Hey, very good day, and welcome to the Vicor Earnings Results for the 3rd quarter ended September 2018. I'd also like to advise all parties this conference is being recorded. And now I would like to hand over to your host for today, James Simms, Chief Financial Officer. Please proceed, sir.
Thank you, Mark. Good afternoon, everyone, and welcome to Vicor Corporation's earnings call for the third quarter of 2018. I'm Jamie Simms, CFO and with me here in Andover are Patrizio of NCirelli, CEO and Dick Nagel, Chief Accounting Officer. After the markets closed on Tuesday, October 16, we issued a press release summarizing our financial results for the 3 9 month periods ended September 30th. This press release has been posted on the Investor Relations page of our website vicorpower.com.
We also filed a Form 8 K on Tuesday related to the issuance of that press release. As we had completed the process of closing the quarter's financial statements, we released results on Tuesday. The because we had already scheduled 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 as well as forecast sales growth spending and profitability 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 or implied by any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2017 Form 10 K which we filed with the call is accurate only as of today, Thursday, October 18, 2018. 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 this call. A replay of today's call will be available 2868010 followed by 05130.
A Relations page of our website. I will start this afternoon's discussion with a review of our financial performance for the third quarter and Patricio will follow with a few comments and take your questions. Beginning with consolidated results, as stated in Tuesday afternoon's press release, FICOR recorded total revenue for the third quarter of $78,000,000, which represented a sequential quarterly increase of 5.2 percent from the $74,200,000 recorded for Q2 and an increase of 37.2 percent over revenue recorded for total revenue for the 1st 9 months of this year was 28.7 Quarterly, international revenue increased 2% sequentially and represented 62% of total revenue. Turns volume that is orders received and shipped within the quarter was approximately 18% of 3rd quarter revenue. Lower turns volume has been a reflection of extended lead times.
With this quarter's call, we will begin providing a breakdown of revenue bookings by legacy and advanced planning to begin reporting with rather than the 3 businesses, BBU, BI Chip and Picore, we have reported to date Going forward, we will present results 606, the new revenue recognition standard. In our discussion of the sources and characteristics of our revenue, through footnote disclosures. For some time, in our filings, we have characterized our products as either legacy or advanced. Legacy products are those associated with our brick business unit, historically representing the majority of our revenue, while advanced products are more recently introduced products, reflecting advanced power conversion engines, advanced power distribution architectures, advanced control ASICs and advanced packaging technology. For the third quarter, legacy product revenue grew excuse me, rose 5.5 percent sequentially.
And as a percentage of consolidated revenue, or 65% percent sequentially, and on a relative basis, represented 35% of total revenue. Consolidated bookings rose 4.1 percent for the quarter, exceeding $91,000,000 and bringing total 1 year backlog to $116,100,000, a sequential increase of 12.6%. Bookings for legacy products declined 6.1 percent sequentially. In contrast, bookings for Advanced Products increased 20 point 6% sequentially, reflecting expansion of demand for power on Package solutions, notably for AI Acceleration in supercomputing applications. We also saw incremental growth of demand for a variety of advanced chips across a range of pending transition in our business.
Products were 64% 36%, respectively. But for the third quarter of 2018, These percentages were 56.44 percent, an indicator of further shift in revenue mix from legacy to advanced product for the coming quarters. Also listeners should keep in mind, booking and delivery patterns can differ for legacy and advanced products. Legacy products generally are high mix, low volume, serving a statistical customer base of nearly 10,000 customers. Orders are generally smaller and scheduled over weeks months, contributing to a smooth booking pattern.
In contrast, advanced products are thus far, low mix, high volume, serving a more concentrated customer base. Individual orders are generally much larger and deliveries can be scheduled over quarters. Since we are in the early stages of market penetration with many of our advanced products, particularly those ordered by OEMs and shipped to their contract manufacturers, advanced product booking patterns at any given time may be less smooth, or as I've said before, lumpy. I'll now turn to product profitability. We achieved a milestone for Q3 and that our consolidated gross profit rose to 50% for the quarter, up from the second quarter's 48.4 percent and the Q3 2017 gross margin of 44.2 percent.
This is a reflection of advance successful in meeting our needs for raw material inventories despite ongoing supply chain uncertainties and long lead times. Overall, we believe our visibility has improved, but we continue to play close attention to assuring availability of components. The recently implemented Section 301 tariffs on Chinese imports did not have a material impact on our costs during the quarter. However, the cost going forward may not be inconsequential given the volume of components currently sourced from China. We are, excuse me, we are seeking non Chinese alternate vendors.
In addition, we have filed requests with the U. S. Government for exclusions from tariffs on a limited number of components for which no alternative vendor exists. As tariffs on Chinese imports are coming a material percentage of our, material costs, we will add a tariff surcharge to the selling price of our products until these tariffs are no longer initiated. Percent in part because of nonrecurring severance expenses incurred in Q2.
