Vicor Corporation

Good day, everyone, and welcome to WICO Earnings Results for the third quarter ended September 13th, 2022, hosted by James Schmidt, Chief Financial Officer. My name is Peter, 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 key star zero on your phone. If you wish to ask a question, please press star and one. I would like to advise all parties this conference is being recorded, and now I'd like to hand over James Schmidt, please proceed.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the third quarter ended September 30th, 2022. I'm Jim Schmidt, Chief Financial Officer, and I'm in Andover with Phil Davies, Vice President of Global Sales and Marketing. Our CEO, Patrizio Vinciarelli, is unable to join today's call because he is out of state attending the trial relating to IP litigation we referenced on our earnings call last quarter. After the markets closed today, we issued a press release summarizing our financial results for the three-month and nine-months ending September 30th. This press release has been posted on the investor relations page of our website, www.ficorpower.com. We also filed a Form 8-K today relating to the issuance of this press release. I remind listeners this conference call is being recorded and is the copyrighted property of I-Corps 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 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 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. Tuesday, October 25, 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 November 9, 2022. The replay dial-in number is 888-286-8010. followed by the passcode 10145508. 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 Q3 financial performance, after which we'll review recent market developments, And 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 third quarter of $103.1 million. approximately a 1% sequential increase from $102.2 million in the second quarter of 2022, and a 21.4% increase from the same quarter a year ago. Advanced product revenue decreased 12.5% sequentially, while brick product revenue increased 27.2% from the prior quarter. Advanced product revenue increased 36.2% from the same quarter a year ago. Shipments to stocking distributors increased 22.5% sequentially and 27.3% year-over-year. The brick products revenue increased over the prior quarter as the result of our manufacturing team's ability to adapt to changing circumstances and focus on the open brick backlog as we have the supply to get the additional output for the quarter. The sequential decline in advanced product revenue in Q3 was due in part to the issuance of an approximately $6 million return material authorization, or RMA, in the quarter. Product covered by this RMA will be evaluated upon receipt and prior to restocking in advance of its future shipment. Exports for the third quarter were relatively flat sequentially as a percentage of total revenue at approximately 70.1% from the prior quarter, 69.2%. For Q3, advanced product share of total revenue decreased to 57.4% compared to 66.2% in the second quarter of 2022, with BRIC product share correspondingly increasing to 42.6% of revenue. Turning to Q3 gross margin, we recorded a consolidated gross profit margin of 45.5%. Gross margin decreased sequentially from 45.8% in the second quarter of 2022, primarily as a net result of favorable overhead absorption offset by tariff costs, higher costs at outside vendors, and incremental in-house manufacturing costs associated with ongoing vertical integration investment in advance of substantial in-house production. Tariffs continue to be a drag on gross margin at $3 million in Q3 and 2.9% of revenue. Our work to reduce tariffs by reducing imports from China continues. I'll now turn to Q3 operating expenses. Total operating expense increased 5.4% from the second quarter of 2022. Like last quarter, and for the same reasons, this above-average sequential increase was largely due to legal fees incurred in connection with intellectual property litigation we've described previously and as disclosed in our filings. The amounts of total equity-based compensation expense for Q3 included in cost of goods, SG&A, and R&D was $479,000, $1,537,000, and $813,000, respectively, totaling approximately $2.8 million. For Q3, we recorded operating income of $9.5 million, representing an operating margin of 9.2%. Income taxes for Q3 were a tax provision of $842,000. Net income for the quarter totaled 8.1 million. GAAP diluted earnings per share was 18 cents based on a fully diluted share count of 44,898,000 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 totaled $202 million at the end of Q3. Accounts receivable, net of reserves, totaled $56.3 million at quarter end. with DSOs for trade receivables at 38 days. All balances are current. Inventory's net of reserves increased 13.6 percent sequentially to 94.3 million, and with annualized turns at 2.61. Operating cash flow totaled 6.6 million for the quarter. Capital expenditures for Q3 totaled 14.4 million. We ended the quarter with a total construction and progress balance of 57 million, and approximately $13.5 million scheduled to be spent through the end of the year, primarily for manufacturing equipment. I'll now address bookings and backlog. Q3 book to bill came in