Vicor Corporation

Welcome, everyone, to today's webinar entitled, Why Core Earnings Results for the First Quarter Ended March 31, 2023. My name is Friji, and I'm your operator today. During the presentation, all attendees will remain in listen-only mode. If you require assistance at any time, please put a message in the chat box. I would like to advise all parties that this conference is being recorded. And with that, I would like to hand over to Jim Schmidt, Chief Financial Officer of Vicor. Please go ahead.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the first quarter ended March 31, 2023. I'm Jim Schmidt, Chief Financial Officer, and I'm in Andover with Patrizio Vinciarelli, Chief Executive Officer, and Phil Davies, Corporate Vice President, 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 related to the issuance of this press release. I remind listeners this conference call is being recorded and is 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 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 in or implied by any of our remarks today. The risk and uncertainties we face are discussed in item 1A of our 2022 Form 10-K, which we filed with the SEC on February 28, 2023. 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, Tuesday, April 25, 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 webcast replay of today's call 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 changes for P&L and balance sheet items and refer you to our press release or upcoming Form 10-Q for additional information. As stated in today's press release, VICOR recorded total revenue for the first quarter of $97.8 million, down 7.3% sequentially from the fourth quarter of 2022, total of $105.5 million. but up 10.8% from the first quarter of 2022, total of $88.3 million. Advanced products revenue declined 19.3% sequentially to $51.3 million, while brick products revenue increased 10.9% sequentially to $46.5 million. Shipments to stocking distributors increased 4.1% sequentially and 43.3% year-over-year. The decline in advanced products revenue was due primarily to constraints at our outsourced manufacturing partner. Exports for the first quarter decreased slightly on a dollar basis, but increased sequentially as a percentage of total revenue to approximately 64.3% from the prior quarter's 59.8%. For Q1, advanced products share of total revenue decreased to 52.4% compared to 60.2% for the fourth quarter of 2022. with BRIC products share correspondingly increasing to 47.6% of total revenue. Turning to Q1 gross margin, we recorded a consolidated gross profit margin of 47.6%, which is a 100 basis point increase from the prior quarter. While lower sales volume pressured gross margins, we did benefit from an improvement in the gross tariff rate as a percentage of revenue. During the quarter, we recovered approximately $3 million in duty drawback of previously paid tariffs. We continue to work to reduce overall tariff expense and recover previously paid duty drawback. I'll now turn to Q1 operating expenses. Total operating expense decreased 12% sequentially from the fourth quarter of 2022 to $36.1 million. The sequential reduction was primarily due to a reduction in legal fees. The amounts of total equity-based compensation expense for Q1 included in cost of goods, SG&A, and R&D was 486,000, 1,520,000, and 811,000 respectively, totaling approximately 2.8 million. For Q1, we recorded operating income of $10.4 million, representing an operating margin of 10.7%. Turning to income taxes, we recorded a tax provision for Q1 of approximately 1.1 million, representing an effective tax rate for the quarter of 9.2%. Net income for Q1 totaled $11.2 million. GAAP diluted earnings per share was 25 cents based on a fully diluted share count of 44,907,000 shares. Fully diluted EPS increased approximately 39% sequentially compared to 18 cents in the fourth quarter of 2022, and more than doubled from 11 cents per share earned in the same quarter a year ago. Turning to our cash flow and balance sheet, cash and cash equivalents totaled 192.9 million at Q1. Accounts receivable net of reserves totaled 61.1 million at quarter end, with DSOs for trade receivables at 35 days. Inventories net of reserves increased 5.9% sequentially to 107.4 million. Annualized inventory turns were 2.1, Operating cash flow totaled $10.1 million for the quarter. Capital expenditures for Q1 totaled $10.1 million. We ended the quarter with a construction in progress balance, primarily from manufacturing equipment of approximately $36 million, and with approximately $13 million remaining to be spent. I'll now address bookings and backlog. Q1 book to bill came in below one, and with one year backlog decreasing 10.9% from the prior quarter, closing at $271.3 million. Turning to our factory expansion, as expected, we recently received the final pieces of equipment necessary to complete vertical integration of our new chip fab. During the month of May, our manufacturing team will conduct pilot runs using this equipment. Through July, we expect to complete manufacturing qualification of our vertically integrated chip fab and then commence volume production. While there will still be some outsourced processing, In Q3, we expect to be vertically integrated across all of the key process steps necessary to manufacture our power modules. This marks a milestone in VICOR's history, aligning our manufacturing capacity in the first global chip fab with the breakthrough design technology VICOR has invented to deliver superior power density. As we said last quarter, 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 completion of our chip fab to provide shorter and more consistent lead times to our customers. Turning to the second quarter of 2023, we expect results to be approximately flat to Q1 with a potential for a modest sequential improvement in overall results, and including a moderate sequential increase in operating expense as we implement our annual merit process. 