Good day, welcome everyone to the Vicor earnings results for the fourth quarter and year-ended December 31st, 2019, hosted by Dr. Patrizio Vinciarelli, CEO of Vicor, and James Simms, CFO of Vicor. My name is Tommy, and I am your event manager. During the presentation, your lines will remain on listen only. If you require assistance at any time, please press star zero on your telephone, and a coordinator will be happy to assist you. I would like to advise all parties, this conference is being recorded for replay purposes. Now I'd like to hand over to James Simms. Please go ahead, sir.
Thank you, Tommy. Good afternoon, everyone, and welcome to Vicor Corporation's earnings call for the fourth quarter and the full year ended 12/31. I'm James Simms, CFO, and with me here in Andover are Patrizio Vinciarelli, CEO, and Phil Davies, Worldwide Head of Global Sales and Marketing. After the markets closed today, we issued a press release summarizing our financial results for the three months and 12 months ended December 31st. 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, planned capacity expansion, as well as management's expectations for sales growth, spending, and profitability, are all 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 2018 Form 10-K, which we filed with the SEC on February 28th, 2019.
We expect to file our 2019 Form 10-K this week, ahead of the SEC's March 2nd deadline. A refreshed discussion of these risks and uncertainties that we face will be presented therein. Please note the information provided during this conference call is accurate only as of today, Tuesday, February 25th, 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 today's call will be available beginning at midnight tonight through March 11th, 2020. The replay dial-in number is 888-286-8010, followed by the passcode 90154129. 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 will start this afternoon's discussion with a review of our financial performance. Phil will address current market circumstances and our outlook, and after closing remarks by Patrizio, we will take your questions. Beginning with consolidated results, as stated in today's press release, Vicor recorded total revenue for the fourth quarter of $63.1 million, down sequentially 10.8% from the third quarter figure of $70.8 million and down 14.4% from the fourth quarter 2018 figure of $73.7 million. Revenue for 2019 totaled $263 million, a decline of 9.7% from the $291 million recorded for 2018. 2019's year-over-year revenue decline primarily reflected for advanced products, reduced shipments into data center applications, and for brick products, the influence on demand from Chinese customers of import tariffs placed on our products.
In aggregate, our annual shipments to China and Hong Kong declined from approximately 38% of our total revenue in 2018 to 22% of total revenue for 2019. Japanese revenue, the sum of distribution and VJCL sales, declined 29% year-over-year, reflecting the significant economic weakening of the second half of 2019. To address the Japanese market, during the year, we repositioned our majority-owned subsidiary, VJCL, to focus on custom and configurable products for the Japanese market. We also established a support office in Tokyo with new hires focusing on promising opportunities in automotive and supercomputing. All sales of brick products and advanced products in Japan are now through new distribution partners, which are well-positioned to broaden our penetration of the world's third-largest economy. North American revenue expanded 9.3% year-over-year, with sales through industrial distribution rising, complemented by increased defense electronics volumes consisting of higher shipments of both brick and advanced products.
European revenue rose 3% for the year, reflecting improved conditions in certain industrial segments on the continent, offset by ongoing weakness in U.K. demand. For the fourth quarter, the same conditions influencing our full year performance were at play. Conditions in China continue to have the most significant influence on our performance. Our exports to China and Hong Kong declined approximately 20% sequentially for the fourth quarter, as the 2019 expansion of trade restrictions by the U.S. government, including the prohibition of sales to certain Chinese customers in supercomputing, data center, and aerospace, reduced both bookings and shipments for the quarter. Revenue through Hong Kong distribution declined sequentially approximately 10% due to further slowing of the Chinese economy and reduced demand across industrial segments owing to the 20% tariffs applied to our products by the Chinese government.
