Vicor Corporation (NASDAQ:VICR) Q1 2023 Earnings Call Transcript April 25, 2023
Vicor Corporation beats earnings expectations. Reported EPS is $0.25, expectations were $0.21.
Operator: Welcome, everyone to today’s webinar entitled Vicor Corporation Earnings Results for the First Quarter Ended March 31, 2023. My name is Trichy and I’m your operator today. During the presentation all attendees will remain in listen-only mode. 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 Corporation. Please go ahead.
Jim Schmidt : 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 31. 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 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 this Private Securities Litigation Reform Act of 1995.
Except for historical information contained in this call, 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 statements 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 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 EDGER 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. 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 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 your to our press release or upcoming Form 10-Q for additional information.
As stated in today’s press release, Vicor recorded a 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 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 Brick Products share correspondingly increasing to 47.6% of total revenue. Turning to Q1 gross margin, we’ve 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 $0.25, based on a fully diluted share count of 44,907,000 shares. Fully diluted EPS increased approximately 39% sequentially, compared to $0.18 in the fourth quarter of 2022, and more than doubled from $0.11 per share earned in the same quarter a year ago.
Turning to our cash flow and balance sheet, cash and capital cash equivalents totaled $192.9 million in Q1. Accounts receivable net of reserves totaled $61.1 million at quarter-end with DSOs for trade receivables at 35 days. Inventories net 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 for manufacturing equipment of approximately $36 million and with approximately $13 million remaining to be spend. 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, posing a $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 a 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 consistently 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 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?
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Phil Davies : 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 Vicor’s radiation tolerant factorize power chipset was on board the launch of Boeing’s O3B communication satellite powering the communication ASICs. This was a critical milestone for us, by proving to other satellite customers that Vicor 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 and available market opportunity of $175 million with Boeing and other customers. Our initial radiation tolerant chipset is being funded 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 versal adaptive SOC, which delivers reprogramable 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, Vicor presented four papers on how our power modules solve the toughest power delivery and conversion challenges in the 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 Vicor 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 had a 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 wine pipeline at existing OEMs with additional platforms and applications. We also started three new collaborations and added a major design win with an SOP date of 2026. High voltage power systems designed with our power modules, are proving to be three to 10 times smaller and lighter than DC-DC converters built with silicon carbide or GaN power switches. We were 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. A 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 five-nanometer processes 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 processes 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. Patrizio, Jim and I will now take your questions. Operator, we’re now ready to take questions.
Operator: Thank you, everyone. Your question-and-answer session will now begin. The first one is coming from Quinn Bolton of Needham. Please go ahead.
Phil Davies : Quinn, are you there?
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Q&A Session
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Quinn Bolton : Hey, Patrizio, Phil, Jim, can you guys hear me?
Phil Davies : Yeah, now we can hear you.
Quinn Bolton : Okay, okay, perfect. Just wanted to start with just clarification, a quote from the press release, recent bookings will or may remain weak until AI OEMs capture the benefits of advance PDN, with lateral vertical solutions. Can you give us some sense of timing, when do you expect to ramp those lateral vertical positions? Is that going to be in calendar 2023, or do you expect that eventually move out to ’24?
Patrizio Vinciarelli : We don’t know with a high degree of confidence when this would happen. It could happen later this year. It could happen in Q1 of next year.
Quinn Bolton : Okay. And last fall, you talked about I think, roughly five or six design wins, 5-nanometer ASICs or other sensors . Are you expecting different trends this year? Can you say those wins using just your lateral solutions, or some of those wins you’ve seen vertical?
Phil Davies : We seem to have some interference on the language, some background noise.
Patrizio Vinciarelli : You understand most of it?
Phil Davies : Yeah. So yeah, I think that what I talked about last time was that we have design wins ongoing with lateral solutions to about four or five companies. And then we’re also engaging with other companies that have higher current processes that will require we believe, lateral vertical, or even pure vertical with Gen 5 technology. So there’s a lot actually happening in the market right now with different process nodes and different current levels. But we will — I expect lateral vertical and pure vertical to be part of the portfolio going through the end of this year and into next year. Quinn, did you get that?
Patrizio Vinciarelli : There appears to be a connectivity issue.
Quinn Bolton : Yeah, I’ll try and see if I can dial in on a phone and see if that helps.
Patrizio Vinciarelli : That’s good. Thanks.
Phil Davies : Let’s go to the next question, please.
Operator: Thank you. The next question is coming from Jon Tanwanteng. Please go ahead with your question. I will unmute you now. Please, also unmute yourself from your end.
Jon Tanwanteng: My first one is, what are your biggest customers telling you about competitiveness of your product stack, compared to a year ago, specifically, in these market?
Phil Davies : Competitive of the products. What are customers telling us with this back to what do we stand competitively vis-à-vis — okay. So Jon. So I think that it’s clear that, the multi-phase technology is advanced with current density, but it’s still not at the levels that we are at in terms of the density of the product. And the ability of the product, which in lateral vertical is very important is to be very thin. So you need to have a very, very thin package that you can place on the back of the board in any sort of GPU ASIC CPU type application. So that’s, that’s number one. I think that with Gen 5 technology, which is where we’re focusing the majority of our product development here now, that’s a complete game changer in terms of the 3x improvement in current density that Patrizio is spoken about the changes things dramatically with regards to power delivery for high current GPUs, and also optical networking backbone processes.
So that’s what we’re looking at currently. But lateral vertical is certainly superior to a multi-phase lateral approach.
Patrizio Vinciarelli : It’s been nearly 40 years. When Vicor introduced its first products, we took converters, which at the time were about one cubic inch to 10-15 watts per cubic inch, at the much higher operating frequency. And our lead in terms of power density, current density key figures, in demanding applications, as persisted for four decades. It’s not about base, as Phil just suggests, is about to take a major leap forward.
Jon Tanwanteng: Got it? Thanks, Patrizio. And just regarding the customers, and maybe specifically on the ones that you’re waiting for to ramp solutions that are using your lateral vertical solutions? Are they simply waiting for your new facility to qualify before giving you orders? Or is it more of a product timing situation? Can you just give us a little more color as to the status of when you expect those orders coming in? And maybe the reasons why they’re maybe a little bit more delayed than we thought it would be.