Good afternoon, ladies and gentlemen. Thank you very much for joining today's Vicor earnings results for the 2nd quarter ended June 30, 2018. And at this moment, all participants are in lesson only, and later we'll have a question and answer session. Star followed by 0 on your telephone, and we'll be happy to assist you. And the next time we introduce our host for today, We have Mr.
James, Mr. James, CFO and Doctor. Patricio Viceralli, CEO. Go ahead please.
Thank you, Bart. Good afternoon and welcome to Vicor Corporation's earnings call for the second quarter of 2018. I'm Amy Simms, CFO and with me here in Andover are Patricio Vinciarelli, CEO and Dick Nagel, CAO. Today, we issued a press release summarizing our financial this press release is available on the Investor Relations page of our website, Vicorpower.com. We also filed a Form 8 K earlier today with the SEC related to the issuance of this press release.
As always, I'll remind listeners conference call is being recorded and is the copyrighted property of Vicor Corporation. I also remind you various remarks we make 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 the 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 our forward looking statements will in fact prove to be correct. Actual results may differ materially from those explicitly set forth in or implied by any of our remarks today.
The risks and uncertainties we face are discussed in Item 1A of our 2017 Form 10 K which we filed with the SEC on March 9, 2018. Please note the information provided during this conference call is accurate as of today, Tuesday, July 24, 2018. Vicor undertakes no obligation to update any statement including forward looking statements made during this call, and you should not rely upon such statements after the conclusion of the call. A replay of the call will be available beginning at midnight tonight through August 8. 2868010 followed by the passcode 686880 22.
In addition, a webcast replay of today's call will be available shortly on the IR page of our website. I'll start this afternoon's discussion with beginning with consolidated results, as stated in this afternoon's press release, Vicor recorded total revenue for the second quarter of $74,200,000. Q2 represented a sequential quarterly increase of 13.7% from the quarter of the prior year 2017. Our consolidated gross margin rose to 40 up from the prior quarter's 46.3 percent gross margin and the Q2 2017 margin of 44.9 percent. Operating expenses sequentially declined on a relative basis from 40.6% to 37.2 percent of revenue.
Operating income rose to 11.2 percent of revenue or $8,300,000, for the second quarter. For the quarter, our effective tax $163,000, resulting in net income after a minority interest of $0.19 per diluted share as compared to $0.10 per share earnings last quarter. $1000, up from the prior quarter's diluted share count of $40,167,000. Notable revenue events in Q2 for Advanced Products included a record volume of PICOR SIP regulator shipments, for 48 Volt to point of load applications and initial shipments of MCMs and MCDs providing our power on package solution for a hyper performance GPU application. Quarterly international revenue increased by 20.3% sequentially.
Turns volume that is orders received and shipped within the quarter totaled 13,500,000 representing approximately 18% of second quarter revenue, reflecting a continued increase in our consolidated backlog, which exceeded $103,000,000 efficiencies of higher production volumes but were negatively impacted by higher material costs. We are carefully monitoring material costs. Given supply chain constraints, which may continue into 2019 for commodities such as ceramic capacitors and discrete semiconductors. Nevertheless, we have not changed our expectation for sequentially higher gross margin percentages through 2018 driven by higher volumes and economies of scale that will further reduce average unit costs. Operating expenses for the 2nd quarter rose 3.9 percent sequentially in absolute terms after being essentially unchanged from the fourth quarter to 1st quarter.
The impact of our annual merit increases for salaries and wages as headcount is our largest expense, an increase of sales commissions paid associated with an increase in commissionable sales, and certain one time charges associated with severance accounted for the bulk of the increase in operating expenses. I'll return to these charges in a moment. Since Q2 2017, the height of the development of power on package technology. For Q2 twenty eighteen, R and D expenses represented 15.4% consolidated revenue. While we believe 15 percent of revenue for engineering expense is an appropriate level of R and D spending for Vicor we also believe having invested upwards of $400,000,000 and secured a comprehensive patent portfolio Our R and D spending can expand at a lower rate than our expected revenue growth rate for the foreseeable future.
