Good day, everyone, and welcome to the Viper earnings results for the 3rd quarter conference call hosted by James Sams, Chief Financial Officer Patricio Vinciarelli, Chief Executive Officer and Phil Davies, Vice President of Sales And Marketing. My name is Annie and Samir Even Manager. I would like to advise all parties that this conference is being recorded. And now, I'd like to hand over to James. Please go ahead, sir.
Thanks, Annie. Good afternoon, everyone, and welcome to Vicor Corporation's earnings call the third quarter ended September 30, 2020. As stated, I'm Jamie Simms, CFO. And with me here in Chusets, our Patricio of NCirelli, CEO and Phil Davies, Vice President of Sales And Marketing. After the markets closed today, we issued a press release summarizing our financial results for the 3 months ended September 30th.
This press release has been posted on the Investor Relations page of our website, www.vicorepower.com. We also filed a Form 8 K today related to the issuance of this press release. I remind listeners this conference call is being recorded and is the copyrighted property of Vicorp Corporation. I also remind you various remarks we make during this call may constitute forward looking statements for 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 potential customers, potential market opportunities, expected events and announcements, and our capacity expansion. As well as management's expectations for sales growth, spending, profitability, all are forward looking statements involving risks and uncertainties. In light of these risks 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 in or implied by any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2019 Form 10 K, which we filed with the SEC, on February 28, 2020.
Construction project in our Form 10 Q for the second quarter, filed with the SEC on July 31, 2020. Both of these documents are available via the EDGAR system only as of today, Thursday, October 22, 2020. 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 the call. A replay of the call will be available beginning at midnight tonight through November 6, 2020. The replay dial in number is 8 88,286 8,010 followed by the passcode 78,499,292.
This dial in and passcode are also set forth in today's press release. In addition, a webcast replay of today's call, along with a transcript, will be available shortly on the financial performance, after which Patricio, Phil and I will take your questions. As we did last quarter, I'll begin with discussion of Vicor's response to the COVID-nineteen pandemic. Beginning in Q1, Vicor took steps protect the health and seeing social distancing from the onset of the pandemic, we have continuously operated 3 shifts at our andover manufacturing facility. With only a few exceptions, our engineering sales and administrative personnel returned to our andover offices in early Q2.
I refer listeners to our pending Form 10 Q filing, which will set forth updated details regarding our response to the pandemic and the impact it had on our operations. We are monitoring changing circumstances closely and may take additional actions to address COVID 19 risks as they evolve. Because much of the potential influence of COVID 19 is associated with risks outside of our control, we cannot estimate the extent of such influence I'll now turn to consolidated results. As stated in today's press release Vicor recorded total revenue for the third quarter of 78.1 sequentially, reflecting higher shipments of power system solutions for AI acceleration and an increase in demand for our 48 volt direct to CPU solutions. Brick product revenue rose 2.7 percent sequentially as shipments to China and an increase in our custom systems revenue offset continued weakness in North America and Europe.
Shipments to stocking distributors rebounded for the quarter after the COVID related Sports increased as a percentage of total revenue to approximately 73% of the total, reflecting booking trends. For Q3, Advanced Product share of total revenue rose for the 4th consecutive quarter to 39% with Brick Products share correspondingly declining percent of total revenues, given the high growth profiles of segments we are targeting in contrast to the maturity of the segments we serve with Brick Products. Due to the ongoing impact of the pandemic on our supply chain partners, product mix challenges and high tariffs Our gross margin, profit margin percentage for the quarter at 42.7 percent did not improve sequentially despite higher unit volumes. Gross
margin
Total OpEx declined 3.7 percent sequentially, but the Q2 figure included a one time noncash compensation charge $1,200,000 for accelerated recognition of stock option compensation. As such, operating expenses were essentially flat quarter to quarter. The amounts of total equity based compensation expense for Q3 included in cost of goods, SG And A And R&D were approximately $296,846,498,000, respectively, totaling $1,640,000. We recorded operating income of $6,100,000, representing an operating margin of 7.8%. Turning to income taxes, we recorded a net provision for Q3 of $651,000, representing an effective tax rate of 10% which is in line with our expectations for the full year.
