Jul 23, 2013
Executives
Jamie Simms - Chief Financial Officer Patrizio Vinciarelli - Chief Executive Officer Dick Nagel - Chief Accounting Officer
Analysts
Jim Bartlett - Bartlett Investors John Dillon - DB Capital Don McKenna - D.B. McKenna
Operator
Good day, ladies and gentlemen, and welcome to the Vicor Earnings Results for the Second Quarter ended June 30, 2013 Conference Call. My name is Ashley, 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) I would now like to turn the conference over to your host for today. We have Jamie Simms, CFO of Vicor Corporation and Dr.
Patrizio Vinciarelli, CEO of Vicor Corporation. Please proceed.
Jamie Simms - Chief Financial Officer
Thank you. Good afternoon and welcome to Vicor Corporation’s conference call for the second quarter ended June 30, 2013.
I am Jamie Simms, Chief Financial Officer and with me here in Andover are Patrizio Vinciarelli, CEO and Dick Nagel, our Chief Accounting Officer. Today, we issued a press release summarizing our financial results for the quarter.
This press release is available on the Investor page of our website, vicorpower.com. Also, we have also filed a Form 8-K with the SEC in association with issuing this press release.
As always, I remind all of you today’s 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 Forms 10-K and 10-Q filed with the SEC.
Please note the information provided during this conference call is accurate only as of the date of the call. Vicor undertakes no obligation to update any of the statements made during this call, and you should not rely upon them after the conclusion of the call.
A replay will be available beginning at midnight tonight through August 7, 2013. The replay dial-in number is 888-286-8010 and the pass code is for 73361295.
In addition, a webcast replay of the conference call will be available on the Investor Relations page of our website shortly upon our conclusion this afternoon. I will start this evening’s call with a review of our financial performance for the second quarter and Patrizio will follow with his comments after which we will take your questions.
As set forth in this afternoon’s press release, Vicor reported an after-tax loss for the second quarter of $4.6 million, representing a net loss of $0.12 per share. This compares to the first quarter after-tax loss of $5 million, which also represented a net loss of $0.12 per share.
Keep in mind, we incurred during the second quarter certain non-cash charges associated with our option exchange offer, and we completed the second tender offer for our shares, which also reduced the number of shares in the denominator of our EPS calculation. In the first quarter, we recorded a severance charge of $1.4 million associated with our reduction enforced during that period.
As such, direct quarter-to-quarter EPS comparisons without taking these circumstances into consideration might be misleading. Vicor’s consolidated revenue for the second quarter of 2013 increased 11.7% sequentially to $46.9 million from the $41.9 million recorded for the first quarter.
The second quarter figure compares to revenue of $55.5 million for the second quarter of 2012, representing a year-over-year quarterly decline of 15.5%. The Brick Business Unit, our largest, experienced a 5.3% sequential increase in revenue, while V*I Chip saw near doubling of revenue from the first quarter’s very low level.
While this rebound is encouraging, V*I Chip’s second quarter revenue at $6 million was approximately two-thirds of the $9 million recorded during the second quarter of 2012 and less than half of the level of the first quarter of 2012. We are encouraged by the reversal of trend in V*I Chip and are committed to further broadening the V*I Chip’s customer base, but until we achieved such diversification V*I Chip remains vulnerable to sharp swings in both bookings and revenue associated with a few large customers.
Patrizio will address V*I Chip’s current and expected performance in his remarks in a moment. Turns revenue, meaning those orders booked and shipped within the quarter declined to approximately 41% of revenue for the second quarter, down from 47% for the first quarter which was the highest level in recent memory.
This decline largely reflects the increase in V*I Chip’s shipments of orders placed during the first quarter and what appears to be a return to long-term trend for the Brick Business Unit. Recognized sell-through revenue for the quarter associated with shipments by our stocking distributors Future Electronics and DigiKey increased over 56% to $1.5 million recovering from the very weak first quarter.
Our shipments to these distributors also rose sharply increasing over 78% to almost $1.8 million. International revenue rose to 57.8% of total revenue for the second quarter, up from 54.1% for the first quarter.
