Vicor Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial amounts below are rounded to millions unless stated otherwise.
Business context
Vicor designs and manufactures modular power components and systems, and licenses technology for royalties. Its segments are Brick Business Unit (BBU), VI Chip, and Picor. Management described a strategic shift toward larger-volume customers, particularly in computing and communications, while demand for legacy products remained weak.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $56.9m | $53.2m | $169.1m | $152.2m |
| Gross margin | $25.1m; 44.2% | $25.9m; 48.7% | $74.7m; 44.2% | $69.7m; 45.8% |
| Operating income (loss) | $0.1m | $2.3m | $(1.8)m | $(3.8)m |
| Net income (loss) attributable to Vicor | $(0.01)m | $2.34m | $(1.44)m | $(3.56)m |
| EPS attributable to Vicor | $(0.00) | $0.06 | $(0.04) | $(0.09) |
- Q3 revenue rose 6.9% year over year but fell 1.4% from Q2 2017. Nine-month revenue grew 11.1%. Growth was led by VI Chip and Picor, particularly 48-volt-to-point-of-load products; BBU revenue was broadly flat for Q3 and down 0.7% for the nine-month period.
- Gross margin percentage declined in both comparison periods, which management attributed primarily to less favorable product mix. Q3 operating expenses increased 5.9% year over year to $25.0m; nine-month operating expenses rose 4.2% to $76.5m.
- At September 30, cash and cash equivalents were $48.9m, current assets $120.1m, current liabilities $31.8m, and working capital $88.3m. The current ratio was 3.8, versus 5.0 at December 31, 2016. No borrowings are presented on the balance sheet.
- For the nine months, operating cash flow was $0.6m; capital expenditures were $10.2m, compared with $6.4m in the prior-year period. Cash declined $7.2m to $48.9m. Financing included $2.5m from common-stock issuance, principally option exercises.
- Inventory increased 24.9% to $33.9m, primarily to support higher VI Chip and Picor bookings. Accounts receivable rose $8.6m from year-end. Deferred revenue increased to $8.8m current from $3.4m at year-end.
- Backlog was approximately $60.1m at quarter-end, up from $53.2m at the end of Q2. Management said Q3 bookings increased 19.4% year over year and backlog and bookings reflected greater uptake of newer products.
Changes, outlook, and risks
- Management reported improved bookings and sequentially higher backlog, but said customer orders and shipment schedules—particularly for VI Chip and Picor—remain unpredictable. New-product sales cycles are longer than expected, and large-customer design collaborations can require substantial time and resources.
- Management expects operating expenses, especially engineering and sales, to remain relatively high as a percentage of revenue. Profitability depends on achieving sustained, higher production volumes to absorb fixed manufacturing overhead. Legacy-product demand remains below historical levels amid weak market conditions and price competition.
- Management believed cash and expected operating cash flows would fund planned operations and capital equipment purchases for the foreseeable future. Capital-expenditure commitments were approximately $3.0m. No specific revenue or earnings guidance was provided.
- Revenue recognition guidance effective January 1, 2018 was expected to change the timing of revenue for sales to stocking distributors: Vicor expected to recognize revenue upon shipment to the distributor, with estimated returns and allowances, rather than upon the distributor’s resale. The company was evaluating the effect and planned retrospective adoption.
- The $3.0m-par failed auction-rate security was carried at $2.6m as a long-term investment, using Level 3 valuation inputs. Management did not intend to sell it and did not consider an other-than-temporary decline to have occurred, but noted further market or credit deterioration could lead to additional losses. Management said its illiquidity did not affect the operating plan.
- SynQor patent litigation remained stayed pending patent-review proceedings. The Federal Circuit affirmed invalidity findings for challenged claims of one patent, affirmed patentability findings for challenged claims of another, and remanded matters for further review. Vicor said it believed the claims lacked merit and did not consider a loss probable; it could not estimate a potential loss or range.
- The IRS was examining Vicor’s 2015 federal corporate tax return. The company maintained a valuation allowance of approximately $32.7m against domestic and most foreign net deferred tax assets; most reported losses therefore generated no tax benefit.
Most important facts for investors to verify
- Whether bookings and backlog convert into shipments and revenue on expected schedules, particularly for 48-volt solutions and large datacenter customers.
- Whether product mix, manufacturing utilization, and price pressure permit gross margins and operating profitability to recover.
- Inventory growth, receivables, deferred revenue, and operating cash generation relative to substantial capital spending.
- The eventual financial and transition effects of the new revenue-recognition standard, especially distributor sales.
- Developments in the SynQor litigation, the failed auction-rate security’s valuation and liquidity, and the IRS examination.