On a relative basis, operating expenses such quarterly decline falling to 33.3 percent of revenue for Q3 from 36.7 percent for Q2 and 40.6% for Q1. R and D expenses declined 6.2% sequentially, largely reflecting improved efficiency in the development of new products and fell to 13.7% from 15 point 4% of revenue. Sales and marketing expenses were essentially unchanged but declined to 13.6% from 14.3 percent of revenue. G and A expenses declined 10.2% largely related to lower stock compensation Operating income rose to 16.7 percent of revenue for Q3, up from 11.2 percent of revenue for Q2. These results are in line As stated then, we expect operating expenses to continue their relative decline as a percentage of revenue.
While expanding on an absolute basis at low single digit percentages, largely driven by compensation costs. Our long term model is to reduce I'll now turn to Dick Nagel for a quick overview of our tax position.
Dick? Percent, and we recorded a net provision of $227,000. During last quarter's conference call, we explained our perspective on the approximately $33,000,000 valuation allowance we had against the value of our domestic deferred tax assets at year end. With one more quarter of positive results behind us and an outlook that remains positive, we have increasing support for the reduction or the release of this allowance. However, management pursuant to the requirements of ASC 740 concluded it was appropriate at quarter end to maintain the full allowance.
We will assess the release of the allowance at the end of the 4th quarter. Also note, the company has been utilizing available net operating loss carry forwards and tax credits to offset taxes due on taxable income throughout the year. And as of September 30th had consumed its federal NOL balance, leaving federal and state R and D tax credits, along with other tax credits, reserves and other accounts as the balance the amount of such a release would be lower than the figure implied by our twelvethirty oneseventeen balance of DTAs other than the NOLs. However, at the present time, we cannot reasonably estimate what the balance of DTAs may be at the time of release, the amount of the allowances to be released. Or the timing of the potential at all of the then current allowance within the next three quarters.
Jamie?
Thank you. So, back to the Q3 P and L. We recorded net income after minority interest of $13,000,000, representing a 66% sequential increase in after tax earnings. Diluted EPS totaled $0.32 up from Q2's $0.19 and Q1's $0.10. Our quarter end diluted share count was 41,124,000 shares.
Turning to the balance sheet. Cash and cash equivalents sequentially increased $14,300,000 for the third quarter and ended at $68,200,000 This increase reflects operating cash flow of $14,300,000 3 $400,000 of proceeds from the exercise of employee stock options during the quarter Cash has increased by $24,000,000. Net trade receivables were a little changed for the quarter, with DSOs actually declining to 41 days and no indications of portfolio risk. Net inventories increased modestly, up $1,700,000 or 4 purchases to ship our increasing backlog. Winding up my review of the 3rd quarter.
Total employee headcount as of ninethirtyeighteen declined to 2018 from 10 24 at the prior quarter end, largely due to lower temporary staffing a reflection of improved factory loading for from $9.72 $9.74. I'll now provide an update on our capacity expansion. The Q3 capital expenditure total of $3,300,000 does not fully capture the level of investment activity underway. We have approximately $15,000,000 of production equipment on order, of which $4,000,000 is scheduled to be put in service during the fourth quarter. This additional equipment to be deployed within our existing 230,000 square foot factory in handover will increase its capacity to approximately 500,000,000 from approximately this $500,000,000 threshold to $750,000,000 foot extension of our factory to be built on land already owned by Vicor as early as Q1 2020.
In response to the request of a large customer, we also are pursuing of establishing a manufacturing facility in Asia Turning to our outlook, given our increased backlog and visibility into customer requirements, we are forecasting a sequential quarterly increase in the U.
S. Government shutdowns.
Despite our planning and safety stock methodology, we remain exposed to raw material and component availability risks. 2nd, we do not yet completely know what impacts Section 301 import tariffs will have on near term results 3rd, We have seen early indications And finally, our backlog at a record high level includes substantial deliveries in the First And Second Quarters of Twenty Nineteen, which reflects the increasing proportion of our backlog made up Accordingly, I must remind listeners as I do each time I speak with you, our operating and financial forecasts are subject to unanticipated changes many of which are caused by factors and influences
As addressed by Jamie, the third quarter of 2018 was characterized by improved financial performance, notably 50% gross margins and appreciably higher profitability. These improvements reflect increasing productivity and broadening adoption of modular power system solutions driven by the distinctly superior performance. In Q3, we hired a global automotive business development vice president, Patrick Walden, to lead sales and marketing in the automotive segment. VICO is already supplying a high density power system for the leading developer or level 5 autonomous driving systems. And developing power system solutions for other automotive applications with significant long term potential for Vyger products in autonomous driving and more generally the electrification of vehicles, we hired Patrick to expand the use of Vygos IP in the automotive 48 volt power systems market with a mix of product sales and technology license agreements.
As always, I'd like to limit my prepared remarks as I would rather answer your penetrating questions, so I will open the call.
Mark? Your first question comes from the line of Quinn Bolton. Please go ahead. You're live in the call.
Hi, Quinn.
Quinn, just please check your not on mute, but you're live to ask your question.
Sorry. Can you hear me now?
Yes.
