Vicor Corporation (NASDAQ:VICR) Q4 2023 Earnings Call Transcript

Vicor Corporation (NASDAQ:VICR) Q4 2023 Earnings Call Transcript February 22, 2024

Vicor Corporation misses on earnings expectations. Reported EPS is $0.19 EPS, expectations were $0.32. Vicor Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome everyone to today’s webinar entitled, Vicor Earnings Results for the Fourth Quarter Ended December 31, 2023. My name is Yono and I’ll be your operator for today. I would like to advise all parties this conference is being recorded. And now I would like to hand it over to Jim Schmidt, Chief Financial Officer. Please go ahead.

Jim Schmidt: Thank you. Good afternoon and welcome to Vicor Corporation’s earnings call for the fourth quarter and year-ended December 31, 2023. I’m Jim Schmidt, Chief Financial Officer and I’m in Andover with Patrizio Vinciarelli, Chief Executive Officer; and Phil Davies, 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 year-ending December 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 relating 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 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, Thursday, February 22, 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 Q4 and full year 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 change for P&L and balance sheet items, as well as full year-on-year changes, and refer you to our press release for our upcoming Form 10-K for additional information. As stated in today’s press release, Vicor recorded total revenue for the fourth quarter of $92.7 million, down 12.2% from the third quarter total of $107.8 million, and down 12.2% from the fourth quarter, $22 total of $105.5 million. Revenues for the year ended December 31, 2023, increased 1.5% to $405.1 million, from $399.1 million for the prior year. Advanced product revenue declined 20.1% sequentially, while brick product revenue declined 7% from the third quarter. Revenues for advanced products for the year ending 2023 decreased 8% to $223.9 million, from $243.3 million the year before.

Revenues for brick products for the year ending 2023 increased 16.3% to $181.2 million, from $155.8 million the year before. Shipments to stocking distributors decreased 23.5% sequentially, but increased 46.9% year-over-year. Exports for the fourth quarter decreased sequentially, as a percentage of total revenue to approximately 56.5% from the prior quarter’s 62.8%. On a year-over-year basis, exports decreased as a percentage of total revenue, to approximately 63.1% from the prior year’s 67.6%. For Q4, advanced product share of total revenue, decreased to 50.4%, compared to 54.2% for the third quarter, with Brick product share correspondingly increasing to 49.6% of total revenue. Turning to Q4 gross margin, we recorded a consolidated gross profit margin of 51.1%, approximately 0.7% less than the prior quarter.

For the full year 2023, gross margin rose by 5.4% to 50.6%, from 45.2% in the prior year. A number of factors contributed to the year-on-year increase in gross margin percentage, including improved sales mix, increased royalty income, reductions in supply chain costs, and lower freight and tariff costs. I’ll now turn to Q4 operating expenses. Total operating expense, including litigation expenses, decreased 0.4% from the third quarter. For the full year 2023, total operating expense as a percent of revenue decreased to 37.9%, from 38.4% in the prior year. The amounts of total equity-based compensation expense for Q4 included in cost of goods, SG&A, and R&D was $680,000, $1,895,000, and $1,007,000, respectively, totaling approximately $3.6 million.

For Q4, we recorded operating income of $7.3 million, representing an operating margin of 7.9%. For the full year 2023, operating income totaled $51.4 million, or 12.7% of revenue, compared to $27.2 million, or 6.8% of revenue in the prior year. Turning to income taxes, we recorded a tax provision for Q4, of approximately $1.9 million, representing an effective tax rate for the quarter of 18.2%. The tax provision for the full year 2023 was approximately $6.6 million, representing an effective tax rate for the year of 11%. Net income for Q4 totaled $8.7 million. GAAP diluted earnings per share was $0.19, based on a fully diluted share count of $45,017,000. For the full year 2023, net income increased to $53.6 million, from $25.5 million in the prior year.

In 2023, fully diluted earnings per share rose from the prior year, increasing to $1.19 from $0.57. Turning to our cash flow and balance sheet, cash and cash equivalents totaled $242.2 million at Q4. Accounts receivable net of reserves totaled $52.6 million at quarter end. With DSOs for trade receivables at 40 days, inventory’s net of reserves increased 1.9% sequentially to $106.6 million. Annualized inventory returns were approximately flat sequentially at 1.92. Operating cash flow totaled approximately $22.1 million for the quarter. Capital expenditures for Q4 totaled $7.7 million. We ended the quarter with a construction and progress balance primarily for manufacturing equipment of approximately $17.7 million, with approximately $17.3 million remaining to be spent.

