Vicor Corporation (VICR) Earnings Call Transcript & Summary

Welcome, everyone, to today's webinar entitled Vicor Earnings Results for the second quarter ended June 30, 2023. My name is Robin, and I'll be the facilitator for today. [Operator Instructions] And with that, I would like to hand the call over to James Schmidt, Chief Financial Officer. Please proceed.

Thank you. Good afternoon, and welcome to Vicor Corporation's earnings call for the second quarter ended June 30, 2023. I'm James 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 market closed today, we issued a press release summarizing our financial results for the 3 months and 6 months ended June 30. 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 was to 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 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 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 our review of our Q2 financial performance, after which Phil will review recent market developments, and Patrizio, 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, Vicor 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 Products revenue increased 31.6% sequentially to $67.5 million, while Brick Products 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 Products share of total revenue increased to 63.2% compared to 52.4% for the first quarter of 2023, with Brick 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 was $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 in Q2. Accounts 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 in 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 Patrizio, 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 4 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 Vicor 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 ChiP-set ramps down, our fourth generation ChiP-set 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 Vicor pioneered and patented. With a 300% advance in current density, Vicor's fifth generation technology enables a more mature and scalable second-generation VPD, which will soon be key to high-performance AI accelerators. The 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. Patrizio, Jim and I will now take your questions.

[Operator Instructions] And the first question is coming from Quinn Bolton.

First question is, can you guys share any more details on the 4G lateral power distribution design? You mentioned in the press release for a new AI platform that ramps in the fourth quarter. Can you say is this a new customer? Or have you worked with this customer previously? Can you give us any sense of what power consumption is for this part? Is it high-power cords? Is it a mid-range power cord? Any details you can share would be very helpful.

Do you think that's on -- it's new generation for the existing customer. And it's a ChiP-set that can be deployed either in a lateral PDN, which is substantially handicapped from a power system perspective to the point that it limits power delivery, power capability, processor performance, in that it gives rise to large losses within the copper of the substrate to the GPU and then the towers. It gives rise to further losses within the [ silicon ] itself, owing to the limitations of a lot of our delivery applied at the 1,000-amp level. With 4G ChiP-set, we can enable a lot of solution with the same handicaps or with a vertical element using the same ChiP-set, a lateral-vertical solution, which is unique, highly differentiated in that improved system efficiency by about 10% and removes a number of limit actions relating to processor performance.

So Patrizio, I guess, as a follow-up, it sounds like it can be deployed either lateral or lateral-vertical. Can you say is the solution going to production in the fourth quarter is that lateral first with the potential to switch the lateral-vertical sometime next year?

It is likely to be lateral first, followed by lateral-vertical.

Great. And then you had mentioned sort of lateral-vertical improves efficiency by 10%. And I think in the press release, you said that would enable a 100-watt power saving. So am I right to be thinking that this AI platform could be consuming nearly 1,000 watts? Is that the right ballpark?

I'm not going to comment about the power consumption of the platform beyond that which is implied in the earlier comments, which is that, to your point, we expect to save in total about 100 watts, which approximately represents a 10% improvement in system efficiency. But one should keep in mind that, well, 10%, in some respects, may not sound like a lot. It is a lot in a number of respects that are somewhat technical in that would be, in effect, somewhat difficult to articulate in sufficient detail in this context today. But whether it's the gradients or voltage differentials across a pin field brought about by lateral curl flow across distances on a substrate with substantial resistance, dissipating a substantial amount of power or the self-feeding within that substrate that is caused by the power dissipation of the substrate and the silicon. What we're really talking about is something we have discussed before, you might recall my pointing to these kinds of limitations and challenges many, many moons ago. It's just indicative of fundamental assembling blocks to what can be accomplished with commercial technology and its constraints within the helm of a power distribution network that is lateral.

The next question is coming from the line of [ John Dillon ].

I want to follow-up on Quinn's question a little bit. Regarding the lateral-vertical opportunity that's coming to production in Q4, is that a high-volume customer? Is it more of a lower-volume or more of a modest-volume customer?

So to be clear, I suggested earlier, the same ChiP-set, which is a 4G chip supports both the lateral and the lateral-vertical. Based on customer inputs expectation as of now is that the lateral implementation will go first. And that's the one we're anticipating for the Q4 ramp. I can't tell you when the other vertical would go into production. But my expectation is that it would be after the lateral.

Yes. But is this going to be a significant customer? Or is this more of an incremental volume that you're going to expect?

This is a significant customer.

Great. Great. That's excellent. Okay. And Patrizio, do you think your bookings are going to rebound strongly upon completion and the qualification of the new factory?