As such, we expect the yearly rate Marketing and sales activities currently represent our 2nd largest expense category at 14.3 percent revenue and have increased as we have built out the global sales and field application personnel and infrastructure needed to to execute our strategic transition. While mindful of the cost of lengthy evangelical efforts needed promote Vicor's highly differentiated products, we believe the company has crossed the chasm, so to speak, given the momentum achieved in the 48 Volt to point of load market segment we have created. As such, we believe growth in marketing and sales Sales commissions, customer support activities, and T and E will likely grow at rates commensurate with our sales growth. But total payroll should increase at a lower rate. Accordingly, we expect the ratio of marketing and sales expenses to revenue to decline.
G and A expenses represented 7% of revenue in Q2 and are expected to decline as a percentage of annual revenue. But of course, will vary quarter to quarter depending upon the timing of audit and filing expenses. Returning to the one time charges incurred during the quarter, we effective twelvethirty 1twenty 18 as a part of our ongoing initiative to streamline operations and improve our cost structure. To cover this closure and other severance and personnel related costs, we incurred a total of approximately $500,000 in charges for the second quarter. Other income swung to a negative loss, largely related to the weakening other income remains positive going forward.
Pre tax income totaled $8,300,000 for the 2nd quarter. As stated, we recorded an income tax provision reflecting federal, state, and foreign amounts of $363,000 for the quarter. I'll now take a As of December 31, 2017, the balance of the 100% allowance against the value of Vicor's domestic net deferred tax assets considered more likely its deferred tax assets, which represent the cumulative value of deductible temporary differences, tax credits, and tax loss carry forward to offset future continue to maintain this valuation allowance based allowing the full utilization of our domestic DTAs. Elements of this assessment will include our ability to accurately forecast taxable income, The number of quarters of successive profitability appropriate to support a decision to release, I. E, reduce the allowance and the amount of we would debit the balance of In turn, resulting in a potentially substantial increase in reported net income for the quarter in which the release occurs.
Please note this release transaction would have no direct impact on cash flow. Also note, due to our recent profitability, The company has been utilizing available net operating loss carry forwards and tax credits to offset taxes due on taxable income, based on our estimated total tax provision for has declined, but because the DTA balances reported on our quarterly balance sheets on a net basis, reflecting the allowance, and because we prepare our quarterly tax In other words, we don't adjust or true up the valuation allowance for the financial statement footnotes in our Form 10 Q filing. The updated balance of DTAs and 2018 Form 10 K, sometime in early March 2019. Assuming continued profitability, If and when we were to decide to release the then current valuation allowance, the amount of such a release would be lower than the 33,000,000 dollar balance recorded as of December 31, 2017. However, at the present time, we cannot reasonably estimate the timing of the potential release, We are bringing this to your attention at this time in consideration of Vicor's improved profitability, driven by what we consider to be sustainable company specific factors.
The company is well positioned to sustain the recent trend of improving performance. As such, although we have no schedule for doing so, we believe it is more likely than not, we will release some portion, if not all, of the then current allowance Cash and cash equivalents sequentially increased $11,200,000 for the 2nd quarter ending at approximately $53,900,000. This increase reflects operating cash flow of $9,300,000 $3,600,000 of proceeds of employee stock options during the quarter offset by capital expenditures of $1,700,000. Note just over half of the proceeds from stock option exercises were associated with the May merger of our PICOR subsidiary into Vicor, which, while I will address at the conclusion in my remarks. Given the increase in sales, ending the quarter at $43,900,000.
DSOs rose slightly to 46 days, up from the prior quarter's 44. Portfolio actually rising $2,800,000 or 7.2 percent, largely reflecting rising material and component purchases to meet our increasing backlog. Annualized inventory turns were steady at 3.5 quarter to quarter. Winding up my review of the 2nd quarter. Total employee headcount as of June 30 increased 1024 from 995 due to increased temporary and co op staffing.