The increase in V*I Chip shipments which primarily go to Asian contract manufacturers working on behalf of our OEM customers was the primary contributor to the increased percentage of total consolidated revenue represented by international activities. Aside from shipments to Asian contract manufacturers, Asia-Pacific markets including India, but excluding Japan continued to be a source of double-digit revenue growth reflecting the robust booking activity of the first quarter.
Our liaison office in Bangalore, India is up and running and we are pleased with the pace at which bookings and shipments are expanding. Overall shipments to Asia-Pacific increased 15.2% sequentially.
As we now have fully staffed offices in Hong Kong and Shanghai, we no longer will segregate Hong Kong from China when discussing the region, but we will have one China. Including our shipments to contract manufacturers, revenue from China increased 54.2% sequentially, including shipments to contract – excuse me, excluding shipments to contract manufacturers shipments to Chinese customers increased 13.6% after increasing 10.1% sequentially for the first quarter.
Japan is experiencing its own economic problems which are reflected in relatively flat performance. However, because we sell in yen in Japan Vicor Japan’s performance was exaggerated as dollar revenue declined 17.8% sequentially reflecting both the weak economy and approximately 13% decline year-to-date and the value of yen relative to the dollar.
The progress of Prime Minister, Abe in implementing his economic agenda leaves us to expect that the yen may continue to weaken and any real recovery of Vicor Japan’s performance may be dilutive by dollar translation. As I state every quarter please keep in mind for financial reporting purposes, we segregate customers by the address to which we ship.
With the exception of Vicor Japan, all of our subsidiaries sell in dollars and all of our products and again with the exception of those manufactured by Vicor Japan are exported from the U.S. As our customer base shifts to domestically based OEMs that use offshore contract manufacturers, international bookings and shipments are increasing because such OEM orders typically are much larger and vary in frequency.
The ratio of international activity to total activity may continue to vary as it has over recent quarters. However, as we implement our OEM strategy, over time we expect the ratio of international bookings or shipments to increase even though the actual purchase orders may be placed domestically.
Given the expansion of our activities in Eastern Europe including and notably Russia, our definition of Europe going forward for purposes of these conference calls will include Northern Europe, Southern Europe and Eastern Europe. Eastern Europe will consist of Poland, Russia and Ukraine.
We will segregate Turkey and Israel which have been included in Southern Europe from this new definition of the region. As a whole, European shipments improved 8.5% sequentially reflecting the first quarter rebound in bookings.
Weakness in certain major markets notably Germany offset strength in Eastern Europe. The second quarter’s revenue increase followed forecast given booking trends.
As reported first quarter consolidated bookings recovered 24% over the very weak fourth quarter of 2012. The improvement continued through the second quarter with consolidated bookings increasing 26.1% sequentially.
However, there are two sides to the second quarter booking story. The primary driver of the recovery in bookings over the last two quarters has been order flow associated with the V*I Chip’s design win in the datacenter space.
These orders are scheduled to be shipped starting later in the third quarter continuing into the first half of 2014. During the second quarter, we also received a substantial defense electronics order.
This order, which is scheduled for shipment across the fourth quarter of 2013 and into the first half of 2014, represented over half of the absolute increase in second quarter bookings. Without this order, bookings for the BBU were essentially unchanged.
So, the other side of the booking story is the BBU continues to experience soft demand for its modules and configurable products in certain market segments in both domestic and international geographies. We are also monitoring signs the rapid growth of Asia-Pacific may be decelerating.
Without V*I Chip’s datacenter business, bookings from China increased only 4.3%. Similarly, without V*I Chip’s datacenter business, all of Asia-Pacific increased only 2.3% reflecting anomalous declines in activity around the Pacific Rim, notably in South Korea, which saw bookings declined by nearly a third.
Total one year backlog at the end of the second quarter was $52 million, an increase of 37% from the first quarter level of $37.9 million. 66.8% of this backlog is scheduled for shipment in the third quarter.
Reported consolidated gross margin was steady for the quarter at 39.4% compared to 39.6% for the first quarter. Recent gross margins have been heavily influenced by capacity and utilization pressures, not by mix or pricing considerations.