As was the case for the full year, for the fourth quarter, brick product revenue increased slightly as higher domestic distribution, higher domestic defense electronic shipments, and an unexpected level of domestic turns volume offset declines in brick product shipments to China. However, advanced products revenue declined by 33% sequentially, driven by three events. Our forecast for Q4 2019 had included shipments to an important hyperscale customer. This customer subsequently rescheduled deliveries, which are now set to ramp in April. We also experienced customer rescheduling of the start of a program in commercial satellites. Production is now scheduled for that program for mid-year. The final contributor to lower advanced products revenue was the delayed shipment of certain pre-production volumes brought about by a supply chain bottleneck. We believe we have successfully addressed this bottleneck ahead of upcoming production ramps.
For the fourth quarter, the brick-to-advanced revenue split was 74% to 26%, in contrast to the split of 66/34 for the third quarter. International revenue declined 24% sequentially, essentially giving back the 28% increase recorded for the third quarter, with the decline largely tied to the Q3 relaunch of a hyperscaler server program and the aforementioned Q4 rescheduling of deliveries for that program. As a percentage of total revenue for the fourth quarter, international declined to 50% from the prior quarter's 58%. For the full year, international revenue represented 54% of total revenue, in contrast to 62% for 2018. Consolidated gross margin as a percentage of revenue for the full year was 46.8%, down slightly from the prior year's 47.7%. For the fourth quarter, gross margin was 47.1%, an increase sequentially from 46.6%. Through the year and the fourth quarter, our operational metrics have improved.
However, we recorded charges of over $1 million in Q4 associated with the aforementioned supply chain bottleneck. High inbound tariffs continue to impact gross margin as we incurred $1.3 million of tariffs for Q4. U.S. Customs is backed up with high volumes of applicants for the duty drawback program. We have yet to recover any amounts of tariffs paid to date. The total amount of Section 301 tariff paid since implementation exceeds $5.6 million. We anticipate more than half of this amount will be eligible for drawback. We continue to evaluate suppliers that would not subject us to Section 301 import tariffs. Certain vendors are nearing completion of their efforts to move production out of China. We hope to see lower imports subject to tariffs through the year. I'll now turn to operating expenses.
For the year, total OpEx rose 2.5%, exclusive of the $402,000 severance charges we recorded in 2018, with the majority of the increase occurring in the fourth quarter, reflecting for the year spending discipline and the headcount-related nature of our spend. For 2019, our full-time headcount increased by 17, or 1.7%, to 993, with 14 of these new hires occurring in the fourth quarter of the year. For the fourth quarter, OpEx increased 7.1% sequentially, largely due to an increase in project-specific prototyping charges. Full year and fourth quarter operating income reflected lower revenue. Full year operating margin declined to 5.3% from the prior year's 11.1%, while Q4 operating margin fell sequentially to 1.4% from 8.6%. Turning to income taxes, we recorded a small net benefit for Q4 to bring our full-year effective tax rate to 5.2%.
Net income attributable to Vicor totaled $14.1 million for 2019, a decline of 56% for the year. The Q4 figure was $1.3 million, representing a sequential decline of 78%. Fully diluted GAAP EPS for the fourth quarter was $0.03 on a diluted share count of 42,404,000 shares. This is in contrast to Q3 net income of $5.9 million, which represented fully diluted GAAP EPS of $0.14. Turning to our balance sheet, cash and cash equivalents sequentially rose to $84.7 million. Accounts receivable, net of reserves, totaled $38.1 million at year-end, down sequentially 4.7%, with DSOs for trade receivables steady at 45 days. All balances are current. Inventories net of reserves decreased 1% sequentially to $49.2 million, with another sequential decline in finished goods. Annualized turns remained at three. Capital expenditures for Q4 totaled $3.4 million, an increase of 3% sequentially.
Now turning to our planned expansion, we closed on the acquisition of land adjacent to our Andover plant in December. Mother Nature is now our primary gating variable, we plan to begin construction in April and complete an expansion of our Federal Street factory by 90,000 sq ft, going from 250,000 sq ft to 340,000 sq ft by year-end. As stated before, we anticipate internally funding both the construction and the multiple phases of planned equipment installation. I'll now address backlog and bookings. At year-end, one-year backlog was over $104 million, an increase of almost 16% sequentially, reflecting a 27% sequential increase in bookings for the quarter. New advanced products orders essentially doubled for the quarter, while brick product orders were flat. New advanced product orders reflected activity in the data center space and a notable increase in orders for commercial lighting applications.