Total full time employment was essentially unchanged, up 3 from 969 to 972. As addressed last quarter, productivity continues to improve with improved level loading of quarterly production, and longer term visibility into our growing backlog. My final comment is on the merger as of of PICOR Corporation with and into the Parent Vicor Corporation. As a result of the merger, The separate corporate distinct segment in our publicly filed financial statements. Both PICOR and the VI Chip subsidiary were established as separate corporations in order to facilitate an independent status at some future date, reflecting their distinct operational and product characteristics.
Over time, employees were awarded options for the purchase of subsidiary stock and some options were exercised resulting Approximately 3 years ago, the Vicor Board authorized the development of a plan that would provide liquidity for holders of subsidiary options and stock. As independent status was less likely for both subsidiaries. We completed the PICOR merger in the second quarter. To affect the merger holders of Pifor common stock and Pifor stock options received an equivalent value of Pifor, excuse me, of Vifor common stock and Vicor stock options, respectively, and the Vicor Corporation amended in restated 2001 Stockop plan and any options outstanding thereafter were assumed by Vicor. The merger and the option plan assumption in the fourth quarter of 2018.
For the fourth quarter of 2018, related financial statements or any impact on our segment reporting for the 3 6 months ended June 30th. The primary impact of in Vicor's fully diluted share count calculation. Management plans to address liquidity for holders of VI Chip Options and shares possibly with the same methodology recently utilized for PIKOR holders. We anticipate being able to complete a transaction involving our VI Chips subsidiary in 2019. Our expectation is the completed transaction or transactions will have no material impact on Vicor's consolidated financial statements.
Finally, turning to our 3rd quarter outlook, given our increased backlog and visibility into customer requirements, we are forecasting a sequential increase I must remind listeners as I do each time I speak with you. Our operating and financial forecasts are subject to unanticipated changes As discussed, supply chain uncertainties represent near term risks for us, as well as our customers, notably Centimeters experiencing supply constraints or the cost of potential tariffs. With that, I'll turn the call over to Patricio.
Thank you. As reported in our press release and addressed by Jamie, the second quarter of 2018 was characterized by a substantial increase in EPS, net of higher material costs and one time charges. Total bookings increased sequentially to 87,500,000 the 10th consecutive quarterly rise, reflecting the long anticipated transition from 12 volt 48 volt in data centers. We believe that before too long, a similar transition will gain momentum in automotive At the point of load, VAICO is uniquely positioned to enable high performance CPUs, GPUs and artificial intelligence ethics for applications, including cloud computing, autonomous driving, 5g Mobility, and robots. It is worth noting that power computing artificial intelligence ethics built on a 7 nanometer node and consuming as much as 1000 amperes cannot be efficiently powered without DTMs or MCMs using Vicor power and package technology.
And the 1000 amp years is what it takes to expand computing beyond the limits of Moore's Law. With the transition from 12 to 48 volt, vigor is also uniquely positioned to provide high density front ends, supplying 48 volt hubs. From AC sources, doubling our market opportunity, while enabling VICO customers to leverage complete high density power systems from the source to the point of load through 48 volts. To meet rising demand, we're expanding capacity initially in our 250,000 square feet and door factory and in approximately 18 months with the 2nd facility specifically designed to manufacture proprietary chips as in converter housed in Package. The package technology needed to enable power on package.
As always, I'd like to limit my prepared remarks to a minimum as I would rather answer your penetrating questions. So I will open the call. Operator?
Thank you.
First question coming from Ken
Farcilas from Otherwise Asset Management. Go ahead please.
Good afternoon. Just let me, I'll
start with two questions and then hop back in the queue and give others a chance. But can you be more specific in your capacity expansion plans going forward? I know last quarter you spoke a little bit about the potential for using a third party, to help you with, on the manufacturing side, can you just expound a little bit on what your plans are at this point to increase your capacity going forward?
