Good day, everyone, and welcome to the Vicor Earnings Results for the Q3 conference call hosted by James Simms, Chief Financial Officer, Patrizio Vinciarelli, Chief Executive Officer, and Phil Davies, Vice President of Sales and Marketing. My name is Annie, and I'm your event manager. During the presentation, your lines will remain on listen only. If you require assistance at any time, please key star zero on your device, and an operator will be happy to assist you. I would like to advise all parties that this conference is being recorded. 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 for the Q3 ended September 30, 2020. As stated, I'm James Simms, CFO. With me here in Andover, MA, are Patrizio Vinciarelli, 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 three months ended September 30. This press release has been posted on the investor relations page of our website, www.vicorpower.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 Vicor Corporation. I also remind you various remarks we 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.
Except for historical information contained in this call, the matters discussed on this call, including any statements regarding current and planned products, current and 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 28th, 2020.
We presented certain updated risk factors regarding the COVID-19 pandemic and our current construction project in our Form 10-Q for the Q2, filed with the SEC on July 31st, 2020. Both of these documents are available via the EDGAR system on the SEC's website. Please note the information provided during this conference call is accurate only as of today, Thursday, October 22nd, 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 6th, 2020. The replay dial-in number is 888-286-8010, followed by the passcode 7849-9292. 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 investor relations page of our website. I'll start this afternoon's discussion with a review of our Q3 financial performance, after which Patrizio, Phil, and I will take your questions. As we did last quarter, I'll begin with a discussion of Vicor's response to the COVID-19 pandemic. Beginning in Q1, Vicor took steps to protect the health and safety of our employees following federal and local government guidelines for employee well-being. Using masks and practicing social distancing from the onset of the pandemic, we have continuously operated three 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 has 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 on our financial or operational performance or when such influence might occur. I'll now turn to consolidated results. As stated in today's press release, Vicor recorded total revenue for the Q3 of $78.1 million, up 10.4% from the prior quarter. Advanced products revenue rose 25% 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% 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 decline of Q2. Turns volume declined sequentially. Exports 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 fourth consecutive quarter to 39%, with brick product share correspondingly declining to 61% of total revenue. Our expectation is that advanced product sales will soon cross 50% 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% did not improve sequentially despite higher unit volumes. Gross margin dollars did rise 10% sequentially. I'll now turn to Q3 operating expenses. Total OpEx declined 3.7% sequentially, the Q2 figure included a one-time non-cash compensation charge of $1.2 million 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&A, and R&D were approximately $296,000, $846,000, and $498,000, respectively, totaling $1,640,000. We recorded operating income of $6.1 million, 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 $5.8 million. 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 $203.6 million, a sequential increase of 3.5%. Accounts receivable net of reserves totaled $41.1 million at quarter end, down $7.4 million 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 quarter. All balances are current.
Inventories net of reserves rose 4.6% sequentially to $58.2 million as we further increased raw materials in support of our outlook for increasing production. Annualized turns remained at 2.8. Operating cash flow totaled $11.6 million, reflecting a favorable swing in working capital. Capital expenditures for Q3 totaled $8.1 million, representing the value of equipment placed in service during the period. At quarter end, we had construction in progress balance of approximately $13 million and a total of $76 million 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 $90.5 million, 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 Taiwanese 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 two consecutive quarters of decline with balanced order flow across both advanced and brick products. Conditions in Europe remain uncertain. At quarter end, one year backlog totaled $140 million, 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 Q4 , 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 flow to EPS given the scalability of our operating model. With that, Patrizio, Phil, and I will take your questions. I ask that you limit yourselves to one question and a 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 much, sir. Everyone, questions and answer session now begin. If you wish to ask a question, please press star one on your telephone. If you then decide to withdraw your question, simply key star two. All questions will be answered in the orders receive, and you will be advised when to ask your question. All our lines remain listen and only. Please remember to ask one question and one related follow-up. Thank you. The first question is coming from Richard Shannon. Please go ahead, sir.
