentially as a percentage of total revenue to approximately 64% of consolidated revenue from the prior quarter's 73%, reflecting the factors just mentioned regarding North American and Chinese shipments. For the full year, exports increased 35% and represented 64.4% of total revenue. For Q4, advanced product share of total revenue rose for the fifth consecutive quarter to 40%, with brick product share correspondingly declining to 60% of total revenue. We believe advanced product sales will expand further as a percentage of total revenues, especially once new manufacturing capacity comes online. Given the high growth segments we are targeting with our 48-volt technology, including AI, data center, and automotive, in contrast to the mature growth of the segments we serve with BRIC products. Turning to Q4 gross margin, we recorded a consolidated gross profit margin of 48%, an increase of five points compared to the margins reported for Q2 and Q3. Higher volumes and improved mix contributed to higher profitability, as did a reduction in cost variances. Gross margin dollars rose 21% sequentially. Margins remain under some pressure of high tariff charges, which totaled 1.5 million, representing approximately 1.8 margin points for the whole quarter. We did see a reduction in quarterly tariffs, as Q4's total was 18% lower sequentially, in part reflecting our ongoing efforts to reduce component imports from China. We expect to see further improvement through 2021. I'll now turn to Q4 OPEX, which rose just under 6% sequentially, but were consistent with a longer-term trend, reflecting periodic swings in discretionary spending. The amounts of total equity-based compensation expense for Q4 included in cost of goods, SG&A, and R&D were approximately $242,000, $851,000, and $504,000, respectively, totaling $1.6 million. For Q4, we recorded operating income of $11.6 million, representing an operating margin of 13.8%. The sequential 90% increase in operating income reflects the operational leverage in our model. Turning to income taxes, we recorded a net provision for Q4 of $788,000, representing an effective tax rate for the quarter of 7%. Net income attributable to VICOR for Q4 totaled $11.2 million. GAAP diluted earnings per share was 25 cents, based on a fully diluted share count of 44,772,000 shares. For the year, net income attributable to VICOR totaled 17.9 million, representing diluted EPS of 41 cents, up from the prior year's 34 cents. Before I turn to our financial position, a few words about COVID-19 and our workforce. Beginning in Q1, VICOR took substantial steps to protect the health and safety of our employees, following federal and local guidelines for employee well-being. As a designated essential manufacturer, using masks and practicing social distancing from the onset of the pandemic, we have continuously operated three shifts at our Andover manufacturing facility. With only a few exceptions, our engineering sales and administrative personnel returned to their offices in early Q2. I refer listeners to our Q3 2020 10Q filing, which sets forth details regarding our response to the pandemic and the impact it has on our operations through September 30th, 2020. As is well known, coronavirus infections rose domestically during the fourth quarter, and the daily total of reported infections only has begun to decline in the past few weeks. Vicor experienced higher absenteeism from December through January, largely the consequence of quarantine requirements. However, our ability to adjust shift staffing in the factory allowed us to avoid meaningful disruption of production schedules, and we hope the worst is behind us, as absenteeism has recently returned to low levels. Nevertheless, because of the potential influence of the COVID-19 pandemic is associated with risks outside of our control, we cannot estimate the extent of such influence on our financial or operational performance or when such influence might occur. Turning to our cash flow and balance sheet, cash, cash equivalents, and short-term investments total $212 million, a sequential increase of 4%. Accounts receivable net of reserves totaled $41 million at quarter end, essentially unchanged sequentially, with DSOs for trade receivables slightly improving to 37 days. All balances are current. Inventories net of reserves declined 1.5% sequentially to $57.3 million. Annualized turns improved to 3.1%. Reflecting the favorable swing in working capital, operating cash flow totaled $19.3 million for the quarter. Capital expenditures for Q4 totaled $11.8 million, representing the value of equipment placed in service during the period. We ended the quarter with a construction and progress balance of another $15 million, and we have approximately $42 million of our capital budget scheduled to be spent through the year. Our factory expansion project is proceeding on schedule and on budget. I'll now address bookings and backlog. Q4 bookings totaled $91.5 million, a 1.2% sequential increase. The overall book-to-bill was approximately 1-to-1, with advanced products at 1.4 and brick products at 0.9%. Q4 bookings largely reflected the same circumstances we saw with Q4 shipments, a strong recovery of North American volume, offsetting a return to trend for Chinese bookings, and to a lesser extent, the natural lumpiness of orders from Asian contract manufacturers. At year end, one year backlog totaled 147.6 million, an increase of 5.4% sequentially. Turning to our outlook for the first quarter of 21, we expect continued revenue growth. We continue to address the sources of gross margin pressure and are forecasting improvement in product level profitability. Further, we do not anticipate any meaningful increases in operating expenses. While substantial further improvement in gross margin will have to await production from our new vertically integrated expanded factory, we expect incremental revenue to drive earnings per share given the scalability of our operating model. Phil will now provide an overview of recent market developments, and then Patricio, Phil, and I will take your questions. I'll ask that you limit yourself to one question or related follow-up so that we can respond to as many of you as we can in the limited time available. If you have one more topic to address, please get back in the queue. So, Phil?