Net income attributable to Vicor for Q3 totaled $5,800,000. GAAP earnings per share was $0.13 based on a fully diluted share count of $43,743,000 shares which includes $1,579,000 exercisable options. Turning to our cash flow and balance sheet, Cash and equivalents totaled $203,600,000, a sequential increase of 3.5%. Accounts receivable net of reserves totaled $41,100,000 at quarter end, down 7.4000000 dollars or 15%. With DSOs for trade receivables at 38 days, down from the prior quarter's 45 days, a level reflecting payment delays due to the pandemic in the prior sequentially to $58,200,000 as we further increase raw materials in support of our outlook for increasing production.
Annualized turns remained at 2.8. Operating cash flow totaled $11,600,000, reflecting a favorable swing in working capital. Capital expenditures for Q3 totaled 8,100,000, representing the value of equipment placed in service during the period. At quarter end, we had construction and progress balance of approximately $13,000,000 and a total of $76,000,000 of approved capital projects. Our factory expansion is progressing on schedule as evidenced by the level of approved projects and the construction activity.
I'll now address bookings and backlog. Q3 bookings totaled $90,500,000, a 3.4% sequential increase. The overall book to bill was 1.16 with advanced products at 1.18 and Brick products at 1.14. Bookings for Advanced Products with Asian Contract Manufacturers were robust. And notably so, for Taiwan, excuse me, Taiwan E's CMs, benefiting from the transfer of programs from Mainland China.
Demand for Brick Products in China was sustained reflecting the sharp recovery of Chinese industry. North American bookings recovered after 2 consecutive quarters of decline with balanced order flow across both advanced and Brick products. Conditions in Europe remain uncertain. At quarter end, 1 year backlog totaled $140,000,000, an increase of 9.8 sequentially. Only a small portion of this backlog consists of orders rescheduled from Q2 into Q4.
Turning to the outlook for the fourth quarter, we expect continued revenue growth given our backlog and production outlook. We are making progress in addressing the sources of past gross margin pressure and are forecasting improvement in product level profitability. Further, we do not anticipate any meaningful increases in operating expenses. As such, as shown this quarter, We expect incremental profitability to Patricio, Phil and I will take your questions. I ask that you limit yourselves to one question and 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. Annie?
Thank you so you. And you will be advised when to ask Thank you. The first question is coming from Richard Shannon. Please go ahead sir.
Thank you everyone for taking my questions here. Maybe I'll address the bookings commentary. I think you said there were some increasing breadth within bookings for Advanced Products. Maybe you could help us understand where that's coming from and categorized by source like HPC CREI Accelerator or hyperscale or however you'd like to detail it, but love to understand the extent of that breadth.
So, Richard, hi, it's Phil. So, so the increase in bookings on Advanced Products came across the market segments actually that you mentioned So we started to see, bookings start to begin now for our HPC customers here in North America. They've been delayed by the COVID virus, but that's really starting to pick up. So we got some bookings, in Q3 for those new programs. We expect that to ramp in terms of bookings numbers for Q4.
And beyond. And then, on the hyperscaler side, hyperscaler customers have been relatively quiet in Q1 and Q2, but came back quite strong in, Q3 for a new high performance intel processor that they were transitioning to. So we had increased bookings there in, in Q3. And then, just, in the GPU, if you like the AI side of the business, we saw increased bookings there as well. So basically across all three market segments that you mentioned in the, sort of, the cloud area, if you like.
Okay. Appreciate that, Phil. And maybe a follow-up for me. Sorry, I've got a cold In terms of gross margins here, we've seen another tick down here and kind of below levels we've seen last year and obviously going through manufacturing transition. Which I assume that the supply chain dynamics is what you're referring to.
Can you help us out in understanding the timeframe by which you expect those supply chain issues to kind of get over with in sunset for good? Is this something that's going to happen this quarter or early next year? Help us understand the time frame to think about there.