As we ramped V*I Chip production volumes to meet scheduled shipment dates, we anticipate meaningful improvement in our overhead absorption, which should contribute to higher margins. However, as V*I Chips make up a greater percentage of our total volumes sold, mix and pricing considerations will become larger factors in our overall gross margin calculation.
Comparisons of reported consolidated operating expenses for the first and second quarters are challenging as the first quarter figure included a $1.4 million severance charge and the second quarter figure included among several one-time expenses, $625,000 of non-cash compensation charges associated with the stock option exchange offer that we completed in June, and $190,000 of expenses associated with a one-time training initiative. On an as reported basis, second quarter operating expenses totaled $25.4 million, representing a $1.4 million sequential increase.
If these one-time charges are excluded from the calculation for both quarters, the sequential increase in operating expenses was approximately 3.7%, which consisted primarily of the annual merit based salary adjustments made during the second quarter. Also included in the second quarter total were increased commissions resulting from increased revenue, an increase of approximately $180,000 in our bad debt reserve due to the bankruptcy of the single customer, and an increase of approximately $170,000 in shareholding reporting expenses associated with our Annual Meeting held in June, and the filing cost associated with the exchange offer.
These increases were largely offset by a sequential decline of approximately $340,000 in audit tax and related accounting fees. Until we have a clear view to profitability, we will continue to restrict expenses and closely scrutinize discretionary spending.
Total headcount stood at 997 as of June 30, an increase of two full-time employees and six part-time employees. Total headcount was 989 as of March 31 and 1,046 as of December 31.
For the second quarter, we recorded an income tax benefit of $2.4 million largely based on a potential net operating loss carry back for federal income tax purposes for the full year. For the first quarter, we have recorded an income tax benefit of $3.5 million also based on the potential of federal net operating loss carry back, as well as the recognition of the full federal research and development tax credit for 2012.
Recall that we recognized the entire 2012 credit in the first quarter along with the portion of the 2013 credit. Cash flow from operations for the second quarter was a deficit of $2.5 million reflecting the $4.6 million net loss and the period’s non-cash deferred tax benefit of $2 million offset by depreciation and amortization of $2.5 million.
We did not experience a meaningful swing in working capital for the quarter. Capital expenditures for the quarter were steady at $1.4 million reflecting maintenance activity.
Patrizio will return to capital expenditures in a moment. In connection with the completion of our second tender offer on April 22, we purchased 1,341,575 shares of our common stock at a price of $5 per share totaling approximately $6.7 million.
Reflecting the operating deficit and this share purchase, cash declined by $10.6 million for the quarter and totaled $60.8 million as of June 30. Turning to the consolidated balance sheet, our receivables portfolio remains in excellent shape with day sales declining to 45 days from the prior quarter’s 49 days.
As mentioned, we did increase our reserves as a result of the bankruptcy of a customer. Consolidated inventories quarter-to-quarter declined slightly 4.2% and there was no meaningful change to reserves.
Annualized inventory turns stood at 3.9 times unchanged from the first quarter of 2013 and for that matter the fourth quarter of 2012. In addition to the $60.8 million of cash at quarter end, we also hold certificates of deposits carried at the face value of $1.5 million and long-term investment securities with a fair value of $6 million that we carry at an estimated fair value of $4.9 million or roughly 82% at par.
Turning to our expectations for the current quarter, we anticipate we will reduce our net loss, but we do not expect to return to profitability for the period. As described booking trends have contributed to restoring our backlog and increased volumes should contribute to overhead absorption.
However, the current outlook for the BBU does not suggest the consolidated company will reach a breakeven level of revenue for the third quarter. We also anticipate another cash deficit from operations for the third quarter albeit smaller, largely as a result of the expected increase in net working capital associated with expected higher revenues.
That concludes my prepared remarks regarding our financials. Now, I will turn the call over to Patrizio.
Patrizio Vinciarelli - Chief Executive Officer
Thank you, Jamie. As Jamie has described the second quarter was characterized by encouraging improvements in orders for in particular V*I Chips powering Intel processors used in large scale datacenters.
Our present solution utilizes first generation V*I Chip PRMs and VTMs as components of a factorized power system in having higher efficiency. Next generation V*I Chips and microchips would provide even greater benefits in efficiency, density and cost effectiveness for the coming generations of Intel VI Standards.