Brick products orders reflected the circumstances seen in our revenue. China and Hong Kong continued their decline, while domestic activity was steady. Turning to our outlook for the first quarter of 2020, subject to the impact of the coronavirus outbreak, we anticipate limited progress in revenues for Q1 ahead of anticipated increases starting in Q2 as shipments for AI accelerators and data center servers start to ramp. With that, I'll turn the call over to Phil, who will provide insights into market conditions and our positioning in those markets.
Well, thank you, Jamie, and good afternoon to everyone. As Jamie just discussed, 2019 was a challenging year for us, particularly in our China market, with the tariff situation and potentially important customers there who ended up on the Department of Commerce's denied parties list. We also faced an over-inventory situation and pushouts with our data center customers, plus reduced spending in the semiconductor test equipment market. We did, however, see growth in North America and Europe with both our brick products and advanced products, and our global distributors grew at a combined 22% year-on-year. We remain enthusiastic about our 2020 prospects in AI acceleration, supercomputing, and data center service, given design wins, an expanding product offering, including Power-on-Package solutions, and an ever-broadening customer list.
Customer interest in Factorized Power solutions for the 48-volt variant of the Open Accelerator Module, or as it's commonly called, the OAM, a design put forth by the Open Compute Project, is high. We are working with GPU and ASIC developers on OAM solutions. If listeners are attending the Open Compute Summit in California in early March, you'll see companies there demonstrating new 48-volt-based OAM accelerator mezzanine cards. There are two power levels for these cards, and the lower power versions use our 48 volt to 12 volt and 12 to 48- volt modules. The 12 to 48- volt modules enable these AI cards to be backwards compatible with data center customers who are still using 12-volt power delivery networks. The higher power cards use our LPD, or lateral power delivery, 48 volt to load Factorized Power solutions.
Looking forward, demand for much higher AI processor performance requires much higher current, which is bringing new customers, both very large and small, such as new startups, to our VPD, or vertical power delivery, as the enabling solution to their current density needs. Some of these startups have already been acquired by larger companies, which is good for us. They all add up as design wins in the data center and AI processor market for next-generation devices that require greater than 600 amps. These projects are expected to ramp in late 2020 through to 2022. In the last quarter, we also engaged with cloud networking companies and network processor suppliers who are facing the same power delivery challenges as the cloud computing and AI processor companies.
We are starting to see current requirements in these applications approach 1,000 amps, and we are engaged on VPD, vertical power delivery solutions, for this new cloud networking market, which will provide significant new opportunities while leveraging capabilities already in place for the AI market. More to come on this in future updates. We continue making progress with design wins for advanced products in other growth markets, as evidenced by the high-power video display project mentioned by Jamie, which we were awarded in Q4. Our unmatched efficiency and density are ideal for such large-scale implementations. The Q4 award is for a 20 MW installation that will be one of the world's largest LED displays. We will see additional projects similar to this on the horizon.
Back in June of 2019, I had an opportunity to update some of you at our annual shareholders meeting, where I discussed a few of these large growth markets, notably automotive. I'd like to take the opportunity to give you a further update on our progress in automotive, which continues to be very positive. The good news is that the move to 48 volts as the main power delivery network within automotive continues to gain significant momentum. I am pleased to report that we have signed agreements with European and Japanese OEMs for new advanced products that enable power system solutions with unprecedented power conversion density and modular system flexibility for hybrid and full electric vehicles. As is the case in artificial intelligence and supercomputing, automotive designers are turning to Vicor for unmatched performance that, in turn, differentiates the performance of their end products.
The progress we have made in just over a year has been remarkable, and the momentum is building, with two agreements signed in the fourth quarter and more coming this quarter. At our next annual shareholders meeting in June, Patrick Wadden, our VP of Worldwide Automotive Business Development, will be presenting our progress in far more detail. With that, I hand the reins over to Patrizio to make a few closing statements.
