Vicor Corporation

Good day and welcome everyone to the WeCore Earnings Results for the first quarter ended March 31st, 2022, hosted by James Schmidt, Chief Financial Officer. My name is Matt and I'm the Revenue Manager. During the presentation, your lines will remain on listen only. If you require assistance at any time, please press star zero on your phone 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'd like to hand it over to James. You may proceed.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the first quarter ended March 31st, 2022. 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 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 relating 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 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 or implied by any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2021 Form 10-K, which we filed with the SEC on March 1, 2022. The 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 21, 2022. RICOR undertakes no obligation to update any statement, 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 May 6, 2022. The replay dial-in number is 888-286-8010, followed by the passcode 190-42467. 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. I'll now turn to a review of our Q1 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 Form 10-Q for year-over-year comparisons. As stated in today's press release, VICOR recorded total revenue for the first quarter of $88.3 million, a 2.2% sequential decrease from $90.3 million in the fourth quarter of 2021. Advanced product revenue increased 3% sequentially, while brick product revenue declined 9% from the prior quarter. Advanced product revenue increased 54% from the same quarter a year ago. Shipments to stocking distributors increased 3.3% sequentially, and decreased 1.2% year-over-year. Exports for the first quarter were relatively flat sequentially as a percentage of total revenue at approximately 72% from the prior quarter's 71.7%. For Q1, advanced product share of total revenue increased to 59.9% compared to 56.9% in the fourth quarter of 2021. with BRIC products share correspondingly decreasing to 40.1% of revenue. Turning to Q1 gross margin, we recorded a consolidated gross profit margin of 42.6%. Gross margin declined sequentially from 45.2% in the fourth quarter of 2021, primarily as a result of lower volume, a full quarter of higher cost of outsourced panel production, an increase in manufacturing spending associated with higher freight costs incurred to respond to supply chain disruptions, as well as increased staffing and activity levels to support the startup of our manufacturing expansion. In addition, tariffs continue to be a drag on gross margin at $2.2 million in Q1 and 2.5% of revenue. Our work to reduce tariffs by reducing imports from China continues. I'll now turn to Q1 operating expenses. Total operating expense increased 2.8% from the fourth quarter of 2021, driven by increased compensation, engineering activity, and professional services. The amounts of total equity-based compensation expense for Q1 included in cost of goods, SG&A, and R&D was $251,000, $1,207,000, and $536,000, respectively, totaling approximately $2 million. For Q1, we recorded operating income of $4.8 million, representing an operating margin of 5.4%. Income taxes for Q1 were a tax benefit of $48,000. Net income for the quarter totaled $5 million. GAAP diluted earnings per share was 11 cents, based on a fully diluted share count of 44,954,000 shares. Before I review 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 are 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. In particular, the zero COVID policy adopted by China has caused disruptions in parts of our supply chain, and the impact and timing of the effect on our results are unpredictable. Turning to our cash flow and balance sheet, Cash, cash equivalents, and short-term investments total $211 million at the end of Q1. Accounts receivable net of reserves total $52.7 million at quarter end, with DSOs for trade receivables at 37 days. All balances are current. Inventories net of reserves increased 9.7% sequentially to $73.9 million, and with annualized turns at 2.65%. Operating cash flow totaled $4.6 million for the quarter. Capital expenditures for Q1 totaled $22.7 million. We ended the quarter with a total construction and progress balance of $50 million and approximately $42 million scheduled to be spent through the year, primarily for manufacturing equipment. Our factory expansion is proceeding on schedule and on budget. I'll now address bookings and backlogs. Q1 book-to-bill came in well above one, and with one-year backlog increasing sequentially by 22.6% from the fourth quarter of 2021. Turning to the second quarter of 2022 and beyond, we expect to bring our integrated CHIP fabrication manufacturing expansion online starting in Q3. CHIP is our acronym for Converter, Housed, and Packaged. Our automated chip foundry will establish the in-house process flow to assemble, mold, plate, test, and finish complete high-density power modules in high volume and at world-class quality levels. Until VICOR's chip foundry is online, existing capacity will limit our ability to increase our production and shipment rate in the short term. During this quarter, we are working on installation of equipment in our chip foundry. Once installed, the production line will undergo full qualification and approving in period. As the line becomes fully operational in the coming months, we will be positioned to significantly increase capacity, efficiency, and output, which we expect will result in improving operating results in the second half of the year. Also during this quarter, we are finalizing and expect to complete our annual merit process. Our focus remains on our long-term success based on our pioneering approach to integrated high-density power module technology. We are working hard to combine world-class operating performance with the technical advantages of the VICOR power delivery products. We've invested in a unique, state-of-the-art, U.S.-based automated manufacturing facility, which is in close proximity to our development engineering teams and allows for co-development of next-generation products. Our manufacturing strategy also de-risks supply chains, lays the foundation for cost efficiency and cost reduction, and positions us to deliver the output needed in the highest volume, most demanding power delivery applications. And we are embarking on an initiative to drive operational excellence across VICOR. At the heart of that initiative is our aim to become a customer-centric company. Our entire organization is engaged to make Vicor the power delivery supplier of choice for customers in a variety of end markets. We are committed to achieving our goal of operational excellence. 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. I'll keep my comments short and focus them primarily on our high-performance computing business, which has received a lot of attention from our investor community. Our backlog growth is driven by our global high-performance computing customers and new supercomputer, cloud server, and AI accelerator card solutions being brought to market. The 48-volt bridging applications are now ramping with major hyperscalers as they deploy rack-based clustered GPU AI systems into their data centers in rapidly increasing numbers. Additionally, GPU and ASIC-based 48-volt accelerator cards, which have varying power requirements, are ramping with both 48-volt to 12-volt bridging solutions for lower power cards as well as direct 48-volt to point-of-load factorized power solutions for higher power GPUs and ASICs. The technology gap separating VICO from a multiplicity of aspiring competitors is expanding, not contracting. Specifically, current density and other key performance attributes of VICO power system solutions are improving at a rate faster than achievable with intermediate bus architecture multi-phase solutions. High performance computing applications require the level of performance that only VICO modules are capable of providing. Very soon, they will require VICO proprietary power system architectures, such as vertical and lateral vertical power delivery. And that is why our data center business opportunity is broadening and going up, not down. To be clear, the high performance computing industry is no different than any other high volume industry seeking multiple sources to de-risk supply chains. However, wishing to accomplish a multiplicity of sources does not necessarily mean being able to do it with good enough performance. We remain confident that our performance advantages will continue to expand our opportunities and design wins with major customers. With a few current multiplier modules deployed laterally or preferably vertically, a VICO power system can achieve higher density, lower noise, higher efficiency, and higher performance than can be achieved with a multi-phase solution consisting of over 100 large, noisy, and hot components. As discussed in previous quarterly calls, 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 their toughest design challenges. As our new vertically integrated capacity comes online in Q3, we will be better positioned to take full advantage of the increased number of high growth opportunities with our current and new high-performance computing customers who are also eagerly anticipating this key event for Vico. As we have discussed in previous quarters, Vico is gearing up for sustained and predictable long-term growth. A major part of our growth strategy will be success in the automotive powertrain market, and having a full vertically integrated manufacturing process will also enable us to meet the exacting qualification standards demanded by our automotive customers. Our progress in developing this exciting new market and engagements with leading OEMs continues to be ahead of our initial plans. That concludes my remarks and Patricio, Jim and I will now take your questions.