Well our datacenter volumes present good news, we do not have meaning visibility into demand within the supercomputing segment in which first generation V*I Chips achieved early success. As the federal government is the primary source of funding for supercomputing selections and federal funding remains quite uncertain.
Our early adopter customer has no real visibility itself into when demand will resume. Design activity is progressing with well-known large scale enterprise computing manufacturers for both server and datacenter applications.
And we expect V*I Chips and our new chips to be designed to platforms that will ramp in the second half of 2014. As a reminder, ChiP is an acronym for Converter housed in a Package, what we earlier referred to as Power Molded packages.
The power density or efficiency and scalability of chip modules makes them attractive to market leaders seeking to differentiate their own next generation systems. As we discussed before, we have reorganized our marketing and sales effort around teams focused on industry verticals.
We are developing chip based power systems for applications within these verticals including in addition to computing, communications, defense electronics, test and measurement instrumentations as well as automotive. We are working closely with numerous potential customers across these various markets.
We are pleased with the inception of recently introduced ChiP packaging technology as received. We have developed an initial product line of chips now beginning to get sample to customers.
We expect that highly differentiated PFM, DCM, PRM, VTM, and BCM chips will begin to make meaningful contributions to our revenue by the second half of 2014. Our ChiP platform is expected substantially lower the manufacturing cost of our modules well below the cost of first generation V*I Chips.
We realized a broader market for factorized power, require both leading-edge performance and a compelling value proposition, especially for the high-volume OEM customers, we see as critical to our growth strategy. We are currently finalizing initial products for what is being acknowledged in the market as embodying breakthrough power component technology enabling power system architects to achieve considerably high performance and faster time to market.
Chips offer unprecedented levels of performance in terms of power density and our efficiency while providing a level of manufacturing cost effectiveness necessary for Vicor to succeed in cost-sensitive volume applications. As said before, our OEM strategy with chips gives Vicor the opportunity to take meaningful market share.
In order to meet our forecast of chip demand, we are finalizing an Intel plan for expansion of V*I Chip manufacturing line to accommodate chip production. Our preliminary estimate is that we may invest upwards of $5 million on capital equipment during the first phase of the suspension.
And this phase is planned to be executed starting in the fourth quarter of this year, ending in the first quarter 2014. In subsequent phase of expansion plan for 2014, we’ll of course require an additional investment.
We have sufficient cash resources to fund the early phase of this expansion as well as the recovery and longer term growth of the business. Further, we are quite confident that we have a very compelling product portfolio, with an addressable market much larger than that for first generation V*I Chips.
Another source of confidence is the progress Vicor is making with the launch of its Cool-Power ZVS regulator power lines for point-of-load applications. As we have highlighted before, the SiP modules and the SiP stands for system-in-package are critical elements of our strategy to provide the most technological advanced solutions for power management from the AC source to the DC point-of-load.
We believe Vicor will achieve substantial penetration from competitors offering traditional point-of-load solutions. While we have reasons to be encouraged, many obstacles remain and there are risks before us.
As Jamie discussed, we expect our performance in third quarter will continue the trends established for the last couple of quarters with improved results, but falling short of profitability. We also anticipate another quarter during which we may consume some cash.
We need to see a clear path to sustain recovery of the BBU and/or further advances in V*I Chip and Picor revenues in order to support robust profitability. As I have said it many times before, I know Vicor is on the correct path to long-term success.
As we have the technology, the products, and the product roadmap necessary to serve the needs of our targeted customers where we define our go-to-market infrastructure, expanding our worldwide capabilities and partnering with well-positioned distributors. Unfortunately, we continue to face strong economic headwinds just as we are delivering on our prior commitments.
This concludes management’s prepared remarks and we’ll now take questions from listeners. Operator?
Operator
(Operator Instructions) Your first question comes from the line of Jim Bartlett with Vicor (sic) Bartlett Investors. Please proceed.
Jim Bartlett - Bartlett Investors
Congratulations on the increase in bookings and backlog if you were to look at those two large orders I guess the datacenter order and the defense electronics order what percentage of the bookings increase would that be?