So with the mix as well as, by chain issues. Q3 was challenging. We expect Q4 to be less challenging. As and Ps from some of the products are trending up yields are getting better with respect to those advanced products that we're ramping and initially challenge at the start of mass production. So all of those factors play into what we expect to be improving gross margins.
Economies of scale
are also going to be a factor, right? As we get to higher capacity utilization, even before we get to the expanded factory, and the vertical integration in that expanded factory, we're going to see improvements in margins.
Thank you. The next question is coming from John Tanwanteng. Please go ahead, sir.
Hi, guys. Great job on the quarter there and thank you for taking my questions. If you could, I was wondering if you could talk about how bookings are tracking so far in October and where you might think they end up by the end of the year. And if there's a mix component in that as well?
So this is Phil. So the bookings are remaining strong. What we see another good quarter ahead of us, right across the board, basically. I think that, data center AI continues to grow. And, we're also getting some really nice penetration in the mass market with some of our other advanced products that we don't talk about so much.
So I think that, we're not just the one trick pony. It's not data center. We've got a lot of new designs in robotics, in UAVs, in, tricks. So I think, there's a lot of stuff that we've been working on
for a
couple of years that really now starting come through. So I think, I think on the bookings front, I still think Q4 is going to be a good quarter for us.
Great. Thanks for that. And then just as a part of the gross margin issues that you've been having, you've been talking about tariffs a lot. Obviously, there might still be more issues in terms of U. S.
China relations. First of all, can you talk about the ability to call back tariffs that you already paid? Number 1, And number 2, how you're kind of positioning yourself for future tariffs and or regime change if that does happen in the White House in the Senate?
So the cumulative time spent are substantial over
$10,000,000
We expect to be able to claw back, about two thirds of that We have been in queue to get attention. As you can imagine, were not alone with respect to this kind of an issue. The responsiveness with respect to the government agencies to take the money and have to give it back isn't being stellar, but We have seen some progress recently and expect to be getting close to starting to get some more money back. I'm told that once that begins to happen, the rest should flow relatively quickly. Most of the challenge has been, in effect, getting set up with the proper processes, procedures to account for, all of the relevant tariffs that we paid on components.
They ended up being sported outside of the U. S. So that's fundamentally the fraction of total components for which we're entitled to refund. Regarding how we are protecting ourselves from, uncertainties relating to, you know, further tariffs, suggesting earlier, meetings, we have been pursuing alternate sources outside of China have been making good progress, even though it is a challenge that takes time. I think with respect to some of the key components of 1-thirty percent, the most significant items in our bond We're about to see some more significant progress.
I would say that, This is a process not going to come to fruition for probably another year, but, I think some conversion outside of China will begin to bear fruit in the interim. Any as to say, we can't, for cast of what may happen, in general, with respect to the Chinese market, demand there is quite robust. Our products generally speaking don't fall into categories that are subjected to severe importation restrictions. And Phil can tell you a little bit more about that. In the new products that, provide advanced fraud performance are attractive enough and unique enough, in terms of the technical methods.
That, Chinese alternate sources aren't available and they're not going to be available for a long time. So we think we're positioned relatively well given, the general, challenges, uncertainties that part of the world.
Got it. Thank you very much. I'll jump back in queue.
Thank you. The next question is coming from Quinn Bolton.
Hey, guys. Congratulations on the nurse results. First, just maybe a clarification on the Advanced Products. It looks like Advanced Products bookings might have hit a quarterly record. Wondering if you could confirm that.
And then within Advanced Products, as you look into calendar 2021, Can you give us an update on the progress you're making with the vertical power on package opportunity? And then I've got a follow-up. Thank you.
Yes. So we have, I'll take the second part of the question first. And then maybe Phil can give you some comment your first first part of your question. So on vertical power delivery, we're making progress on on three fronts with 3 key customers. GSV vertical power delivery products, represent the very forefront of technology.
