Earnings Call: Q3 2018

Oct 18, 2018

A very good day, welcome to the Vicor earnings results for the third quarter ended September 2018. During the presentation, your lines will remain on listen only. If you need assistance, please key star zero on your telephone and a coordinator will be happy to assist you. I'd also like to advise all parties this conference is being recorded. 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, 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 Vinciarelli, CEO, and Dick Nagel, Chief Accounting Officer. After the markets closed on Tuesday, October 16th, we issued a press release summarizing our financial results for the three and nine-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. Because we had already scheduled this conference call, we left its timing unchanged. As always, 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, 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 SEC on March 9th, 2018. Please note the information provided during this conference call is accurate only as of today, Thursday, October 18th, 2018. Vicor undertakes no obligation to update any statements, including forward-looking statements made during this call, you should not rely upon such statements after the conclusion of this call. A replay of today's call will be available beginning at midnight tonight through November 2nd. The replay dial-in number is 888-286-8010, followed by the passcode 77605130. In addition, a webcast replay of today's call 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 for the third quarter, Patrizio will follow with a few comments and take your questions. Beginning with consolidated results. As stated in Tuesday afternoon's press release, Vicor recorded total revenue for the third quarter of $78 million, which represented a sequential quarterly increase of 5.2% from the $74.2 million recorded for Q2, and an increase of 37.2% over revenue recorded for the third quarter of the prior year 2017. On a year-to-date basis, total revenue for the first nine months of this year was 28.7% higher than the level recorded for the first nine months of 2017. 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 third-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 and bookings by legacy and advanced products. We've been working to increase the efficiency of our organization and are planning to begin reporting with our 2018 Form 10-K our activities as one business segment rather than the three businesses, BBU, VI Chip, and Picor, we have reported to date. Going forward, we will present results only on a consolidated basis, and product and marketing details will be provided pursuant to ASC 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 rose 5.5% sequentially, and as a percentage of consolidated revenue, were 65%, the same level as the prior quarter. Advanced product revenue increased 4.6% sequentially, and on a relative basis, represented 35% of total revenue. Consolidated bookings rose 4.1% for the quarter, exceeding $91 million and bringing total one-year backlog to $116.1 million, a sequential increase of 12.6%. Bookings for legacy products declined 6.1% sequentially. In contrast, bookings for advanced products increased 20.6% sequentially, reflecting expansion of demand for power on package solutions, notably for AI acceleration and supercomputing applications. We also saw incremental growth of demand for a variety of advanced chips across a range of other applications. The shift in the mix of legacy and advanced product bookings over the last year highlights the impending transition in our business. For the third quarter of 2017, a year ago, the percentages of total bookings for legacy and advanced products were 64% and 36%, respectively. For the third quarter of 2018, these percentages were 56% and 44%, an indicator of further shift in revenue mix from legacy to advanced products for the coming quarters. 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 and 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're 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 in that our consolidated gross profit rose to 50% for the quarter, up from the second quarter's 48.4%, and the Q3 2017 gross margin of 44.2%. This is a reflection of the scalability of our business model, and more specifically, the improving performance of the manufacturing process associated with our advanced chip components, which are expanding as a percentage of our total unit volume. During the quarter, we were 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. We continue to pay 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. 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 becoming 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 an issue. Turning to operating expenses, Q3's total declined sequentially 4.6%, in part because of non-recurring severance expenses incurred in Q2. On a relative basis, operating expenses again declined sequentially as a percentage of revenue, the seventh such quarterly decline, falling to 33.3% of revenue for Q3 from 36.7% for Q2 and 40.6% for Q1. R&D expenses declined 6.2% sequentially, largely reflecting improved efficiency in the development of new products, and fell to 13.7% from 15.4% of revenue. Sales and marketing expenses were essentially unchanged, declined to 13.6% from 14.3% of revenue. G&A expenses declined 10.2%, largely related to lower stock compensation and personnel-related expenses, and fell to 6% from 7% of revenue. Operating income rose to 16.7% of revenue for Q3, up from 11.2% of revenue for Q2. These results are in line with the statements I made last quarter regarding spending trends. 