Vicor Corporation (VICR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Vicor's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Jim Schmidt, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the second quarter ended June 30, 2024. I am Jim Schmidt, Chief Financial Officer, and I am in Andover with Patrizio Vinciarelli, Chief Executive Officer. Phil Davies, Corporate Vice President, Global Sales and Marketing is joining remotely. After the markets closed today, we issued a press release summarizing our financial results for the 3 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 it's 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 risk 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 and/or implied by any of our remarks today. The risk and uncertainties we face are discussed in Item 1A of our 2023 Form 10-K, which we filed with the SEC on February 28, 2024. 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 23, 2024. 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 Q2 financial performance, after which Phil will review recent market development, 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 $85.9 million, up 2.4% sequentially from the first quarter of 2024 total of $83.9 million and down 19.6% from the second quarter of 2023 total of $106.7 million. Advanced Products' revenue increased 7.1% sequentially to $46.4 million, while Brick Products revenue decreased 2.7% sequentially to $39.5 million. Shipments to stocking distributors decreased 5.2% sequentially and increased 33.1% year-over-year. Exports for the second quarter increased sequentially as a percentage of total revenue to approximately 43.3% from the prior quarter's 42.6%. For Q2, Advanced Products' share of total revenue increased to 54% compared to 51.6% for the first quarter of 2024 with Brick Products' share correspondingly decreasing to 46% of total revenue. Turning to Q2 gross margin. We recorded a consolidated gross profit margin of 49.8%, which is a 400 basis point decrease from the prior quarter, primarily due to a change in product mix. During the quarter, we recovered approximately $662,000 in duty drawback of previously paid tariffs. Tariff expense net of duty drawback was approximately 0 in Q2. I'll now turn to Q2 operating expenses. Total operating expense decreased 30.5% sequentially from the first quarter of 2024 to $42.6 million. The sequential decrease was primarily due to a reduction in legal fees and expenses. The amounts of total equity-based compensation expense for Q2 included in cost of goods, SG&A and R&D was $744,000, $1,757,000 and $930,000, respectively, totaling approximately $3.4 million. Turning to income taxes. We recorded a tax provision for Q2 of approximately $4.2 million. The company's tax expense and the rate for the quarter has been impacted by the capitalization of R&D expenses under Section 174 as well as the full valuation allowance we carry against deferred tax assets. Net loss for Q2 totaled $1.2 million. GAAP diluted loss per share was $0.03 based on a fully diluted share count of 44,855,000 shares. Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $251.9 million at Q2. Accounts receivable net of reserves totaled $54.9 million at quarter end, with DSOs for trade receivables at 45 days. Inventories net of reserves decreased 2.9% sequentially to $109.1 million. Annualized inventory turns were 1.7. Operating cash flow totaled $15.6 million for the quarter. Capital expenditures for Q2 totaled $6.1 million. We ended the quarter with a construction and progress balance, primarily for manufacturing equipment of approximately $12.6 million and with approximately $15.8 million remaining to be spent. I'll now address bookings and backlog. Q2 book-to-bill came at above 1 and 1 year backlog increased 2.3% from the prior quarter, closing of $153.8 million. As we said on last quarter earnings call, 2024 is a year of uncertainty and opportunity. As of today, the quarterly and annual outcome in terms of top line and bottom line is subject to a relatively wide range of scenarios. Given the wide range of possible outcomes, we are unable to provide quarterly guidance until we are further along resolving uncertainties and capitalizing on opportunities. 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 yourself to 1 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 1 topic to address, please get back in the queue. Phil?

Thank you, Jim. It was good to see our book-to-bill [Technical Difficulty] above 1 for the first time in 8 quarters, driven by stronger demand in our industrial and aerospace and defense markets and ramping new programs in high-performance computing. As we discussed at our Annual Shareholders Meeting a few weeks ago, our HPC business is in transition to our Gen 5 Factorized Power technology, whose high current density enables scalable VPD solutions. The AI market is forecasted to continue its remarkable growth, providing significant business opportunities for the leading GPU company and all of its aspiring competitors, focused on taking a share of the sizable opportunity. We are currently working with customers wishing to capture the value proposition of cutting PDN power loss and gaining a competitive edge by moving to scalable vertical power delivery, VPD, for new higher-power GPUs and network processes and also with wafer scale and chiplet-based AI processor designs utilizing advanced packaging technologies. Our Gen 5 current multipliers occupy 1/3 of the footprint and are 3x thinner than stacked package multiphase solutions. Stacked multiphase VPD solutions are challenged mechanically, thermally and, last but not least, from the IP perspective. Preparations for the introduction of our Gen 5 chipset are progressing and we have powered up our first Gen 5 customer evaluation board. A broad business portfolio is necessary to provide greater stability to our business by focusing on 100 customers globally across 4 main markets and a product development strategy of leveraging technologies and products developed for our HPC and automotive markets for the industrial and aerospace and defense customers, we believe that we are well positioned. We have also partnered with top distributors globally in supply and logistics support for our broad market business that further amplifies our capabilities and opportunities. At the ASM, we outlined our goal of doubling revenues in our industrial and aerospace and defense markets. New AC to DC and DC to DC converter power modules, utilizing advanced packaging technologies from our new chip fab and advances in control systems and components enable a 2 to 3x higher power density and are being sampled to our top 100 customers in these markets. The movement of automotive OEMs to a 48-volt-based zonal architecture has diversified our opportunity base from the BEV market into mild and plug-in hybrid powertrain applications. And we are seeing an increase in new business opportunities across EMEA, Japan and Asia Pacific. I am pleased that in Q2, we were rewarded an additional program for an onboard charger at a leading high-end automotive OEM, which will begin to ramp in 2026. Overall, our automotive pipeline, which currently stands at $1.3 billion continues to grow, and we are quickly regaining the momentum lost due to the slowdown in new platform development during COVID. Thank you. And with that, we'll now take your questions.

