Vicor: finally the results we’ve been waiting for

The long wait for Vicor to post a step change in results is over.  With the release of the fourth quarter there was an end to the delays and they put out some solid concrete numbers.   To be sure, the fourth quarter itself was not very good (this was expected), but guidance and color around what to expect next quarter and beyond was very positive.

Here’s a summary

• Backlog at the end of the fourth quarter sat at $73 million compared to $60 million at the end of the third quarter
• Bookings grew 11% sequentially to $71 million
• Bookings thus far in the first quarter were $55 million (through 8 weeks of a 13 week quarter)
• They expect sequential bookings improvement throughout the year

As is typically the case, Vicor gave hard data on the next quarter but you had to piece together the long-term picture from circumstantial evidence and color.   This quarter we got to extrapolate from their comments on facility expansion.

Vicor  has a 240,000 sq. ft. facility in Andover, MA.  They said on past calls that they can produce $400-$600 million of revenue from Andover.  In the fourth quarter updated/reiterated that this number at $500 million.

In the past Vicor has talked about adding capacity by purchasing or leasing additional space nearby.  From the second quarter call:

…we’re also actively looking for incremental space nearby, not far away from the Andover facility, to further expand capacity in about 1-year time frame

On the third quarter call they hinted that this plan might be evolving as they were leaning towards building their own facility.  Last week  they confirmed this was the case, and in the process gave us a hint about where revenue might eventually go:

…we’ve had a change of plans regarding that. What we concluded after investigating certain options in the neighborhood of our existing Federal Street facility is that a building of the order of 80,000 to 100,000 square feet would not serve our long-term needs. So we were able to secure a deal with a partner to help our short-term capacity requirements to give us some breathing room for breaking ground on larger lot with considerably more room for expansion. So we’re looking at options for as much as 250,000 square feet, which would be equivalent in terms of capacity to our Federal Street building.

So the circumstantial evidence that we got is that while they have a $500-$600 million revenue facility, they have decided to forego a 100,000 square foot addition via an existing nearby building in favor of building another $500-$600 million facility.  They are taking this course of action because they think they would outgrow the smaller facility.

Conclusion

The reason I have been in Vicor is because of the potential for big revenues as they ramp product for 48V servers, for automotive, and for high-end FPGA’s that utilize power on package technology.  They have always been vague about how big these opportunities might be.  With the fourth quarter results we started to get some sense of that size.

To be honest, the opportunity needs to be big, because the stock isn’t particularly cheap.   At a $27 share price the enterprise value is about $1 billion.  Trailing twelve month revenue is $227 million and EBITDA is non-existent.

Looking forward, if we get 50% growth in 2018 and if gross margins improve to 50%, I estimate that EBITDA should be around $70 million if most of the gross margin falls to the bottom line.  That gives Vicor a 13.5x EBITDA multiple.

Vicor starts to look cheap if you think they can get to $500 million plus of revenue.  Again, assuming a modest increase to operating expenses (I’m guessing $140 million annualized), and an uptick in gross margins to 52%, I come up with $135 million of EBITDA, which would give Vicor a forward multiple of 7.5x.

Of course if you start factoring in the second facility, you are looking at $1 billion plus revenue and then the stock clearly has further to run.

So that’s the potential trajectory.  It’s actually always been the big picture that I have hoped would play out.  With the fourth quarter numbers and first quarter guidance, that picture is a little less presumed and a little more expected.   Its still a long way from being a sure thing, but its moving in the right direction.  And that’s why you have gotten the move in the stock that you have.