Hi. Sorry about that. Hello, Patricio. Hi, Jamie. I wanted to start first, just thank you for the color on the split between legacy and advanced product.
Obviously, a lot of excitement, growing around the 48 volt architectures. Is the Advanced Products largely or entirely consist of your 48 volt solutions, or does it include other power and power delivery other than 48 volt?
So as of now, it's primarily 48 to the point of load. But as you might have seen from a press release earlier this week, before too long, it will be a mix of part delivery point of load and power delivery to the 48 volt bus. Fundamentally, a strategy is to provide connectivity from the power source, whatever that may be, high voltage DC, single phase or 3 phase AC lines to 48 volts as a stepping stone to the point of load. The emphasis up to this point has been for the 48 from 48 to the point of load, But we've had initial applications to leverage our advanced products, soup to NASA from the power source to the load. And it's going to be more of these kinds of applications going forward.
So I guess just to clarification there. It sounds like most of the revenue today then is from 48 volt stepping down to either 12 volt or directly to the load voltage or is it, is it including some of the 3 phase AC to 48 volts converters that might sit sort of at the bottom of the rack?
Well, it has involved, let's put it this way, a few $1,000,000 of 3 phase to 48 is going to be a lot more debt in the future. It has evolved primarily to your earlier point 48 to the point of load Intel process of 1.8volt or, an AI XPU at less than 1 volt and 100 of 1 peers of current row, at that low voltage provided directly from Fort Jay Vault. We also make in our selling in initial quantities to a growing list of customers, bus converters that take the 48 volt down to 12 volts for intermediate bus applications. And those products themselves are, far superior, several times smaller in size and more cost effective than alternative solutions intermediate bus conversions. By the way, those products in addition to being relevant into the incentive space or in retrofitting 12 volt racks with, advanced GPUs that are powered from 48 volt, they're also going to be seen, I think, before too long in other types of applications, including, automotive applications, were densification, infrastructure is changing.
As we all know, it's moving to 48 volts, but there are 12 hour legacy loads are going to be around for quite some time. Those loads need to be fed, at the existing operational voltages, ideally directly from a 48 volt infrastructure, ideally without involving the heavy and expensive copper wiring that a 12 volt infrastructure requires. So, part of our strategy in summary and essential part of our strategy is to provide connectivity from and to any, intermediate voltage 4812, it doesn't matter that the advantages of the technology are, very comprehensively applied to each relevant node.
Understanding that the step 10 to 12 volt today just allows you to interface with some of the legacy architectures. It seems longer term, a direct conversion from 48 down to the load voltage makes more sense. Can you just give us some sense how Vicor is positioned against some of your leading competitors in this space? Analog devices Infineon, Max of monolith power in terms of the approach. I think you're taking a direct 38 volt down to the load voltage where some of your competitors may have to do a 2 stage conversion with an intermediate voltage.
Can you just talk about the architect what advantages you have relative to competitors when you look at the 48 volt space? Thank you.
Well, it could be a long answer. I'll try to keep it as short as it can be and at a high level without getting into too much technical detail. But to your point, the competition for 40 volt power system has been down a number of paths. Including direct 48 to 2 point of load, some of these companies that you referenced are on the second or third try, involving 1st direct conversion, which did not work out. And then essentially, for the most part, gone back to the starting point of an intermediate bus architecture, were, to your point, there's an intermediate step, to 12 volt, in effect, there's a stepping stone on the way down from 48 volt infrastructure to the point of load.
There are significant handicaps that come with the 2 step approach. And some of them are in effect as fundamental as onslow, very basic. I would say that and I obviously hold in extremely high regard, many of the companies that you referenced that are accomplished all great things in their past. But frankly, particularly in the semiconductor companies, they don't fully understand power. They believe or some of them believe that a better switch, a better semiconductor switch like a GaN device will provide a magic bullet to solve each and every problem.
And that's really not the case, far from it. And I would say that again in particular is irrelevant at the point of load it's irrelevant in terms of power and package solutions. It really wouldn't make any difference. And even in upfront converters that provide, conversion from higher voltage passes, to 48 volts or from 48 volts 8 to 12 volt intermediate bus. Again, as it stands today, doesn't offer any advantage in it costs more money than silicon.
It is still not nearly as mature as silicon. It's got a number of limitations, but most of all, it doesn't really offer an appreciable or any efficiency advantage if as we do, you have the right power conversion technology and the right power distribution architecture. So, to paraphrase, a, the actual purchasing at one of our customers asked by a person that joined the company recently in our presence, what is Vyger's competition? The answer was Vyger has no competition. And this is why we had no competition is that we've been working at this for nearly 15 years.
We have, addressed all the facets of a very complex problem that again involves a lot more than a better switch, which is an element in a converter among many with many other ones providing, or presenting limitations, sir, considerably more significant than the switch itself. Let me come at it from yet another angle. As I look at one of our higher voltage converters were a relatively high voltage device such as GaN could be used in a look at the power that we dissipate in a silicon switch that amounts to a small fraction of 1%. So even if that device, the signal device were replaced by perfectly ideal, mature, cost effective, Gant device, the upside in terms of reduction in loss would be negligible. But somehow, that's what a lot of the industry appears to be focused on.
