Vicor Corporation

Good day, everyone, and welcome to the WICOR earnings results for the first quarter conference call. My name is Wanda, and I will be your event manager today. During the presentation, your earnings will remain on this one only. If you require assistance at any time, please press star zero on your telephone, and the coordinator will be happy to assist you. I would like to advise all parties that this conference is being recorded, and with that, I would like to hand over to Dick Nagel. Please proceed.

Thank you.

Good afternoon and welcome to Vicor Corporation's earnings call for the first quarter ended March 31st, 2021. I'm Dick Nagel, Chief Accounting Officer, and in Andover, our Patricio Vincerelli, Chief Executive Officer, Phil Davies, Vice President of Global Sales and Marketing, and Kemble Morrison, Vice President and Corporate Controller. After the markets closed today, we issued a press release summarizing our financial results for the three months ending March 31st. This press release has been posted on the investor relations page of our website, www.vicorpower.com. We also filed a form 8K today related to the issuance of this press release. Our mind listeners, this 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. 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 2020 Form 10-K, which we filed with the SEC on March 1st, 2021. This document is available via the EDGAR system on the SEC's website. Please note the information provided during this conference call is accurate only as of today, Thursday, April 22nd, 2021. VICOR undertakes no obligation to update any statements, including forward-looking statements made during this call. And you should not rely on such statements after the conclusion of this call. A replay of today's call will be available beginning at midnight tonight through May 7th, 2021. The replay dial-in number is 888-286-8010, followed by the passcode 66693367. 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. As noted in our press release dated April 6, 2021, we announced the appointment of Jim Schmidt as Chief Financial Officer, effective June 1, 2021, succeeding Jamie Sims. Jim will also join the VICOR Board of Directors and serve as the corporate company's treasurer and secretary. We're looking forward to having Jim join the company. I'll now turn to a review of our Q1 financial performance after which Phil will review recent market developments, and Patricio and Phil will take your questions. In my remarks, I will focus mostly on the sequential quarterly change for P&L and balance sheet items and refer you to our press release or our upcoming Form 10-Q for year-over-year comparisons. As stated in today's press release, VICOR recorded total revenue for the first quarter of $88.8 million, up 5.3% from the fourth quarter total of $84.3 million. Quarterly, advanced products revenue rose 2.2% sequentially. This growth was constrained by limited component availability due to global semiconductor supply allocation issues experienced during the quarter. Brick products revenue rose 7.6% sequentially Reflecting a resumption of shipments to our European customers after the pandemic-related trough of 2020, while Asian customers grew 18% from Q4 2020. These increases offset a modest sequential decline in shipments to North America. Shipments to stocking distributors rose 79% sequentially, primarily due to an increase in brick products shipments. Turns volume also increased sequentially. Exports for the first quarter increased sequentially as a percentage of total revenue, approximately 69% of consolidated revenue from the prior quarter's 64%, reflecting the factors just mentioned regarding Europe and Asian shipments. For Q1, advanced products share of total revenue declined slightly to 39%. compared to 40% for the fourth quarter, with brick product share correspondingly increasing to 61% of total revenue. We believe advanced product sales, though, will expand significantly as a percentage of total revenues, especially once new manufacturing capacity comes online, given the high-growth segments we have penetrated with our 48-volt technology, including AI, data center, and automotive. in contrast to the maturity of the segments we serve with GRIP products. Turning to Q1 gross margin, we recorded a consolidated gross profit margin of 50.3%. Higher volumes and improved mix contributed to higher profitability, as did a reduction in cost variances and tariff charges. Gross margin dollars rose 11% sequentially. While margins remain under the pressure of high tariff charges, the Q1 charge declined approximately 33% from Q4's charge of approximately $1.5 million. We expect to see further improvement through 2021, in part reflecting our ongoing efforts to reduce component imports from China. I'll now turn to Q1 operating expenses. Total OpEx rose just under 4% sequentially but consistent with longer-term trend reflecting periodic swings in discretionary spending. The amounts of total equity-based compensation expense for Q1 included in cost of goods, SG&A, and R&D were approximately $228,000, $853,000, and $490,000, respectively, totaling $1.6 million. For Q1, we reported operating income of $14.7 million, representing an operating margin of 16.6 percent. The sequential 27 percent increase in operating income reflects the operational leverage in our model. Referring to taxes, we recorded a net benefit for Q1 of $143,000, representing an effective tax rate for the quarter of minus 1 percent. Net income attributable to VICOR for Q1 totaled $15.1 million. GAAP diluted earnings per share was 34 cents based on a fully diluted share count of $44,841,000. Before I turn to our financial position, just a brief update about COVID-19 and our workforce. As previously discussed, the 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. While we have seen a small increase in cases again recently, cases are below the levels experienced in the December through January timeframe, and absenteeism has declined. Nevertheless, because much 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 totaled $223 million at Q1, a sequential increase of 5%. Accounts receivable net of reserves totaled $47.7 million at quarter end, an increase of 16.3% over Q4, with DSOs for trade receivable steady at 38 days. All balances are current. Inventories net of reserves declined 5.3% sequentially to $54.3 million. Annualized turns improved to 3.1 more. Reflecting the positive operating results, operating cash flow totaled $17.6 million for the quarter. Capital expenditures for Q1 totaled $9.3 million. We ended the quarter with a construction and progress balance of $19 million, leaving approximately $38 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 backlogs. Q1 bookings totaled $99 million, an 8.1% sequential increase. The overall book-to-bill was approximately 1.1, with advanced products at 1.4 and brick products at 1.0. Q1 bookings largely reflected the same circumstances we saw with shipments, growth in Europe and Asia with a modest decline in North America. At year end, one-year backlog totaled $157.1 million, an increase of 6.5 percent sequentially. Turning to our outlook for the second quarter of 2021, we expect 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 increase in operating expenses. While substantial further improvements in gross margins will have to await production from our new vertically integrated factory, we expect incremental revenue to drive earnings per share given the scalability of our operating model. With that, Phil will provide an overview of recent market developments, and then Patricio and Phil will take your questions. I ask that you limit yourself to one question and a related follow-up so that we can respond to as many of you as we can in the limited time available. If you have more than one topic to address, please get back in the queue. Bill?