Jamie Simms
All of it. That is what we are getting at is that the datacenter orders were staggered over the quarter it wasn’t one simple – single order whereas the defense electronics order was.
But between the two opportunities, the sum of all that was more than all of the bookings increase, bookings in the other areas of the business are best characterized as flat.
Jim Bartlett - Bartlett Investors
And could you give some characterization to the design activity which was mentioned to be robust?
Patrizio Vinciarelli
Yes, so we are finally seeing traction in the computing space across a much broader customer base. I remember getting questions years ago on these calls with respect to replicating a success story of the leading customer elsewhere we are now seeing that happening with both factorized power system solutions for the point of load as well as front end modules using ChiP technology, so that’s very encouraging.
These engagements, all very promising in terms of being as substantial as our first those have their customer in some cases potentially more substantial than that. So, that’s a very exciting area for us.
Communications on a smaller scale but still in terms of breadth of customer’s traction interest is progressing well. As are the other targeting markets.
I think in a nutshell we are seeing a good deal of interest and excitement to leverage in particular chip products as well as some other more classic first generation V*I Chips and at an earlier stage, but nevertheless quite exciting is also the level of traction that we are getting with SiP regulator products that Vicor is introducing.
Jim Bartlett - Bartlett Investors
And when you stated that the chip the differentiated PFM, DCM, PRM, etcetera make meaningful contributions of revenue by the second half of 2004 would meaningful mean over 10% or can you qualify that?
Patrizio Vinciarelli
So, we are going to see in the initial contribution starting end of this year, beginning of next year as planned conversions to ChiP based solutions and SiP solutions begin to take price. And as the year progresses we are anticipating significant contributions from other computing customers in server applications and other kinds of applications.
So, because of the magnitude of these opportunities, I think it’s and the immediate uncertainty with respect to timing is up to be very specific at this point but there is tremendous potential. And we are seeing a number of other customers so what we have seen and talked about in this call with respect to the reference of the center task.
Jim Bartlett - Bartlett Investors
Thank you.
Operator
Your next question comes from the line of (John Dillon with DB Capital). Please proceed.
John Dillon - DB Capital
Hi guys, just wondering, if the bookings increases, are these sustainable, I mean do you see enough new stuff coming in to continue the increase in bookings in the next couple of quarters?
Patrizio Vinciarelli
Yes, John, we are anticipating a progression in bookings. We don’t anticipate in the third quarter step up we saw in the second quarter, but we are anticipating progress and the bigger progress in the fourth quarter and into next year.
John Dillon - DB Capital
Okay. So, I wasn’t sure if I caught that, I think what I heard is you do expect your bookings to increase next quarter and then more so in the fourth quarter and then more so by around next year, is that correct?
Patrizio Vinciarelli
Yes. So, the sequential pattern is one of increases, a modest increase next quarter followed by greater increase in the fourth quarter and greater increases into next year.
And that relates back to the engagements that I was referencing in answer to the earlier question.
John Dillon - DB Capital
Well, that’s good news. And again, congratulations on the bookings increase this quarter.
So, I think again what I am hearing is that some of the engagements that you talked about in additional computing environments, so they are not going to wait for the chip technology, you still have some class for V*I Chips stuff that you will be able to deliver to and be a little bit more diversified in the coming two quarters, because you have new customers that you will be getting into, is that correct?
Patrizio Vinciarelli
Yes. So, let me answer it this way.
We are seeing more diversification taking place with the classic chips, but to be clear, the market opportunity for chips is far, far larger than the first generation of V*I Chip products. And the reason why that is discussed early is to do with the fact that we are raising the bar substantially by in the case of power density a significant multiple, while increasing efficiency and reducing the cents per watt, which is a key figure in terms of penetrating cost-sensitive applications.
So, the combined effect of a remarkable increase in power density and increasing efficiency and a remarkable decrease in cents per watt as you might imagine that the right mix in terms of opening up much higher volume, cost-sensitive opportunities that they are still dependent for comparative reasons on performance advantage.
John Dillon - DB Capital
Yes, that sounds pretty good, because I think from before, you have always had a performance advantage, but you never really had the cents per watt and it sounds like now you did better performance, better density, and a better cents per watt, is that correct?