Okay. Operator, we're ready for questions.

[Operator Instructions] Our first question comes from the line of Quinn Bolton of Needham & Company.

Congratulations on the first positive book-to-bill in several quarters. I guess, Patrizio or Phil, wanted to ask, at the Annual Shareholder Meeting, you guys sort of gave a Road map for the sampling of the Gen 5 technology. And wanted just to double check that everything is still on track for first customer samples beginning to ship next month in August. Is that still on track?

Demo system display to some select customers towards the end of August. That's what we currently expect.

Perfect. And then I guess maybe just looking at the mix of business, can you give us some sense -- I think there may be a misperception in terms of Vicor's current revenue split between your 4 targeted end markets. Can you give us a sense how much of the revenue comes from sort of industrial versus A&D versus HPC versus automotive? I think there's perhaps misperception out there that you guys are still pretty heavily driven by HPC. And I think at the Annual Shareholder Meeting, you were saying that the aerospace and defense and industrial markets might be a much higher percentage of current revenue than investors may expect. And so I just wondered if you could sort of touch on revenue by end market.

Phil, do you want to take that?

Sure. Yes. So I guess, with the decline in our Gen 4 HPC business, the industrial and aerospace business, which has been on a very good growth rate for us over the past 5 to 10 years, actually, it's almost doubled in each of those market segments, started to take a bigger share. And so we don't typically break things down, Quinn, as you know. So I will say that aerospace and defense plus industrial is a larger share of our business today than HPC was going back 1.5 years.

Perfect. And then just maybe a last question on gross margins. It looks like you had a mix shift that accounted for margins being down. Wondering if there's any more color you could give us in terms of that mix shift. And then I know you'll give us the royalty number in the Q when it's filed, but wondering if you might be able to comment just directionally, was the royalty payment received in the June quarter, was that flat, up or down from the level in March?

So the shift in the mix had primarily to do with significant shipments within the past quarter of a legacy HPC system with relatively low margins. So that brought the margins down somewhat.

And just to add to what Patrizio said there, Quinn, I would say, also there was an A&D revenue stream in Q1, higher A&D -- high-margin revenue stream in Q1. Relative to royalties, you're right, you'll see it in the Q, but we're putting together quarters now of sequential increases that are double digits, so it's positive.

Our next question comes from the line of Jon Tanwanteng of CJS Securities.

Congrats on the positive book-to-bill. I was wondering if you could talk a little bit more about the mix of orders you saw in the quarter where you saw the most strength. I think you mentioned several buckets, but I was wondering which was the strongest which surprised you and if that included HPC orders that were, I guess, of the current generation, last generation, I guess, if you could bring up more color, it would be helpful.

Phil, do you want to take that?

Sure. So no real surprises, Jon. I would say we've seen the industrial market in recent years growing nicely. Aerospace and defense is a great business for us. Particularly with North America and Europe, we've got some wonderful customers, long-term customers over 30-plus years who continue to grow themselves and award Vicor new business as we moved along. So I wouldn't say anything surprising in the quarter other than continued strength in industrial and aerospace and defense, which we are planning on. As I said in my remarks, doubling over the next 5 to 7 years once again.

Okay, great. And then can you talk about the margins that you're seeing going forward, just given the rising concentration, I guess, of this industrial and aerospace? Is it going to be another headwind on mix just compared to what you've seen in the past? Or should there be a reversion?

Jon, I think I would just go back to the prepared remarks and say that we're just not going to offer guidance at this point given the range of outcomes that we could experience over the coming quarters for a variety of reasons, some of which are going to be fairly sizable and significant potentially. So we just don't provide the guidance right now.

Our next question comes from the line of Richard Shannon of Craig-Hallum Capital Group.