Thank you everyone for taking my question too.
Maybe I'll address the bookings commentary. I think you said there was some increasing breadth within bookings for advanced products. Maybe you could help us understand where that's coming from and categorize by source, like HPC or AI accelerator or hyperscaler, however you'd like to detail it, but I'd love to understand the extent of that breadth.
Richard, hi, it's Phil. The increase in bookings on advanced products came across the market segments actually that you mentioned. We started to see bookings start 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. We got some bookings in Q3 for those new programs. We expect that to ramp in terms of bookings numbers for Q4 and beyond. On the hyperscaler side. Hyperscaler customers have been relatively quiet in Q1 and Q2, but came back quite strong in Q3 for a new higher performance Intel processor that they were transitioning to so we had increase bookings there in Q3. Just in the GPU, if you like the AI side of the business, we saw increased bookings there as well.
Basically across all three market segments that you mentioned in the cloud area, if you like.
Okay. Appreciate that, Phil. Maybe a follow-up for me. Sorry, I've got a cold. In terms of gross margins here, we saw another tick down here and kind of below levels that we've seen last year and obviously going through a 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 get over with and sunset for good? Is this something that's going to happen this quarter or early next year? Help us understand the timeframe to think about there.
With mix as well as various supply chain issues, Q3 was challenging. We expect Q4 to be less challenging. ASPs from some of the products are trending up, yields are getting better with respect to those advanced products that were ramping and initially challenged at the start of mass production. All of those factors play into what we expect to be improving gross margins.
Great. Thank you.
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 Jon 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. If there's a mixed component in that as well.
This is Phil. The bookings are remaining strong. 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. I think that we're not just a one-trick pony. It's not just data center. We've got a lot of new design-ins in robotics, in UAVs, and automatic test equipment.
A pony with too many tricks.
That's right. I think there's a lot of stuff that we've been working on for a couple of years that really now is starting to come through. I think on the bookings front, I still think Q4 is going to be a good quarter for us.
Great, thanks for that. 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 claw back tariffs that you've already paid, number one, and number two, how you're positioning yourself for future tariffs and/or regime change if that does happen in the White House and the Senate?
The cumulative tariffs paid are substantial, over $10 million. 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, we're not alone with respect to this kind of an issue. The responsiveness with respect to the government agencies that take the money and have to give it back isn't being stellar. 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 fact getting set up with the proper processes, procedures, to account for all of the relevant tariffs that we paid on components that ended up being exported outside of the U.S.
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 further tariffs, as suggested in earlier meetings, we have been pursuing alternate sources outside of China, have been making good progress even though it is a challenge, it takes time. I think with respect to some of the key components, the 130%, the more significant items in our BOM, we're about to see some more significant progress. I would say that it 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. Needless to say, we can't forecast 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 subject to severe importation restrictions, and Phil can tell you a little bit more about that. The new products that provide advanced power performance are attractive enough and unique enough, in terms of their technical merits, that Chinese alternate sources aren't available, and they're not going to be available for a long time. We think we're positioned relatively well given the general challenges and uncertainties in 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. Please go ahead.
Hey, guys. Congratulations on the nice results. First, just maybe a clarification on the advanced products. Looks like advanced products bookings might have hit a quarterly record. Wondering if you could confirm that. 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? I've got a follow-up. Thank you.
Yeah. I'll take the second part of the question first, and then maybe Phil can give you some comment on the first part of your question. On vertical power delivery, we're making progress on three fronts with three key customers. Generally speaking, vertical power delivery products represent the very forefront of technology. They are complex products. In one case, they involve the stacking of two layers of converter stages. In two other cases, they involve the stacking of three layers. Our packaging technology, which is quite unique when it comes to these, handles these vertical power delivery products through manufacturing processes. They entail the separate manufacturing first of each of two or three layers. They're stacking at the panel level, followed by singular action. These developments are inherently complex.