I am limiting my remarks today, given a bad cold and cough that may make it even harder to comprehend my voice. I want to repeat a statement from last quarter. Vicor is executing well in the face of challenging conditions and near-term uncertainties, and we're confident the company is well-positioned for long-term growth in very promising markets. We're engaged with parties interested in partnering with us for either technology or market access, with the goal of accelerating expansion of vertical markets with alternate sources. Phil has spoken to the substantial head start we enjoy in AI acceleration and automotive electronics, which are both expected to follow sustained secular growth trends. Jamie mentioned our forthcoming capacity expansion, evidence of confidence in the future. As discussed, booking patterns continue to reflect U.S.-China trade and tariff dynamics, country-specific micro uncertainty, segment-specific demand visibility challenges, and more recently, the coronavirus uncertainty.
Bookings growth in Q4 was expected to set the stage for an upward trend in Q1 with sequentially higher bookings and revenues. Program uncertainties are causing Q1 revenues to be less than earlier forecasted. We have a sizable pipeline of customer programs in AI acceleration, supercomputing, and data center servers. With the sudden supply chain uncertainty brought about by the coronavirus, some large near-term advanced products orders may be delayed until a clear sense of the extent and length of the outbreak is developed. We'll now take your questions. Operator?
Thank you so much. Everyone, your question- and- answer session will now begin. If you wish to ask a question, please press star one on your telephone. If you decide to withdraw your question, simply press star two. All questions will be answered in the order received. You'll be advised when to ask your question. All other lines will remain on listen only. The first question is coming from the line of Quinn Bolton. Quinn, please proceed, you're live on the call now.
Hi, gentlemen. Congratulations on a nice order in the fourth quarter. Obviously, some near-term uncertainty around a number of moving factors, but was hoping you could just clarify your comments again about the orders that pushed out. Did you say that it was a HPC customer or a hyperscale server customer that pushed, I guess, from Q4 to the month of April?
We saw pushouts from a couple of our data center and HPC customers, actually. It was a couple of fairly large companies that we've been dealing with for a couple of years now.
Got it.
Yes.
I guess, the second question, Jamie, you sort of said in your script that you did not expect revenue in the first quarter to advance or some similar term. Wondering if that's effectively sort of you're looking for revenue to be roughly flat, or do you think it actually takes a step down with coronavirus and continued weakness out of the China, Hong Kong part of the business?
I would expect it to be slightly up, but not substantially up, contrary to our expectations. Going back to the question that Phil answered regarding the scheduling. What we are on the verge of with a large customer in the service space is a ramp starting in April. At this point, that's locked in for April. We're also on the verge of what's expected to be a major ramp for a new GPU applications. That's also due to start ramping in the next couple of months. I'm sorry.
No, please continue, Patrizio, I'm sorry.
While there's been some rescheduling with those customers at this point, we have line of sight to ramps that are imminent. We should all be cautious, though, with respect to the potential impact of coronavirus, right? It has a disruptive effect on supply chain. We need to sit tight over the next several weeks to see what actually ends up happening. It's good news over the weekend that the Chinese Government instructed Chinese companies to get back into business. That will help relieve some of the supply chain constraints, we think. Until the dust settles, there's still uncertainty in the near term.
Great. Just last question from me, it sounds like the Q2 ramp and beyond is driven from multiple customers, hyperscale servers, new GPU, the HPC business coming back. Do you now have firm orders on the books for delivery beginning Q2 for those programs? Are you still waiting for some of those orders at this point?
No, we have orders on the books for a lot of the new programs for this coming year. We are in good shape.
Great. Thank you.
More timing there.
Yeah, of course.
Yeah. What's in the books covers the near term.
Yeah.
Including particularly the ramp in the server application starting in April.
The next question is coming from the line of Jon Tanwanteng. Please proceed, you're live on the call.
