Jamie Simms – Chief Financial Officer Patrizio Vinciarelli – Chief Executive Officer.

John Dillon – D&B Capital.

Good day, ladies and gentlemen, and welcome to the Vicor Earnings Results for the Fourth Quarter and Year Ended December 31, 2015 Conference Call. My name is Teshina and I will be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

[Operator Instructions] As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Jamie Simms, CFO; and Dr. Patrizio Vinciarelli, CEO. Please proceed..

Thank you. Good afternoon and welcome to Vicor Corporation’s conference call for the fourth quarter and the full year ended December 31, 2015. I’m Jamie Simms, Chief Financial Officer. And with me here in Andover are Patrizio Vinciarelli, Chief Executive Officer, and Dick Nagel, Chief Accounting Officer.

Today we issued a press release summarizing our financial results for the fourth quarter and the 12 months ended December 31. This press release is available on the Investor Relations page of our website www.vicorpower.com. We also have filed a Form 8-K with the Securities and Exchange Commission in association with issuing this press release.

I remind listeners this conference call is being recorded and is the copyrighted property of Vicor Corporation. I also remind you various remarks we may 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.

Our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those explicitly set forth or implied in our statements. Such risks and uncertainties are discussed in our most recent Form 10-K filed with the SEC on March 6, 2015.

Please note the information provided during this conference call is accurate only as of today, Thursday, February 25, 2016. Vicor undertakes no obligation to update any statements made during this call and you should not rely upon such statements after the conclusion of the call.

A replay of today’s call will be available beginning at midnight tonight through March 11, 2016. The replay number is 888-286-8010 and the passcode is 84047926. In addition, a webcast replay of today’s call will be available shortly on the Investor Relations page of our website.

I will start this afternoon’s discussion with a review of our financial performance for the quarter, and year. And Patrizio will follow with his comments, after which he will take your questions regarding our business.

So the fourth quarter, as stated in this afternoon’s press release, Vicor recorded a net loss for basic share of $0.05, representing a net loss of $1.75 million. For the third quarter, we reported net income per diluted share of $0.06, which represented net income of $2.5 million.

However, the third quarter figure included a gain of $5 million recognized on the recovery of our investment in Great Wall Semiconductor, which was acquired by Intersil Corporation in September.

Absent this investment gain, which did not have a tax effect, our comparable pro forma net loss per basic share for the third quarter approached $0.07, based on a pro forma net loss of approximately $2.5 million.

Excluding the third quarter’s investment gain, the two quarters are similar in terms of operating performance, reflecting the unfavorable market conditions we’ve been experiencing.

Due to uncertainty domestically, notably in defense electronics, the continued unfavorable conditions across Europe, and delays in the deployment of next-generation processor solutions for the datacenter segment. Our consolidated revenue remains below the range at which we breakeven.

So, while consolidated revenue rose 5.6% sequentially reflecting increases in shipments by VI Chip and Picor, including shipments of our solution for the current generation of datacenter server processors, we did not reach the breakeven level.

Our turns volume for the fourth quarter actually declined slightly on an absolute basis, but remained in the vicinity of 40% of total revenue. Concluding on consolidated revenue, recognized distribution revenue for the fourth quarter rebounded 14.4% to $3.6 million.

Our consolidated gross margin percentage for the quarter increased slightly, reflecting the incrementally higher production.

Consolidated operating expenses rose sequentially, but only to the absolute levels of the first half of 2015, as we experienced a higher than usual consumption of accrued vacation during the third quarter, which resulted in a sequential swing in compensation expense upwards of $900,000, more than twice the amount we have experienced in prior Q3 to Q4 transitions.

An additional contributor to the sequential increase and operating expenses was an increase in professional fees, with the anomaly being legal fees associated with the transactions we completed involving certain of our Vicor Custom Power subsidiaries, which I will discuss in a moment.

It is worth noting Q4’s total operating expenses were below Q2’s total and almost exactly at Q1’s level. Despite higher revenue, our consolidated operating loss worsened, again, because Q3’s results reflected the favorable impact of vacation consumption.

We recorded a tax benefit for the fourth quarter of $775,000, reducing our consolidated net loss before noncontrolling interests to $1.7 million. Two fourth quarter events contributed to this total benefit.

The first contributor and by far the larger was the reversal of tax reserves we had established over many years to address possible exposures to income taxes at the state level. During 2015, we addressed these exposures with the states and question leading to the Q4 reversal of the associated reserves.

The second contributor was the reversal of a sizable deferred tax liability we carried on our consolidated balance sheet, brought about by our fourth quarter sale of our 49% equity stake in a Vicor Custom Power subsidiary, which resulted in our deconsolidation of that subsidiary’s financial statements from our own at year-end.