Yes. So as discussed in earlier calls, we have lined up, third parties to facilitate certain process steps that can be taken out of our manufacturing lines in andover, to both align ourselves with certain core competencies and facilitate greater capacity within the indoor factory. With this initiative, we believe that the indoor factory can support, upwards of a $500,000,000 in sales. We are, in parallel pursuing, opportunities for expansion in in our general area, likely in New Hampshire, but possibly Massachusetts, we're looking at a variety of opportunities. And we'll be closing in on one of these opportunities in the near future, anticipating that the second factory will want to be up and running in approximately 18 months.
Okay. And were there any 10% customers in the quarter? And if there were, was anyone new to that list in the current quarter?
There was no 10% customer in this past quarter. Thank
you. Thank you. Our next question coming from Matt Vignoff from Shay. Go ahead please.
Good afternoon as well. And my question is related to the previous one, but noting that the company has achieved the best gross margin in recent years and the continued progress expected in sales, I'd like to ask about A, how many how much more efficiency can be achieved out of the existing facilities in Andover from a gross margin standpoint. And then Part B would be as you contemplate the additional facility 18 months out, when this comes online, would it be reasonable to expect a step back in gross margins or would the additional capacity be possible in a format that maintains your gross margin progress? Thank you so much.
Thank you. So first with respect to expanding capacity within our existing facility. As you can imagine or as implied by discussions that have taken place in the past, we've had a large and largely fixed cost structure associated in particular in this area. Manufacturing overhead to facilitate the unique processes and capabilities we have developed in our factory. This resources will not have to scale up anywhere close to direct proportion the increases in revenues that can be supported from the indoor factory.
In other words, as we get to the roughly $300,000,000 level of the most recent quarter to $500,000,000 level. I do not see the bulk of our manufacturing infrastructure growing in cost by more than, I would say, high single digits. So with that, we anticipate significant improvements in margins. We also expect to be able to achieve reduced material costs, associated with, you know, larger volumes. So all this should support an expansion in margins.
I should note though that with respect to the material cost component, as suggested in the prepared remarks, and that's noted also by Jeremy, particularly with respect to certain commodities, in recent quarters, the MBA really had commodities because of, the demand levels with respect to those components. But this is an issue that will settle out. And again, looking at the 10,000 feet, the material cost structure of the products will be going down to some degree with increased volumes. Now with respect to the second half of your question, to your point, As we begin to invest in a new facility, we're going to have to start depreciating that facility the equipment that goes in it. And we're talking tens of 1,000,000 of dollars worth of equipment.
However, as suggested in earlier calls, we are first taking the steps to necessary to expand capacity within the existing facility. To increase the margins well above the recently reported 48% before we begin to have to carry depreciation costs associated with the new facility. Also, in regards to the new facility, as suggested in the prepared remarks, This is going to be a facility that will be designed is being designed from the ground up to make the manufacturing of chips our unique packages that support a good support visually all of the products, in the most efficient manner more efficiently than with the existing facilities. So, in summary there's going to be continuing improvements over the next several quarters. At some point, there's going to be negative contributions arising from additional depreciation, but those are going to be absorbed by the higher revenues and ultimately are going to be benefiting from the greater efficiency of manufacturing line that is architected to make, best user resources in making chips.
Something that when the Pandora facility was originally designed, wasn't even a figment of anybody's imagination.
Thank you for the insight and best of luck.
Thank you. Our next question is coming from John Henderson from Kershner Trading Group. Go ahead please.
Hey guys, congrats on the forward progress. Exciting.
Thank you.
One question regarding the cadence of orders on your last call. I think you had provided investors with the expectation that orders would grow sequentially throughout the year? I was just checking in on that front. Are the expectations still the same?
Yes, dispositions are still the same. Thus far this quarter, we are, ahead of the prior quarter, about the same rate as last quarter.
Understood. And looking further ahead, is there any type of acceleration that you can talk about for Q4 for next year? Just too early yet?
I think it's too early. There's a lot of moving pieces. As suggested in the prepared remarks, within the last several months, see change having to do with the many initiatives on the AI front, the realization that many have come to make regarding the fact that when you need to power an asset with 400, 500, 600 amps of current consumption at 0.8voltsor0.7volt the traditional solution going through 12 volt pass and a large multiplicity of backregulators. No longer works. The expression the buck stops here comes to mind or the many bucks stop there.
