Vicor Corporation

Welcome everyone to today's webinar entitled Why Curve Earnings Results for the Third Quarter ended September 13th, 2023. My name is Jano and I'm your producer for today. During the presentation, all participants will remain on listen-only mode. If you require assistance at any time, please put the message in your chat box and send it to the host. I would like to advise all parties this conference is being recorded. And now I would like to hand it over to Julie Smith, CHEF Financial Officer. Please go ahead.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the third quarter ended September 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 and nine months ended September 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 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 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, October 24, 2023. BICOR 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 Q3 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, BICOR recorded total revenue for the third quarter of $107.8 million, up 1% sequentially from the second quarter of 2023, total of $106.7 million, and up 4.6% from the third quarter of 2022, total of 103.1 million. Advanced product revenue decreased 13.5% sequentially to 58.4 million, while brick product revenue increased 26% sequentially to 49.4 million. Shipments to stocking distributors increased 50.5% sequentially and 81.5% year over year. Exports for the third quarter decreased sequentially as a percentage of total revenue to approximately 62.8% from the prior quarter's 68.1%. For Q3, advanced product share of total revenue decreased to 54.2% compared to 63.2% for the second quarter of 2023, with brick product share correspondingly increasing to 45.8% of total revenue. Turning to Q3 gross margin, we recorded a consolidated gross profit margin of 51.8%, which is a 10 basis point increase from the prior quarter. I'll now turn to Q3 operating expenses. Total operating expense increased 7.7% sequentially from the second quarter of 2023 to $40.2 million. The sequential increase was primarily due to R&D spending and an increase in legal fees, which will remain at substantial levels through the completion of the investigation by the International Trade Commission of the unlawful importation into the United States of modules and systems that infringe the asserted VICOR patents. The amounts of total equity-based compensation expense for Q3 included in cost of goods, SG&A, and R&D was $693,000, $1,788,000, and $977,000 respectively, totaling approximately $3.5 million. For Q3, we recorded operating income of $15.7 million, representing an operating margin of 14.6%. Turning to income taxes, we recorded a tax provision for Q3 of approximately $1 million, representing an effective tax rate for the quarter of 5.9%. Net income for Q3 totaled $16.6 million. GAAP diluted earnings per share was 37 cents based on a fully diluted share count of 45,187,000 shares. Fully diluted EPS decreased approximately 3% sequentially compared to 38 cents in the second quarter of 2023 and increased approximately 825% from 4 cents per share earned in the same quarter a year ago. Turning to our cash flow and balance sheet, Cash and cash equivalents totaled $227.8 million at Q3. Accounts receivable net of reserves totaled $62.6 million at quarter end, with DSOs for trade receivables at 42 days. Inventories net of reserves decreased 1.9% sequentially to $104.6 million. Annualized inventory turns were 2.1. Operating cash flow totaled $23.8 million for the quarter. Capital expenditures for Q3 totaled $7.7 million. We ended the quarter with a construction and progress balance primarily for manufacturing equipment of approximately $26 million, and with approximately $16.7 million remaining to be spent. I'll now address bookings and backlog. Q3 book to bill came in below one, and one year backlog decreased 19.6% from the prior quarter, closing at $174.7 million. Turning to the fourth quarter of 2023, with reduction in backlog, including overdue backlog, we are more dependent on terms orders, and that results in less visibility to our near-term outlook. While that is the case, our current expectation is that revenue, gross margin, and operating expenses will be approximately flat sequentially. With that, Philip 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's begin with an update on our high-performance computing or HPC business, which will continue to be our major growth driver in the next few years. For the next few quarters, we will be focusing in three key areas. The first will be ramping production of our Gen 4 48-volt bus converter and factorized power point-of-load products in our new chip fab. The second will be completing development of our Gen 5 factorized power point-of-load solutions and delivering models and tools in Q1 of 2024. The third will be continuing to expand our customer base beyond the major accounts that dominated our revenues in the HPC market over the past five years. Regarding revenues in HPC, we expect customers using both lateral and lateral vertical Gen 4 products to be in production through 2025. before introducing new processors utilizing Gen 5 vertical power delivery or VPD solutions midway through 2025. In reference to the expansion of our customer base, we have continued to have substantial