They are complex products in In one case, they involve, stacking of two layers of converter stages. In two other cases, they involve the stacking of 3 layers. So our a packaging technology, which is quite unique when it comes to these handles, this vertical power delivery products through manufacturing processes, they entail the separate manufacturing first of each of 2 or 3 layers, they're stacking at the panel level followed by simulation. These developments are inherently complex. I will say this is the most complex implementation of our technology and not surprisingly, we've had some challenges bringing it all together.
But we're getting there. We recently got initial functional yields for triple stacks, which bode well for, not just other people stacks with other customers and applications, but also for the relatively simpler double stacks. So in terms of, production ramp for these products, with a couple of the customers, of the triple stacks, the forecast is for ramps somewhere in the middle of, 21. The third one is a bit more uncertain, but generally speaking, the demands of ASICs as voltage nodes, lithography get finer and voltage nodes get lower and currents get past the 1000 amps, drive this kind of technological development. And we are in a unique position with respect to it.
We were pioneers in developing this technology. We have a multiplicity of patents, both some issues and some pending. 1 actually just recently within the last few days, allowed with additional claims, and, and look forward to having a very strong position in that market.
Quinn, this is Phil. That's a, that was a great question. That keeps me on my toes remembering quarters going by. Actually, if you look back to Q3 of 2018, we had, quite a large advanced product quarter there. And I'm trying to think back to what that was.
And I think it was the ramp of 1 of the big GPU guys. We got a very big order in, in that quarter to set us up. But, but this quarter, we've been, we've been consecutively, you know, climbing on the Advanced Products. So this quarter is only about $4,000,000 or $5,000,000 off that that great quarter we had back there in Q3 2018. So that's going to continue to trend up.
So I think we'll maybe next quarter, we'll get to that. So the last time I had comparable levels,
we did not have the it was a very strong dependency on 1 or 2 unique projects And now we have a more diversified base of applications or customers in complementary portions of the cloud market and I end computing. So both in terms of the makeup of the bookings and the progression, we see it as sustainable. And that's the reason why We anticipate before too long, having Advanced Products costs past the 50% mark, as a percentage of the bookings as a whole, while big products hold their own in their mature markets.
Great. And I guess the follow-up question is, the last couple of quarters, I think your bookings were 87,500,000 to 90,500,000 sequentially, I think in the past, Steve kind of said that bookings lead revenue by 1 to 2 quarters. I'm just wondering if I might be able to put any kind of range for expectations of revenue growth in December? Do you think we could see revenue up 5% to 10%, which would to be sort of supported by the orders you've seen in the June September quarters? Or can you make any further comments about, revenue expectations in December?
Thank you.
Yes, I would say that without getting pinned down too specifically at times where we still get to worry about COVID and all kinds of unpredictabilities that I think a reasonable expectation would be for step up in revenues on a percentage basis, commensurate with what happened in the last quarter. The bookings more than support that to your point, the lead, the revenues And the book of bill has been very strong. I think in the past quarter, it was 1.106, right? So we see bookings this quarter being higher than the prior quarter and we see revenues stepping up to catch up with the bookings.
Thank you. The last question is coming from Hamed Khashand. Please go ahead.
Hi. I just wanted to talk a little bit more about the gross margin. In last quarter, you were talking about the an efficiencies were diminishing. Were there new challenges that you saw this in Q3? Or was this in the gross margin purely reflective of just getting rid of old inventory and then the gross margin start to move up as now better yields going forward?
So I would say that the third quarter was to a significant degree characterized by a major ramp with a program that has a significant multiplicity of different chips. It's not one device. It's a number of different devices. Each presenting their own unique tooling, and process requirements that are not all the same. And each involving, outside processing other partner.
As you may recall from prior discussions, we have embarked on an expansion of the factory to vertically integrate these processes, we're still, 6 to 9 in some instances for a minor portion, maybe 10, 12 months away from that level of integration that is going to shorten cycle time and improve efficiency and avoid some of the bottlenecks that we've had to work around, particularly in Q3. Were not done with those kinds of challenges, but we see that over the next 3 to 6 months, there's going to be significant progress. I mean, part of it is, just getting to a high level of maturity with respect to this individual products that are ramping in very high volume. Part of it is, getting with that to yields in the 90s and the high 90s that are appropriate for mass production devices. And part of it is getting further along with, the production rates of these kinds of products.