They stop at a few 100 amps, particularly speaking. So we're seeing a lot more opportunity developing on that general front, also suggested in the prepared remarks, We're also seeing more opportunity taking customers from their AC sources to the 48 volt up. We already had one such engagement in Japan last year, believe that this precursor to future engagements of a similar kind, we're going to be providing the complete solution from the AC source to the point of load through factorized power building blocks all the way. So all of these things, will contribute to near term and longer term growth opportunity. As far as I can see.
Thank you. And final question, I know when I attended investor meeting for your annual report, you were, referenced Waymo as a customer And in Google's conference call, they referenced how autonomous vehicle usage was 8,000,000 miles seems as though the opportunity has nearly begun. Are you still of the opinion that it's going to be 2020 to see full fledged adoption there?
Yes. We believe from a variety of sources that the promise of level 4 and eventually level 5 autonomous driving is is coming to fruition. I think it is going to start happening with the fleets for particular purposes in that general timeframe. We're very excited to be engaged in the best applications of this kind with, I think, companies that have had great leadership in that general field. So this is a first step in our entry into the automotive space, where we believe we have considerable opportunities going beyond the autonomous driving opportunity.
GPU's are another area of opportunity in the general space.
Great.
Thanks so much guys.
Thank you.
Mark Lanier from Texas Capital. Go ahead please.
Thank you. One of my questions has been answered. The other one has to do with the subject of of tariffs. I understand the full range of uncertainty that surrounds this issue, to a degree, but I wonder, because you mentioned it, previously in the call, what thoughts you have about the levels of exposure you may have for potential tariffs that people may be predicting. That would be helpful.
Thank you very much.
Well, so it's obviously a very fluid situation. I have to predict what is going to happen. Thus far, we have not incurred significant incremental costs due to any tariff. We do not know whether there will be any real impact from any of the tariffs obviously, it's been talk of potentially having tariffs applied to all of the Chinese imports in particular. And we do source from China certain components.
But I would say on a general level that throughout the electronics supply chain, tariffs are going to have to be absorbed and to the extent that they stick passed along. To customers. Obviously, if it is a de minimis impact that we're going to absorb them for goodwill, if it were to become more significant with that to reflect them in the price of the product. I hope that answers your question.
Hello?
Thank you. Our next question coming from John Dillon from DNB Capital.
Hey, guys. Congratulations. Really great quarter. In particular, the backlog numbers, I think, a record, all time record. And also, it was really nice to see you generate that much cash, really, really nice job.
So my question is, on the bookings. I wanted to just see if I could get a little more color on the bookings, opportunities hitting in the fourth quarter. I think Navidea has announced they're going to be shipping production quantities of their new systems in the fourth quarter. Can we expect the bookings to have a sequential increase this quarter?
Yes.
And
As I mentioned earlier, an answer to an earlier question, through July 24th, we are substantially ahead of where we were at this time last quarter.
Okay, good. Could we expect a 10% increase do you think on that?
I'm not going to make a 2 digit accurate prediction with respect to that. Let's wait and see what happens. But I think we are continuing to see improvements on the demand side.
Have you had many bookings for the Navidea stuff yet or is it still, coming this quarter?
Did you have
We're not mentioning customer names. But generally speaking, we are seeing, bookings from all of our new programs, including ones that have been made public.
And you mentioned supply chain constraints. Do you feel that that's going to slow down your revenue? I mean, I heard from Jamie, expecting a sequential increase in revenue, but I didn't hear any kind of, is it going to be a substantial or just a marginal increase in revenue?
We're going to see, I think, a substantial increase in revenue. I think availability of certain components, in particular ceramic caps and power semiconductors has been an issue. There have been some price increases in that our area. We will solve those. We incurred some incremental costs in Q2 because of those But we've been able to get the components we need in order to take care of our customers.
Okay, great. So you have the parts. You're just going to pay a little bit more for them?