Patrizio Vinciarelli
Well, I think the answer to that question needs to be carefully structured. As you might imagine, our cost structure is very much a function, which particular function we are delivering.
So, as suggested by the various names, PFMs, DCMs, BCMs, and so on and so forth. Each of these different types of devices perform different functions, and depending on the type of device, the cents per watt figure made can be dramatically different, but I think it’s appropriate to say that at least for certain categories, our structure is well below industry standards, whereas for other categories is a lot more competitive than it is to be.
John Dillon - DB Capital
That’s great. Good news.
And years ago, you were looking at the flat panel market and the flat panel TV market, I am wondering of the new chip technology and the cents per watt coming down, do you have any design wins or is there any interest from that market again?
Patrizio Vinciarelli
There maybe opportunities, too early to say. But let me put it this way, I’ll answer the question more generally for the PFM break that leverages a V*I Chip inside technology, which was introduced within the last year.
We are seeing a lot of traction with that device in spite of the fact that it being based on a classic first generation V*I Chip, it doesn’t have the best or the most cost effective cost structure or cost card. With the eminent deployment of the chip base, the PFMs, we are going to be taking the density to a higher level.
We are going to be taking efficiency to a higher level. And most significantly, we are going to take our cost card way down and that will open up a much broader market for AC solutions, including possibly markets, that is the one you referenced, I think they are dependent on very thin low-profile power system solutions.
John Dillon - DB Capital
Excellent. So, congratulations, I’ll get back in the queue.
Thank you.
Operator
Your next question comes from the line of Don McKenna with D.B. McKenna.
Please proceed.
Don McKenna - D.B. McKenna
Hi, guys. Nice to have a positive meeting.
I wanted to ask you Jamie on the number of shares outstanding earnings for calculated on, is that an average for the quarter or is that the actual at the end of the quarter?
Jamie Simms
The average.
Don McKenna - D.B. McKenna
Okay. And just as a kind of a back-of-the-envelope calculation, would I be right in using something in the range of about $57 million as your breakeven point?
And I understand mix will change, but would I be right in the range in there?
Jamie Simms
I’ll jump in the middle of that then let’s not get pinned down. Let’s put this way.
I think, if you give look at where we have been and where we are going, but in terms of thresholds for profitability and bookings and revenue growth trends, I think we can all see the light at the end of this tunnel, and we are all excited about that, but whether it’s going to be $55 million, $57 million, or $59 million, I think it’s the TBD.
Don McKenna - D.B. McKenna
That’s fine. That kind of range I can live with any day.
And the capital expenditures you are planning on the $5 million or so, I assume that’s on the V*I Chip line?
Patrizio Vinciarelli
Specifically, in order to bring about the significant the chip production on capacity.
Don McKenna - D.B. McKenna
Yes. How much of an increase in capacity would that result in?
Patrizio Vinciarelli
I don’t want to put specific number at this point. We are still fine-tuning a plan.
As I mentioned in the prepared remarks, this is going to be two phases. And we might be able in the next conference call to provide the more clearly with respect to capacity by each of the two phases.
But I think it’s fair to say that we are putting in place the capacity needed to support the demand, which over the next year, particularly in the chip front, is expected to be growing significantly to the point to where chip capacity or chip demand will across past the V*I Chip production rates within the next 12 months. So, to say that of course, we are putting in place the capacity necessary to support production rates or chips in excess of post-production rates of V*I Chips.
Don McKenna - D.B. McKenna
And in the existing lines, that we are also far below capacity at this point, aren’t they?
Patrizio Vinciarelli
Well, obviously, they comeback somewhat from being at extremely depressed level that there is still capacity to be had there on those lines, yes.
Don McKenna - D.B. McKenna
But we should emphasize the capacity isn’t exclusive to one line or the other?
Patrizio Vinciarelli
Well, so to Jamie’s point, there is a great deal of commonality with respect to most manufacturing process steps for V*I Chips and ChiPs. Even though ChiPs, because of the unique packaging technology have certain processing steps that require additional equipment, but we are obviously looking to reuse and recycle all of the equipment that we have as the mix shifts from being dominated by first generation V*I Chips to being dominated by ChiPs in years to come.
