Vicor Corporation

Good day, everyone, and welcome to the YCOR earnings results for the fourth quarter, and your ended December 31, 2022 conference call hosted by Jim Smith, Chief Financial Officer. My name is Esther, and I'm your operator today. 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 call is being recorded. And with that, I would like to hand over to Jim. Please go ahead.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the fourth quarter and year ended December 31, 2022. I'm Jim Schmidt, Chief Financial Officer, and I'm in Andover with Patrizio Vinciarelli, Chief Executive Officer, and Phil Davies, Vice President, 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 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 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 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 2021 Form 10-K. which we filed with the SEC on March 1, 2022. 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 23, 2023. VICOR 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 10th, 2023. The replay dial-in number is 888-286-8010, followed by the passcode 998-13947. 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 for our upcoming Form 10-K for additional information. As stated in today's press release, FICOR recorded total revenue for the fourth quarter of $105.5 million, up 2.3% from the third quarter total of $103.1 million, and up 16.8% from the fourth quarter 2021 total of $90.3 million. Revenues for the year ended December 31, 2022 increased 11.1% to $399.1 million from $359.4 million for the prior year. Advanced product revenue rose 7.3% sequentially, while brick products revenue declined 4.4% from the third quarter. Revenues for advanced products for the year ending 2022 increased 42.9% to $243.3 million from $170.2 million the year before. Shipments to stocking distributors increased 16.4% sequentially and 3.4% year-over-year. Exports for the fourth quarter decreased sequentially as a percentage of total revenue to approximately 59.8% from the prior quarter, 70.1%. On a year-over-year basis, exports increased as a percentage of total revenue to approximately 67.6% from the prior year, 67%. For Q4, advanced product share of total revenue increased to 60.2% compared to 57.4% for the third quarter. with BRIC product share correspondingly decreasing to 39.8% of total revenue. Turning to Q4 gross margin, we recorded a consolidated gross profit margin of 46.6%, which is approximately a 100 basis point increase from the prior quarter. For the full year 2022, gross margin declined to 45.2% from 49.6% in the prior year. A number of factors contributed to the year-on-year decline in gross margin percentage, including less factory utilization associated with lower brick volume, increasing startup costs incurred as we equip our in-house vertically integrated manufacturing facility, higher outsourced manufacturing costs during the year, and higher freight and tariff costs. I'll now turn to Q4 operating expenses. Total operating expense decreased 6.7 percent from the third quarter, For the full year 2022, total operating expenses of percent of revenue increased to 38.4% from 34.1% in the prior year. The amounts of total equity-based compensation expense for Q4 included in cost of goods, SG&A, and R&D was $486,000, $1,551,000, and $781,000 respectively, totaling approximately $2.8 million. For Q4, we recorded operating income of $8.1 million representing an operating margin of 7.7%. For the full year 2022, operating income totaled $27.2 million or 6.8% of revenue compared to $55.6 million or 15.5% of revenue in the prior year. Turning to income taxes, we recorded a tax provision for Q4 of approximately $1.9 million representing an effective tax rate for the quarter of 18.8%. The tax provision for the full year 2022 was approximately 3.3 million, representing an effective tax rate for the year of 11.4%. Net income for Q4 totaled 8.1 million. GAAP diluted earnings per share was 18 cents, based on a fully diluted share count of 44,859,000. For the full year 2022, net income decreased to 25.5 million, from $56.6 million in the prior year. In 2022, fully diluted earnings per share declined from the prior year, decreasing to 57 cents from $1.26. Turning to our cash flow and balance sheet, cash and cash equivalents totaled $190.6 million at Q4. Accounts receivable net of reserves totaled $65.4 million at quarter end, with DSOs for trade receivables at 40 days. Inventory's net of reserves increased 7.5% sequentially to $101.4 million. Annualized inventory turns were approximately flat sequentially at $2.59. Operating cash flow totaled $929,000 for the quarter. Capital expenditures for Q4 totaled $12.7 million. We ended the quarter with a construction and progress balance primarily for manufacturing equipment of approximately $60.4 million. and with approximately 20.6 million remaining to be spent. I'll now address bookings and backlog. Q4 book to build came in far below one and with one year backlog decreasing 18.1% from the prior quarter and 11.9% from the same period last year, closing at 304 million at year end. Q4 bookings included cancellation of orders as well as new