It’s worth noting that in Q4, we accrued approximately $13 million as an investment tax credit related to the CHIPS Act for equipment installed in our vertically integrated ChiP fab. I’ll now address bookings and backlog. Q4 book-to-bill while improving sequentially, came in below 1 and with one-year backlog decreasing 8% from the prior quarter, closing at $160.8 million. Turning to the first quarter and the full year, 2024 is a year of uncertainty and opportunity. As of today, the year’s 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 one question and a related follow-up so that we can respond to, as many of you as we can in the limited time available. If you have more than one topic to address, please get back in the queue. Phil?

Phil Davies: Thank you, Jim. As Jim covered in his update, our book-to-bill ratio was still below one in Q4, mainly due to low booking levels in our HPC business and the Automatic Test Equipment segment of our industrial business. In HPC, Q4 bookings were lower than expected as we turned down deals inconsistent with our long-term OEM licensing strategy. The license gives OEMs access to alternate sources of supply for products covered by Vicor IP from otherwise infringing suppliers, enabling current and future-gen AI processors to achieve higher performance. The OEM license provides access to game-changing technology from a single-source innovator through multi-source supply chains. The OEM license avoids the risk of exclusion orders and the OEM license respects the IP of American innovators and manufacturers.

In anticipation of market needs, Vicor was the first to develop key technologies, control systems, topologies, components, and packaging for 48-volt high-current processor power delivery networks. Those market needs are clearly with us now in the advent of gen AI, machine learning, 48-volt rack power systems, and vertical power delivery. As evidenced by progress already made in forcing are IPs to NBMs, our message to the market is clear. The OEM license gives you open-ended access to superior power system technology. It provides continuity of supply for otherwise infringing servers and AI processors. Additional customer engagements in Q4 confirm that gen AI and network processor platforms, will require significantly higher current density and vertical power delivery.

Our investment in the world’s first chip foundry and our 5G product line once again anticipated these future AI power system requirements, uniquely positioning us to expand our share of the AI power system market. We are getting ready to deliver evaluation systems, models, tools, and samples to lead AI processor customers. On other market and customer fronts, our new product and applications pipeline continues to grow, creating both near-term and future demand, to fill our vertically integrated foundry. In our automotive business, collaborations that were initiated with OEMs in 2021 have started to move into production with low-volume platforms as we ramp our automotive qualification, manufacturing, and OEM relationships through early learning cycles.

Momentum is picking up in both the mild hybrid and BEV market for Vicor’s technology in response to the 48-volt Zono architecture first conceived and patented by Vicor and recently promoted by Tesla. Collaborations with larger OEMs on higher-volume platforms are gaining momentum with visibility to production dates in coming years. We will be participating at WCX in Detroit once again this year, with four technology papers that will showcase our technology and power system value propositions for 800-volt and 48-volt power modules. In our other business units, we continue to see stronger demand in our broad industrial, aerospace, and defense markets for both large OEMs, and smaller customers who purchase through our channel partners. Customer visits from our top 100 accounts have also continued to view and audit, our new ChiP fab as we now ramp production of advanced products.

Thank you, and with that, we will now take your questions.

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Q&A Session

Operator: Good afternoon, everyone. [Operator Instructions] And the first question is coming from Jon Tanwanteng. Please go ahead. Your line is unmuted now.

Patrizio Vinciarelli: Hello, Jon.

Jim Schmidt: Yes, go ahead, Jon.

Jon Tanwanteng: Oh, great. Thank you for taking questions. So to clarify, you turned down data center or HPC deals. Are you saying for [XPU power due to NBM licensing] issues or were they just pure NBM deals? And kind of help me understand, you know, what the concerns were surrounding the technology. Was it economic or purely surrounding the IP?