Maybe I'll follow up on a prior question here. Patrizio, when you talked about delivery of, I think it was demo systems or samples kind of late in August. What do you think about the time frame by which customers make decisions? And is there going to be any difficulty in time frames hitting their market timing windows in order to do that?

So the development is primarily driven by where we see the applications landing over the next few years. As you know, at any one point in time with different customers or potential customers, there are opportunities that, in some cases, may not line up perfectly with our capabilities. I mean certainly, within the last couple of years, given how things evolved with respect to the market opportunity for earlier generation based solutions involving lateral or the vertical, we did not have an alignment that we might have had under different scenarios. But getting back to upcoming opportunities and how we're going to be able to address them with a 5G chipset, given the much higher crowd density, much higher power density, both in terms of footprint, thickness, ability to provide scalable VPD solutions that are cost-effective, inherently robust, thermally adapt. We think we have a unique capability that is very well aligned with developing market needs. Now different customers have different agendas when it comes to this and some that have been in the forefront, it might, given the challenges presented by conventional or earlier generation, I would say, VPD solutions might choose to wait for that technology to mature. We think with the VPD capabilities that a 5G chipset enables, we're going to be providing those customers that are aligned with us a significant competitive advantage.

Let me follow up with a question that might overlap this topic somewhat here, but as you're talking with customers about your 5G products, and as you've talked about in the last generation, you saw a change in mindset from customers moving from performance-oriented solutions to one that prioritizes supply chain certainty here. To what degree are you seeing the tone and tenor of those conversations changing here, particularly as you bring your 5G solutions to them? Are they changing? Are they contingent on other actions like what you have going on in the legal realm or waiting on manufacturing to mature or have enough volume there? What are -- kind of what are the things that build into the change in approach from the last generation to what you hope will be a performance-oriented one going forward?

So to your point, the priorities as of a few years ago for leading customers in AI switched to scalability and supply chain, multi-sourcing commoditization. And with respect to that particular customer, we don't see a change taking place in the near term. But we do believe based on our visibility with respect to power system needs, that is not a viable approach in the long term. But we'll wait to see how things evolve on that general front. With respect to the rest of the world, if you will, looking to catch up, their performance is what this is all about, right? And in effect, the general set of priorities are quite different because competitors aspiring to compete particularly on the hardware front, want to make, want to enable the most competitive, most advanced hardware solution. And their priority is not necessarily one of multi-sourcing commoditization at the expense of performance, is performance ahead of those other considerations, particularly since with our fab, we have now a level of scalability we didn't have before.

Our next question comes from the line of [ John Dillon of DNB Capital ].

Congratulations on the positive book-to-bill, again, that was really good to see. Patrizio, I have a follow-up question on the answer you just gave. On those customers who are looking to -- looking more for performance, do you have any design wins with any of those guys yet? Or do you expect design wins from them shortly with the exception of the one customer you've talked about that you've got coming into Q1 2025?

So we have design wins. They are not -- when it comes to 5G solutions yet diversified and across a substantial multiplicity of customers, we have a few primary engagements that in our view represent a great deal of opportunity. So we're focused first on servicing their needs. As we get further along later this year, we're going to be straining our wings somewhat in terms of involving others.

Right, good to hear. My follow-up is with the legal -- with the positive outcomes in the court cases against Delta, are other infringers now coming to the table and negotiating with you?

So for a variety of reasons, I'm not going to get into any details regarding the evolving IP issues, beyond saying that at this point, our first case is complete. It's with the admissible law judge. We expect the decision at the beginning of October and we expect that to be a favorable decision that should, before too long, result in an exclusion order, and we'll see where it goes from there. But fundamentally, we cannot continue to allow certain companies within the industry and OEMs that work closely with those companies to misappropriate our intellectual property. We're going to be extremely hard-nosed about it. We have the resources and determination to see to it that these kind of abusive practices come to an end and there may be lying down situations that result as we progress along with our campaign.

Our next question comes from the line of Alan Hicks of Ainsley Capital.

I had a question that's going to follow-up on Advanced Products. Did you say that royalties increased double-digits this last quarter?

I think I was kind of -- that's probably in reference to royalty income. So that will -- the numbers will be in the 10-Q when it gets filed. It has been increasing.

Okay. And then -- so it sounds like -- products you produced, in fact, they are also increasing.

I'm sorry, Alan, I didn't catch that.

So it looks like your Advanced Products rose by about $3 million. So if royalties grew, say, to roughly $1 million, then products you produced are now increasing also as part of the overall Advanced Products revenues?

Yes. So legacy products in Q2 declined somewhat.

That's right.

Okay. But I'm saying, if you deduct royalties from your net Advanced Products, they would be roughly in the mid- to high $30 million level, if the numbers work out. Does that sound about right?

That's about right.

Okay. And so then on the -- in the annual meeting, you announced a series of new products for industrial, aerospace, military. Are those released yet? Were they in this last quarter or are they yet to come?