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 total operating expenses to 30% of revenues as we drive gross margins towards 60%. I'll now turn to Dick Nagel for a quick overview of our tax position. For the third quarter, our effective tax rate was 1.7%, and we recorded a net provision of $227,000. During last quarter's conference call, we explained our perspective on the approximately $33 million 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 fourth quarter. Note, the company has been utilizing available net operating loss carryforwards 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&D tax credits, along with other tax credits, reserves, and other accounts, as the balance of our DTAs. If and when we decide to release the then current valuation allowance, the amount of such a release would be lower than the figure implied by our 12/31/17 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 release. As stated last quarter, we believe it is more likely than not we will release some portion, if not all, of the then current allowance within the next three quarters. Jamie? Thank you. Back to the Q3 P&L. We recorded net income after minority interest of $13 million, 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 to $14.3 million for the third quarter and ended at $68.2 million. This increase reflects operating cash flow of $14.3 million and $3.4 million of proceeds from the exercise of employee stock options during the quarter, offset by CapEx of $3.2 million. On a year-to-date basis, cash has increased by $24 million. Net trade receivables were little changed for the quarter, with DSOs actually declining to 41 days and no indications of portfolio risk. Net inventories increased modestly, up $1.7 million or 4%, largely reflecting rising material and component purchases to ship our increasing backlog. Annualized inventory turns rose slightly to 3.6. Winding up my review of the third quarter, total employee headcount as of 9/30/2018 declined to 1,018 from 1,024 at the prior quarter end, largely due to lower temporary staffing, a reflection of improved factory loading for the quarter. Total full-time employment was essentially unchanged, up a net two from 972 to 974. I'll now provide an update on our capacity expansion. The Q3 CapEx total of $3.3 million does not fully capture the level of investment activity underway. We have approximately $15 million of production equipment on order, of which $4 million is scheduled to be put in service during the fourth quarter. This additional equipment to be deployed within our existing 230,000 sq ft factory in Andover will increase its capacity to approximately $500 million in annual revenue. The next increment of capacity, from approximately this $500 million threshold to $750 million of revenue, will be deployed within an approximately 90,000 sq ft 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 the possibility of establishing a manufacturing facility in Asia, possibly with an Asian partner. Turning to our outlook, given our increased backlog and visibility into customer requirements, we are forecasting a sequential quarterly increase in consolidated revenue. This sequential increase may be relatively small, pending further increases in manufacturing capacity for advanced products. Listeners should keep the following in mind. First, despite our planning and safety stock methodology, we remain exposed to raw material and component availability risks. Second, we do not yet completely know what impact Section 301 import tariffs will have on near-term results. Third, we have seen early indications that the Chinese markets may be cooling, an indirect reaction to the U.S.-China trade dispute. Finally, our backlog, at a record high level, includes substantial deliveries in the first and second quarters of 2019, which reflects the increasing proportion of our backlog made up of orders for long lead time advanced products. 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 outside of our control. With that, I'll turn the call over to Patrizio. 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 their distinctly superior performance. In Q3, we hired a Global Automotive Business Development Vice President, Patrick Wadden, to lead sales and marketing in the automotive segment. Vicor is already supplying a high-density power system for the leading developer on level 5 autonomous driving systems, and developing power system solutions for other automotive applications. With significant long-term potential for Vicor products in autonomous driving and more generally, the electrification of vehicles, we hired Patrick to expand the use of Vicor's IP in the automotive 48-volt power systems market with a mix of product sales and technology license agreements. As always, I like to limit my prepared remarks, as I would rather answer your pending questions, so I will open the call. Mark? Thank you. Ladies and gentlemen, if you do wish to ask a question, then simply key star, then one. If you decide to withdraw your question or it has been answered, it's star two. To ask a question, it's star one. Please stand by for your first question. Your first question comes from the line of Quinn Bolton. Please go ahead. You're live on the call. Hi, Quinn. Quinn, just please check you're not on mute, but you're live to ask your question. Sorry, can you hear me now? Yes. Hi. Sorry about that. Hello, Patrizio. Hi, Jamie. Wanted to start first, just thank you for the color on the split between legacy and advanced products. 