On a full year basis, consolidated revenue for 2015 was 2.5% lower than the level recorded for 2014. This decline was largely the result of the consolidation of our Westcor operation in December 2014, which resulted in a pruning of our product lines when we transferred manufacturing of Westcor products to our Andover facility.

Additional contributors for the decline were associated with the performance of certain of our Vicor Custom Power subsidiaries, which we addressed in 2015, as well as the market drop in the dollar-based performance of our Japanese subsidiary, as weaker unit volume sold were exacerbated further by a year-over-year decline in the yen-dollar exchange rate.

These revenue declines were offset by a steady performance of the Brick Business Unit, the BBU, and somewhat higher volume shipped by VI Chip and Picor during the first half of 2015. Also 2015 was the year in which we began to see meaningful licensing income.

For the year, our consolidated gross margin percentage increased from 43%to 45.2%, largely due to the consolidation of Westcor and the factory efficiencies associated with higher production volumes, notably for VI Chip. The higher percentage of Picor, still a centric module in the sales mix also contributed to the improved product margin.

Comparisons of operating expenses year-over-year as reported are heavily influenced by the high level of legal fees we incurred in 2014, especially during the second half of the year. Excluding litigation related costs, total operating expenses were unchanged year-over-year, declining less than 1%.

Total expenses would have declined further, but for the costs associated with the consolidation of certain Vicor Custom Power subsidiaries, which I’ll now address.

During prior calls and in shareholder communications, we have stated our intent to right size our network of regional locations dedicated to custom power systems solutions, largely targeted at defense electronics applications.

Our custom military business has lately reflected the challenges of federal budget uncertainty and shifting spending priorities. Rationalizing capacity and focusing capabilities were primary drivers of this effort, but an important consideration was addressing the partial ownership of three subsidiaries by their respective managers.

In December, we completed two transactions, and a third transaction should be formally completed within this quarter, although the operations of the subsidiary involved were consolidated with another subsidiary before year-end.

We did not record any special charges for these transactions, although, as mentioned a moment ago, we incurred increases in costs and expenses associated with the consolidation, ranging from the costs of inventory and equipment disposals and relocation, the closure of leased facilities, and other transactions specific expenses.

When we file our Annual Report on Form 10-K in approximately two weeks, readers will see the minimal impact of these transactions on our consolidated income statement and balance sheet.

Since the three customer locations operated through December, their operations are reflected in the consolidated income statement for the fourth quarter and the full year as are the costs you mentioned a moment ago.

The income statement presentation still shows the impact of the noncontrolling interest on consolidated net income or loss and net income or loss attributable to Vicor Corporation. Each specific transaction form influenced the associated accounting treatment. For example, we sold our 49% equity ownership in one subsidiary back to that subsidiary.

As a result, at year end, we deconsolidated the previously consolidated balance sheet of this subsidiary.

Our December 31 balance sheet reflects the elimination of assets and liabilities of that subsidiary, as well as elimination of the noncontrolling interest, which represented the 51% we did not own, which was carried as a component of our consolidated shareholders equity.

Another notable consequence of this deconsolidation was its impact on our consolidated backlog at year-end and our consolidated bookings for the quarter.

Because of the deconsolidation and related de-booking of that subsidiary’s backlog, consolidated backlog at year-end was lower by approximately $1.1 million and adjusted total bookings for the quarter reflected a smaller, but similar decline.

The other completed transaction involved a statutory merger of the subsidiary into another surviving subsidiary, and the cash purchase of the 18% equity interest we did not own. The asset and liability accounts of the subsidiary as of closing, net of the cash paid for the 18% interest, were combined with the surviving subsidiary.

As such, the before and after pictures are very similar since there was no deconsolidation of the merged subsidiary’s balance sheet.

Including the deconsolidation of one subsidiary and the merger of the other, the aggregate net reduction of assets and liabilities for the two completed transactions was approximately $3.4 million, consisting primarily of current and long-term assets of the deconsolidated subsidiary.

With the third transaction, which is yet to close, we relocated production from the subsidiary in question to another subsidiary in December, and our consolidated year-end balance sheet shows little impact.

Assuming this third transaction is closed within the quarter, our first quarter Form 10-Q will reflect the structure of the transaction, which I’m not prepared to comment on today.

As a result of these transactions, Vicor will have three 100% on subsidiaries, targeting a customer base previously served by six operations, three of which were partially owned. In addition, we have reorganized our sales and marketing effort to have a dedicated team coordinating customer relationships and go-to market activity.