Over the last four quarters, we're reviewing some charts this morning. We made major sides. So to some extent, the challenge with margins has had to do with inefficiencies associated with the mix of products. And these are all advanced products, what we call chips or converter housed in package that have plating steps that the La Perfoam, again, through a partner supplier and those have been somewhat painful from, the cost perspective. But we're making good progress.
There's going to be further progress in Q4. And as we get closer to beginning to benefit from Vertex integration with respect to some of the process steps in particular on Vertex part delivery, in this morning's report, we've heard that as early as the end of April, we're going to be able to install in our expanded facility, the equipment necessary to manufacture BPD products. And that is itself is going to provide a great deal of relief to the operations team that is had serious challenges with my fashionableity and production ramps and unique new products.
Thank you. 3 questions just came in. Should I move on to the next one? Thank you. So the next one is coming from Alan Hicks.
Please go ahead.
On the new facility coming up, when do you expect production to begin there? But mid next year?
No, on VPD products, we're going to be in power production with respect, in the second quarter. The equipment is going to be stalled, in April. And we expect to start vertically integrating those processes in towards the end of Q2. Okay.
So a new facility will be producing in Q2 of next year?
Well, I think that's where the vertical power delivery products will, will start as a timeframe in which they're going start. And as I suggested, answering an earlier question, that's where the rational team has had guess challenge is working remotely with a faraway partner. Right, particularly in the time of COVID where the Vina variety of issues, particularly at the partner. So the second quarter activity isn't going to amount to, I think in terms of number of units of revenue, it's going to be power production in our own facility with VPD products So leading the way by the third quarter for, mass production for other products, what you might view as more mundane chips, still involving planting steps, but on a single layer as opposed to involving 2 or 3 layers.
Okay. Then how quickly do you expect that to improve gross margins once it gets up and running?
So, typically, we expect to see a significant uptick in margins this quarter and then another one next quarter was we're now waiting for vertical integration and new facility to bring about, relief on the margin front. I think variety of initiatives starting with much better yields that we are now getting and involve again, greater utilization of our capacity, amortization of these costs. That's having an impact. I think what we saw in the third quarter where margins were essentially the same, slightly lower than the prior quarter was the bottom, and I expect to see an upward trend that will be significant starting this quarter and become more significant as we get to, leverage, the efficiencies of vertical integration with respect to our very advanced package issues.
The next Fon is coming from Gus Richard. Please go ahead.
Yes, thanks for taking the question. I just want to understand on the Advanced Products, is that a high mix low volume or is it still, dominated by a couple of customers? And sort of the follow on to this is how much customization is required for each customer and implementation? Are there some standard products Or is it a unique process flow for each customer?
Yes, those are very good questions. So there is considerable number of different devices that are involved, as I suggested, earlier, both in some instances with one customer and one application and across the multiplicity of customers and applications. As you might have heard from prior discussions, the packaging technology, if forwards a great deal of scalability and configurability. Now we've leveraged historically that to be able to support, unique requirements. And more and more, we are focusing with further advances in the technology, particularly with the structure of our current multiplier sale, getting more advanced and more dense and more efficient.
We're looking to leverage that through a, in array or standard product offerings that leverage the cell methodology were, in effect, instead of engineering a dock, a device for an application, we deploy the multiplicity of cells that best suit that application. And both from electrical engineering perspective, from a design, from a testament of dollar, from the operational perspective, active in terms of the types of components to be used. And in particular, in terms of builds the materials and a multiplicity of components to be sourced. That brings about scalability and efficiency that, again, will play into improved margins. And facilitate giving customers the range of capabilities they need without burdening our operational teams with, 2 complex mix of products.