I would say this is the most complex implementation of our technology, and not surprisingly we've had some challenges bringing it all together. We're getting there. We recently got initial functional yields for triple stacks, which bode well for not just other triple stacks with other customers and applications, but also for the relatively simpler double stacks. 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 2021. The third one is a bit more uncertain, but generally speaking, the demands of ASICs as voltage nodes, lithography get finer, voltage nodes get lower, and currents get past 1,000 amps. These kinds 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 issued and some pending. One actually just recently, within the last few days, allowed with additional claims. I look forward to having a very strong position in that market.
Yeah, Quinn, this is Phil. That was a great question. That keeps me on my toes with remembering quarters gone 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. I think it was the ramp of one of the big GPU guys. We got a very big order in that quarter to set us up. This quarter, we've been consecutively climbing on the advanced products. This quarter is only about $4 million or $5 million off that great quarter we had back there in Q3 2018. That's going to continue to trend up. I think maybe next quarter, we'll get to that.
The last time I had comparable levels, it was a very strong dependency on one or two unique projects. Now we have a more diversified base of applications of customers in complementary portions of the cloud market and AI and computing. Both in terms of the makeup of the bookings and the progression, we see it is sustainable. That's the reason why we anticipate, before too long, having advanced products cross past the 50% mark as a percentage of the bookings as a whole, while big products hold their own in their mature markets.
Great. I guess the follow-up question is, the last couple of quarters, I think your bookings were $87.5 million, then $90.5 million sequential. I think in the past you've kind of said that bookings lead revenue by one to two 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%-10%, which would seem to be sort of supported by the orders you've seen in the June and September quarters? Can you make any further comments about revenue expectations in December? Thank you.
I would say that without getting pinned down too specifically at times where we still got to worry about COVID-19 and all kinds of unpredictabilities, that I think a reasonable expectation would be for a 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, they lead the revenues, and the book of bill has been very strong. I think in the past quarter, it was 1.16, right? We see bookings this quarter being higher than the prior quarter, and we see revenues stepping up to catch up with the bookings.
Great. Thank you.
Thank you. The last question is coming from Hamed Khorsand. Please go ahead.
Hi, I just wanted to talk a little bit more about the gross margin. In the last quarter, you were talking about the inefficiencies were diminishing. Were there new challenges that you saw this in Q3, or was the gross margin purely reflective of just getting rid of old inventory, and then the gross margin starts to move up as now you have better yields going forward?
I would say that the Q3 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. They're not all the same, and each involving outside processing at a 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 six to nine, 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 efficiencies and avoid some of the bottlenecks that we've had to work around, particularly in Q3.
We're not done with those kinds of challenges. We see that over the next three to six months, there's going to be significant progress. Part of it is just getting to a high level of maturity with respect to these 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. Part of it is getting further along with the production rates of these kinds of products. Over the last several quarters, we're reviewing some charts this morning; we made major strides. To some extent, the challenge with margins has had to do with inefficiencies associated with the mix of products. These are all advanced products, what we call CHiPs or Converter housed in Package that have plating steps that are performed, again, through a partner/supplier.
Those have been somewhat painful from the cost perspective. We're making good progress. There's going to be further progress in Q4 and as we get closer to beginning to benefit from vertical integration with respect to some of the process steps, in particular on vertical power 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 VPD products. That in and of itself is going to provide a great deal of relief to the operations team that has had serious challenges with manufacturability and production ramps and unique new products.
Okay, great. That was very helpful. Thank you.
Thank you.
Thank you. Three questions just came in. Should I move on to the next one?
Please.
Thank you. The next one is coming from Alan Hicks. Please go ahead.
Yeah, good afternoon. On the new facility coming up, when do you expect production to begin there? Mid next year?
No. On VPD products, we're going to be in power production, we expect, in the Q2 . The equipment is going to be installed in April, and we expect to start vertically integrating those processes towards the end of Q2.
Okay. A new facility will be producing in Q2 of next year?