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 possible 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 begin with an update on our satellite market business development initiatives, which we haven't discussed for a while. In December of 2022, we announced that VICO's radiation-tolerant factorized power chipset was on board the launch of Boeing's O3B communications satellite, powering the communication ASICs. This was a critical milestone for us. by proving to other satellite customers that VICO power modules could improve signal integrity, efficiency, and power density while meeting the tough environmental and quality demands of space applications. Building a space heritage opens up an available market opportunity of $175 million with Boeing and other customers. Our initial radiation-tolerant chipset is being expanded with additional input and output voltage modules, critical for other customers and applications. In early Q3, we will introduce a reference design for AMD's first space-grade Verso Adaptive SoC, which delivers reprogrammable AI inferencing and high-bandwidth signal processing for satellite and space applications. Turning to our automotive market opportunity, at the World Congress event in Detroit last week, VICO presented four papers on how our power modules solve the toughest power delivery and conversion challenges in electric vehicle power systems, which are increasingly transitioning to a 48-volt power distribution architecture. Broader adoption of 48-volt power distribution bodes well for us, given that the 48-volt architecture is one that VICO has pioneered and innovated around for over 15 years. developing proprietary and patented power distribution networks, topologies, control systems, and packaging to deliver the highest power density 48-volt solutions. The chips and applications presented at WCX and on display at our booth are the foundation of our expanding OEM and Tier 1 collaborations and design wins. In Q1, we signed a supplier agreement with a major Tier 1 and expanded our design wind pipeline at existing OEMs with additional platforms and applications. We also started three new collaborations and added a major design wind with an SOP date of 2026. High-voltage power systems designed with our power modules are proving to be 3 to 10 times smaller and lighter than DC-DC converters built with silicon carbide of GaN power switches. We are also on track to achieve automotive-level qualification for several of our power modules in Q2. In Q1, the high-performance computing market saw the introduction of artificial intelligence chatbots using large language models, which have significantly stimulated the market for AI systems at hyperscalers and social media companies globally. These new chatbot capabilities open up completely new areas of AI to the masses and have a much higher customer satisfaction than traditional search engines. Our factorized power solutions are being used to power the rollout of this exciting new technology, and as higher performing processes are introduced, our lateral vertical solutions will provide the higher current density and lower PDN losses that these next generation AI processes demand, with increasing current levels and lower operating voltages. As I commented in our last call, new 5-nanometer processors being introduced to the market using lateral power conversion solutions are hindered with high PDN loss, which limits performance from otherwise achievable levels. Lateral vertical factorized power enables the full potential of AI processors by reducing processor and PDN losses. On the product development front, our Gen 5 technology continues to make excellent progress. and is on schedule for introduction to major customers this year. These next-generation point-of-load solutions enable scalable, cost-effective VPD, or vertical power delivery, which will be a game-changer for the industry and enable next-generation processors that would otherwise be handicapped by the power conversion and delivery challenges of multi-phase technology. In summary, all of our four business units are seeing expanding opportunities and major customer engagements across our top 100 customers as electrification, autonomy, and artificial intelligence requirements rapidly expand. Account managers for our top 100 accounts are setting up visits to our new chip fab for Q3 and Q4 as part of our operational excellence initiatives to provide our target customer base worldwide visibility to our scalable capacity and to introduce them to the superior power system capabilities of our Gen 5 chips. That concludes my remarks. Patricio, Jim, and I will now take your questions.