Vicor Corporation

Welcome everyone to today's webinar entitled microearnings results for the second quarter ended June 30, 2023. My name is Robin and I'll be the producer for today. During the presentation, all attendees will remain on listen-only mode. If you require assistance at any time, please put a message in the chat box. And with that, I would like to hand the call over to James Smith, Chief Financial Officer. Please proceed.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the second quarter ended June 30th, 2023. I'm Jim Schmidt, Chief Financial Officer, and I'm in Andover with Patricio 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 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 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 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 risks 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, July 25th, 2023. RICOR 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 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 changes for P&L and balance sheet items, and refer you to our press release or our upcoming Form 10-Q for additional information. As stated in today's press release, FICO recorded total revenue for the second quarter of $106.7 million, up 9.1% sequentially from the first quarter of 2023, total of $97.8 million, and up 4.5% from the second quarter of 2022, total of $102.2 million. Advanced product revenue increased 31.6% sequentially to $67.5 million, while brick product revenue decreased 15.7% sequentially to $39.2 million. Shipments to stocking distributors decreased 0.5% sequentially and increased 47.6% year-over-year. Exports for the second quarter increased sequentially as a percentage of total revenue to approximately 68.1% from the prior quarter's 64.3%. For Q2, advanced product share of total revenue increased to 63.2% compared to 52.4% for the first quarter of 2023. With BRIC products share correspondingly decreased to 36.8% of total revenue. Turning to Q2 gross margin, we recorded a consolidated gross profit margin of 51.7%, which is a 410 basis point increase from the prior quarter. During the quarter, we recovered approximately 2.8 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 Q2 operating expenses. Total operating expense increased 3.4% sequentially from the first quarter of 2023 to $37.3 million. The sequential increase was primarily due to an increase in R&D spending. The amounts of total equity-based compensation expense for Q2 included in cost of goods, SG&A, and R&D was 570,000, 1,626,000, and $816,000 respectively, totaling approximately $3 million. For Q2, we recorded operating income of $17.9 million, representing an operating margin of 16.7%. Turning to income taxes, we recorded a tax provision for Q2 of approximately $2.5 million, representing an effective tax rate for the quarter of 12.9%. Net income for Q2 totaled $17.1 million. GAAP diluted earnings per share with $0.38 based on a fully diluted share count of 44,906,000 shares. Fully diluted EPS increased approximately 52% sequentially compared to $0.25 in the first quarter of 2023 and increased approximately 58% from $0.24 per share earned in the same quarter a year ago. Turning to our cash flow and balance sheet, cash and cash equivalents totaled $203.8 million at Q2. Account for receivable net of reserves totaled $63.8 million at quarter end, with DSOs for trade receivables at 43 days. Inventories net of reserves decreased 0.7% sequentially to $106.6 million. Annualized inventory turns were 2.1%. Operating cash flow totaled $19 million for the quarter. Capital expenditures for Q2 totaled $8.5 million. We ended the quarter with a construction and progress balance primarily for manufacturing equipment of approximately $23 million and with approximately $10 million remaining to be spent. I'll now address bookings and backlog. Q2 book to bill came in below 1. and one-year backlog decreased 19.9% from the prior quarter, closing at 217.3 million. Turning to the third quarter of 2023, we expect revenue and gross margin to be approximately flat, We also expect a sequential increase in operating expenses, primarily as a result of funding the legal work associated with cases filed earlier this month at the International Trade Commission and in federal court in the Eastern District of Texas against foreign manufacturers of power modules and computing systems infringing VICOR patents covering non-isolated bus converters, NBMs. Legal work associated with these cases and related legal expenses are expected to grow substantially over the next year. Legal expenses are, however, less than the royalties paid to VICOR by licensees of our patents. In our ITC case, we are seeking an exclusion order precluding importation into the United States of power modules, servers, or AI cards that infringe our patents. In our district court case, we are seeking damages for willful patent infringement. 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. Let me begin by summarizing the key messages from the annual shareholders meeting we held in Boston four weeks ago. Our business opportunities have never been stronger given the future growth of AI and the move to 48-volt power distribution in both the high-performance computing and automotive markets. Our investments in 48-volt power distribution and power conversion technology over the past 15 years have put VICO in a unique position with intellectual property to key innovations in power distribution architectures. including factorized power and vertical power delivery, powertrain topologies, control systems, and power module packaging technology. Our new and the world's first chip fab is coming online in September, setting the stage for unprecedented scalability as we start shipping initial quantities of vertically integrated chips to lead customers for their qualification. Our lateral vertical distribution network provides superior performance for advanced GPUs, strengthening our position as the supplier of high performance power systems in HPC markets. In short, as an earlier generation AI program using our third generation factorized power chipset ramps down, A fourth generation chipset is expected to start shipping in Q4 into a next generation AI platform in a lateral or lateral vertical PDN. The lateral vertical PDN will provide nearly 10% higher power system efficiency and superior processor performance. Advanced processes currently in development require current levels that can only be supported with vertical power delivery through complex, stacked VPD structures that VICO pioneered and patented. With a 300% advance in current density, VICO's fifth-generation technology enables a more mature and scalable second-generation VPD, which will soon be key to high-performance AI accelerators. Electrification and autonomy are opening up other markets for us, including industrial, aerospace, and defense markets. Our commitment to a set of top 100 customers globally, achieving operational excellence, supported by our new chip fab, is the focus of our entire company, and execution is now the name of the game. Thank you. Patricio, Jim, and I will now take your questions.