And I will submit in view of my experience in the field that that, this misplaced priority, there's a lot more to making a high density DI efficiency cost effective power converters than replacing a ceiling of fab with a GaN fab.
Thank you for that. Maybe just a quick one for Jamie. Jamie, from your prepared comments, it sounds like the component availability screen, ceramic capacitors, while still tight, maybe incrementally getting better. Am I reading those comments correctly?
That's correct. I mean, we're far from out of it, but we're in good shape.
Your next question comes from the line of Alan Hicks. Please go ahead. You're live in the call.
Yeah. Good afternoon and congratulations on record revenues. And I think it's the 2nd highest net income quarter you've ever had. But going back to the the gallium nitride, technology, has any of your competitors gotten any traction with that so far?
None. None in the power conversion field. I think there's some very minimal traction for some specialty applications. But again, we keep gauging progress with respect to the Gan fats. We benchmarked them.
We've done that recently again. And it is something that's been high frankly for at least 5 years and whose drive to the finish line keeps pushing out. And even once it gets there, and I have no doubt they will get there, its impact on power conversion will be very negligible. Okay.
And then the area I know you've talked about in the past, some of the CPUs and XPUs are coming out with very fine line widths 7 to 10 nanometers. What gives you the advantage there?
Well, so at 7 nanometer, it processes are fed by voltage, it's typically 0.6.7 volts. To efficiently deliver that voltage occurrence that in many applications now are reaching up and getting past the 1000 amperes. What you need, which is unique attribute of our technology is a current multiplier. Not a device such as traditional back converters operating from 12 volt that take to the 12 volt and average it down to a lower voltage. That works reasonably well when you average down from 12 to 1.8 which is the standard voltage, the Intel Processors operate from, largely because within those processes, there is a further step down that takes place within a converter structure that Intel has developed.
When you stretch that methodology all the way down to 0.6 volts, it gets that much harder, the so called duty cycles get narrow and narrower, and the the dynamic performance, and I don't want to get too technical, but let's do it this way. This fundamental limitation to the proposition of averaging down a voltage. It's a little bit like trying to make water is a little bit, warmer than the cold water faucet by mixing it in with a hot water feed, where in effect you're trying to heat a water temperature that is closed to the cold water. There is a much better methodology for this, which we planted. It involves credmartipliers, they instead of averaging down a high voltage, they divide it.
And they can divide it by an arbitrary large factor. So we have applications where we divide down by factor 48. We have other applications. Where we divide down by factor 64. We got some new applications.
We're going to be dividing down by factor 72. So you take 48 volts or 54 volts, you divide down by 72 and you're right in the sweet spot of what the 7 nanometer processor requires. And you get there with all of the right attributes, very fast response to low transients, very low noise statistics such that with our power package and our packaging technology, you can integrate it within the XPU package itself or right next to it. Hey, Sean.
At what point would there be a tipping point where this technology be required to enable majority of processors.
But that's the key point is taking place now. We just within the last 6, 7 months, we've been approached by half a dozen other major competitors vying for their share of the AI market opportunity. And universally, they're all relying on power and package, our current multipliers, There is no gun anywhere close to that. There is no other solution anywhere close to that.
So there's no competitor that's even close.
There's no competitor that's even close because we are I could argue 10 years ahead of the competition. And we have nearly 100 patents standing in the way of the competition. And we've been working diligently over a long time to planting a minefield for any as Grupo's competitor would want to try and chase a truck. Never mind the fact that there are fundamental technical challenges to doing that independently of the IP.
Okay. And on the new RFM product, how long how long will it take for that to go into high volume production?
Well, that's often an architectural change within the system. So don't expect, immediate step up in revenue. We've had the lead customer for that product As you can see from the recent announcement, we're now broadening the offering to involve other customers, other input voltage ranges, the engagement with our first customer was for Japanese 200 Volt AC Mains. We've since developed a broader input range capability. And by the way, we also have a whole new family of next generation technology products are 4th essex generation that will take the RFM and all these other products to yet another level of efficient see and density and cost effectiveness.
So, when it comes to RFM applications, front end applications, I expect we're going to have some level of penetration with the RFM that has been recently announced. We're going to have much deeper penetration as we released the 1st 4g Elephant products next year.
And then on your announcement with hiring the manager for the automobile industry, there was a mention of licensing are you, do you have any prospects for licensing there?
Yes, we've been approached by a number of parties with an interest in taking a license for certain aspects of our technology for automotive application. Patrick was actually at a conference in Berlin just within the last couple of days. Is reported back that our NBM or the 48 to 12 bus converter was the talk of the show at that conference, because it represents a tremendous opportunity for eliminating wiring and simplifying and reducing the cost of, automotive systems. So whether it's the NBM, or other products such as the power strip, which is a problem we have developed for the complex power system or level 5 autonomous driving capability, our technology when it comes to the modular applications as a number of sweet spots.
So are you in discussions already for licensing?
