Vicor Corporation

Good day and welcome everyone to the WICAR earnings results for the second quarter ended June 30, 2022, hosted by Jim Schmidt, Chief Financial Officer. My name is Nandi and I'm your event manager today. During the presentation, your lines will remain on listen only. If you require assistance at any time, please keep star zero on your telephone and the coordinator will be happy to assist you. I would also like to advise all parties that this conference is being recorded. And now I'd like to hand it over to your host, Jim. Please proceed.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the second quarter ended June 30th, 2022. 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 and six months ended June 30th. 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 the 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 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 or implied by any of our remarks today. The risk 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, July 21, 2022. BICOR 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 August 5th, 2022. The replay dial-in number is 888-286-8010, followed by the passcode 644-90033. 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 Q2 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 second quarter of $102.2 million, a 15.7% sequential increase from $88.3 million in the first quarter of 2022. Advanced products revenue increased 27.8% sequentially, while brick products revenue declined 2.4% from the prior quarter. Advanced products revenue increased 64.9% from the same quarter a year ago, Shipments to stocking distributors decreased 3.4% sequentially and 34.1% year over year. Exports for the second quarter were relatively flat sequentially as a percentage of total revenue at approximately 69.2% from the prior quarter, 72%. For Q2, advanced product share of total revenue increased to 66.2% compared to 59.9% in the first quarter of 2022. with BRIC products share correspondingly decreasing to 33.8% of revenue. Turning to Q2 gross margin, we recorded a consolidated gross profit margin of 45.8%. Gross margin increased sequentially from 42.6% in the first quarter of 2022, primarily as a result of higher volume. Headwinds impacting our gross margin, including elevated cost of securing supply and outsourced capacity, continued in Q2. In addition, tariffs continue to be a drag on gross margin at $2.1 million in Q2 and 2.1% of revenue. Our work to reduce tariffs by reducing imports from China continues. I'll now turn to Q2 operating expenses. Total operating expense increased 8.3% from the first quarter of 2022. This above average sequential increase was largely due to legal fees incurred in connection with intellectual property litigation. NICOR is both a defendant in a case scheduled for trial in October and a plaintiff in an upcoming ITC case to stop importation of infringing OEM products into the U.S. In the larger context, as described previously, VICOR has developed proprietary power modules and system architectures providing superior power system solutions. These capabilities are being broadly adopted by OEMs purchasing VICOR modules, by an OEM licensing VICOR technology to procure otherwise infringing modules from unlicensed suppliers, and by OEMs taking their chances with the importation into the U.S. of infringing products. NICOR is committed to vigorously enforce its IP. The amounts of total equity-based compensation expense for Q2 included in cost of goods, SG&A, and R&D was $431,000, $1,440,000, and $751,000, respectively, totaling approximately $2.6 million. For Q2, we recorded operating income of $11.3 million. representing an operating margin of 11.1%. Income taxes for Q2 were a tax provision of $802,000. Net income for the quarter totaled 10.6 million. GAAP diluted earnings per share was 24 cents, based on a fully diluted share count of 44,866,000. 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 effects on our results are unpredictable. Turning to our cash flow and balance sheet, cash, cash equivalents, and short-term investments total $207.6 million at the end of Q2. Accounts receivable net of reserves totaled 54.5 million at quarter end, with DSOs for trade receivables at 37 days. All balances are current. Inventories net of reserves increased 12.4% sequentially to 83.1 million, and with annualized turns at 2.62. Operating cash flow totaled 10.8 million for the quarter. Capital expenditures for Q2 totaled 14.2 million, We ended the quarter with a total construction and progress balance of 50.8 million and approximately 35.1 million scheduled to be spent through the year, primarily for manufacturing equipment. I'll now address bookings and backlog. Q2 book to bill came in below one and with one year backlog decreasing sequentially by 3.2% from the first quarter of 2022. Turning to the third quarter of 2022, As we updated at the annual shareholders meeting in June, our chip fab is nearing completion and we expect vertically integrated production in Q4. As it ramps up, our chip fab will provide the capacity we need to further improve output and the efficiency necessary to improve gross margins. 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. Q2 bookings are a result of securing long-term NCNR orders in prior quarters that now form a large part of our backlog. The outlook for the data center market is positive, as hyperscalers continue to build out their machine learning technologies and capabilities, as well as upgrading their 48-volt CPU racks with the latest Intel and AMD CPUs. Our backlog, which stands at over $400 million, is strong and made up of major HPC customers with a mix of older and newer programs that are just beginning their ramps. Our objectives in the next two to three quarters are to catch up with customer demand and reduce lead times. As discussed in our annual shareholders presentation a few weeks ago, we are working on next generation AI processor and AI systems in the HPC market with lateral and lateral vertical solutions and with new network processor-based designs for backhaul speed upgrades. Since the ASM, we have also agreed to a funded collaboration agreement with an additional automotive OEM. Our legacy product backlog increased in Q2, and although a smaller percentage of our overall business mix, legacy products remain important to our business. Many of our 8,000-plus customers representing a very long tail and loyal base are transitioning to our advanced products for next-generation programs. This is important to our portfolio as we build out a broad-based industrial and channel business. I cannot emphasize enough how important our new chip fab is to not only increasing short-term revenue growth for our advanced product customers globally, but also to our mid- and long-term strategic goals. Our major HPC customers need access to scalable capacity with shorter lead times in support of their critical production ramps and volume requirements. Our automotive customers also need assurance that the power modules they use in vehicle platforms are manufactured in an automotive-qualified facility under VICO's full control. In conjunction with world-class manufacturing of chips in our first fab, our company-wide operational excellence initiatives are now being rolled out. Our pivot from a product-centric company to a more customer-centric company is at the heart of this change. On the ASM call, I spoke of a focused set of 100 customers, that had the SAMs to get us to $1 billion revenue target. We will be laser focused on this customer set with the objective of achieving the highest possible scores across technology, quality, responsiveness, delivery, and cost, more commonly referred to as TQRDC, such that the most impactful companies around the world trust us to deliver power system solutions with the high performance necessary to enable their innovations. Thank you. Patricio, Jim, and I will now take your questions.