Vicor Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 8 speakers on the call.

Operator

Welcome everyone to today's webinar entitled Vicor Earnings Results for the Q3 Ended September 13, 2023. My name is Jono, and I'm your producer for today. During the presentation, our policy front will remain on listen only mode. I would like to advise all parties this conference is being recorded. And now I would like to hand it over to Jim Smith, Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the Q3 ended September 30, 2023. I'm Jim Schmidt, Chief Financial Officer and I'm in hand over with Patrizio Vinciarelli, Chief Executive Officer and Phil Davies, Corporate Vice President, Global Sales and Marketing. After the market Closed today, we issued a press release summarizing our financial results for the 3 9 months ended September 30. This press release has been posted on the Investor Relations page of our website, www.vicorpower.com.

Speaker 1

We also filed a Form 8 ks today related to the issuance of this press release. I remind listeners, This conference call is being recorded and is the copyrighted property of Vicor Corporation. I also remind 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 ARKit opportunities, Expected events and announcements and our capacity expansion as well as management's expectations for 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.

Speaker 1

Actual results may differ materially from those explicitly set in or implied by any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2022 Form 10 ks, which we filed with the SEC on February 28, 2023. This document is available via the EDGAR system on the SEC's website. Please note the information provided during this conference call is accurate only as of today, Tuesday, October 24, 2023. Vicor undertakes no obligation to update any statements, including forward looking statements made during this call, and you should not rely upon such statements after the conclusion of this call.

Speaker 1

A webcast replay of today's call will Shortly on the Investor Relations page of our website. I'll now turn to a review of our Q3 financial performance, After which Phil will review recent market developments and Patrizio, Phil and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly changes for P and L and balance sheet items and refer you to our press release or our upcoming Form 10 Q for additional information. As stated in today's press release, Vicor recorded total revenue for the Q3 of $107,800,000 up 1% sequentially from the Q2 of 2023 total of $106,700,000 and up 4.6% from the 3rd Quarter of 2022 total of $103,100,000 Advanced Products revenue decreased 13.5% sequentially to 58,400,000 while Brick Products revenue increased 26% sequentially to $49,400,000 Shipments to stocking distributors increased 50.5 percent sequentially and 81.5 percent year over year. Exports for the 3rd quarter decreased sequentially as a percentage of total revenue 62.8 percent from the prior quarter's 68.1%.

Speaker 1

For Q3, Advanced Products share of total revenue decreased to 54.2% compared to 63.2% for the Q2 of 2023 with Brick Products share correspondingly increasing to 45.8 percent of total revenue. Turning to Q3 gross margin, We recorded a consolidated gross profit margin of 51.8 percent, which is a 10 basis point increase from the prior quarter. I'll now turn to Q3 operating expenses. Total operating expense increased 7.7% sequentially from the Q2 of 2023 to $40,200,000 The sequential increase was primarily due to R and D spending and an increase in legal fees, which will remain at substantial levels through the completion of the investigation by the International Trade Commission of the unlawful importation into the United States of modules and Systems that infringe the asserted Vicor patents. The amounts of total equity based compensation expense for Q3 included in cost of goods, SG and A and R and D was 693,000, 1,788,000 and $977,000 respectively, totaling approximately $3,500,000 For Q3, we recorded operating income of 15 point $7,000,000 representing an operating margin of 14.6%.

Speaker 1

Turning to income taxes, we've recorded a tax provision for Q3 of approximately $1,000,000 representing an effective tax rate for the quarter of 5.9%. Net income for Q3 totaled $16,600,000 GAAP diluted earnings per share was $0.37 based on a fully diluted share count of 45,187,000 shares. Fully diluted EPS decreased approximately 3% sequentially compared to $0.38 in the Q2 of 2023 and increased approximately 8.20 5% from $0.04 per share earned in the same quarter a year ago. Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $227,800,000 at Q3.