As you might have heard me say in the past, chips are made in panels. And one of our greatest abilities. And this is a very proprietary aspect of our technology that brings to power converters the economies of scale and scalability and flexibility of semiconductor wafer processing, is that just as with some of our conductor chips that are made on a certain wafer size, with a certain set of processes and might involve depending on the particular requirement a larger, smaller multiplicity of, smaller or larger chip within the wafer. Likewise, with our converters housed in package in a panel, or in case of vertical power delivery, a multiplicity of 2 or 3 stacked panels, we have a consistent process flow where these devices are made, depending on their size, in a different multiplicity. But using the same power methodology.
So they go through the same process steps and On that basis, we can manufacture, let's say, a converter for a 50 kilowatt automotive application on a panel just as well as we can manufacture on a panel going through the same process steps a multiplicity of 50 or 60, relatively low power, much smaller devices. To some degree, there is a complexity to the packaging technology and and what it implies throughout the enterprise, from the engineering to the operational level. But in other ways, there is the enhanced scalability that we have, kaido from the precedent of Semiconductor Fads in Semiconductor Wafer Process And as we get further along with respect to, scale and number of panels, we process per week, and then Ambev has been rapidly escalating, the more efficient we're going to be, again, we're getting yields now in the 90s with products that are in mass production. And, and we're going to be able to enjoy the benefits of flexibility and broad support customer requirements with, scalability and repeatability and predictability business. Say in order to deliver strong financial performance.
I understand. Thank you for that. I appreciate it. And then just in terms of the, in the Advanced Products, has how much is the customer base diversified?
So, I would say that diversification really started about 2 years go. When we started to introduce the lateral power delivery technology, many of the companies that compete with NVIDIA, in the AI space across North America and also in, in Asia. And even in Europe and Israel as well that there are a number of companies there developing some very impressive AI chips. That that diversification started a while ago. And today, we're 10 plus customers, into this and growing.
And, for example, in Asia, we've got a new list of customers of about 8 to 10 new chip ASIC GPU company startups that are working on technologies for that neck of the woods. So so yes, it's been continually growing and, it's just going to be very strong into the future. And then moving to vertical power delivery that Patricio talked about, those companies will transition there eventually as their current levels increase in their products.
Got it. Thank you so much. Thank
you. The next one is coming from John Dillon Please go ahead.
My question is geared towards Phil and it's on autos. And Phil, I'm just wondering, are you shipping any small production runs to some specialized auto companies currently And then how many different companies do you have engineering engagements with? And how many do you have design wins with?
Good question. So we're not shipping, production units yet to the big automobile industry. We have some niche plays off of that in different types of markets. But In terms of that particular activity, we've seen continued success. So we have, 3 engagements right now with 3 major companies around the world, 1 in Japan, 1 in Europe, and 1 in North America.
And we're engaged with 8 others on putting together proposals, for, products that are, going to be required and Aviso talked a lot about scalability. This is the big advantage of a modular power component methodology where we can attack power levels in different vehicle platforms with the same component. So we're working with different car companies on doing that. But we're at the A sample stage. We're actually a good question.
We didn't ship production, but we did ship our first A samples to 3 those 3 customers. And, that's just still a very exciting story for us, John. So we're still
2 years away from
Yes, no, I know it's a way to weigh. Do you have any real design wins or are these the design wins in you're talking about? Or let me see engagement. Is there any?
Yes, we have 3 wins, John. That's significant.
And, we've got about, as I said, 7 or 8 in the pipeline that we're actively working now. Yes, there's more coming this quarter, what after that. And this company is parting company with substantial NREs in order to get chips to their requirements. And thus far, they've been extremely impressed with are well. Our prototypes have performed in their system.
So we have 1 European customer that has assembled system with tens of kilowatts of power capability. They're extremely impressed with, the ability to configure an array of our models to support those kinds of power requirements. With, great efficiency, it's seen power density. It takes a lot of weight will take our weight out of the vehicle, both by reducing the volume and weight of the power converter, but also importantly by removing the need for battery systems because with our products and we have IP on this, it's possible to fundamentally eliminate duplicate battery systems because the converters, the traits that are necessary to enable that. But in terms of, in sliding across safety boundaries, and doing so with the requisite speed, with the bandwidth, and, the photons that allows a battery system to be eliminated.