We expect bookings to pick up, in particular, the platform we just referenced that ramps. And because of other contributing elements, not least of which, to your point, being online, our first ramp. It's from history, we've had professional challenges and capacity limitations within the last couple of years with Advanced Products relying on unique processes that had to be outsourced. So common sense, in and of itself, it would imply that as we overcome these stumbling blocks and bottlenecks and being capable of delivering the kind of solutions that we're uniquely equipped to provide that bookings and backlog will build back up quite substantially. I know there may be a concern at this point in time in the minds of some shareholders. For whatever its worth, it's not my concern.

There's one more question coming from Quinn Bolton on the Webex.

Patrizio, I guess I wanted to ask about the recent actions, legal actions against Delta Electronics and Foxconn, I guess, both with the ITC and in the Texas courts. It seems like at least your A-large GPU manufacturer in the industry, current sources modules from Delta Electronics on its late-generation platform, and I'm guessing -- I'd like to know what do you think the potential effect on your relationship with this GPU manufacturer might be to the extent you're going after one of its power module suppliers?

So I'm not going to be specific for obvious reasons. But as implied by public disclosures, and you can read the complaint at the ITC. They're difficult to get to it and find out for yourself. We do have licensees of the technology. And those licensees were prudent enough to acquire a license and put themselves in a position where they could source products, including NBMs, that would otherwise infringe our patents without incurring the risks of infringement. So you should not assume when it comes to the center or AI OEMs that they're all in the same boat. One -- notable one is not because it's a part of the license. The other ones are going to have to deal with the issues that arise when foreign manufacturers, unscrupulous as they are, copy products that are covered by effective intellectual property.

Understood. And just to further clarify, the Andover qualification, do you still see that as on track for September? And at the shareholder meeting, I think you said that you anticipated an increase in the number of customer visits and customer qualifications as you got to -- into the third quarter here, do you -- is that customer qualification? And is that still on track to those customer audits?

We've had customer visits and we've had price for what we're doing, the progress with respect to it. And going back to the first part of your question, yes, we are on track to make complete modules in September, late August, September, so essentially starting about 1 month from now, we're going to be able to play up any chip.

I will start taking questions on the phone now. [Operator Instructions] First telephone line is open now. Please proceed.

Hi, Patrizio. This is Don McKenna, D.B. McKenna.

Good afternoon.

I wanted to follow up on the 4G ChiP-set coming on. And we're talking now roughly -- a backlog of roughly 6 months' worth of current run rates. What are you quoting for lead times at this point in time? And do you expect if you're going to ramp in the fourth quarter that you'll be receiving these orders in the third quarter?

So we already have a backlog for the upcoming ramp, but we expect to get additional backlog. Maybe, Phil, do you want to comment on that?

No, I think that's exactly right. We have existing backlog and our plan is to obviously begin to ramp with that particular backlog. And then in Q3, Q4, we'll getting increased bookings for the follow-on 2024.

And have you already seen -- because your backlog is down now, are you quoting shorter lead times? And has that, in turn, generated additional bookings for you?

So let's put things in perspective. We're still playing catch-up. We're going to be completing the catch-up play this quarter. But we're still, with respect to orders that were placed quite some time ago, because of the capacity bottlenecks that, again, we're aware of and I reminded yourself earlier in the call, we're still playing catch-up. So while that is the case, and that's going to come to an end relatively soon, our lead times are still long. But once we get to that, which is imminent, and once we have the benefit of being in control of our destiny with our first fab, then lead times will come down.

I guess the concern is when you look at the bookings this past quarter, we're somewhere in the what, $55 million range. Do you foresee a period where the revenues for the quarter are going to diminish? Or do you see them continuing to increase as we're going forward?

I think Jim pointed out that we expect essentially flat revenues this quarter. That's our expectation. Again, to put things in context, if we go back quite some time, we've had an [ enormous ] situation with respect to bookings, and we pointed this out 1.5 years ago, with very long lead times and capacity bottlenecks. And also in light of general industry conditions, we were -- we had book-to-bill ratios of nearly 2, which are obviously not sustainable. So there's a process that has been going on for some time with a timescale literally of 1 year, 1.5 years of building up the backlog, now bringing it back down towards sustainable level where additional bookings will bring the backlog back up. In terms of our turns business and the relationship between the backlog and projected revenues, right now, we're not in a comfortable position. Obviously, we had a lot more backlog a year ago. But again, that was an anomaly rather than a sustainable condition.

Understood. I'm sure you can appreciate our concern or nervousness, if you will, when we see that the incoming orders are so much lower than the revenues for the quarter. And I just hate to see any dips along the way.