Speaker 1

Accounts receivable net of reserves totaled $62,600,000 at quarter With DSOs for trade receivables at 42 days, inventories net of reserves decreased 1.9% sequentially to $104,600,000 annualized inventory turns were 2.1 Operating cash flow totaled $23,800,000 for the quarter. Capital expenditures for Q3 totaled 7,700,000 We ended the quarter with a construction in progress balance primarily for manufacturing equipment of approximately 26,000,000 And with approximately $16,700,000 remaining to be spent. I'll now address bookings and backlog. Q3 book to bill came in below 1 and 1 year backlog decreased 19.6% from the prior quarter, closing at 174,700,000 Turning to the Q4 of 2023, with reduction in backlog, including overdue backlog, We are more dependent on Tern's orders and that results in less visibility to our near term outlook. While that is the case, our current expectation is that revenue, gross margin and operating expenses will be approximately flat sequentially.

Speaker 1

With that, Philip We'll provide an overview of recent market developments and then Patrizio, Phil and I will take your questions. I ask that you limit yourselves to one question and a related follow-up so that we can respond to as many of you as possible in the limited time available. If you have more than one topic to address, Please get back in the queue. Phil?

Speaker 2

Thank you, Jim. Let's begin with an update on our high performance computing or HPC business, which will continue to be our major growth driver in the next few years. For the next few quarters, we will be focusing in 3 key areas. The first will be ramping production of our Gen 4 48 volt bus converter and factorized power point of load products in our new chip fab. The second will be completing development of our Gen 5 factorized power point of load solutions and delivering models and tools in Q1 of 2024.

Speaker 2

The third will be continuing to expand our customer base beyond the major accounts that dominated our revenues in the HPC market over the past 5 years. Regarding revenues in HPC, We expect customers using both lateral and lateral vertical Gen 4 products to be in production through 2025 before introducing new processes utilizing Gen5 vertical power delivery of VPD solutions midway through 2025. In reference to the expansion of our customer base, we have continued to have Substantial discussions with large data center, AI and network processor companies on their challenges in powering next generation high current products. All of these companies recognize they need scalable access to more adept power system technology to effectively address the technical and operational challenges of generative AI at scale. The one major technology challenge that is foremost in everyone's minds and heard repeatedly was power density and power delivery.

Speaker 2

Power delivery to the processors, power delivery to the AI accelerator cards and their rack systems, And last but not least, power delivery to the data centers while driving towards a carbon neutral objective. HPC customers are becoming aware that our Gen our current Gen 4 lateral vertical solutions can reduce power losses in an AI enabled data center by 1 to 3 megawatts while enabling high processor performance. Future processes will, however, require full vertical power delivery or VPD to continue power loss reduction. FICO's 1st generation VPD solutions introduced in 2020 required complex stacked packaging to incorporate bypass capacitors in a gearbox layer due to insufficient current multiplier density. Putting their customers at risk, competitors are going down the same route with even lower current density based on multi cell, Multiphase solutions running into greater mechanical and thermal challenges as they try to deploy VPD using thick, heavy and thermally inept stack packages.

Speaker 2

Our Gen5 MCM technology steps up current density by over 3x and reduces the multiplicity of bypass capacitors needed, eliminating a stacked capacitive layer and enabling a 2nd generation VPD solution to the power system requirements of the AI card that is thinner, more thermally adept, reliable and cost effective. Customer engagements for our Gen 5 VPD solutions are happening at an accelerating pace, and our objective in coming quarters will be to secure significant design wins. In view of the current density and performance gaps enabled by our 5 gs solutions and evolving AI power system demands, I am confident that within a few years, we will gain a dominant share of the AI power system market. One of the major objectives in the design and development of our 5 gs product line was to have a scalable, low cost, short cycle time and vertically integrated chip fab with a short time frame for capacity expansion. We will need this capability to meet the supply chain demands of our customers who are in 2 distinct groups at the moment based on different priorities.

Speaker 2

The first group where the priority is supply chain flexibility is focused on a multi source, Multiphase VR technology and the second group where the priority is competitive advantage from product performance is focused on the power system attributes needed to enable superior AI. Due to competitive market forces, Our belief is that the first group will soon embrace the level of innovation and scalability enabled by 5 gs power system solutions from a multiplicity of chip fabs. I am very pleased with our progress in other key markets, which are critical to developing a robust and flexible business portfolio of our own. We have reached a very important milestone In our automotive business development, achieving PPAP qualification for 3 of our platform power modules for 800 volts to 48 volt power conversion, which enables production for these products in the second half of twenty twenty four. As in previous quarters, we continue to develop new collaborations with OEMs and Tier 1 suppliers who value lightweight, high density power system solutions.