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? As of now, it is primarily 48 to the point of load. As you might have seen from a press release earlier this week, before too long, it will be a mix of power delivery to the point of load and power delivery to the 48-volt bus. Fundamentally, our strategy is to provide connectivity from the power source, whatever that may be, high voltage DC, single-phase or three-phase AC lines to 48 volt as a stepping stone to the point of load. The emphasis up to this point has been from 48 to the point of load. We've had initial applications that leverage our advanced products soup to nuts from the power source to the load, and there's going to be more of those kinds of applications going forward. I guess, just a 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. Is it including some of the three-phase AC to 48-volt converters that might sit at the bottom of the rack? Well, it has involved, let's put it this way, a few million dollars of 3-phase to 48. There's going to be a lot more of that in the future. It has involved primarily, to your earlier point, 48 to the point of load, Intel processor 1.8 volt, or an AI XPU at less than one volt and hundreds of amperes of current draw at that low voltage provided directly from 48 volt. We also make and are selling in initial quantities to a growing list of customers, bus converters that take the 48 volt down to 12 volt for intermediate bus applications. Those products themselves are far superior, several times smaller in size and more cost-effective than alternative solutions for intermediate bus conversions. By the way, those products, in addition to being relevant in the data center 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 or electrification, infrastructure is changing, as we all know. It's moving to 48 volt, but there are 12 volt legacy loads that are going to be around for quite some time. Those loads need to be fed at their 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. Part of our strategy, in summary, an essential part of our strategy, is to provide connectivity from and to any intermediate voltage, 48, 12, it doesn't matter. The advantages of the technology are very comprehensively applied to each relevant node. Understanding that the step-down 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 low voltage makes more sense. Can you just give us some sense how Vicor is positioned against some of your leading competitors in the space, Analog Devices, Infineon, Maxim Integrated, Monolithic Power Systems, in terms of the approach? I think you're taking a direct 48 volt down to the load voltage, where some of your competitors may have to do a 2-phase or 2-stage conversion with an intermediate voltage. Can you just talk about the architectures, what advantages you have relative to competitors when you look at the 48 volt space? Thank you. 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. To your point, the competition for 48 volt power system has been down a number of paths, including direct 48 to point of load. Some of these companies that you referenced are on the second or third try, involving first direct conversion, which did not work out. They've essentially, for the most part, gone back to the starting point of an intermediate bus architecture, where 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 infrastructures to the point of load. There are significant handicaps that come with the two-step approach, and some of them are, in effect, as fundamental as Ohm's law. Very basic. I will say that, I obviously hold in extremely high regard many of the companies that you referenced, that have accomplished all great things in their past. Frankly, particularly 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, that's really not the case, far from it. I would say that GaN, 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. Even in upfront converters that provide conversion from higher voltage buses to 48 volt, or from 48 volt, let's say, to 12 volt intermediate bus, GaN, as it stands today, doesn't offer any advantage. It costs more money than silicon. It's 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. To paraphrase, the head of purchasing at one of our customers, asked by a person that joined the company recently, in our presence, what is Vicor's competition? The answer was, Vicor has no competition. The reason why we have 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 that are 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, where a relatively high voltage device such as GaN could be used, and I look at the power that we dissipate in a silicon switch, that amounts to a small fraction of 1%. Even if that device, the silicon device, were replaced by perfectly ideal, mature, cost-effective GaN device, the upside in terms of reduction in loss would be negligible. Somehow, that's what a lot of the industry appears to be focused on. I would submit, in view of my experience in the field, that there's a misplaced priority. There's a lot more to making high density, high efficiency, cost-effective power converters, than replacing a silicon FET with a GaN FET. Thank you for that. Maybe just a quick one for Jamie. Jamie, from your prepared comments, it sounds like the component availability, discrete ceramic capacitors, while still tight, may be incrementally getting better. Am I reading those comments correctly? That's correct. Great. Thank you. We're far from out of it, but we're in good shape. Thank you. Your next question comes from the line of Alan Hicks. Please go ahead. You're live on the call. Yeah, good afternoon. Congratulations on record revenues, and I think it's the second highest net income quarter you've ever had. Going back to 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 is some very minimal traction for some specialty applications. Again, we keep gauging progress with respect to the GaN FETs. We benchmark them. We've done that recently again. It is something that's been hyped, frankly, for at least five years, and whose drive to the finish line keeps pushing out. Even once it gets there, and I have no doubt it will get there, its impact on power conversion will be very negligible. Mm-hmm. Okay. The area we've talked about in the past, some of the CPUs and XPUs are coming out with very fine line widths, 7-10 nanometers. What gives you the advantage there? At seven nanometers, processors are fed by voltages typically 0.6, 0.7 volts. To efficiently deliver that voltage at currents that in many applications now are reaching up and getting past 1,000 amperes, what you need, which is a unique attribute of our technology, is a current