Well, I think that's where the vertical power delivery products will start. That's the timeframe in which they're going to start. As I suggested in answering an earlier question, that's where the operational team has had the greatest challenges, working remotely with a faraway partner. Particularly in the time of COVID-19, where there have been a variety of issues, particularly at the partner. The Q2 activity isn't going to amount to significant production either in terms of number of units of revenue. It's going to be power production in our own facility with VPD products. Leading the way by the Q3 for mass production for other products, what you might view as more mundane CHiPs, still involving plating steps, but on a single layer as opposed to involving two or three layers.
Okay. How quickly do you expect that to improve those margins once it gets up and running?
To be clear, we expect to see a significant uptick in margins this quarter and then another one next quarter. In other words, we're now waiting for vertical integration in a new facility to bring about relief on the margin front. I think a variety of initiatives, starting with much better yields that we're now getting and involving, again, greater utilization of our capacity, amortization of these costs, that's having an impact. I think what we saw in the Q3 , where margins were essentially the same, slightly lower than the prior quarter was the bottom. 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 packages.
Okay. Thank you very much.
Thank you.
Thank you. The next one 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? 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?
Yeah, those are very good questions. There is a 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 affords a great deal of scalability and configurability. We've leveraged historically that to be able to support unique requirements. More and more, we are focusing with further advances in the technology, particularly with the structure of our current multiplier cell, getting more advanced and more dense and more efficient. We're looking to leverage that through an array of standard product offerings that leverage the cell methodology, where, in effect, instead of engineering a device for an application, we deploy the multiplicity of cells that best suit that application.
Both from the electrical engineering perspective, from a design, from a test methodology, from the operational perspective in terms of the types of components to be used, and in particular, in terms of the Bills of Materials and the 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 too complex a mix of products.
As you might have heard me say in the past, CHiPs are made in panels, and one of our greatest flexibilities, 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 semiconductor 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 or smaller multiplicity of smaller or larger CHiPs within the wafer. Likewise, with our Converter housed in Package in a panel, or in case of vertical power delivery, a multiplicity of two or three stack 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. They go through the same process steps.
On that basis, we can manufacture, let's say, a converter for a 50 kW 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 what it implies throughout the enterprise, from the engineering to the operational level. In other ways, there is the inherent scalability that we have carried over from the precedent of semiconductor fabs and semiconductor wafer processing. As we get further along with respect to scale and number of panels that we process per week, and that number's been rapidly escalating, the more efficient we're going to be.
We're getting yields now in the 90s with products that are in mass production, and we're going to be able to enjoy the benefits of flexibility and broad support for customer requirements with the scalability and repeatability and predictability that is necessary in order to deliver strong financial performance.
I understand. Thank you for that. I appreciate it. Just in terms of the advanced products, how much is the customer base diversified?
I would say the diversification really started about two years ago, 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 Asia and even in Europe and Israel as well, there are a number of companies there developing some very impressive AI CHiPs. That diversification started a while ago, and today we're at 10+ customers into this and growing. For example, in Asia, we've got a new list of customers of about eight to 10 new chip ASIC GPU company startups that are working on technologies for that neck of the woods. Yeah, it's been continually growing, and it's going to be very strong into the future.
Moving to vertical power delivery that Patrizio 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.
Hey, guys. Congratulations on a great quarter. Really good to see. My question is geared towards Phil. It's on autos. Phil, I'm just wondering, are you shipping any small production runs to some specialized auto companies currently? How many different companies do you have engineering engagements with, and how many do you have design wins with?
Good question. 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. In terms of that particular activity, we've seen continued success. We have three engagements right now with three major companies around the world, one in Japan, one in Europe, and one in North America. We're engaged with eight others on putting together proposals for products that are going to be required, and Patrizio 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. We're working with different car companies on doing that. We're at the A sample stage. Good question, we didn't ship production. We did ship our first A samples to those three customers.
That's just still a very exciting story for us, John.
Great.
So we're still two years away .
Yeah, two years away.
Yeah, I know it's a ways away.
Yeah.