Yes, we expected that, these opportunities are going to expand Obviously, hiring Patrick was a key step to a broader automotive energy. We're going to take some time to assess all of the opportunities and prioritize our pursuits both from a product development and from a licensing partnering opportunity perspective.
Okay. So are we both gonna be automobile companies or auto parts companies or or both?
Both.
Okay. Well, thank you very much. Congratulations on a great quarter.
Thank you.
Thank you. Your next question comes from the line of Don McKenna. Please go ahead. You're live in the call.
Wanted to ask you a couple of things. Jamie, first of all, on the, increased lead times that you were talking about with the current backlog. Is that because of, capacity constraints you have, or is it because, you know, some of the raw materials you've been having trouble getting? And then the second question I wanted to ask was about the expansion. It seems like it's a turnaround from where we were 3 months ago with the new facility.
Could you give a little more detail on that and what you've your partner in Asia might be?
Let's just start with the is answered.
Okay. So, I think the first part of the answer to do with the lead times and capacity constraints So we've had some capacity constraint, within the third quarter for advanced products, no capacity constraints on legacy products. And that's why we've been, placing orders and starting to install additional equipment to expand that capacity. As suggested in JEMI's prepared remarks, there's going to be a significant expansion taking place in Q4. Actually next month in November and further expansion taking place in Q1.
This expansion in capacity for Advanced Products is needed to meet the forecast of demand for 2019. So as suggested in the prepared remarks, we are in transition from the majority of the revenues being legacy products to come 2019, the majority of the revenues being Advanced Products and we're working proactively to make sure that capacity does not send in the way of that. We do not let customers down and and we are very good at scaling up capacity and deploying it in time to to stay ahead of demand. But the recent couple of months have been a little challenging. It's a challenge that is going to get, and we've had to add a lot of over time and that kind of thing to ensure that we brought about the capacity that was necessary care customer needs, we're going to provide some relief with respect to that with the selection of equipment that's about to take place.
And then more so come the first quarter. And the second part of the demand that with real estate? Real estate. So yes, the we have fine tuned our strategy with respect to capacity expansion in terms of where to do it and whom to do it with. And that's come about as a result of a number of revelations.
So one has to do with the timing for breaking down and, installing capacity in a different location, away, further away from our existing manufacturing facility. As it turns out, we have enough land to extend the existing facility to expand it and bring about nearly 50% increase in total capacity. And this very leverage with respect to the Advanced Products because in terms of revenue per square foot, it's a much more favorable multiplier. We've also got an input from potentially very significant customer that, they would very much like to have a presence in Asia for a variety of reasons. So we started looking at that possibility.
And this is not a near term opportunity. It's something that will take some time to fully sort itself out and be executed upon. We feel comfortable with the near term strategy of adding essentially 50 percent increment of revenue capacity as an appendix to our existing facility.
The idea of the additional capacity, 90,000 square feet being available for first quarter 2020. Is that, an indication that you will have reached your 500,000 or or 500,000,000 rather, capabilities at the end of 2019?
I wouldn't draw that conclusion. I think it's indication of the fact that I was suggesting earlier, we want to make sure when it comes to expanding capacity with respect to, in particular, brick and mortar, which has got longer lead times than equipment that we are way ahead of our needs so that that doesn't become a bottleneck. So to be clear, purchasing and deploying additional equipment within existing walls is essentially a 3 4 month proposition. And obviously it takes a lot longer than that to get, new facilities built from the ground up.
Okay. Well, thanks very much. And 2, congratulations on your award there recently.
Thank you. Your next question comes from the line of John Dillon. Please go ahead. You're live in a call.
Hey guys, again, I want to congratulate you on, you know, a really great quarter. Love to see the gross margins up there and the cash you generated and also Patricio on your award. That was really nice to see. So my first question is, has anything fundamentally changed with Vicor in the last 90 days?
Well, I think the evidence keeps building on the major opportunity we have, with respect to AI applications suggested earlier, there's no competition. The only way, competitors looking to establish a strong competitive position powering 7 nanometer processors the only way to, add a competitive solution is, with our technology. So that sentence become abundance a year within the last 90 days as more and more companies account to us that come here or approach this to pursue solutions for them, you know, working with other partners to enable, advanced XPUs, sub-one volt at 400 to 2000 acres. I think that the other significant takeaway in my mind within the last three months has been, you know, validation of our 4th generation Essex. Both, with, the 4 gprm and the 4 g VTM.
Were very far along with these devices. We're making initial products with the PRM, very close to making VTM and car multiplier products using the VTM 4g controller. This device is bring about a major advance in terms of performance, density, they eliminate a lot of the component count, of early generation control silicon. They enable much more advanced products, including, among other things, more advanced versions of the RFM. So, I think in my mind, those have been very significant milestones in terms of continue to advance the state of our art.