Patrizio Vinciarelli: Yes, so you’re not going to have an opportunity to analyze it, because we’re not going to get into specific details. But I think it’s important to understand that we have a clear vision of where we’re going. And we’re sticking to that vision as events unfold on a variety of fronts related to, asserting our patents with respect to the NBM and other developments. So the marketplace, needless to say, is driven by a complex set of forces. On the one hand, there is a drive to multi-sourcing, particularly for very high volume applications. But at the end of the day, there is also an overwhelming need for higher current density solutions, vertical power delivery. And these are areas where Vicor, is a pioneer, has established a strong beachhead of IP and opportunities that we’re going to seek to realize through the right mix of licensing to facilitate the multi-sourcing as needed, where needed, and participation directly with modular solutions from a new hub.

Jon Tanwanteng: Okay. Fair enough. And I understand. Is this something that can be resolved in the near term as you negotiate more? Is this something that will take the assertion of your litigation strategy and the completion of that to complete?

Patrizio Vinciarelli: Well, so as implied by Jim’s point in his remarks regarding the uncertainty and opportunity that characterizes the national quarters, we can’t make that prediction. And we don’t want to make that prediction, because we want to retain the flexibility needed to implement our long-term strategy. So, we’re not going to go out on a limb in terms of predicting when things will happen. I can tell you that my expectation is that, we’re going to be successful. We’re going to be successful with our first litigation, with respect to asserting the NBM patents. We’re doing very well in that regard. And we’re far along with respect to that process. And we’re also going to fill the factory in due course. So, we’re very confident of our strategy, very determined to enable it, and patient if need be in order to bring it about.

Jon Tanwanteng: Understood. Thank you. I’ll jump back in queue.

Operator: The next question is coming from Quinn Bolton. Please go ahead. Your line is open now.

Quinn Bolton: Hello?

Patrizio Vinciarelli: Yes. Go ahead, Quinn.

Quinn Bolton: Okay. Great. I guess I understand you don’t want to provide a lot of detail. But I just want to try to make sure I understand sort of the range of alternatives. You said you’re turning down deals for NBMs. It sounds like from your opinion or perspective, many of the competing NBMs may infringe your patents. And so if you turn down the deal, what’s the alternative for the customer? They just use infringing NBMs until you have asserted those patents or competitors license your patents?

Patrizio Vinciarelli: So, we have existing proof of a business model that works quite well. We have a significant licensee that has been sourcing NBMs from an otherwise infringing source by virtue of an OEM license with us. And that’s, again, part of our overall strategy with respect to balancing a variety of needs and opportunities for our customers, the market at large, and ourselves with due respect for international property as well as the needs of the customers that in some relevant instances. Do have an overwhelming need for a multi-phase sources.

Quinn Bolton: And I guess a second question just sort of around the IT front. I know we’ve got the APEX show next week. A lot of papers at that conference will be talking about vertical power delivery. I think Monolithic Power, Analog Devices, and NBM have all talked about vertical power delivery from the multi-phase perspective. Can you give us your latest thoughts, Patrizio? Just where do you feel the industry is in terms of adopting vertical power delivery and to the extent that multi-phase competitors are moving in that direction, is that an area where you may have to assert your patents on that front? Because I know you’ve been talking about vertical power delivery now for probably three-plus years? Thank you.

Patrizio Vinciarelli: Yes. So vertical power delivery means certain specific things. One of them with what we call first-gen VPD, the stacking of what we call a multi-cell converter. The multi-cell converter can be a vehicle car multiplier. It can also be a multi-phase solution. It doesn’t matter. It falls within our IP in the context of a stack solution with certain attributes. So, we pioneered that concept. It’s been implemented to a limited extent, by competitors whose solutions lack robustness, lack scalability, lack cost effectiveness. They suffer from all the traits of first-generation technology that in many respects is immature and not scalable. Without question, it’s going to become somewhat more mature and somewhat more scalable as initially conceived by Vicor.

But still handicapped in a variety of fronts, including the intellectual property front. With our 5G technology, we are on what we call a second generation of VPD, which is much more scalable, much more cost effective, much lower profile, much more efficient, and which we believe before too long will enable much more advanced solutions.

Quinn Bolton: Understood. Thank you.

Operator: The next question is coming from John Dillon. Go ahead.

John Dillon: Can you hear me?