multiplier. Not a device such as traditional buck converters operating from 12 volt, that take 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 processors, 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 volt, it gets that much harder. The so-called duty cycles get narrower and narrower, the dynamic performance I don't want to get too technical, but let's put it this way, these fundamental limitations to the proposition of averaging down a voltage, it's a little bit like trying to make water that is a little bit warmer than the cold water faucet by mixing it in with the hot water feed, where in effect, you're trying to reach a water temperature that is close to the cold water. There is a much better methodology for this, which we patented. It involves so-called current multipliers. Instead of averaging down a high voltage, they divide it, and they can divide it by an arbitrarily large factor. We have applications where we divide down by a factor of 48. We have other applications where we divide down by a factor of 64. We got some new applications we're going to be dividing down by a factor of 72. You take 48 volt or 54 volt, you divide it down by 72, and you're right in the sweet spot of what the seven-nanometer processor requires. You get there with all the right attributes. Very fast response to load transients, very low noise characteristics, such that with our Power-on-Package and our packaging technology, you can integrate it within the XPU package itself or right next to it. Rachel. In the marketplace, at what point would there be a tipping point where this technology will be required to enable the majority of processors? That tipping point is taking place now. Just within the last six, seven months, we've been approached by half a dozen other major competitors, vying for their share of the AI market opportunity. Universally, they're all relying on our package, our current multipliers. There's no GaN anywhere close to that. There is no other solution anywhere close to that. Mm-hmm. 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 unscrupulous competitor who would want to try and chase our truck. Never mind the fact that there are fundamental technical challenges to doing that independently of the IP. Okay. On the new RFM product, how long will it take that to go into high-volume production? That's often an architectural change within the system, don't expect any immediate step-up in revenue. We've had a 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 the first customer was for Japanese 200 volt AC mains. We've since developed broader input range capability. By the way, we also have a whole new family of next-generation technology products, our fourth ASIC generation, that will take the RFM and all these other products to yet another level of efficiency and density and cost effectiveness. When it comes to RFM applications, front-end applications, I expect we're going to have some level of penetration with the RFM that's been recently announced. We're going to have a much deeper penetration as we release the first 4G RFM products next year. Okay. On your announcement with hiring the manager for the automobile industry, there was a mention of licensing. 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. He's 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. Whether it's the NBM or other products such as the power strip, which is a product we have developed for the complex power system of a level 5 autonomous driving capability, our technology, when it comes to automotive applications, has a number of sweet spots. Are you in discussions already for licensing? Yes, we expect that these opportunities are going to expand. Obviously, hiring Patrick was a key step to a broader automotive strategy. 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. It'll be automobile companies or auto parts companies, 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 on the call. Hi, guys. Congratulations too from me. I 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 of some of the raw materials you've been having trouble getting? Then the second question I wanted to ask was about the expansion. It seems like it's a turnaround from where we were three months ago with the new facility. Could you give a little more detail on that and what your partner in Asia might be? Let's start with his answer. Okay. I think the first part of the answer to do with lead times and capacity constraints. We've had some capacity constraint within the third quarter for advanced products. No capacity constraint on legacy products. That's why we've been placing orders and starting to install additional equipment to expand that capacity. As suggested in Jamie'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. 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. We're working proactively to make sure that capacity does not stand in the way of that. We do not let customers down, we are very good at scaling up capacity and deploying it in time to stay ahead of demand. The recent couple of months have been a little challenging. We've had to add a lot of overtime and that kind of thing to ensure that we brought about the capacity that was necessary to take care of customer needs. We're going to provide some relief with respect to that with the selection of equipment that is about to take place, then more so come the first quarter. The second part of the demand. Real estate. Huh? Real estate. Real estate. Yes, we have fine-tuned our strategy with respect to capacity expansion in terms of where to do it and whom to do it with. That's come about as a result of a number of revelations. One has to do with the timing for breaking ground and installing capacity in a different location, further away from our existing manufacturing facility. As it turns out, we have enough land to expand the existing facility, to expand it and bring about a nearly 50% increase in total capacity. It's very leveraged 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 a potentially very significant customer that they would very much like to have us have a presence in Asia for a variety of reasons. We started looking at that possibility. 