Yes.
Yes. And one last thing. You said you were extending the performance beyond Moore's Law with the new 7 nanometer. Can you kind of explain that a little bit more? Is it because the way you deliver power you're enabling these, artificial intelligence systems or
Right. So to be clear, we're not, you know, we're not in the business of making the CPUs or GPUs far from it, our business opportunity is limited to enabling solutions, best in class solutions which notably require power. And the point there is that it has become very clear. That, number 1, moves low, is at the long run and a great run, Intel was for a very long time able to keep raising the bar on performance I think it's no mystery that, Intel CPU is not in recent times made progress at the rate of early times. So more slow has been, if not hitting the wall, has been coming into a different area of maturity and a slowdown.
On the other hand, invidia as the prime example with its GPUs has been able to accelerate no pun intended performance of Essex that are developed on with a different methodology and on processes that, require power delivery as the level of several 100 amperes and, voltage nodes that will be the 1 volt. So that's fundamentally different from the Intel paradigm. So the Intel paradigm has been predicated on a different computing architecture. And on an internal, regular methodology that sources power typically at 1.8volt. So what you have in the computing field is, again, the Intel paradigm, which continues to leverage Moore's Law based on 1.8 volt feed to the CPU are typically 100 or 200 amperes.
On the one hand. And then you have GPUs and other kinds of, ai ethics, that are operating on 7 nanometer on a 7 nanometer node typically TSMC in Taiwan. And from those platforms, they can achieve a very high level of parallel computing performance, but at the cost that we're going to feed those devices with, 0.8,0.7 volt, the 400, 500, 600 app years and rising. It's those kinds of computing platforms that are going beyond the limits of Mooreslow. And it's those kinds of computing platforms that with our chips and with our factorized power solutions, with our VDMs and even more so with our MCMs.
With our power and package technology, we can best support.
Got it. Thank you very much. And again, congratulations.
Thank you.
Thank you. Next we have Ken Vasos from of Life Asset Management. Go ahead please.
Thank you for taking a follow-up. I appreciate it. Just two more questions quickly. The new facility you talk about an 18 month timeframe to have that facility up and running. Is that being driven by specific customer demand forecast that your customers have discussed with you?
In other words, what visibility do you have over that timeframe for the need to have that type of revenue capacity? And what do you think the CapEx would be for the new facility roughly?
So the math is relatively simple, right? We're growing at 30%, 35% an annual rate. And in the most recent quarter, we were analyzed the $300,000,000 rate. So, just a linear separation. I don't want to go out on line here, but I'm answering your question.
In effect at a high level, right. In 12 months, with a 30%, 35% growth, the 300,000,000 turns in to $400,000,000. And 6 months after that, we get pretty close to the capacity limits of Pandora facility. And obviously, we will not want to be, that close to the capacity limits of the facility. So we want to get a new facility up and running ahead of a national need.
Now having said that this elasticity with respect some level of elasticity with respect to the expected capacity of our existing underwear factory. We've been creative in the past with respect to figuring out ways on how to get more capacity out of a certain space. And I'm sure there's still opportunity for some further expansion in that capacity that shouldn't need arise. So this is, roughly speaking, the math that stands behind the need to have another facility in place in approximately 18 months, whether it's going to be, 13, 14 months or a little longer than 18 months, it's going to depend on how more capacity we can get out
of it.
And what actually happens with respect to demand from particularly large customers and customers are larger. We have more and growing statistical base of customers. So that's a general rise in the tide. And within that, there are some very large customers, even though we haven't had one in the last quarter with more than 10% we may well have in the next year greater than 10% customers, maybe 1, maybe 2. So their unique demands will also drive the decision point with 3 back to the additional capacity.
Okay, great. And Jamie, just more of a housekeeping question. You talked about the revenue split between Advanced Products and legacy products in the quarter?
We did not in our remarks, but I believe we do in the filing.
Okay.
That's fine. Yeah. Now, speaking, I would say that both, we look at the business as a power component business at the point of load and a power system business in the front end. The power system business includes within it, the legacy business of the classic Vago Bricks. Both businesses are growing.