below one, and with one year backlog decreasing sequentially by 9.4% from the second quarter of 2022. Before addressing our outlook for the fourth quarter of 2022, I'd like to comment on significant external events and developments that have occurred since our last earnings call in July. Over the course of the last three months, the macroeconomic environment has deteriorated. Many parts of the semiconductor industry have entered a downturn. The Commerce Department issued new and stricter export control rules, and the Chips and Science Act became law. While it's too soon to tell what the impact of the first three of these developments may mean for our business, They certainly represent headwinds in the near term. On the other hand, the passage of the CHIPS and Science Act could present an opportunity for VICOR, both in terms of potential funding for new investments in vertically integrated US-based manufacturing, and also the possibility of leveraging its investment tax credit. As we operate in this environment, we are working to control all the factors that we can control. For example, We are taking a more conservative stance on hiring and have recently reprioritized and reduced open personnel requisitions. We continue to work to bring our vertically integrated U.S.-based production capacity online while also looking for opportunities to take advantage of the investment tax credit in the CHIPS Act relating to equipment procured after the CHIPS Act became law and is subsequently placed into service after December. We have taken steps to rebalance our manufacturing production plan in order to make progress catching up with customer demand that we've not been able to adequately support in the past. We are continuing our company-wide work in support of operational excellence. And we remain focused on the development of our next generation power delivery technology while building the business across our customer base in HPC, automotive, industrial, and aerospace and defense and markets. In all of this, we remain focused on executing our strategy, which we laid out at our annual shareholders meeting in June. Given our continued near-term dependence on outsourced production for certain package process steps, our outlook for the fourth quarter is approximately flat to our Q3 results, with a potential for modest sequential improvement as we increasingly leverage in-house process equipment to alleviate production constraints. With that, Phil will provide an overview of recent market developments, and then 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. As Jim mentioned, our book-to-bill ratio came in below 1 in Q3, reflecting the second quarter in a row where this has occurred. At a high level, this trend is reflective of the deteriorating macroeconomic environment. However, it's important to point out that we maintain substantial backlog as we enter Q4. From an end market perspective and on a more positive note, the outlook for the data center market in North America at the current time is still good. as hyperscalers continue to build out their machine learning technologies and capabilities, as well as upgrading their CPU racks with the latest Intel and AMD CPUs. Managing the transitions to newer processor platforms in our customer base will require some maneuvering of our NCNR backlog in Q4 from Gen 3 to Gen 4 factorized power modules. I remain confident in our position in the HPC market and in the customers that we have worked hard to develop in recent years. Our factorized power solutions remain the highest performance in terms of current density, low noise, and overall power system efficiency. Our Generation 5 technology and new FPA modules, which we are now beginning to introduce to lead customers, will be a game changer in cloud computing and machine learning, with a significant step up in current density. Our Gen 5 technology will also enable direct chip-on-processor solutions, which will completely eliminate board and substrate PDN losses for our advanced processor customers, while also providing a significant step up in transient performance. While multi-phase buck regulators have increased their power density and represent an attractive alternative due to the multi-sourcing, it remains to be proven if these multi-phase solutions can manage significantly higher PDN losses and meet the low noise and high performance required by high power AI and network processes. Our industrial and aerospace business remains stable in Q3, and both POS and new orders within our global distributors remain strong. However, we have started to see signs of a potential slowdown in some segments of our industrial business in China and Europe, which reflect macroeconomic headwinds. Our automotive business development continued its positive trajectory with OEM and Tier 1 power system evaluations making great progress towards securing start of production dates with very attractive volume opportunities at several OEMs. We had two successful OEM audits in Q3. Both OEMs have approved VICOR as a supplier of power modules for their vehicles. In Q3, we also engaged with additional hyperscalers and processor OEMs regarding an OEM license that would ensure continuity of supply ahead of our upcoming campaign to enforce VICO bus converter patents. Thank you.