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% increment of revenue capacity as an appendix to our existing facility. All right. Is 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 $500 million, rather, capabilities at the end of 2019? I wouldn't draw that conclusion. I think it's an indication of the fact, as 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 procuring additional equipment, that we are way ahead of our needs so that that doesn't become a bottleneck. To be clear, purchasing and deploying additional equipment within existing walls is essentially a three, four-month proposition. Obviously, it takes a lot longer than that to get new facilities built from the ground up. Okay. Well, thanks very much. Two, congratulations on your award there recently. Thank you. Thank you. Your next question comes from the line of John Dillon. Please go ahead. You're live on the call. Hey, guys. Again, I want to congratulate you on a really great quarter. Love to see the gross margins up there and the cash you generated, and also Patrizio on your award. That was really nice to see. My first question is, has anything fundamentally changed with Vicor in the last 90 days? 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 seven nanometer processors, the only way to have a competitive solution is with our technology. That sentiment has become abundantly clear within the last 90 days, as more and more companies, they come to us, they come here, or approach us to pursue solutions for them, working with other partners to enable advanced XPUs, sub-one volt, at 500 to 1,000 amperes. I think that the other significant takeaway in my mind within the last three months has been validation of our fourth generation ASICs, both with the 4G PRM and the 4G VTM. We're very far along with these devices. We're making initial products with the PRM. Very close to making VTM and current multiplier products using the VTM 4G controller. These devices bring about a major advance in terms of performance, density. They eliminate a lot of the component count of earlier generation control silicon. They enable much more advanced products, including, among other things, more advanced versions of the RFM. I think in my mind, those have been very significant milestones in terms of continuing to advance the state of our art. We are on track to We've got our own version of a Moore's Law, right? Moore's Law, which has been in effect for quite some time, sort of came to an end recently in terms of further advances with respect to processor 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. As we do that, the technological gap between Vicor and the competition gets wider as opposed to getting narrower. We're 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? Yeah, let me mention one more thing. Cost-effectiveness. In many products, take the NBM as an example. We have, by far, the lowest cost to actual than any competitive product. Not only are we one-third the size, but perhaps not surprisingly, being one-third the size, we're not quite one-third the cost, our cost, but we're substantially lower cost than any competitive alternative. That's just great to hear, because I know a long time in the past, you used to always have the technology superiority, but not always the lowest cost. That's really good to hear. Well, you might have heard me in the past as saying that, and it remains true, that superior 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. When competitors say we are two or three times the cost, they're looking at a Vicor from 10 years ago. They are either oblivious or purposely ignoring the realities of today. Exactly. You mentioned in the pre-announcement, you had a nice answer to that about the GaN converters and all. What I was wondering, has their claims with lower cost and GaN-built parts, has that affected your wins in the lower power CPUs that you power? For example, the Intel chips don't, like you said, they're only 1.8 volts instead of 0.7. Are they starting to pick up traction in those wins, or is that still consistent with you? Well, they had all the traction in those wins up to the point in time in which we successfully penetrated some of that business. To be clear, I suggested this in answer to an earlier question, our competitive advantage at 0.6 volt, that is for the AI processors, is, in one way of looking at it, several times greater than it is at 1.8 volt. Right. I don't expect that our competitive position at 1.8 volt, which is where Intel processors have been and may continue to be, may or may not, time will tell. That's not our strong suit. Our strong suit is in powering directly 7 nanometer nodes, doing so whether or not competitors take an intermediate step to 12 volt. Right. You're not losing any of your Intel business? No. Okay. Is there any reason in the world why your company would be valued at 40% less than it was 90 days ago? Can you think of any reason? I'm not going to answer that question. I cannot think of a reason. Okay. I can't either. You didn't really talk about bookings. Other than the general market malaise, right? Right. We're all mindful of what's been going on in general. Right. There's no company specific rationale whatsoever. There's no fundamental reason, there's no changes or anything that would fundamentally affect your company. 