We are on track to, and we've, we got our own version of Moore's Law, right? Muslow, which has been in effect for quite some time, so came to an end recently in terms of further advances with respect to, you know, Processors Technology Our own version of Moore's Law is continuing to increase the density and efficiency of our products by about 20% every couple of years. And we keep being on track with that. And as we do that, the technological gap between Viger and the competition gets wider as opposed to getting narrow, well on that track. And our 4G silicon and the power package technology and the further advances with respect to our chip technology at large, are continuing to build that strong competitive capability.
Nothing negative fundamentally has changed. All you see is positive fundamental changes in the fact that you're growing your market, you're attracting newer customers and you're accelerating into the AI world. That's what I think I'm hearing. Is that right?
Yes. And let me mention one more thing. Cost effectiveness in many products, take the NBM as an example, we have by far the lowest cost pressure than any competitive product. Not only are we one third the size, but perhaps not surprisingly being 1 third the size. We're not quite 1 third the cost, our cost, but we're substantially lower cost than any competitive alternative.
That that's just great to hear because I know long time in the past, you still always have the technology superiority, but not always the lowest cost. So that's really good to hear.
Well, you might have heard me in the past saying that, and it remains true that technology is not just superior in terms of efficiency, density, fast response, low noise, last but not least, it's got to be superior in terms of cost. So when competitors say we are 2 or 3 times the cost, they're looking at a VICO from 10 years ago. They are either oblivious or purposely ignoring the realities of today.
Exactly. Exactly. You mentioned in the preannouncement, and you had a nice answer to that about the GA converters and all. But what I was wondering has their claims with lower costs and GA built parts, has that affected your your, your wins and the lower power CPUs that you power. For example, you know, the intel chips don't they like you said, they're only 1.8 volts instead of point 7.
Are they starting to pick up traction in those wins or is that still consistent with you?
Well, so they all the traction in those wins up to the point in time in which we successfully penetrated some of that business. To be clear, and I suggested this announced to an earlier question. Our competitive advantage at 0.6volt that is for DI Processors is, in one way of looking at it several times greater than it is a 1.8 volt. So I don't expect that, our competitive position at 1.8volt, which is where intel Processors have been and may continue to be may or may not time will tell. That's not our strong suite.
Our strong suite is empowering directly. 700 meter notes and doing so whether or not competitors take an intermediate step, but through 12 volt.
Right. But you're not losing any of your Intel business.
No.
So is there any reason in the world why your company would be valued at 40% less than it was 90 days ago? Can you
I'm not going to answer that question. I cannot think of a reason, but
Okay. I can either. You didn't really talk about bookings.
Other than the general market in Malaysia, right? We're all mindful of been going on in general, but there's no company specific crash in our server.
There's no fundamental reason. There's no changes or anything would fundamentally affect your
I think our competitive set is growing. I can tell you that there isn't a recognized player in the either CPU space. Or GPU or general XPU space that is not talking to us or coming to visit us to, pursue opportunities for Viger to give them a competitive advantage. Nobody wants to be handicapped. Because ultimately the issue from the perspective of these companies is was going to help them win against their competitors.
And, you know, they're very smart, right? There wouldn't be, wanting to recap their competitive stance by, following a crowd that has failed to provide the level of advances in power system density, the efficiency exibility package of technology that these systems require in order to achieve the low performance that guessing my head of that competitive.
Right. I mean, you enable a higher performance computer. So of course,
and we enable a higher performance GPU and we're going to be enabling a lot of higher performance ASICs.
And if you wanted to, you could convert to your designs to GA also, correct, to GaN. I mean, but but you don't need to.
We have actually benchmarked that. We periodically do that and there's no benefit.
No benefit. Got you.
There's a cost penalty.
Got you. Cost penalty. One last question then, bookings this quarter, are they still on track? I mean, do you think you'll still have about the same bookings for that you saw last quarter?
I'm not going to stick my neck out with respect to that. I think that we've obviously been building up the backlog. The backlog is expanded gradually as suggested, in Jeremy's prepared remarks, we see the revenues ticking up at a modest rate this quarter and we'll have to wait and see with respect to the bookings. But generally speaking, as I look
I imagine some companies prime the pump then and gave you pretty good bookings upfront for
Let me put it this way. As we look, you might recall me saying, several quarters ago that we need to get past the stagnation of a long time frame in which we're building up our technological capability, but we have not translated yet in design wins and revenue growth. And I think I mentioned back then, that the key milestone was to get past or to the $300,000,000 level as a yearly run rate. That would open up, more opportunities. It would signify the kind of traction and more widespread adoption that we're now seeing.
And I think that's coming through just as expected. By the way, in the past, I think many companies at some level of hesitation with respect to doing business with VIGO having to do with the fact that we were viewed as a supplier of specialty product, a niche player, that would be sort of a supplier last resort, if you needed to have higher performance. That all perception has changed continued to change. Again, the calculus now is along the lines that are aligned a little while ago. Vagu is gaining traction, Vagu is getting to critical mass.
I get a lot more to lose from not doing business with VIGO than the other we're at.
Congratulations. It's really amazing quarter and looking forward to the future. Thank you.
Thank you. Your next question comes from the line of Peter Low. Please go ahead. You're live in the call.