Good afternoon. This is Brendan on for Jon. I just wanted to ask real quick. I know a lot of customers have moved their supply lines out of China due to tariffs, which caused you to have a little rain delay. Wondering if you've been able to pursue similar strategies in your production at all, and do you see more of that kind of impact looking ahead?
Yeah. We've been pursuing the general strategy of limiting our exposure to Chinese supply because of the ongoing tariffs and other considerations. Unfortunately, these initiatives take time. We're looking forward with some of the key suppliers having established an alternate source outside of China in the first half of this year. The dependency has been lessened, but it's still significant.
Great. Thank you.
The next question is coming from the line of Rich Shannon. Please go ahead, you're live in the call now.
Hi, guys. Thanks for taking my question as well. Let's see, maybe a quick question on the brick business here. If I'm to read the tea leaves right here, is it fair to say that your brick business is getting reasonably good bookings outside of China, but the ones for China are the ones that are seeing some issues?
Yes, that's correct.
Okay. As we look at China going forward, and if I caught the numbers right from Jamie, you had 20% of your sales for 2019, I didn't catch the number exiting the year. In kind of a worst case scenario, when the tariffs and the supply chain issues that you've talked about already continue to be enforced and you can't solve the supply chain problem, do you see a big risk to a lot or most of that China-based business disappearing over time, or do you feel like you can still sustain some of that?
I think it's a complex question to answer. There's a lot of imponderables. In general, our bricks have proven to have a high degree of resiliency to a variety of factors, the passage of time and the recent set of issues. That said, we obviously took a hit with respect to brick business in China last year. Phil, what do you see happening going forward with the brick business in China?
I think that from the tariff point of view, the business has sort of flattened out in terms of that. Actually the overall brick market in China is actually growing as a total market opportunity. It's just that there are local supply now for Chinese-made brick products. The overall market is growing, and our position in that market is still very strong with a very high brand of high quality, high reliability, ruggedness. I still see a good brick business for us going forward for a number of years in the Chinese market.
Yeah. To be clear, the copycat bricks from Chinese makers don't work all that well.
Right
When going up against our 30 or 40 years old bricks.
Yeah.
We are cannibalizing our own bricks with advanced products that perform the brick function in a fraction of the space and with significant performance advantages. Particularly, when we take into consideration the long-term competitive advantage of the advanced product version of an old-fashioned brick, demand in that market is subject to avoidance of excessive governmental interference, should stay strong.
Okay. That's helpful. A couple more questions from me and I'll jump out of line. First of all, last quarter, you got a sense of increasing breadth of your orders, and I'm specifically interested in the advanced products. Maybe if you could provide some context to how that finished the fourth quarter, how you're seeing the first quarter, maybe give us a sense of what you expect in the breadth of this order and sales book by exiting this year.
Exiting the year, we had some very nice orders from some new applications, actually. We mentioned the video, the very large video wall display that we're involved with at the 20 MW level. That was for a new front end, 3-phase AC-DC product to AC to 48 volts. It's our first entry, if you like, into a new AC-to-DC market that is actually four times bigger than the DC-to-DC converter market. It's a market that we have big plans for as we introduce new products through this year. That order came in in the fourth quarter. We've been working on it for a while. We started to see preliminary orders coming in for the launch of these new data center, HPC, and GPU customers.
Early ramps, if you like, in pre-production phases, getting systems in place for their early customers. That came on in fourth quarter as well.
Okay, perfect. One last question from me. I think in your prepared remarks here, Phil, I think it was you were discussing the OAM modules. A, just want to confirm that that's really a market, at least today, that are really serving by your NBMs, B, how many of the announced partners for OAMs, both on the inference and training side, are you working with?
Well, to answer the last question first, we're working with a lot of them. When it comes to 48 volts, the NBM is the densest, highest efficiency product on the market. It's very easy to use, drop-down solution, and pretty much all of the OAM guys going 48 volts to 12 volts are using it. For the 12-volt infrastructure market, where they have to go 12 volts to 48 volts, they're using NBMs there as well. We've got really great penetration with that product. There's a regulated version of that product that's getting great traction out there as well right now. We have high hopes for the 48 volts to 12 volts market, actually.