Don McKenna - D.B. McKenna
Okay. Well, I am glad I wasn’t able to participate in the last call, because in the back of my mind I did have a question that I was going to ask you, Patrizio and that was which of us was the more delusional, me in my continued faith or you and obviously that’s not a question that needs to be answered at this point in time.
Congratulations on the nice quarter.
Jamie Simms
But rhetorically asked.
Patrizio Vinciarelli
Well, let’s hope so. Thank you.
Operator
Your next question comes from the line of (John Dillon with DB Capital). Please proceed.
John Dillon - DB Capital
I have three today. I have the same question as Jim there, but I wanted to make sure I understood your answer.
What I think I heard was you’re expecting to build capacity for the new ChiP technology that will exceed the V*I Chip capacity, is that what I heard?
Patrizio Vinciarelli
Yes, we’re going to be installing chip capacity through the first two phases of capacity expansion to support volumes of chips that are going to cross over the V*I Chip run rate within the next 12 months.
John Dillon - DB Capital
Wow, that looks pretty significant. I mean you’re at the height of your V*I Chips, you are doing about $50 million, $60 million of V*I Chips and so this will be greater capacity than that?
Patrizio Vinciarelli
Let’s not get that specific and obviously the comment I make here refers to the run rate of V*I Chip, not of the peak of past capacity, but as we saw over the next 12 months.
John Dillon - DB Capital
Okay, okay, I get you.
Patrizio Vinciarelli
Over the next 12 months is a progressive transition with chips in effect taking over. We’re still getting, as suggested earlier in the discussion, we’re still getting new opportunities and new design wins for the old first generation chips.
Those are not going to go away. But I suggested earlier that performance cost metrics don’t create nearly the level of market opportunity that chips represent.
And so we’re going to be seeing a transition to chip-based solutions that will get to a level of significance towards the middle of next year with chips overtaking the run rate of V*I Chips.
John Dillon - DB Capital
Okay, great. And back to the (indiscernible) increase in activity and design wins in the computers, it seemed like mostly the V*I Chips were really seen as the high-end computers and the people looking for the performance.
That’s where you seem to be successful and what I think now is that you’re broadening your market, it’s been getting into more commodity computers, is that correct?
Patrizio Vinciarelli
We are...
Jamie Simms
Not commodity computers.
Patrizio Vinciarelli
Yes. So, let me answer it this way.
We are, as suggested earlier, with ChiP Technology enabling much more cost-effective applications. And when I say much more cost-effective to quantify it, depending on the application of the particular function, the cost per watt could be half, or potentially even less than half of a solution implemented using first generation V*I Chips.
So, that given market velocity factors can bring about significant opportunity in terms of being able to penetrate a more cost sensitive applications.
John Dillon - DB Capital
Okay, so, not commodity computers, but more the high-end computers but not the highest like you were in before?
Patrizio Vinciarelli
So, let me put it this way. Another way to approach this is in terms as we discussed in the past, differentiating between let’s say the end processors on the one hand which could be characterized as you know particular niche within the market and Intel processors which needless to say are mainstream.
So, we are already – and we’ve been for a few months in production for applications involving the current generation Intel processors, we expect to be, it used to come expanding our reach into future generations of Intel processors which needless to say, go into applications that are much more cost sensitive than we’ve been able to address in the past with V*I Chips.
John Dillon - DB Capital
That’s great. That’s good news.
Thank you very much.
Operator
Your next question comes from the line of Jim Bartlett with Vicor (sic) Bartlett Investors. Please proceed.
Jim Bartlett - Bartlett Investors
Yes, could you give us some guidance or help in looking at the run rate for both the R&D line and the SG&A line going forward, you highlighted some $800,000 I believe of special expenses that were in the SG&A line this quarter. What does it look on sort of steady operating base going forward in the third and fourth quarter?
Patrizio Vinciarelli
Well, what are you specifically – are you looking for a percentage or a number?
Jim Bartlett - Bartlett Investors
No, no, just from the current dollar level in the second quarter, should we be looking for increases in the SG&A line going forward of the significant amount or?
Patrizio Vinciarelli
We are hoping that the third quarter will be free of unusual or non-recurring charges or accruals, and as such, we are anticipating a decrease in our OpEx on an absolute basis.