orders for a next generation program in our high performance compute business. The net effect was a reduction in backlog of $15 million, which contributed to the 18.1 sequential decline in total backlog. Turning to our factory expansion, our manufacturing team is working diligently to bring our in-house vertically integrated advanced products factory fully online. While we have begun to benefit from the use of certain process steps in the fabrication of our advanced products, we are not yet self-sufficient in a key plating process operation. Installation and startup of this process equipment has been delayed due to resource and material constraints of the equipment manufacturer from the first quarter of this year to what is now expected to be the second quarter. As we near the completion of our vertically integrated U.S.-based fab for advanced products, we are looking forward to the substantial reduction in cycle time, improved manufacturing efficiency, and full manufacturing control that this facility will allow. And we are anxious to leverage the imminent completion of our factory to provide shorter and more consistent lead times to our customers. Turning to the first quarter of 2023, we expect results to be approximately flat to Q4. We expect operating expenses to decline modestly, sequentially, and a tax rate on the order of 15% to 20% in 2023. 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.

Our low order rate for the second half of 2022, and specifically in Q4, continued to reflect the backlog that we had built in prior quarters, and the transitions that are occurring to next-generation processor platforms at hyperscaler and XPU customers. While a number of processor chip companies and hyperscalers with internal ASIC developments are about to launch 5-nanometer-based products with FPA solutions and bus converters from VICOR, their next-generation R&D is focused on 3-nanometer technology. This process node will drive chip current requirements even higher, closer to 2,000 amps. and at the same time reduce core voltages down to 0.45 volts. Our prediction about the future of power delivery is playing out in real time. High-performance processors and clustered processor arrays will soon require vertical power delivery, VPD, and current multiplication, both proprietary VICO technologies. Instead of voltage averaging, Vicochips uniquely enable processors to meet their performance requirements. In Q4, we initiated discussions with several major OEMs on how to best intersect their three nanometer products with our next generation 5G solutions. Our FPA solutions provide the highest performance in terms of current density, low noise, and overall power system efficiency. And our Generation 5 technology will, as I have said in previous calls, be a game-changer in cloud computing and machine learning with a 3x step-up in current density. The journey to smaller geometries to support ever-expanding AI processor performance requirements fully aligns to VICO's proprietary technology. Our competitive position in HPC is growing stronger, and as a result, my confidence in our HPC market position and in the customers that we have worked hard to develop in recent years is increasing. Our industrial and defense and aerospace businesses remain stable in Q4, and POS and new orders with our global distributors remain strong. The addition of Avnet as a globally franchised distributor will add strength to our broad market efforts and support the identification and engagement with new customers developing advanced electrified systems across a broad set of applications. I expect the revenues from these two business units to grow in 2023 as a result of design wins in emerging high-growth markets that are being driven by electrification, automation, and autonomy. These target markets represent over $2 billion in SAM for VICOR. One exciting new opportunity spans the entire battery ecosystem that includes forming and testing cells, testing packs, using packs in electrified applications, and battery recycling. We have important design wins with leading customers in all of these high-growth markets for our high-voltage modules, with early revenues in 2023. Our progress in the automotive market remains very positive, with three successful OEM audits in the past six months, resulting in approval of Vicor as an automotive supplier. We expect to be IATF certified in Q2 2023, and we will PPAP our top three flagship advanced products in Q2 with additional products to follow in Q3 and Q4. OEM and Tier 1 engagements are strong, and we expect further NRE-funded collaborations in 2023. As in our HPC market, automotive customers are valuing the modularity and power density that VICO modules bring to their powertrain system designs, and the competitive advantage that we enable for their vehicles. As our new factory comes online and we release our new 5G modules into production this year, our front-end team is laser-focused on our top 100 customers, securing design and production wins that will put us on track to achieve our North Star goal of $1 billion in revenues and 65% gross margins. Thank you. Patricio, Jim, and I will now take your questions.