Vicor Corporation

Good day and welcome everyone to the Vicor earnings results for the fourth quarter and year ended December 31, 2021. My name is Robin and I'll be the operator today. During the presentation, your lines 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 now, I would like to hand the call over to Jim Schmidt, Chief Financial Officer. Please proceed, sir.

Thank you, and good afternoon, and welcome to Vicor Corporation's earnings call for the fourth quarter and year-ended December 31st, 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 and year-ending December 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. 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 this 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 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, February 24, 2022. BICOR 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 March 11, 2022. The replay dial-in number is 888-286-8010, followed by the passcode 63075291. 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 Q4 and full-year 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, as well as full year-on-year changes, and refer you to our press release or our upcoming Form 10-K for additional information. As stated in today's press release, Vicor recorded total revenue for the fourth quarter of $90.3 million, up 6.3% from the third quarter total of $84.9 million. Revenues for the year ended December 31, 2021 increased 21.2% to $359.4 million from $296.6 million for the prior year. Advanced product revenue rose 18.2% sequentially. while brick products revenue declined 6.2% from the third quarter. Revenues for advanced products for the year ending 2021 increased 60.1% to 170.2 million from 106.3 million the year before. Shipments to stocking distributors increased 4.2% sequentially and 67.4% year over year, with year over year increases for both advanced and brick products. Exports for the fourth quarter increased sequentially as a percentage of total revenue to approximately 71.7% from the prior quarter's 62.4%, primarily due to increases in advanced products. On a year-over-year basis, exports increased as a percentage of total revenue to approximately 67% from the prior year's 64.4%. For Q4, advanced product share of total revenue increased to 56.9%, compared to 51.2% for the third quarter, with BRIC products share correspondingly decreasing to 43.1% of total revenue. Turning to Q4 gross margin, we recorded a consolidated gross profit margin of 45.2%. For the full year 2021, gross margin improved to 49.6% from 44.3% in the prior year. While margins remain under the pressure of high tariff charges, The Q4 charge did decrease by approximately 7.1% compared to Q3 to approximately 1.8 million. We continue to expect to see improvement over time, in part reflecting our ongoing efforts to reduce component imports from China. I'll now turn to Q4 operating expenses. Total operating expense increased 3.5% from the third quarter, driven by increased compensation, legal, and business development expense. For the full year 2021, total operating expenses and percent of revenue declined to 34.1% from 38.5% in the prior year. The amounts of total equity-based compensation expense for Q4 included in cost of goods sold, SG&A, and R&D was $261,000, $1.207 million, and $562,000 respectively, totaling approximately $2 million. For Q4, we recorded operating income of 8.9 million, representing an operating margin of 9.9%. For the full year 2021, operating income totaled 55.6 million, or 15.5% of revenue, compared to 17.4 million, or 5.9% of revenue in the prior year. Turning to income taxes, we recorded a tax provision for Q4 of $206,000, representing an effective tax rate for the quarter of 2.3%. The tax provision for the full year 2021 was $176,000, representing an effective tax rate for the year of 0.3%. This was primarily due to a result of the income tax accounting required for stock options exercise during those periods. Net income for Q4 totaled 8.9 million. GAAP diluted earnings per share was 20 cents, based on a fully diluted share count of 45,148,000 shares. For the full year 2021, net income increased to 56.6 million, up from 17.9 million in the prior year. In 2021, fully diluted earnings per share more than tripled from the prior year, increasing to $1.26 from 41 cents in the prior year. 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've 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 under 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 $227.6 million at Q4. Accounts receivable net of reserves totaled $55.1 million at quarter end, with DSOs for trade receivables basically steady at 41 days. All balances are current. Inventories net of reserves increased 6.2% sequentially to 67.3 million. Annualized turns remained unchanged at 2.9. Operating cash flow totaled 14.2 million for the quarter. Capital expenditures for Q4 totaled 16.8 million. We ended the quarter with a construction in progress balance of approximately 36 million, leaving approximately 35 million scheduled to be spent through the year. primarily for manufacturing equipment. Our factory expansion project is proceeding on schedule and on budget. And on January 27th, we received certificate of occupancy. I'll now address bookings and backlog. Q4 booked bill came in well above one and with one year backlog increasing 17% from the immediately prior quarter and up more than twofold from the same period last year. Turning to the first quarter of 2022, Our practice continues to be not to provide specific quarterly targets. Our focus is directed at bringing our in-house production online in the coming months so that we can fully support the customer base that is driving demand for our products. We continue to work on improvements in product level profitability. Further, we do not anticipate any meaningful increases 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, 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.

Q4 was once again characterized by strong bookings for advanced products with high performance computing customers and with anticipated lower legacy product bookings. Orders for legacy products in regions other than China remain strong. On the advanced products front, the strong bookings growth trajectory for a high performance computing business is expected to continue with both increased demand from major customers and new opportunities and designing activity continuing at both existing and new customers. Established OEMs and several well-known and well-funded AI startup companies, having introduced initial relatively low-current AI platforms, are now planning AI ASICs with currents approaching 1,000 amps and have turned to VICO's lateral and lateral vertical power solutions. Our customer portfolio in high-performance computing continues to grow, And we are readying new Generation 5 technologies and control silicon and components to continue our advances in power density, current density, efficiency, and transient response, which are all critical to high-performance AI applications. Our Gen 5 point-of-load products, incorporating several major performance advances, will be introduced in Q3 this year to early lead customers. The demand for high density power delivery solutions continues unabated across all of our target markets, with power systems engineers turning to VICO's modular power solutions to solve the toughest design challenges. Our work in the past three years in the broad industrial marketplace to find new growth applications is beginning to pay off. Due to the rapid electrification and autonomy trends within both existing and emerging industrial markets, We have identified an additional $2.5 billion of available market in the next five years across market segments such as light, electric vehicles, robotics, battery test equipment, and UAVs. Our opportunity pipeline currently stands for $250 million for these new high-growth applications. Our automotive business development success in 2021 confirmed our confidence that the automotive market presents a significant growth opportunity for Vycle power modules and our place as a major future supplier of power modules to the automobile and truck industry. Our directed supplier strategy with leading OEMs has been very successful, with three production design wins and now 10 collaboration projects with major OEMs on technology and power module based system evaluations. Our aerospace and defense business strategy is undergoing a refocusing on four key growth markets. In one of these markets, satellite communications, we have made advances with new customers and our opportunity pipeline outside of our lead customer Boeing is beginning to grow. We are excited for what lies ahead of us in 2022 and beyond, given the major dislocations occurring in numerous large end markets, a system power level increase and electrification and autonomy drive the demand for higher performance power delivery networks. Major customers across our target markets clearly see the significant benefits of moving to higher voltages and away from discrete based custom power system solutions. and towards high-density modular power solutions from Vicor. Key to maximizing our growth opportunity will be achieving and maintaining operational excellence across our entire company. Initiatives launched in Q2 of last year are now well underway with multiple cross-functional teams focusing on seven pillars of continuous improvement, ranging from customer centricity to talent retention and acquisition. Our commitment to vertical integration of our manufacturing processes and expanding our American base of operations is also a key success factor to achieving operational excellence. As Jim noted earlier in his prepared remarks, our new facility is approaching completion and will be operational in Q3 of this year with a ribbon cutting opening ceremony on April the 26th. That concludes my remarks and Patricio, Jim and I will now take your questions.