discussions with large data center, AI, and network processor companies on their challenges in powering next-generation high-current products. All of these companies recognize they need scalable access to more adept power system technology to effectively address the technical and operational challenges of generative AI at scale. The one major technology challenge that is foremost in everyone's minds and heard repeatedly was power density and power delivery. Power delivery to the processors, power delivery to the AI accelerator cards and their rack systems, and last but not least, power delivery to the data centers while driving towards a carbon-neutral objective. HPC customers are becoming aware that our current Gen 4 lateral vertical solutions can reduce power losses in an AI-enabled data center by 1 to 3 megawatts while enabling high processor performance Future processors will, however, require full vertical power delivery, or VPD, to continue power loss reduction. VICO's first-generation VPD solutions introduced in 2020 required complex stack packaging to incorporate bypass capacitors in a gearbox layer due to insufficient current multiplier density. Putting their customers at risk, competitors are going down the same route with even lower current density based on multi-cell, multi-phase solutions running into greater mechanical and thermal challenges as they try to deploy VPD using thick, heavy, and thermally inept stack packages. Our Gen5 MCM technology steps up current density by over three times. and reduces the multiplicity of bypass capacitors needed, eliminating a stacked capacitive layer, and enabling a second-generation VPD solution to the power system requirements of the AI card that is thinner, more thermally adept, reliable, and cost-effective. Customer engagements for our Gen5 VPD solutions are happening at an accelerating pace. and our objective in coming quarters will be to secure significant design wins. In view of the current density and performance gaps enabled by our 5G solutions and evolving AI power system demands, I am confident that within a few years we will gain a dominant share of the AI power system market. One of the major objectives in the design and development of our 5G product line was to have a scalable, low-cost, short cycle time and vertically integrated chip fab with a short timeframe for capacity expansion. We will need this capability to meet the supply chain demands of our customers, who are in two distinct groups at the moment, based on different priorities. The first group, where the priority is supply chain flexibility, is focused on a multi-source, multi-phase VR technology And the second group, where the priority is competitive advantage from product performance, is focused on the power system attributes needed to enable superior AI. Due to competitive market forces, our belief is that the first group will soon embrace the level of innovation and scalability enabled by 5G power system solutions from a multiplicity of chip fabs. I am very pleased with our progress in other key markets, which are critical to developing a robust and flexible business portfolio of our own. We have reached a very important milestone in our automotive business development, achieving PPAP qualification for three of our platform power modules for 800 volts to 48 volt power conversion, which enables production for these products in the second half of 2024. As in previous quarters, we continue to develop new collaborations with OEMs and Tier 1 suppliers who value lightweight, high-density power system solutions. These collaborations will enable design wins for 2026 production and beyond. Towards the end of Q3 and early into Q4, we have seen demand strengthen in our broad industrial, aerospace, and defense markets for both large OEMs and smaller customers who purchase through our channel partners. Demand in China remains weak for both legacy brick and advanced products. And we have been shifting our focus in recent quarters towards the Korean and Asia Pacific markets, where we see new opportunities for our advanced power modules across a broad range of industries. Our new sales and marketing team in Japan has been making excellent progress, developing new pipelines of opportunity with large industrial automation accounts, and are on track to add significant revenues in the coming years. Momentum with our operational excellence initiatives continues with teams working on specific performance improvements with our top 100 customers. And with new products set to launch in Q4 and Q1 of 2024, we are on track to meet our OGSM goals. Customer visits from our top 100 accounts to view or audit our new chip fab have been averaging one per week in recent months. This pace will pick up in 2024 as we ramp production and have the ability to host more customers. Visitors have left impressed with our new fab and its capacity and scalability. They understand their need to access our FAB capacity for power systems with power density and performance attributes that cannot be supported by multi-source, multi-phase solutions that cannot keep up with our current density and PDN flexibility. They also understand our commitment to operational excellence as clearly reflected in the equipment, process, and systems of our chip FAB. Thank you, and with that, we will now take your questions.