Jim Bartlett - Bartlett Investors
Because the number would be at roughly $800,000 of special items in the second quarter?
Patrizio Vinciarelli
No, more than that.
Jim Bartlett - Bartlett Investors
With the $800,000 plus what else?
Patrizio Vinciarelli
There were various elements, but let’s put it this way. Setting aside non-recurring charges, which hopefully will be non-recurring.
We anticipate that we will not need for the next few quarters to significantly expand the investment in terms of either the front end of the business or R&D activities as we come into fruition with investment phase that started quite sometime ago. So, as we drive toward profitability and before too long robust profitability, we are going to be managing the operating expanse level, leveraging the investments that we already made.
We don’t anticipate having to hire lots of people or incur operating expenses that have not been with us over the last several quarters.
Jamie Simms
Keep in mind, the story has not changed. We are still very much driven by headcount and the associated compensation.
Jim Bartlett - Bartlett Investors
Right, right.
Jamie Simms
So, when you back out a lot of these unusual charges, whether it be because of these transactions we have undertaken or whether it be for special initiatives, we don’t anticipate any of those for the coming quarters. And as such, you should expect that not only will the absolute dollar amount fall, but we are also being far more attentive, or let’s just put it, we are being very attentive to expenses going forward.
Jim Bartlett - Bartlett Investors
And so what were the total value of the special items in SG&A in the second quarter?
Jamie Simms
Well, I mentioned in the discussion that we had...
Jim Bartlett - Bartlett Investors
I got $800,000 there.
Jamie Simms
Adding up...
Jim Bartlett - Bartlett Investors
There were a couple of items that are $800,000, but you are saying it’s more than that. I certainly could have missed that.
Jamie Simms
Well, it’s tough to characterize one type of expense as non-recurring when I don’t want to get in a position, where I am getting into a lot of detail, giving you very specific numbers, Jim.
Jim Bartlett - Bartlett Investors
Okay, fair enough, fair enough. I got a feeling for what’s going on in there.
And could you give me a little better feel, I mean, there is obviously a big bounce back in the future in DigiKey, a better understanding of what the outlook is there going forward?
Patrizio Vinciarelli
Well, we think of that and as fact that with the introduction of Vicor SiPs and ChiPs and the various products that we referenced, which represents a very good match in terms of channel capability that we are going to see a significant growth phase through our channel partners that are very well suited for projecting those kinds of products and more so than, let’s say, classic bricks.
Jim Bartlett - Bartlett Investors
Just a final question, could you tell me what’s happening in the auto sector for you?
Patrizio Vinciarelli
Well, we are continuing to make investments as discussed several times in the past. We don’t view our engagement in the automotive market as representing a short-term revenue opportunity, it’s a longer term revenue opportunity, but it is in the long-term a major market, if not the most significant market.
So, our strategy in the short-term remains focused when it comes to revenue growth on the computing segment, the communications segment. The other segments other than automotive that we referenced were – there is an opportunity to convert excitement with respect to new products into orders on a time scale of typically 12 months.
The corresponding time scale in the automotive space is far longer than that. Even though with the event and growing traction from hybrids and (indiscernible), some of those time scales are getting at least with some potential customers to be shorted, then there will be historically in the automotive space at large.
But I think we should all be clear about fact that, that’s not where the action is going to be over the next 18 to 24 months. The action is going to be in computing, communications and some of the other markets that we are in.
Jim Bartlett - Bartlett Investors
And finally, could you give us update on what’s happening in the bus converters space?
Patrizio Vinciarelli
I don’t really have anything significant to say beyond the remarks after the annual meeting which I think you can access through.
Jamie Simms
Yeah. There is an audio cast on the website.
Patrizio Vinciarelli
Nothing much has changed with respect to that. And I think you can get the current assessment of our expectations and position based on listening to that audio.
Jamie Simms
But certainly nothing has changed in the month since we…
Jim Bartlett - Bartlett Investors
Thank you.
Jamie Simms
Any more questions?
Operator
At this time, there are no further questions in the queue.
Patrizio Vinciarelli - Chief Executive Officer
Thanks very much. Talk to you in a few months.