Thank you, Jamie. I would like to start my comments with a short review of our progress in 2020, which I would characterize as successful on many fronts, critical to our business growth objectives. We continue to strengthen our position as the leading supplier of high performance power modules to customers in the data center, advanced processor, and high performance computing markets. In 2020, we not only expanded our customer base, but also solidified our position with existing large customers by starting next generation projects for higher performance processes with significantly higher power levels currently under development and scheduled for introduction in 2022 and 2023. Our leadership position is clear in that customers worldwide are selecting Vico because of the increased performance that they can achieve with our factorized power solutions. which are characterized by much higher power and current density. In 2021, we will begin to ship our new proprietary vertical power delivery modules in volume to customers developing highly advanced supercomputers. These supercomputers utilize large clusters of AI processors in close proximity to enable faster parallel processing of heavy and complex workloads, such as those found in autonomous driving applications. These complex systems can utilize greater than 50 processes, all requiring a vertical power delivery module from Vicor. I'll now turn to a new product strategy and growth initiative that was launched in 2020 and what should bring additional opportunities and revenues in 2021. This is our new line of single-phase and three-phase AC power modules incorporating our latest advances. These are successes to our former RFM assemblies. As rack and data center power requirements grow, the need to leverage existing facility footprints and rack infrastructure becomes a priority. Veiko's new high density AC front end product families will meet this challenge head on. These new OEM customer funded products are scheduled to ship in Q3 of this year And we are excited about the future of this product line, which significantly expands our available market. As the 48-volt market continues to grow and as new customers introduce AI and HPC solutions, VICO is extremely well positioned to meet its growth objectives for this business in the coming years. Competitors trying to catch up with 48-volt-based solutions have started to set foot on our minefield of intellectual property. Misinformed and unscrupulous competitors are exposing OEMs purchasing infringing converters to significant risk of supply chain disruption. Having learned how to protect its inventions and assert its IP, VICO's IP strategy is to hold OEMs accountable for OEM products incorporating infringing power modules from unlicensed module manufacturers. OEMs seeking an alternate source to VICOR can take an OEM license to VICOR IP. Licensing revenue from a comprehensive IP strategy should contribute appreciably to VICOR's gross margins. So let's move on to our progress in the automotive market. As we all recognize, electrification of cars like vehicles and trucks is advancing rapidly with major investments and aggressive new model introduction plans announced. by almost all of the major automotive OEMs. I am very pleased with the progress we made in 2020 in establishing several direct OEM-funded product development initiatives for electrified vehicles, which are scheduled for introduction in 2023 and beyond. I am particularly optimistic about our opportunity for a new high-power 800-volt and 400-volt onboard charging solution for pure electric vehicles which achieves unparalleled power density and low weight. In Q4 of 2020, we received funding from a large North American OEM for a solution that we expect to deliver to the customer next week, with an expected start of production in 2024. We are also working closely with several other global OEMs, with which we expect to sign agreements in the coming months. The automotive market offers Vico a large incremental revenue stream for 2023 and beyond in both the mild hybrid and pure electric automotive market for our high power, high efficiency, and lightweight modular solutions. With a range of $100 to $1,500 per vehicle for our power modules, the revenue opportunity for Vico is substantial. In addition to the data center and automotive markets, we see further growth into the 5G communications market, both for power delivery to network processors and high-density, low-profile AC front ends. The opportunity for VICO lies not only in land-based systems but also in satellite constellations. We recently announced a collaboration with Boeing for a new MEO-based constellation for which we developed a family of radiation-tolerant power modules. These modules are now being sampled to other satellite customers in this emerging and growing market. And we are also collaborating on the development of additional customer-funded power modules. The products and technologies developed for these growth markets are also ubiquitous to power delivery networks in many emerging applications, such as robots, unmanned vehicles, such as drones and delivery vehicles, which should continue to expand our available market. We are selectively pursuing promising opportunities across such emerging applications. So in summary, we made excellent advances in 2020, and I expect increasing traction in 2021. I'll now turn the call back over to the operator so that we can take your questions. Operator.