I mean, fundamentally in a vehicle, there's only a need for in energy storage, up to one node, wherever it needs to be most efficient. And with our bus converters, from that battery node, you can generate derivative voltages deceive them efficiently throughout the vehicle in a safe manner, thus simplifying what is otherwise a very complex landscape. And in the process of doing that, you can also get rid of, heavy wiring that takes up, volume and weight, particularly on legacy 12 volt systems.
That's a great answer. It's really exciting. The follow on would be, I understand that you gen 4 front ends would be using autos, but also another application. So I'm just wondering how the Gen 4 financials are coming along.
It's coming along quite well. We have, actually, we got a controller that we developed. It's fully functional. We have, powered up the power stages. We have a lead customer in the very high end computing realm where we've been supplying a 1st generation of MCT, MCM type solutions.
It actually happens to be a vertical power delivery system. But implemented within effect lateral power delivery components. For that customer, we are developing and we we get 1st functional units of a TIPO stack DCM to, in effect, double the current capability for each of the radicals of a large multiplicity of radicals across a wafer. And for that same customer, we've been developing a front end, which in increments of 20 kilowatts would provide a much more compact efficient and flexible front end power system. So we expect to ship initial samples of that front end, which is a 4G front end using a proprietary topologies and power system technology, towards the end of Q1.
That sounds great. Really good stuff. Really good answer. It's really congratulations, Scott. This looks really good.
Thank you.
Thank you.
We have one more question on the line. This is the last one. Is coming from Richard Shannon. Please go ahead.
Thanks guys.
Just one question for me. Again, on the topic of gross margin, based on the last answers, we're kind of looking at kind of a 2 stage gross margin improvement cycle here over the next several quarters. One being, more mix of manufacturing than we get in the new equipment and the new fab here. I guess, I wonder if you could quantify them agreed to, which we'd see where we'd see gross margins without the, the kind of the supply chain issues that we see today. We look at the model here, we've got gross margins last year at 46, 47, 48 range and now we're down to 42s.
Would we be in that 46, 48 range without these issues, or can you help us just kind of stand where we'd be without those?
So even before we get to the new factory, inverting integration, And the benefits that will bring in terms of manufacturing efficiencies, we see an opportunity for several points of margin improvement resulting from the the factors that were described earlier. First of all, major improvement in yields, like 10 of percentage points on yields for Advanced Products as they transition from early production to more stable, more advanced production rates. So that's a contributing factor. AS and Ps have been going up. That's a factor.
So before we get to the new wing at Federal Street, the new equipment. And needless to say, we should point out the new equipment, will need to get depreciated, right? So that's something that needs to be taken into account, but we keep close track of, how each process step and equipment that's deposited in new factory, factors into the cost, our cost per panel, which is again, the the counterpart of wafer processing. And we see very favorable trade offs there, meaning that With Vertu integration, we're going to be able not only to make a life or the life of our folks in operation, a lot easier, but we're going to see for many of the process steps in reduction in cost per panel. So Let's save in effect those opportunities for later, because as discussed earlier, they're not really going to come about until Q3 of next year.
And I wouldn't expect that in the first quarter production, in the new facility, we're going to have instant economies, right? We should all assume that there are 2 that is going to be an initial phase where it would still be for a little while inefficient. But leading up to that, in this quarter and the next couple of quarters as we're still dependent on outside sources for some of the key process steps there's several points of improvement in margin that are, I would say, low hanging fruits. That we believe we would capture starting this quarter.
Okay, great. Thanks for that detail. That's all for me.
Just one final comment. I think it's good to look at this at the margin opportunity as, comprising 2 phases. Right. There's a phase between now and about this time next year, and then there's another phase after that. And thanks very much.
We'll be talking to you in
call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.