Vicor Corporation

Good day and welcome everyone to the Vicar Earnings Resort for the second quarter and the June 30, 2021 call hosted by Jim Schmidt, Chief Financial Officer. My name is Lily and I am your Rent Manager. During the presentation, your lines will remain on listen only, but if you require assistance at any time, please key star and zero on your telephone, and the coordinator will be happy to assist you. I would like to advise all parties that this call is being recorded for replay purposes. And now I would like to hand it over to James Schmidt. Please take it away, sir.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the second quarter ended June 30th, 2021. I'm Jim Schmidt, Chief Financial Officer, and I am in Andover with Patrizio 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 months ending June 30th. This press release has been posted on the investor relations page of our website, www.vicorpower.com. We also filed a Form 8-K today related to the issuance of this press release. I remind 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 risk 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 1, 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, July 22, 2021. VICOR 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 today's call will be available beginning at midnight tonight through August 6, 2021. The replay dial-in number is 888- 2868010, followed by the passcode 18601464. This dial-in and passcode also are 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. I'll now turn to a review of our Q2 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, FICOR recorded total revenue for the second quarter of $95.4 million, up 7.4% from the first quarter total of $88.8 million. Quarterly, advanced products revenue rose 19.7% sequentially. Product shipment growth continued to be constrained by limited component availability due to global semiconductor supply allocation issues experienced during the quarter. Brick products revenue was basically unchanged from the first quarter. Shipments to stocking distributors rose 43% sequentially, primarily due to an increase in brick product shipments. Exports for the second quarter decreased sequentially as a percentage of total revenue to approximately 64% of consolidated revenue from the prior quarter's 69%, primarily due to decreases in BRIC products. For Q2, advanced products' share of total revenue increased to 43%, compared to 39% for the first quarter, with BRIC products' share correspondingly decreasing to 57% of total revenue. We believe advanced product sales 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 brick products. Turning to Q2 gross margin, we recorded a consolidated gross profit margin of 52.3%. Higher volumes and improved mix contributed to higher profitability, as did a reduction in cost variances and process yield improvements. Gross margin dollars rose 11.6 percent sequentially. Margins remain under the pressure of high tariff charges as the Q2 charge increased approximately 36 percent from Q1's charge of approximately $1.4 million, primarily due to an increase in receipts of inventories subject to tariffs. Despite the increase, we expect to see improvement through 2021, in part reflecting our ongoing efforts to reduce component imports from China. I'll now turn to Q2 operating expenses. Total OPEX was essentially even with the first quarter. The amounts of total equity-based compensation expense for Q2 included in cost of goods, SG&A, and R&D were approximately $252,000, $780,000, and $536,000 respectively, totaling $1.6 million. For Q2, we recorded operating income of $20 million, representing an operating margin of 21%. The sequential 36% increase in operating income reflects the operational leverage in our model. Turning to income taxes, we recorded a net provision for Q2 of $999,000, representing an effective tax rate for the quarter of 4.9%. Net income attributable to VICOR for Q2 totaled $19.4 million. GAAP diluted earnings per share was 43 cents based on a fully diluted share count of 44,841,000 shares. Before I turn to our financial position, just a brief update about COVID-19 and our workforce. As previously discussed, 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. Cases and absenteeism due to COVID are now negligible. Nevertheless, because much of the potential influence of the COVID-19 pandemic is associated with risk 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 equivalents in short-term investments total $230.2 million at Q2, a sequential increase of 3.2 percent. Accounts receivable net of reserves total $55 million at quarter end, an increase of 15.3 percent over Q1. with DSOs for trade receivables basically steady at 39 days. All balances are current. Inventories' net of reserves increased 5.3 percent sequentially to 57.1 million. Annualized turns remained essentially the same at 3.12. Reflecting the positive operating results, operating cash flow totaled 12.3 million for the quarter. Capital expenditures for Q2 total $15 million. We ended the quarter with a construction and progress balance of $28 million, leaving approximately $28 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. Bookings momentum continued in Q2 with book to bill well above one. and with one-year backlog increasing sequentially from Q1. Turning to our outlook for the third quarter of 2021, we expect increased revenue growth in advanced products offset by an anticipated decline in BRIC products revenue. We continue to address the sources of gross margin pressure and our forecasting improvement in product-level profitability. Further, we do not anticipate any meaningful increases in operating expenses. While substantial further improvements in gross margin 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 yourselves 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. Phil?

Thank you, Jim. Good afternoon, and thank you for joining us. First, I'll address our data center business, which showed continued momentum in Q2 with next generation design wins for both point of load factorized power solutions and 48 to 12 and 12 to 48 volt bridging applications. for both low-power CPU servers and AI accelerator installations into legacy 12-volt rack-based servers at North American hyperscalers. We also made excellent progress in our new AC to DC front-end product development initiatives, and we'll be delivering pre-production units as planned in Q3 to lead customers. Automotive OEM collaborations continue to advance, with OEMs adding additional vehicle platforms as a result of successful testing of our power modules and as their electrification strategies become firmer with larger R&D commitments. As our power density capabilities become more visible to new divisions and with higher management levels within OEMs with which we are collaborating, we are seeing increased opportunities due to the realization of the major advantages that our high density power modules bring to an electrified vehicle power system. In Q2, we added two new collaboration projects with OEMs in Japan and Korea, and we initiated two new onboard charging projects in collaboration with a Tier 1 partner. We are on track to ship our first fully automotive qualified modules in Q4 of this year, and we continue to add to our operations, quality, reliability, and front-end teams with resources that have significant automotive experience. At our annual shareholders meeting a few weeks ago, I discussed the progress and next steps of our five layers of growth strategy, which has seen our market share and new customer acquisition accelerate in the past four years. While our layer three high growth markets of data center, AI, and automotive, with a combined SAM of over $20 billion by 2026, are currently dominating our growth and conversations with shareholders, we are focused on building a broad markets business that builds on our legacy product revenues. The opportunities in the broad markets with emerging applications are significant, with a billion-dollar SAM for advanced products in 2026 and justify increased focus and attention as customers in emerging growth markets challenged with higher power requirements look for smaller, lower weight, and higher performance power delivery solutions. We will be updating our progress in the broad markets in upcoming calls. With that, Patricio, Jim and I will now take your questions. Thank you.