The regulated version is called the DCM, and customers can choose between fixed ratio and regulated alternatives with somewhat different trade-offs. In both, we have, by far, a superior solution.
Okay, excellent. I appreciate all the detail, guys. That is all the questions from me.
The next question is coming from the line of John Dillon. Please go ahead. Your line in the call.
Hi, guys. Good to hear you. I just wanted to say, it was really nice seeing gross margins go up this quarter, even though your revenue went down. That was nice to see. My questions are more on, first of all, Patrizio, I just want to make sure I understood. The bookings for next quarter, you expect to be up sequentially. Is that what I heard?
No, I didn't say that. We see this quarter bookings being above the revenue level with greater than one book-to-bill. We don't expect it to be this quarter at the level of Q4.
Okay. I misunderstood. Thank you. All right. Let's talk about the backlog for a second. It seems like you have a great backlog, over $100 million in backlog. I'm wondering, is that all scheduled to ship within the year?
Yes.
Yes.
Is there any orders in-house that are scheduled for more than a year out that are not included in the backlog numbers?
There are some, but they are the minimum, so they're not all that significant because generally speaking, customers don't book that far out.
Correct. Okay. Just wasn't sure if some customers kind of, the customers who keep coming back to you would put in some long multi-year orders to get better pricing or something. I didn't know if that was possible or not. For Phil, you talked about some of the ramps that you're seeing. We've seen one hyper data center, Google, who's been taking product from you for quite a while now. I imagine your strategy is to use some of the AI chips to get your foot into the door of the other data centers, the big data centers. I'm just wondering, can you give us a little bit more color on that? Also, is there any visibility as to when another hyper-scale data center will adopt 48 volts on a grand scale across the whole data center?
Okay. there's a lot of, okay.
We'll leave the specific names of customers-
Yeah
out of this, right?
Yeah.
We're talking generalities.
It's safe to say we're working with pretty much all of the data center companies here in the United States across a variety of different applications. Some I've talked about, which is the 48-volt to 12-volt and 12-volt to 48-volt sort of applications. We're working with pretty much all of them on that. With regards to Factorized Power applications, we're working with, again, quite a few of them on their own internal ASIC developments. Those are new engagements that we came on board in Q4, and further ones that we are in the initial stages on, which will come on in Q1, Q2 of this year.
One of them dates back over a year.
Yes
In terms of development.
Yes.
But there have been more recent-
Right
additions.
That's right. Yes. In terms of deployment of large scale 48-volt racks, that is starting and the Open Compute , you'll see a lot more 48-volt at that show this year than you did last year, although last year was very encouraging. You'll start to see, I think, 48 volts in the rack in terms of the power delivery networks, at the big other hyperscalers like Facebook, Amazon, Microsoft, and companies like that. I would think at the 2021, 2022 sort of area. Up until then.
Great
They have to use the 12-volt to 48-volt, and then our 48-volt to load Factorized Power solutions for the AI accelerators that they're going to use.
Because the accelerators have transitioned to 48- volt already.
That's right.
The ones that really matter.
Yeah. We're getting into those data centers, sort of like a Trojan horse strategy, if you like.
You're kind of getting your foot in the door with the AI stuff, but then it sounds like the data center customers are starting to realize that 48 volts can go across the whole data center, and that would be beneficial to them. Is that what I'm hearing?
Yep
The lay of the land?
There's no turning back from 48- volt, either in the data center space, in AI, or for that matter, in automotive . It's coming.
We see the same thing happening in China as well. The China, Alibaba, Baidu, Tencent, they're all actively developing 48-volt racks based on the Scorpio standard, which is their equivalent of the Open Compute.
Great. I'll get back in the queue at this time. Thanks.
The next question is coming from the line of Gus Richard. Please proceed, your line is open.
Yes. Thanks for taking the question. Just quickly on the reschedules that you saw, can you give a little bit more color as to what's driving that? I know one was a comm satellite and the other was hyperscalers. Is there an issue with their facilities, their products? Any color there would be helpful.