Do you have any real design wins, or are these the design wins that you're talking about?
Yeah.
I'm missing engagements with different.
Yeah, we have three wins, John.
Great.
They're significant. We've got about, as I said, seven or eight in the pipeline that we're actively working now.
Yeah, there's more coming this quarter after that. These companies are parting company with substantial NREs in order to get CHiPs to their requirements. Thus far they've been extremely impressed with how well our prototypes have performed in their system. We have one European customer that has assembled a system with tens of kilowatts of power capability. They're extremely impressed with the ability to configure an array of our modules to support those kinds of power requirements with great efficiency, extreme power density. It will take a lot of 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 have the traits that are necessary in order to enable that, both in terms of sliding across safety boundaries and doing so with the requisite speed, with the bandwidth, and the fault tolerance that allows a battery system to be eliminated. I mean, fundamentally in a vehicle, there's only a need for an energy storage at one node, wherever it needs to be to be most efficient. With our bus converters, from that battery node, you can generate derivative voltages, distribute them efficiently throughout the vehicle in a safe manner, thus simplifying what is otherwise a very complex landscape. 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 your Gen 4 front ends would be used in autos, but also in other applications. I'm just wondering how the Gen 4 front ends are coming along.
It's coming along quite well. 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 AI and computing realm, where we've been supplying a first generation of MCD, MCM type solutions. That actually happens to be vertical power delivery system, but implemented with, in effect, lateral power delivery components. For that customer, we are developing, and we recently got first functional units of a triple stack DCM, to in effect double the current capability, for each of the reticles of a large multiplicity of reticles across a wafer. For that same customer, we've been developing a front end, which in increments of 20 kW, would provide a much more compact, efficient and flexible front-end power system.
We expect to ship initial samples of that front end, which is a 4G front end, using proprietary topologies and power system technology, towards the end of Q1.
That sounds great. Really good stuff. Really good answers. Really, congratulations, guys. This looks really good. Thank you.
Thank you.
Time for one more?
Sure.
Thank you. We have one more question on the line. This is the last one. It is coming from Richard Shannon. Please go ahead.
Thanks, guys. Just one question from me, again, on the topic of gross margins. Based on the last answers, we're kind of looking at kind of a two-stage gross margin improvement cycle here over the next several quarters, one being more mix in manufacturing than we get in the new equipment and the new fab here. I'm wondering if you could quantify the degree to where we'd see gross margins without the supply chain issues that we see today. If we look at the model here, we've got gross margins last year in 46%, 47%, 48% range, and now we're down to 42%. Would we be in that 46%-48% range without these issues? Can you help us just kind of understand where we'd be without those?
Even before we get to the new factory and vertical 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 factors that were described earlier. First of all, major improvement in yields, like tens of percentage points on yields for advanced products as they transition from early production to more stable, more advanced production rates. That's a contributing factor. ASPs have been going up. That's a factor. 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. That's something that needs to be taken into account.
We keep close track of how each process step and equipment that's deployed in the new factory factors into the cost or cost per panel, which is again, the counterpart of wafer processing. We see very favorable trade-offs there, meaning that with vertical integration, we're going to be able not only to make the life of our folks in operation a lot easier, but we're going to see for many of the process steps a reduction in cost per panel. 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. I wouldn't expect that in the Q1 of production in the new facility, we're going to have instant economies, right?
We should all assume that there, too, there is going to be an initial phase where it will still be, for a little while inefficient. Leading up to that, in this quarter and the next several quarters, as we're still dependent on outside sources for some of the key process steps, there is several points of improvement in margin that are, I would say, low-hanging fruits that we believe we will capture starting this quarter.
Okay, great. Thanks for that detail. That's all for me.
To your point, I think it's good.
There are no more questions.
Yeah. Just one final comment. I think it's good to look at the margin opportunity as comprising two phases, right? There's a phase between now and about this time next year, and then there's another phase after that. Thanks very much. We'll be talking to you in February.
Thank you so much, everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.