Vicor Corporation

Good day, everyone, and welcome to the WICOR earnings results for the third quarter ended September 30th, 2021. My name is Wanda, and I'm your email manager. During the presentation, your lines will remain on listen 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 Jim Schmidt, Chief Financial Officer. Please proceed.

Thank you, and good afternoon, and welcome to Vicor Corporation's earnings call for the third quarter ended September 30th, 2021. I'm Jim Schmidt, Chief Financial Officer, and I'm 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 September 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 the 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 risk 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 risk 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, October 21, 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 today's call will be available beginning at midnight tonight through November 5th, 2021. The replay dial-in number is 888-286-8010, followed by the passcode 333-42563. 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 Q3 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 P&L and balance sheet items, and refer you to our press release or our upcoming Forum 10Q for year-over-year comparisons. As stated in today's press release, FICOR recorded total revenue for the second quarter of $84.9 million, Down 11% from the second quarter, a total of $95.4 million. Revenues came in substantially below expectations because of semiconductor component shortages compounded by our own capacity constraints. Component shortages were due to limited wafer allocation and long cycle time backend semiconductor component packaging processes. Advanced product revenue rose 6% sequentially, while brick product revenue declined 23.7% from the second quarter. Shipments to stocking distributors declined 36.6% sequentially, primarily due to a decline in BRIC products. Exports for the second quarter decreased sequentially, as a percentage of total revenue, to approximately 62.4% of consolidated revenue from the prior quarter's 64.3%, primarily due to a decrease in BRIC products. For Q3, advanced product share of total revenue increased to 51.2%, compared to 43% for the second quarter, with BRICS product share correspondingly decreasing to 48.8% of total revenue. Turning to Q3 gross margin, we recorded a consolidated gross profit of 50.4%. Gross margin dollars declined by 14% sequentially due to the decline in volume, but increased 28% from the same period a year ago. Margins remain under the pressure of high tariff charges, though the Q3 charge was approximately the same as Q2's charge of approximately $1.9 million. We expect to see improvement over time, in part reflecting our ongoing efforts to reduce component imports from China. I'll now turn to Q3 operating expenses. Total OPEX increased 3.3% from the second quarter, driven by increased compensation, legal and consulting fees, and recruitment expense. The amounts of total equity-based compensation expense for Q3 included in cost of goods sold, SG&A, and R&D were approximately $259,000, $1,033,000, and $575,000, respectively, totaling approximately $1.9 million. For Q3, we recorded operating income of $12 million, representing an operating margin of 14.1%. Turning to income taxes, we recorded a net tax benefit for Q3 of $886,000, representing an effective tax rate for the quarter of minus 7%. The net tax benefit for Q3 and year-to-date was primarily due to a result of the income tax accounting required for stock options exercised during this period. Net income for Q3 totaled $13.3 million. GAAP diluted earnings per share with 29 cents, based on a fully diluted share count of 45,034,000 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-19 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, cash equivalents, and short-term investments total $228.9 million at the end of Q3. Accounts receivable net of reserves totaled $51.1 million at quarter end, with DSOs for trade receivables basically steady at 40 days. All balances are current. Inventories net of reserves increased 11% sequentially to $63.4 million. Annualized turns decreased slightly to 2.91 from 3.12 for Q2. Operating cash flow totaled $10.1 million for the quarter. Capital expenditures for Q3 totaled $15.2 million. We ended the quarter with a construction and progress balance of $36 million, leaving approximately $20 million of our capital budget scheduled to be spent through the year. Our factory expansion is proceeding on schedule and on budget. I'll now address bookings and backlog. Q3 book to build came at a 2.0 and one year backlog more than doubled from the same period last year. Turning to our outlook for the fourth quarter of 2021, our practice continues to be to not provide specific quarterly targets. However, given our assessment of available semiconductor components and of our capacity, we are planning on a 20% increase in revenue in Q4. Availability of semiconductor components has improved since Q3 because of reduced cycle times and back-end processes and a substantial increase in our wafer allocations. Easing supply chain bottlenecks and recent increases in our advanced products manufacturing capacity should enable a significant step up in advanced products revenue. We continue to focus on 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, Phil and I 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, everyone, and thank you for joining us. In Q3, we achieved record bookings, a record book to bill, and record backlog. Bookings for AI and data center customers for factorized power solutions and 12-volt to 48-volt bridging bus converters were robust, and our visibility into production programs is longer than we have seen on previous projects. Some of the next generation programs will also run in parallel with existing programs, which is a new strategy for some of our data center customers. Next generation AI processor and data center CPU server programs in early stages of development and pre-production will provide $70 to $150 of VICA content per board. New clustered processor AI applications offer much higher dollar content for our proprietary vertical power delivery solutions whose IP protection and technical challenges set us further apart from our competitors. Expanding our SAM within the large data center market is always an objective for our teams, and evaluation of our advanced AC to DC solutions have started at lead customers with derivative products in development that will target applications for both single-phase and three-phase AC to DC across the high-performance computing industrial and aerospace and defense markets. We are also engaging with customers who are deploying ASICs for high-speed optical networking units, which have power delivery challenges due to major increases in core rail currents above 1,000 amps. Our first major customer in this new market will be in production in Q3 2022. As the data center industry shifts to 48-volt-based rack power delivery, The upcoming open compute forum will feature 48 volt power distribution and the need for a more robust ecosystem of high density modular power solutions rather than low density discrete approaches. All of which validates decisions we made to commit to this market before it emerged 10 years ago. Our OEM licensing practice will facilitate an ecosystem of high performance power system solutions for the AI and data center industry. Anticipating power delivery challenges and trends and innovating to deliver solutions ahead of market needs is VICO's track record. This is playing out with additional growth in Q3 for our pipeline of automotive opportunities as electrification commitments grow within OEMs for additional models and the new electrified vehicle introduction dates solidify. We are not only seeing more opportunities in pure EV, but also in plug-in and mild hybrid platforms, as well as the truck industry, broadening and diversifying our market and customer base. With this backdrop of increasing growth opportunities, we have decided to restructure the front end of our business into market-based business units. The four business units will be high performance computing, automotive, aerospace and defense, and broad markets. This structure aligns with our five layers of growth strategy and brings a higher level of focus on a global scale to our target markets, customers, and applications, as well as increased responsibility in the team for funnel conversion, revenue streams, and gross margin improvement. Because of the high level of technology reuse and applicability of our innovations across markets, engineering and product development will remain centralized. Patricio, Jim, and I will now take your questions. Thank you.