I sympathize with -- in effect, the concern of the nervousness is certainly justifiable. But again, it's very important when dislocations of this kind have happened over the last 1.5 years take place to being a safe harbor with an objective view of all of the relevant factors, right? So as pointed out by Phil in his earlier comments, Vicor is uniquely positioned because of the convergence of technological trends that we anticipated, invested in and are uniquely equipped to explore. And that's the safe harbor that we're operating from. And that's basis for looking forward, as suggested in my post to the press release for sustained growth and improving profitability.

All right. I will now take the second phone question. Please state your name and company name before asking your question.

This is Jon Tanwanteng for CJS. I was wondering if there was any more color or detail behind why the lateral implementation of the product. So this new added product will be launching first. Has there been a delay in the lateral-vertical? Any more commentary would be helpful there.

I'm sorry, John, I didn't fully get your question there. You're coming through a little bit muffled. Can you repeat?

I was wondering why the lateral-only version of this new product is launching first compared to the higher-performing, lateral-vertical products.

So the lateral version, even though the start of its development was over a year after the start of development based on multi-source, multiphase "competitive alternative" that was, in effect, predicated on the same kind of PDN that the multiphase multi-source solutions are in effect on fine to. But because of the fact that its development, even though it was delayed, still started early in time, as gathered to the finish line ahead of a more advanced PDN, which we have projected to have the benefits is proving out to have, but because of the fact that, that only gets started about 6, 7 months ago from a development perspective, it is following on the heels of a lateral-vertical solution that have been started nearly a year earlier. But it's rapidly catching up and it's proving out to be as good as we had advertised it to be. And in my belief, because of its much stronger trends, again, in terms of not just our system performance, but processor performance, it will soon, I believe, play catch-up and become the social choice.

Jon, it's Phil. Patrizio said this earlier, it's exactly the same ChiP-set, which is key for the lateral and the lateral-vertical. It's a much, much improved layout better PDN with lateral-vertical placing one of the VTMs underneath the processor that gets the benefit. So we can do that because the packaging is very thin, very thermally adept. So it's got a lot of advantages being the same ChiP-set that gets qualified for the lateral.

Can I ask when you actually launched the lateral-vertical product with the same ChiP-set, does that get you a higher dollar content per AI card for this product?

No, the ChiP-set has been quoted for over a year now. And that ChiP-set is a price -- a fixed price, and that goes for lateral or lateral-vertical implementations.

But the other vertical implementation, which had been recommended to the customer earlier but did not get started until later, delivers a lot more performance. So the value of decision is much greater, particularly if you look at it in terms of anticipated processor performance.

Got it. Should we think of the lateral product then is similar to a drop and replacement for the existing multiphase solutions or as a second source and maybe your lateral-vertical products get higher performance, higher efficiency type [ steel ], which may launch later?

So the lateral solution using the same ChiP-set is not the "drop-in" because with different components, the layout itself is different, but it shares a common lateral PDN, given fundamentally the floor planning that had been done, which floor planning was, again, predicated on a multi-source, multiphase solution. So we're first in effect within the same general floor plan, fitting in a solution which is better in many respects, mature and nice, better performance, in general, but handicapped by the lateral PDN. So that handicap is a common denominator limitation that can be overcome. As Phil pointed out a moment ago, by taking one of the VTMs that supports the primary high current output and redeploying it into a vertical position close to the center of the GPU. And in that location, it can do wonderful things in terms of not just reducing PDN loss for the primary output, but also slash the PDN losses in the secondary and tertiary outputs that are also very current by large percentages, and with that, improve overall system performance. So the outcome of all this effort, which could have started earlier, but it did not get after until 6 months ago, will be a superior system with better performance or...

The next question is coming from the line of [ John Dillon ].

In the last conference call, you discussed the lateral-vertical that you've got a number of designs that were coming out in the third quarter, I believe. One sounds like was your high-volume customer, existing customer is doing a re-spend that you talked about. But you had, I think 5 other designs that were supposed to come out? Are they still coming out? Or are those slipped? Are they coming out as vertical-lateral or vertical -- I mean, or lateral?

Yes. So [ John ], those are lateral designs. The process occurrence there are lower. They are slightly lower performance applications, different types of workloads. And yes, the customer count there is about the same, 4, 5 customers, but those are lateral implementations. But again, using basically the same technology.

And do you expect those to start production in the third quarter also?

No. I expect those to be in production, mostly like Q1 of next year.

So would we expect -- are those things that you have bookings on orders for already? Or will we see the bookings next quarter for those?

We have a small amount of backlog, maybe a few million dollars, just the early prototype type quantities for initial ramps. And then I expect the bookings for those to be Q3, Q4.

Yes. But they're not as high volume as the other order that you were talking about. Correct?

Correct.