The growth rate or the power component business that is the point of load business has been significantly higher than the power system business. But as suggested earlier, I would expect that before too long, the Power System business growth rate will increase and long term both business units should grow at comparable rates.
Great. Thanks again for your time and congratulations.
Thank you.
Thank you. Next question coming from Wally Walker from Hana Roderick Capital. Go ahead please.
Yes. Thank you for taking my question and let me echo congratulations on another great quarter. As your backlog has grown as rapidly and significantly as it has, how should we think about the trend in converting that into revenue? And with was Q2 a reasonable template for doing so.
Yes, I think that, as suggested in the prepared remarks, we see the quarter worrying is according, which we're going to be growing the top line. We're not spelling out exactly how much because of our idea of factors, but we see growth that is going to bring about a further expansion in the margins. We expect to get to cross the 50% level on gross margins based on, at the top line increasing. A level that would be about credit economies of scale.
Thank you.
You're welcome.
Thank you. Next question comes coming from Alan Hicks from and supply capital management. Go ahead.
Yes. Good afternoon. Can you give us an update on the RFM product?
So we have, began to branch it out into particular models for a broadening range or customer opportunities. So, the issue engagement, as you might recall, was with the Japanese customer that I referenced earlier were, that was the first we provided the complete solution from what in Japan is a two 100 volt 3 phase AC source all the way to the point of load by way of, larger array is a multi megawatt installation, larger array of RFMs. In liquid cool system, delivering to a 40 8 volt up, the power required to drive MCD and MCMs powering a large array of CPUs. That initial system is paving the way for new engagements with a number of customers that will not use the same 200 Volt RFM because that's kind of specific to the Japanese AC mains. What we'll need for other engagements are, versions of the RFM that enable conversion from 400 volt and 480 volt AC sources.
Those are coming together and having customer demonstrations in the next few months, again, setting the stage for RFM sales and compete solutions from the ACRs all the way to the point of load.
The initial, product in Japan that was sort of, what just like a was like a custom application for them or? Well,
it was a solution, again, for the Japanese AC source to face source, which happens to be to undervolt. To apply LFS into datacenters and other applications on a global scale, it takes a variation on the initial RSM It's fundamentally the same product. It's just the minor adaptations that enable it to operate from 400 or 480 volts sources. So we've completed those improvements and those are our passions And I'm engaging now in or beginning to engage in demo sessions with a number of interested customers. So there is a great deal of interest in this product for a number of reasons.
So one is obviously the 48 volt hub taking hold, in certain end markets and needing to supply the 48 volt hub from variety of sources, including in particular 3 phase AC sources. Another factor of play is liquid cooling. The RFM is uniquely adept at being cooled either in Fine Earth in an immersion bath or with more conventional water cooling. Which conventional ACDC front ends are not nearly as capable of doing. In other words, we can support much, much higher density in the front end than conventional AC power systems can.
Because of the unique attributes of the RFMs. As you might have read, liquid cooling is coming of age because of the drive to higher density in racks and generally speaking in a variety of systems. So all these factors converge to the merit of a solution is architected in all of its key elements from the FM performing conversion from the power source to the 48 volt app followed by, in particular, power on package, MCDMCM systems, taking power from the 4 k volt up and delivering it to the point of load.
So would you say you're standardizing some products based on that original application with PESI?
We have a standard product now that is can be configured to convert power from either 400 volt to 200 volt or 480 volt, to a 48 volt or a 54 volt hub.
Okay. So how soon do you think those would be shipping in volume?
Well, so I think we are engaging with customers that have a from interest, I think, to manage expectations in this regard, I should point out that We are dealing with a product that is not a consumer product. It's got a gestation period in terms of designing cycle. That gets measured in, ballpark 12 months. I think best case, it can be a little shortened that in some cases, it can be 1.5 times or 2 times that depending on the nature of the customer and the application. But I think it is something that as we look out 1 year to 2 years, we'll begin to make a substantial contribution to our revenues.