Jim Schmidt: Hi, guys. It’s pretty faint, John.

Patrizio Vinciarelli: Yes, I don’t think we can hear you.

John Dillon: Okay. So I mean just previous remarks, you were talking about some IP that you have in the automotive. Then right after that, you said it was promoted by Tesla. Can we infer from that that Tesla might be a customer [of yours soon]?

Patrizio Vinciarelli: So I heard the word [Tesla and 48-Vol and IP].

Jim Schmidt: Okay. Is Tesla going to be a customer soon, I think is what John was asking?

Patrizio Vinciarelli: So, we’re not going to make comments about specific companies or potential customers, but I will mention that as in other fronts, Vicor was a pioneer with respect to the concept of using bus converters within automotive power distribution. So that’s an area of intellectual property that may come to fruition at some point in time. As you can imagine, or as implied by earlier comments, there’s no shortage of opportunity. As of now, we’re very focused on bringing to fruition our NBM initiative, but it is part of a very broad campaign, which again is part of a very comprehensive strategy to enable a more efficient, scalable, and fair market when it comes to advanced power system technology.

John Dillon: The other thing I wanted to congratulate you on the bookings. It looks like from the press release, it’s headed up and it looks like your bookings are up about $13.5 million from the previous quarter. So I’m just wondering, Bill, do you expect this trend to continue? I don’t want any specifics, but can we expect the trend to continue throughout the year?

Patrizio Vinciarelli: Yes, so I don’t think that the word trend applies or the United States of America, or whatever you want to call it, to events unfolding over the next few quarters. Because as discussed earlier, I think we should all be clear with respect to this, there is a wide range of scenarios. And because of that, individual events could impact bookings, top line, bottom line, from one quarter to the next in ways that are frankly unpredictable. And yes, to say there is a book stop at the low end, but we’re not going to quantify what that is. There is limited downside, I would say. There is quite a bit of upside, but that upside is hard to predict in terms of the time to fish.

John Dillon: I get that. I understand that. So this is last quarter you alluded to, last conference call you alluded to, a sizable upside. It sounds like that sizable upside is still out there, but it’s not predictable at this time?

Patrizio Vinciarelli: That’s right. I will say that the cumulative impact over time, is more predictable than instant contribution that may happen sooner or later. So fundamentally, a strategy, as it has always been, is to take a very long-term view. We’re not, I know we’re in the context of reporting to the financial markets, but we’re not, to be perfectly honest with you, making decisions based on what may look particularly good in any one quarter. We are making decisions based on what we think is in the long-term interest of the shareholders, again, balancing the various factors at play in a comprehensive strategy.

John Dillon: Got it. I’ll get back in the queue. Thank you. Thank you very much.

Operator: The next question is coming from Quinn Bolton. Please go ahead. Your line is open.

Quinn Bolton: Okay. I guess I wanted to follow-up on John’s question. There are obviously a range of scenarios you’re talking about, but to the extent the upside scenario plays out, I assume that those are likely either NBM or fourth generation or more, hopefully fifth generation design wins. How quickly could you ramp that business? I mean, I think in past quarters, you’ve talked about manufacturing lead times that are about six months, and so, would it take a couple of quarters, to sort of start to realize some of those upside opportunities? Is that the right, kind of way to think about the timing, to the extent the upside case begins to play out? And then I’ve got a follow-up?

Patrizio Vinciarelli: So, we have capacity in place now. We could, in the next quarter, the quarter after that, manufacture more subject to, obviously, material procurement lead time. Then we would, based on what we stand currently in terms of the bookings and backlog situation. Just as a reminder, the issues and challenges of yesteryears, when we didn’t have a very integrated factory, we were dependent on outside sources of supply for critical process steps, are gone. Those are no longer challenges. Now we face a different type of challenge that, again, is resulting from sticking to a strategy that has us balance a variety of considerations. But as I think back about the starting challenges, I feel that with the establishment of first chip foundry, we are in a position we’ve never been in, in answer to your question regarding scalability.

We have a level of scalability that Vicor never had. We manufacture advanced products in panels, which are akin to wafers. And in our chip foundry, we can make a very, very large quantity of panels. We have a lot of capacity. Needless to say, there’s still going to be a lead time. There’s no set function to be had. But demand can be addressed with supply within a relatively short cycle time.