Hi. Thank you for taking the question. So we had one confusion you could say we saw your release related to the NVIDIA V100 cards, which we understand are 12 volt and are plugging in 12 volt servers, but you are selling a 48 volt product. So how does that work?
Well, there is no claim whatsoever that we have taken all of the business at any one customer, right? So without mentioning customer's names, you can imagine that any customer undergoing a transition from 12 to 48 may for a variety of reasons. Continue to develop some products that will evolve. This is not an all or none proposition. It's a progress see some steps, whether it's the customer you mentioned or any other customer.
I have no doubt whatsoever that before too long. It's all going to be 48 volts. It's all going to be 48 volts in the center space. It's going to be 48 volts in automotive.
Okay. So if the if the card or the product is plugging into a 12 volt server, then it would not use your product, but if it's going into a 48 volt server, then it would use your product. Is that fair?
Not necessarily because what we also do with the NBM, and we're going to be doing with more products sell that kind, These are pediatrician converters that can convert 48 to 12 and convert 12 to 48. So whether it's a data center requirement with the 12 Voltifers Sasha were 48 volt GPU needs to be powered from 12 volt and the NBM can convert 12 to 48 to power the 48 volts load or as I suggested earlier, the modular application where there's an opportunity to use a 48 volt battery get rid of the 12 volt battery, if they'll distribute 12 volt with heavy gauge wire, distribute 4k volts, and then power legacy 12 volt load with NPM, we can go either way. And, fundamentally, we got the best of all solutions from 48 volt to Doctor. 2 point of load, we also have with the NBM by far the best, the highest performance, highest density and lowest cost solution for either converting 48 to 12 for converting 12 to 48.
Okay. Can you give us a little more color or feel for what your ASP is for what would be a total solution to deliver power from the wall to the CPU, how much content do you have either in a number or a relative versus a more traditional product?
Well, for competitive reasons, I'm not going to mention a specific number. And obviously, the number is so much dependent on the particular opportunities volume, the revenue opportunity the margin opportunity is a function of revenue level that we want to achieve. But I'll go back to my earlier statement, which is both in front end conversion and in point or load conversion, we have the lowest cost are if you measure the cost of our building blocks in terms of cents per watt or cents per ramp, we have the lowest cost card. The technology enables the lowest cost solution. It's densest And with that, it's got less of everything, the factors into the cost of the product.
It's got less silicone. It's got less copper. It's got less PC board. It's got less of a packaging cost. Now the delivery of these is to some degree dependent on volume, right?
Because we've had an infrastructure that we've been paying for which needs to be amortized over larger volumes. So our costs and with that, the margins get better as the volume goes up, As that happens, we obviously want to leverage the reduction in cost to offer more competitive pricing to our customers to make it more attractive for them to adopt the solution. I'm not saying that today, we are selling in every application at the lowest cents per watt or the lowest cents per amp, we don't. We sell to some degree on value. But I'm saying that the cost structure of our engines and everything that goes into it is inherently the lowest cost.
Got you. Earlier in the call, you talked about Chinese markets are cooling. Can you provide more color on that? What segment of the Chinese market is cooling? Are seen cooling anywhere else in any other geography, U.
S, Europe, is it more industrial focused, server focused, data center focused? When did the cooling start also, please?
So there's been some cooling taking place over the last 12 months let me answer it this way. Getting power Semiconductors fab I'm not talking about gun fence. Now I'm talking about good old silicon fence. Getting fast months ago, was a lot harder than it is today. Getting ceramic capacitors several months ago was a lot harder than it is today.
And that's symptomatic of the fact that that the strains on the supply lines at least, I think, considerably over the last several months. I mean, frankly, from our perspective, this is a good thing. We would not want to be constrained by availability of components. There's plenty of opportunity for growth next year. And the year after that, we don't need the most robust Chinese economy or the most robust global economy for us to deliver growth.
So, this environment is perfectly fine from us for us. I think, frankly, with some level of concern with respect to the component pipeline, months ago. And in some instances, we had to pay premium prices for some of these components. So that's no longer the case or much less of a case today.
But are you seeing a cooling in your own business on probably more on the legacy side versus the advanced?
Well, so bookings, last quarter were sequentially lower for bricks than in the prior quarter. And Jamie gave you some quantitative measures that I think Bric's bookings declined by, what percentage? It
was 5% or
6% down from the power cord.
It's
also very, very strong for the first half.
Yes. But we've seen it declined. However, the advanced products bookings went up, I think, but it's slightly over 20%. Right. So, and that's really indicative of the job point that I was focused on, which is when you look at the cooling Chinese economy or or global demand for, electronic products and you correlate it to a legacy product, which is a mature product, where there's not going to be a growth, right?
We've organized that for a long time that It's good for the bricks to old essentially level revenues in a normal environment. Well, those products, guess what, they're going to be affected by a cooling Chinese economy, a cooling global economy. But when it comes to the advanced products, the much bigger driver there is traction with new customers and new applications that dwarfs, the temperature of the economy, right? Because that's the 2nd order effect.