And by the way, the Japanese customer will, will be buying for 2019 substantial new quantities are FMs as well. So, it's not that we get is dry spell from here until broader shipments of our FMs.
Have you shipped I think if I remember right, it was $8,000,000 order from the Japanese customer.
Yes, it was very substantial at the time.
And is that all been shipped?
Yes.
So that's not included in backlog then. So
No, that's not that was shipped last year.
Oh, that's no.
Yes, that was last year. It hasn't contributed in recent quarters, but the those systems with that particular customer will come back in significant volume in the first half of twenty nineteen.
They had another larger system they were developing? Is that
A larger scale system. Yeah.
Yeah. Okay. Then was it It was maybe a year or 2 ago. I think Jamie mentioned you might be having a new revenue line called Power Systems at some point. And I would assume what the products like the RFM
Yes, they fall in that category. Absolutely. So, the RFM is the prime example of a power system product. It's not the only one. So the NVM is also power system product.
So generally speaking, power system products are unlike point of load solutions, they are devices converters that take, if our source and convert it to some hub, the 48 volts, 12 volts, as the case may be, to And these are, in effect, intermediate voltages to the point of load. You can think of it as a stepping stone. Fundamentally, in our kind of power conversion, the power comes from a source, typically a high voltage brass or an AC source single phase or 3 phase. And to get to the point of load, to get, let's say, to an AI ASIC, ideally, it would take a first step from the source to 40 k vault and sometimes that's 54 volts. And then from 54 volts or 48 volts as the case may be directly to the point of load.
The hub is, if you will, an analogy of an airline, adding airplanes that take customers from any initial effort to a variety of destination by way of a hub, a voltage up that plays a similar role. We take the power from a variety of sources take it through 48 volt, on its way to the point of load. In the power system business to do with taking that first step.
And I think you said at one point, the power systems part of the business could be 50 percent of all your revenues?
Yes, because fundamentally it's the same amount of power, right? Power is essentially concerned. So these systems are typically having efficiency in the 90s. So whatever is consumed let's say, by Essex, gets supplied, if it gets supplied by a factor solution for pricing PRMs, PTMs or MCMs, that same power comes out of the 48 volt up. It needs to be delivered needs to be replenished at the 48 volt up by a front end system.
So what you're dealing with is the same power delivery through this series of two steps. And the value proposition with each of the two steps in terms of cents per watt is fundamentally in the same ballpark. So, that's the simple matter stands behind the factor too.
Okay. One last question. I was looking at the last 10 Q, and it was about the elimination. So I think you did $8,200,000, I think, in PICAR revenues, but gets reported as $4,500,000 because part of it goes into the BBU revenue line? Is that how that works?
Yes. Well, so what is going on with that is that part of the very important role that PAGR has played and continues to play within PAGR large, it is the source of all our assets. So we don't make, to be clear, but we do design, develop, get fabricated, a variety of vaguer unique controllers. These are ASICs that PIGO has designed, developed, and provided to Vygrene as a whole. And so that being intercompany sales having to do with those assets.
Okay. Thank you very much.
Thank you. If there's one more question, we're getting pretty much to the end, but if there's one more,
Okay. Next question coming from Jim Bartlett from Bartlett Investors. Go ahead, please.
Real quick. Quickly on the, on the new facility, assuming 250,000 square feet,
what would be the capital cost?
I'm not going to spell out the number, but it is several tens of 1,000,000 of dollars all in. It's not going to be all in on day 1, but obviously there is the space itself and then a considerable amount of equipment going in.
Is it just going to be 250,000 square feet or could it be more?
Well, so we're looking at options that may include more than the land required to support 250,000 square feet, but I'm not sure that we're going to end up on a campus that can support that. So there's a lot of factors at play, and this will all get sorted out in the next few months.
Great. And congratulations again, fabulous quarter in the way you position the company.
Thank you. With that, Thank you and we'll be talking to you in 3 months.
Thank you. Ladies and gentlemen, you may now disconnect.