Speaker 2

These collaborations will enable design wins for 2026 production and beyond. Towards the end of Q3 and early into Q4, we have seen demand strengthen in our broad industrial, Aerospace and defense markets for both large OEMs and smaller customers who purchase through our channel partners. Demand in China remains weak for both legacy Brick and Advanced Products, and we have been shifting our focus in recent quarters towards the Korean and Asia Pacific markets, where we see new opportunities for our advanced power modules across a broad range of industries. Our new sales and marketing team in Japan has been making excellent progress, developing new Pipelines of opportunity with large industrial automation accounts and are on track to add significant revenues in the coming years. Momentum with our operational excellence initiatives continues with teams working on specific performance improvements with our top 100 customers And with new products set to launch in Q4 and Q1 of 2024, we are on track to meet our OGSM goals.

Speaker 2

Customer visits from our top 100 accounts to view or audit our new chip fab have been averaging 1 per week in recent months. This pace will pick up in 2024 as we ramp production and have the ability to host more customers. Visitors have left impressed with our new fab and its capacity and scalability. They understand their need to Sysau Fab capacity for power systems with power density and performance attributes that cannot be supported by multi source, multi phase solutions that cannot keep up with our current density and PDN flexibility. They also understand our commitment to operational excellence as clearly reflected in the equipment, process and systems of our chip fab.

Speaker 2

Thank you. And with that, we will now take your questions.

Speaker 1

Okay, operator, we're ready for questions now.

Operator

And the first question is coming from John Tummington. You are unmuted. Please go ahead.

Speaker 3

Thank you for taking my questions guys. First one, I was just wondering how At the new facility, can you talk about when you'll start shipping volume through the vertical plating capacity and kind of the initial demand that you're seeing And the response that you're seeing from customers?

Speaker 4

I think we had trouble hearing part of your question. Could you repeat it, please?

Speaker 3

Sure. I was wondering how the qualification process went So the initial customers for the new vertically integrated plating capacity, and when you expect to start shipping volume on that new equipment?

Speaker 4

Okay. So as Phil pointed out in his prepared remarks, we've had visits At the next trading pace, frequent visits, weekly visits. As you mentioned, these visits have generally gone quite well. Visitors are impressed with the equipment, the processes, the systems we put in place to achieve much shorter cycle time in scalable capacity. This is very evident to every visitor that has come through the fab.

Speaker 4

The fab at this point in terms of its vertical integration is what I would say essentially complete. That's not to say that all of the equipment has been delivered and installed. The strategy that the operations team has pursued in terms of enabling initial capacity has been to get The core equipment with respect to our 3 d mesh integrated packaging capabilities in place, While deferring some of the other measures in order to facilitate some of the challenges by some of the vendors. That automation is coming in and is getting installed over the next few months. But while we are In effect, not all of them.

Speaker 4

We are done to a very large extent. We can, at this point, make complete units, Including all of the three-dimensional package integration steps that are essential to our 4 gs products In terms of vertical integrating processes that have been outsourced as well as enabling our 5 gs platform capability, which has some very exciting new process steps.

Speaker 3

Okay. To be clear, are you already shipping or are you still in the Qualifications and maybe finishing out phases of the facility, are you producing out of That piece that you've been working so hard to in source over the last year or 2?

Speaker 4

We are Seeing it for some of our in house needs, I will say most of our in house needs at this point And beginning to selectively use it for certain customers who are seeking short cycle time or rapid turnaround To service their needs, but not on a mass scale yet.

Speaker 3

Got it. Okay. Just a follow on, Patricia, when do you think the book to bill will start to creep back over 1 and you see that your backlog increasing again?

Speaker 4

Well, that could happen relatively soon. It could take a little longer. We're not going to make any specific prediction. I think it's a This landscape and there is a number of variable supply. So I think we need to be non committal with respect to that.