Of course. Within that 6% decline in bookings, Can you isolate it to an end market? Is it server? Is it auto industrial?
So we sell bricks into a diverse set of customers and applications, from transportation to industrial applications to some communications applications. I mean, these are products as mentioned in the prepared remarks that are sold to something of the order of 10,000 customers. So they're a good barometer of the general state of demand. And I think they are the 6% reduction from Q2 to Q3 is itself indicative independently of the other indicator having to do with the components we use caps and fats, of a cooling economy. But again, that's got to be contrasted with the significant growth in Advanced Products, which has got really nothing to do with warming or cooling economy, it's got everything to do with traction with new customers and new applications.
Yes. Of course. Thank you.
Thank you so much. And the next question is coming from the line of Jim Bartlett Please proceed.
Could you give us an idea when you see significant impact, and let's say made by the haves, there things. 1st of all, on the NBM second, with the RFM, products and And 3rd with, and this is interrelated if you're new 4G.
Okay. So we see a significant growth in revenues next year from AI applications. I will put that at the top of the list that you just referenced. So MCD, MCMs, point of role solutions, they're going to drive significant growth next year. The NBM has got design wins, a larger multiplicity of design wins, but it would rank below that, the level of opportunity with, point of load, the 4k volta, active point of load solutions in the near term.
Now in automotive, and longer term, with, legacy 12 volt passes the MDM has got tremendous opportunity. But because of the architectural changes that relate to that, I think it's going to take time to fully develop. And a similar comment would apply to the RFM. So 4G is going to start shipping in volume to customers the second half of twenty nineteen. It's going to drive much further advances in performance and cost effectiveness of all of these building blocks.
It's a control system that is universally applicable to high voltage passes, it could be a 1000 volts, it undervolts or it can be 0.6 volts. It doesn't matter. We got in a control system with 4 g capability that were with all to decimal and do so with extremely high performance and cost effectiveness. But that if you were to ask specifically what is the revenue that is earmarked to 4G, that's going to start in the second half of next year. And in terms of being a significant share of the business, it will have to be 2020.
And again, I was confused on the front end part of it with RFM products, where does that start to have a significant impact?
Well, so there's going to be a significant RFM business, but on a lesser scale than the other 2. Yeah, we rank them again point of load, way ahead of of the other things and beyond below that in the short term. RFM below that in the short term. But longer term, the RFM type of building block represents essentially half of the pie. One way of looking at it is that this as many cents per watt go taking the watts from 3 phase AC to 48 volts as there is taking it from 48 volts to the point of load.
So The FM is game changer in terms of, I think the analogy I like to use is the airline analogy. So fundamentally, the strategy is to have a jumbo jets that take the payload from the source to a 48 volt pass on the way to the point of load. It can take on different directions going from 48 to the point of load, but there's a common denominator need to take power from the worldwide AC Mains, single phase 3 phase, to the 4854 volt bus, there's going to be at the heart of the entire point of load infrastructure. And that's particularly the case in any station application in and to some extent, it can also be the case in automotive applications.
And when do you see your 1st automotive revenue?
Well, we got some de minimos automotive revenue now, but with Patrick, we have target, an initial target of $100,000,000 in automotive revenues. I'm not going to mention a timeframe of that. I think certainly since he's come on board, he has commented about excitement, the extreme opportunity from the meetings he's at, with some major companies. And, I think that the time frame in which that initial $100,000,000 target can be achieved, I believe has moved in relative to its expectations before joining the company.
Speaking of time frame, mentioned, Jamie mentioned the 30 percent operating cost and 60% gross margin, driving towards that. Could you give some time frame on that?
I'm not going to get pinned down on that. I think that, obviously, we've had some very strong progression on the operating expense reduction front. It was actually closer. I said internal target of 30% early in the year. And in some of these cashews, we thought it would take longer to invest again to get close to it at the lower 30%.
I think it would be easier and faster to get to 30% of adding expenses than to get up to 60% on margin. So to some extent, that's going to be a function of aggressive we choose to go on driving business growth. So we we that's the level we want to keep at our disposal with respect to driving long term, dominance in the marketplace.
Would a 5 year timeframe be reasonable?
Well, so if you were to draw a some kind of linear separation from the progression has taken place in the last year on an initial relatively modest revenue step up from $225,000,000 level to $320,000,000 run rate of the recent quarter, you would draw the conclusion that it could happen a lot quicker than 5 years. I'm not going to go there because again, to some degree, we want to retain all the flexibility we should have. With respect to driving the trade off between revenue growth, economies of Scale and short term gross margin and short term profitability. I think it's safe to say that, that's a good problem to have. And we're going to drive that balance in a way that may evolve over time depending on a variety of factors.
Terrific. And I want to add my congratulations spending a lot of money and developing a lot of patents and strategy and some terrific technology.
Yes, it's only taking $400,000,000, but and a lot of sweat, but we are, I think, in a much better place today. Thank you. And with that, we'll look forward to talking to you in a few months. Have a good night.
Thank you very much. Ladies and gentlemen, that concludes your conference call for today. Thank you for joining.