While we anticipate revenue from Vicor Custom Power will decline sequentially, as new order volume for custom products fell sharply during the fourth quarter, and as mentioned we deconsolidated the backlog of one of the subsidiaries.

We do expect revenue to recover through the year and due to the rightsizing of the operations in a coordinated management approach, yield higher profitability.

Once the adjustments to the consolidation of operations and product lines is completed, our intent is to drive new product innovation based on the use of our high performance, highly differentiated ChiP modules and VIA solutions. A final note, our last remaining less than 100% owned subsidiary is Vicor Japan, in which we have a 92.5% interest.

We plan to address this noncontrolling interest in 2016, thereby completing the streamlining of the presentation of our financial reporting. Turning to the fourth quarter performance of our business units, revenue recorded by the BBU increased 1.4% sequentially, reflecting higher shipments to Asia, notably China.

In contrast to the experience of many manufacturers, we’ve seen steady demand for our products in China. However, these improvements were offset by a 3.6% decline in revenue contributed by our Japanese subsidiary.

North America was sequentially flat, but behind year-over-year with regional fluctuations tied to defense electronics notably in custom products. Europe, stable as a whole sequentially, remains weak, reflecting macro conditions, which are often country specific.

BBU’s international sales were unchanged at $23.2 million, representing 55.6% of BBU sales and 78.2% of consolidated international sales. The BBU’s gross profit margin was essentially flat for the fourth quarter. BBU bookings decreased 11.8% reflecting the winding down of these three custom power subsidiaries during the fourth quarter.

The BBU’s module business saw increased bookings with consecutively strong order flow from China and other Asian markets, excluding Japan.

VI Chip’s revenue increased 27.3% sequentially with, as mentioned, volumes of current generation VR 12.5 solutions shipped as well as sustained volumes of our first generation VI Chips used in test and instrumentation and various defense applications.

Shipments to offshore contract manufacturers of domestic OEMs increased driving export sales to represent 66% of VI Chip sales for the fourth quarter.

Reflecting a leverage of volume production on VI Chips results, its gross profit margin essentially doubled sequentially, as extended production runs of certain products, in this case Chip VTMs, enabled improved overhead absorption, even as the VI Chip lines operated well under capacity.

VI Chip’s bookings increased 25.1% sequentially, recovering from an especially weak third quarter, reflecting orders for our current generation datacenter solutions.

As Patrizio will address in his remarks, our current expectation is that meaningful order volume for our VR 13 datacenter solution will begin in the middle of the year with shipments scheduled for the second half of the year.

Our Picor subsidiary saw external revenue increased by a third sequentially, reflecting the shipment of Chip PRM regulators to fulfill demand for the current generation VR 12.5 datacenter solution. Picor’s gross profit margin, reflecting its fabless model, increased, although it remains below recent volume related highs.

Picor’s bookings increased 1.7%, reflecting only modest datacenter activity. Recall that I have explained before how datacenter contract manufacturers typically do not pair their orders for PRMs and VTMs. So one quarter’s bookings from one CM might be heavily weighted towards one or the other component of the two component solution.

Turning to cash flow for the fourth quarter, operations were approximately net neutral before the impact of the deconsolidation of the previously discussed custom subsidiary. Other modest changes in the components of operating working capital largely offset one another.

Capital expenditures for the fourth quarter rose to $3.5 million from $2.3 million for the third quarter, reflecting the placement in service of our new VI manufacturing line, as well as the additions of capacity expanding equipment and fixtures for chip manufacturing. We expect capital expenditures to return into prior quarter’s level.

Turning to our consolidated balance sheet, the quality of our receivables portfolio remains excellent, with days’ sales at 42. We have not identified any problem credits and we have made no changes to our reserve during the quarter. Annualized turnover of consolidated inventory is steady as well at 4.9 times.

No unusual or notable activity occurred in our inventory reserve accounts. I’m pleased to report we have completed the exit of our Westcor Sunnyvale facility, and signed a long-term lease with a corporate tenant, which will occupy the building in June.

Cash and cash equivalents stood at $63 million at quarter end, down from the prior quarter $68.6 million. This figure includes one last auction rate security with a par value of $3 million carried on our balance sheet at an estimated fair value of $2.6 million, representing roughly 86% of par value.

Employee headcount as of December 31 was 985 down 43 from the September 30 total of 1,028, largely reflecting the three custom power transactions described earlier. I’ll now turn to our financial outlook for the first quarter.