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 Vicor to give them a competitive advantage. Nobody wants to be handicapped, because ultimately, the issue from the perspective of these companies is, what's going to help them win against their competitors? They're very smart, right? They wouldn't be wanting to handicap their competitive stance by following a crowd that has failed to provide the level of advances in power system density, efficiency, flexibility, power package technology that these systems require in order to achieve the low performance that gets them ahead of their competitors. Right. You enable a higher performance computer. Of course they come to you, right? We do. We enable a higher performance GPU, and we're going to be- Yeah We are enabling a lot of higher performance ASICs. Yep. If you wanted to, you could convert your designs to GaN also, correct? To GaN. 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? Do you think you'll still have about the same bookings 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 has expanded gradually, as suggested in Jamie's prepared remarks. We see the revenues ticking up at a modest rate this quarter. We'll have to wait and see with respect to the bookings. Jamie's opinion is a look- I imagine some companies primed the pump then and gave you pretty good bookings upfront for Let me put it this way. You might recall me saying several quarters ago that we need to get past the stagnation of a long timeframe in which we're building up our technological capability. We have not translated yet in design wins and revenue growth. I think I mentioned back then that the key milestone was to get past, or to, the $300 million 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. I think that's coming through just as expected. By the way, in the past, I think many companies had some level of hesitation with respect to doing business with Vicor, 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 of last resort if you needed to have higher performance. That old perception has changed, is continuing to change. Again, the calculus now is along the lines that I outlined a little while ago. Vicor is gaining traction. Vicor is getting to critical mass. I get a lot more to lose from not doing business with Vicor than the other way around. Congratulations. It's really amazing quarter, and looking forward to the future. Thank you. Thank you. Thank you. Your next question comes from the line of Peter Low. Please go ahead. You're live on the call. Hi. Thank you for taking the question. 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 into 12-volt servers, but you are selling a 48-volt product. How does that work? Well, there is no claim whatsoever that we have taken all the business of any one customer, right? Without mentioning customers' 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 at 12-volt. This is not an all or none proposition. It's a progressive A series of 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-volt. It's all going to be 48-volt in the data center space. It's going to be 48-volt in automotive. Okay. If the car 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 of that kind, these are bi-directional converters that can convert 48 to 12 and convert 12 to 48. Whether it's a data center requirement with a 12-volt infrastructure where a 48-volt GPU needs to be powered from 12-volt, and an NBM can convert 12 to 48 to power the 48-volt load. As I suggested earlier, in automotive application, where there's an opportunity to use a 48-volt battery, get rid of the 12-volt battery. Instead of distribute 12-volt with heavy gauge wire, distribute 48-volt, and then power legacy 12-volt load with an NBM. We can go either way, and fundamentally, we get the best of all solutions from 48-volt direct to 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 or 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. Obviously, the number is so much dependent on the particular opportunities, volume, the revenue opportunity, and the margin opportunity as a function of revenue level that we want to achieve. I'll go back to my earlier statement, which is both in front-end conversion and in point-of-load conversion, we have the lowest cost card. If you measure the cost of our building blocks in terms of cents per watt or cents per amp, 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 that factors into the cost of the product. It's got less silicon, it's got less copper, it's got less PC board, it's got less of a packaging cost. Now, the delivery of this 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. 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. 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 here? What segment of the Chinese market is cooling? Are you seeing 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? There's been some cooling taking place over the last several months. Let me answer it this way. Getting power semiconductors, FETs, I'm not talking about GaN FETs now, I'm talking about good old silicon FETs. Getting FETs months ago was a lot harder than it is today. Getting ceramic capacitors several months ago was a lot harder than it is today, that's symptomatic of the fact that the strains on the supply lines have eased, I think, considerably over the last several months. Frankly, from our perspective, this is a good thing. We would not want to be constrained by availability of components. There's plenty 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. This environment is perfectly fine for us. I think, frankly, we had some level of concern with respect to the component pipeline months ago. In some instances, we had to pay premium prices for some of these components. That's no longer the case or much less of a case today. Are you seeing a cooling in your own business, probably more on the legacy side versus the advanced? Bookings last quarter were sequentially lower for bricks than the prior quarter. Jamie gave you some quantitative measure of that. Yes. I think bricks bookings declined by, what percentage? What was it? 5%, 6%? It was 5% or 6% down essentially from the prior quarter. It was also very strong for the first half. Within- It declined. The advanced products bookings were up, I think, by slightly over 20%, right? That's really indicative of