Quinn Bolton: Thank you. Patrizio, the follow-up question is, in the current latest generation GPU market, one of the multi-phase vendors that has pretty high share recently had some testing issues. And I’m wondering if you’ve had any discussions sort of since that event that might lead you to believe that any of the large AI processor GPU vendors, one, are now more open to having multiple sources of supply. And particularly, has this event potentially raised some concerns about the multi-phase approach in general, given that you’ve got one or more controllers that may have to control 20, 30, 40 phases? You know, have you seen anything coming out of that event that may benefit Vicor, either in the near term or the longer term? Thank you.

Patrizio Vinciarelli: So multi-phase systems have challenges. And those challenges get compounded in a VPD type of solution. So the underlying primary challenge of multi-phase is that it is a lower current density type of solution. It involves the averaging down of a voltage to step up the current through switching elements that need to support a much higher voltage withstand, and do so reliably and without a well-safe operating area. Then with a Vicor current multiplier, which can, in effect, multiply current and do so much more efficiently, with lower voltage semiconductors without commensurate safe operating area challenges. There are benefits there to do, in particular, just to give you some examples, with the fact that without our proprietary approach, there is no multi-phase.

Each one of which, should it fail, could take a GPU or the AI processor with it, as it can fail with a top switch short, which could happen with any of a larger multiplicity of phases. So, we have many, many advantages in terms of the power distribution architecture, the topology, the type of components that these solutions require, which are fundamentally different. But then getting back to the VPD side of things, with a multi-cell approach involving a multiplicity of phases as opposed to a multiplicity of current multipliers, as we have, you have, in effect, the compounded challenge of a power conversion topology, back-converter, which is nearly low current density, compounded by the mechanical challenges with first-generation VPD of stacking this multi-cell topology with gearboxes or capacitive layers that are required in order to provide filtering and dynamic response.

And only to get too technical with this, getting to the punchline, VPD, first-generation VPD implemented with multi-cell solutions in the form of multi-phase is very, very challenging, costly, not truly scalable, immediately handicapped, and in need of an overhaul. And we’re not seeing, based on our visibility, it being scaled up with the level of load effect rates and manufacturability that larger EMs would expect to have.

Quinn Bolton: Got it. Thank you.

Operator: The next question is coming from [Alan Hicks]. Please go ahead. Your line is open.

Unidentified Analyst: Hear me?

Patrizio Vinciarelli: Yes.

Unidentified Analyst: Okay. It sounds like the factory is virtually complete, although I know you have some more build-out. Can you confirm that?

Patrizio Vinciarelli: Yes. We have a bar graph that we review every week. It used to be yellow and red. It’s now all green in the sense that the green sourcing of yesterday, which was yellow and red, has become a green source has made handover in our Berkeley Integrated Facility. And those bars are rising from week-to-week. So we are doing well in that regard. So that challenge is essentially behind us. To your point, we’re not fully done with bringing in equipment. There’s still some additional equipment that is equipment we committed to that’s going to add some additional capacity and process capability that’s due in in the next several months. But the core capability of, in effect, building up the other layers of our unique converter housing package, type of technology, two panels, again, the wafer analogy when it comes to high-density power converter modules, that capability is in place. And we’re using it and we’re setting it up.

Unidentified Analyst: Okay. So you would say lead times are coming down?

Patrizio Vinciarelli: Well, so what is going on in? What has been going on, in particular, within the last quarter is that the mix has changed, right? With the different backlog situation and the need to utilize capacity to address some of the backlog that have been overdue, our mix has changed. And that places its own constraint on thought capacity. And that’s frankly the reason why we fell short somewhat of our internal target in terms of top line within the quarter. It wasn’t that we didn’t have enough backlog. It’s just that there was a bit of a mixed challenge, because instead of making lots of modules of a certain kind, we had to make a somewhat smaller quantity or variety of different things, right? So that’s a factor with respect to thought capacity. And it was a factor in particular with respect to top line in the last quarter.

Unidentified Analyst: Okay. And going forward, you’re capable of building the 4G products lateral, vertical, and so on. And what’s the interest in 4G?