Total consolidated bookings for the fourth quarter declined 7.4% sequentially, and our one-year backlog declined 9.9%, largely reflecting the impact of the three custom power transactions. Absent this impact, consolidated bookings would have increased over 3% sequentially.

However, for the fourth quarter our consolidated book-to-bill ratio, reflecting the three custom transactions, was 0.91, which implies a continuation for at least the first quarter of the performance we’ve seen for the third and fourth quarters of 2015, especially since we are two-thirds of the way through the current quarter.

We do not expect the forecast efficiencies from the custom power transactions to be seen until mid-year. Absent any pronounced shift in turns volume or a change in expense patterns, and assuming a straightforward tax calculation, we are forecasting a net loss in line with the prior two quarters. I’ll now turn the call over to Patrizio..

aerospace and aviation, for example, for use in unmanned aerial vehicles, due to their small form factor and light weight; in defense electronics, for example, in airborne, seaborne, or field radar, due to their high power capabilities, high conversion efficiencies, ruggedness, and reliability; in industrial automation, instrumentation, and test equipment, for example, for use in semiconductor testing, due to their power density and tight regulation; in telecommunications and networking infrastructures, for example, for use in pole-mounted small cell base stations in urban environments, due to their form factor, reliability, and cost performance profile.

And as a final, other example, transportation, for example, in autonomous driving vehicles, due to their high density, light weight, high efficiency, and low cost.

To conclude my remarks, we’re experiencing a sustained, rising tide of positive news, especially about the potential for our new products, in emerging applications, including some of those I just highlighted.

However, anticipated order volumes, whether from the datacenter space or segments targeted with the new products I made reference to, will not approach an inflection point until latter part of 2016.

While we expect modest continued shipments of VR 12.5 solutions to the first half of 2016, an initial volume of VR 13 during the second half, we have been pursuing other market opportunities to drive growth starting later this year. I’m sure listeners have questions, so we’ll open the call. Operator, we will take the first call..

[Operator Instructions] Your first question comes from the line of John Dillon. Please proceed..

Hi, Patrizio. I was wondering if you can give us an update on the VR 13, when you expect that to start shipping in. And it sounds like you’re expecting orders about the middle of the year.

Do you think that happen in the second quarter or will wait for the third quarter?.

Orders are expected to come in the second quarter and shipments will start in the second half of the year..

Okay, great. You mentioned before you’ve got design wins, I think you’ve said a number of datacenters, but you also mentioned supercomputers in your press release. And it sounds like you’ve got a rising tide of opportunities.

It sounds to me like everyone is waiting for that VR 13 because obviously the VR 12, you’ve had one customer, it sounds like they’re still taking product. But all the new customers are waiting for the VR 13.

What’s going to happen when the VR 13 hits? You can have the capacity in place to meet all those orders and I mean I would imagine going from one datacenter to possibly three or more plus supercomputer wins. That is going to be a pretty significant step up.

Can you just give us little more color on all that?.

So we have a good deal of scalability in manufacturing operations. So, making a reference, for example, to VR 12.5 starting in the June time frame of 2014. That’s when the ramp started and, essentially we started with the initial amount zero in the second quarter of 2014 and started shipping in third quarter of 2014.

By the first quarter of 2015, we were shipping over 40,000 chip-sets per week. So that’s quite a feat, given the complexity of the products. And a testament to this scalability of the mature operations, manufacturing operations, we have in our Andover facility.

So I have great confidence with respect to the ability to get – to expand our capacity to address a broader set of customers and applications, which, to your point, certain amount of requirements and common denominator gates, primarily related to the roll out of VR 13 solutions by Intel..

And besides the delivering the power for the processors, do you have other design wins in datacenters for either memory rails or other parts of the computer or delivering the 48 volts to the servers?.

Yes we do, and we’re looking to expand that footprint more as we progress further. I suggested in the prepared remarks, we really see a sea change with respect to interest and, in some cases, early adoption by a new customers of 48V based solutions. We see that trend growing, accelerating. And that trend involves more than processor-type applications.

I suggested earlier it involves applications in supercomputers, networking, memory slots, and potentially other kinds of point-of-load applications..

And any VIA designs in the datacenters?.

We have VIA designs. We have secured some significant, early wins, with several design wins – in particular one very large customer – and shipments due to begin in the fourth quarter of this year..

And any of those in the datacenter? Any of the design wins in the data center?.

I can’t pinpoint the application environment, but I can tell you it’s a computing application..

Okay. Awesome. I’m going to get back in the queue, let someone else have a chance. Thank you..

Thank you..

There are no more questions at this time..

That’s good we get to – go back to work soon. Talk to you in about a quarter. Thank you..

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day..