the general point that I was focused on, which is when you look at the cooling Chinese economy or global demand for electronic products, you correlate it to a legacy product, which is a mature product, where there's not going to be growth, right? We recognized that for a long time that it's good for the bricks to hold, essentially level revenues in a normal environment. Those products, guess what? They're going to be affected by a cooling Chinese economy, a cooling global economy. When it comes to the advanced products, the much bigger driver there is the traction with new customers and new applications. That dwarfs the temperature of the economy, right? Because that's the second 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? We sell bricks into a diverse set of customers and applications, from transportation to industrial applications to some communications applications. These are products, as mentioned in the prepared remarks, that are sold to something of the order of 10,000 customers. They're a good barometer of the general state of demand, and I think the 6% reduction from Q2 to Q3 is itself indicative, independently of the other indicators having to do with the components we use, CAPS and FETs, of a cooling economy. Again, that's got to be contrasted with the significant growth in advanced products, which has got really nothing to do with a warming or cooling economy. It's got everything to do with traction with new customers and new applications. Yep. Of course. Thank you. Thank you. If there's one more question, we'll take it. Thank you so much. The next question is coming from the line of Jim Bartlett. Please proceed. Could you give us an idea when you see significant impact in, let's say, maybe by the haves of various things? First of all, on the NBM, second with the RFM products, and third with, and this is interrelated, if your new 4G. Okay. 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. MCD, MCMs, point-of-load solutions, they're going to drive significant growth next year. The NBM has got design wins, large multiplication design wins, but it would rank below that, the level of opportunity with point of load, the 48 volt, the active point of load solutions in the near term. Now, in automotive, in longer term, with legacy 12 volt buses, the NBM 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. A similar comment would apply to the RFM. 4G is going to start shipping in volume to customers in the second half of 2019. 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 buses. It could be 1,000 volts, 800 volts, or it can be 0.6 volt. It doesn't matter. We get in a control system with 4G capability, what we know to decimal, and do so with extremely high performance and cost effectiveness. 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. Again, I was confused on the front end part of it with RFM products. Where does that start to have a significant impact? There's going to be significant RFM business, but on a lesser scale than the other two. We rank them, again, point of load, way ahead of the other things. NBM, below that in the short term. RFM, below that in the short term. Longer term, the RFM type of building block represents essentially half of the pie. One way of looking at it is that there's as many cents per watt go taking the watts from three-phase AC to 48 V, as there is taking it from 48 V to the point of load. The RFM is game changer in terms of, I think the analogy I like to use is the airline analogy. Fundamentally, the strategy is to have jumbo jets that take the payload from the source to a 48 V bus on the way to the point of load. It can take on different directions going from 48 to the point of load. There's a common denominator need to take power from the worldwide AC mains, single phase, three-phase, to the 48/54 V bus that is going to be at the heart of the entire point of load infrastructure. That's particularly the case in any stationary application. To some extent, it can also be the case in other module applications. When do you see your first automotive revenue? We got some minimum automotive revenue now. With Patrick, we have an initial target of $100 million 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 extreme excitement, extreme opportunity from the meetings he's at with some major companies. I think that the timeframe in which that initial $100 million target can be achieved, I believe, has moved in relative to his expectations before joining the company. Speaking of timeframes, you mentioned, or Jamie mentioned the 30% operating cost and 60% gross margin, driving towards that. Could you give some timeframe 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. We're actually closer. I set an internal target of 30% early in the year, and in our internal discussions, we thought it would take longer than that, again, to get close to it at the low 30%. I think it would be easier and faster to get to 30% operating expenses than to get up to 60% on margin. To some extent, that's going to be a function of how aggressive we choose to go on driving business growth. That's the level we want to keep at our disposal with respect to driving long-term dominance in the marketplace. Would a five-year timeframe be reasonable? Well, if you were to draw some kind of linear extrapolation from the progression that's taken place in the last year on an initial relatively modest revenue step up from $200 million-$250 million level to $320 million run rate of the recent quarter, you would draw the conclusion that it could happen a lot quicker than five 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. I would add my congratulations on spending a lot of money and developing a lot of patents and strategy and some terrific technology. Yeah, it's only taken $400 million, and a lot of sweat, we are, I think, in a much better place today. Thank you. With that, we'll look forward to talking to you in a few months. Have a good night.