No, it was the bring up of new products, new platforms, and they were over inventoried quite a bit on some of the older programs or platforms. They build those out, and then they start working on the next generation microprocessors and GPUs and that was the reason for the push out. The programs are there, they're healthy. They'll come on in Q2.
Got it. On the supply bottlenecks, any additional color there? Is that issues getting magnetics or something else?
Thus far, we've not been impacted on the supply side from coronavirus. We may be impacted if shops in China stay closed. Again, as suggested earlier, it was encouraging to see over the weekend that the mandate from the Chinese leadership is to get back to work. We'll have to see how it plays out. Obviously, if coronavirus turns out to be very serious and the recent reversal in China were to turn the other way around, that could have serious effects with respect to the supply chain. Thus far, we've been able to get, for the most part, the components we need from China. Obviously, the Chinese supply chain was effectively closed over the Chinese New Year, and this year, because of coronavirus, what's usually a one-week shutdown turned into a three-week shutdown. Things are still not really running smoothly.
In anticipation of the usual shutdown, we obviously had buffer materials. We're covered through the next several weeks. We're taking a wait and see attitude and obviously taking steps where possible to make sure that our needs are taken care of.
Got it. Then the last one from me. You're working with a number of ASIC vendors, GPU vendors, et cetera, I'm just trying to understand, most of those customers, is your products required when they move to 7 nm or 5 nm, or is it independent of what process node they are currently running?
It's really more to do with the level of current that they need. Certainly, as you go to 7 nm, the performance is going up, therefore the current's going up, the power's going up. The same at 5 nm. The challenge as they move down those process nodes is that sometimes the operating voltage that they're working at is dropping. Our Factorized Power solution with current multipliers is a fantastic way of going from 48 volts down to, we've got customers as low as 0.35 volts. You can still do that with a Factorized Power solution much easier than you can an IBA multi-phase solution. It's across the board, really, but it really depends on the amount of current.
There's a correlation between the voltage node and the current, because generally speaking, the technology trend of going down to 7 nm and 5 nm is a technology trend that leverages a reduction in voltage, an increase in current capability for comparable to our power dissipation to achieve greater processor performance. To Phil's point, that's also strongly correlated to our solution in that with our solution, and that's unique to our solution, lower voltages and higher currents, the more the merrier. Whereas with so-called competitive alternatives, it's very difficult to average down to a fraction of a volt from bus voltage that is acceptably efficient at distributing power. There's a fundamental conflict between efficient power distribution and the ability to support very low voltages, because the alternative technologies lack the current multiplication function that is our core of Factorized Power.
Got it. Thank you so much.
The next question is coming from the line of John Dillon. Once again, please proceed. You're live in the call.
Hi, guys. Back. Patrizio, I wonder if you can give us an update on the RFM.
We have a 2G RFM, and we're getting very close to the 4G RFM.
We get limited scope of engagement, intentionally so, with the 2G, which is in effect a scouting product. It's intended for really specialty applications as opposed to high volume mainstream applications. That's what the 4G RFM is intended for. We actually recently saw a step-up in interest in at least one 2G RFM application. We're seeing other interests for 4G RFMs. As with the front-end products for which we got a very substantial order late last year, I think the future of generally speaking, RFMs, is very bright for us, very complementary to our point-of-load solutions. They dovetail with each other financially, because customers need to power the systems, typically from AC sources. The 48-volt bus is the intermediate step, which with our technology, brings it all together.
The RFM, in effect, takes the power from the source and delivers it at the 48-volt level, which is safe, it's efficient to distribute, and it's coupled with our current multiplier technology to then be converted directly to 7 nm nodes or 5 nm nodes with very high levels of efficiency. The RFM products with upcoming 4G versions are going to be much higher performance and much more cost-effective than 2G, plays an important role into the overall strategy. I'll make one comment with respect to the strategy. We are the only company that has the breadth of capabilities to address general power system needs with a power component methodology that spans the gamut from 480-volt AC sources all the way to, as Phil was saying earlier, 0.35-volt subthreshold implementations of AI chips. The RFM is a key element of that strategy.
It's, if you will, the jumbo jet that takes the power to an efficient hub, which is 48-volt, on the way to the point of load.
Yeah, it sounds really exciting. When do you expect we would see initial revenue for that, and then when do you expect we would see production revenue for the 4th generation version?
We are actually engaging on 4G RFM developments. We have a controller chip that is due in in about six, seven weeks, and we're going to start powering things up in 4G RFM land in the second quarter.
Excellent.
Platform straight to go with the controller due to arrive in, again, seven or eight weeks.
Production revenue, when do you expect that possibly?
Well, I think that's probably still at least a year away, but we're going to design activity. We already have some design activity taking place as we speak.
Great. The results today kind of begs the question. We've talked about diversification in previous conference calls. I'm just wondering, when do you think we'll have sufficient diversification that we can kind of smooth out the quarterly bumps that we're seeing?
Phil?
Yeah, I think this year is the year to do that. I think if you look at the customer list that we had going back a couple of years, it was one big data center guy, maybe a couple of small ones. Now, if you look at our customer list for this year, it's expanded significantly. I think 2020 is the year to do that, then 2021 with all the new programs coming on with AI, powering AI ASICs, the OAM cards, the 48-volt to 12-volt. I'm very confident about our position in the data center market and the growth that's going to come from that. To your point, smoothing out the bumps that we've gone through the last year and the year before.
Yeah. At the moment, it is still two to three years away.
Yeah
That's going to add a significant component.
Yeah. I'm encouraged also, I mentioned the cloud networking companies that have come to us and have asked us for solutions for 48 volts now and higher current networking processors. That's a new market that parallels very closely the AI and cloud computing space. It's the same challenge, the same problem. We've got exactly the right technology and products for it, and that market is very large.
Are you talking about network processors like the Cavium chip?
No, I'm talking much higher bandwidth than that. I mean, the stuff that is in the back haul of data centers that's really needed to move the data around.
Great. All right, great. Sounds good. Thank you very much. Thank you all.
If there's one more question, we'll take it.
We've got one more question from the line of Quinn Bolton. Please go ahead. You're live in the call.
Yeah. Great. I just wanted to follow up on John's question about the broader adoption in data centers. It sounds like the next 12 months or so is going to be driven by the AI accelerators, the OAM modules, or the NBM, where it's 12-volt to 48-volt or 48-volt to 12-volt. When you talk about broader adoption of 48- volt racks, are you sort of implying that everything on the card or everything in the server would be 48 volts, so that would be including the Intel and AMD CPUs, and so you'd have opportunity for point of load for pretty much every component on the motherboard?
Yes, in terms of the high-performance compute, right? The exascale type computing, that's already 48 volts. We do power AMD processors and high-performance Intel processors on those cards, directly from 48 volts with Factorized Power solutions. In terms of the general, if you like, cloud computing server market, that infrastructure is starting to move over to 48 volts at the big data center companies, because they're moving to add AI capabilities to the cloud. The power and the racks are going up over 20 kW-40 kW. You cannot use 12-volt power delivery networks in the rack for that. That's going to take a year or two to happen, but that infrastructure change is happening and is being supported by OCP with the racks.
Yeah. Last quick one for Jamie, the OpEx ticked up in the fourth quarter. You said some of that was project-specific development charges. How should we be thinking about OpEx in Q1 and for the rest of the year in 2020?
Well, the headcount expansion was essentially a replacement, a truing up over the year. As you saw, the percentage increase was very small. I don't think there's real reason to assume that there's going to be a sustained ramp. The project materials, the prototyping expense was somewhat one-off. That's not to say that we won't be spending a lot on prototyping. It surged a lot just from timing.
Maybe flattish in Q1 from Q4?
Yeah. Not materially more. Again, I emphasize the personnel nature of our OpEx. It's headcount.
Got it. Thank you.
With that, thank you very much. We'll be talking to you in a few months. Have a good day.
Thank you, everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.