Speaker 3

Okay, fair enough. I'll jump back in queue. Thank you.

Speaker 4

Thank you.

Operator

The next question is coming from John Dillon. You are unmuted. Please go ahead.

Speaker 5

Hey, Phil. I'm wondering if you can give us a little more color on the bookings. For example, how does the bookings look for the next Couple of quarters. Are we going to see sequential increases in the bookings? Or do you expect them to be flat or down?

Speaker 4

We may see substantial increases. Again, we don't want to be very specific because of Uncertainties that are out some of our control, but there is a range of scenarios that include pretty steep Climb, but then again, it might take a while longer.

Speaker 5

Just give us a little more color on What's going on? It sounds like you could possibly see a nice increase in bookings, but And I understand bookings, trust me, I really do. But if you could just give us a little more color on that, that would be helpful.

Speaker 2

So John, this is Phil. So as Patrizio said, it's a complex landscape of older programs ramping down, newer programs coming up. There's a whole host of things out there complex wise in terms of the deployment of next generation solutions. So So as Patricio said, it's better to just take a little bit of a wait and see approach to that at the moment, given, as I said, the complexities that we're looking at.

Speaker 5

I guess I understand that the problem is there's a bunch of people that are short on the stock and the shorts are running around saying, you guys aren't going to see any bookings You're out of the GPU business. Maybe you can just answer that question a little bit better because they're pretty vocal About the demise of Vipor and they're really betting against you and the company. So I'm just wondering if you can help us out a little bit here, give us a little color Yes. What do you see as far as GP Land is concerned?

Speaker 4

John, as you know, I think you've been an investor for a long time. We don't run a company based on what the shorts might do For any near term type of consideration, we take the long view that we are very committed. We believe we are in a very unique position, the only position that can support Critical market needs. So that's how we run the company. That's how we operate.

Speaker 4

We're not going to get into Any debate regarding that which to us It's quite obvious with respect to the tenure of our technology, the need for it. The customers that are literally flocking to us in terms of their Next Generation AI needs confirm what we believe and is objectively Ported by numbers such as current density and PDM flexibility and vertical power delivery capabilities that are without equal in the industry. So That's what I think investors should be relying upon. Obviously, they have a choice to believe us or not believe us. We believe ourselves, and time will tell with respect to that.

Speaker 5

Yes, I completely understand. I was involved in programs where there was voltage drop and I understand that all too well. And I don't know if all the investors do, but I completely understand and understand how your technology is.

Speaker 4

So if some of them, that's Going to be too bad for them, but I think we need to move on to the next topic.

Speaker 5

I'll be back in the queue. Thank you very much.

Speaker 4

Thank you.

Operator

And the next question is coming from Quinn Bolton. You are unmuted. Please go ahead.

Speaker 6

Hey guys, can you hear me?

Speaker 1

Yes. Thank you, Wayne.

Speaker 7

I guess first question, last quarter

Speaker 6

you guys seemed pretty excited about this new AI platform that You expect it to ramp in the Q4 of 2023 throughout 2024. Can you just give us any updates On that program, how are you feeling about it? Is it still on track? Have you started to see more bookings associated for that? And a related question, there are now 2 platforms on the market, one By NVIDIA, 1 by AMD that I think both are rated at 1,000 watt TDP.

Speaker 6

It seems like 1,000 watt is kind of The key power level where you guys bring some real advantages especially with lateral vertical. Can you confirm whether This AI platform is indeed a 1000 watts here?

Speaker 2

So Quinn, this is Phil. So the first part of your question, I think, was what we talked about the last call. And my prepared remarks, I basically said that the first area of focus was to ramp in Q4, our 48 volt bus converters and factorized power solutions. I hope that answers that question pretty clearly. The second, in terms of power, we're seeing 1,000 watt GPUs and network processes and all sorts The basics and mixes of CPU, GPU combos out there.

Speaker 2

As Patrizio talked about, We have the technology to address those that offers, as I mentioned in my prepared remarks as well, Significant power savings with lateral vertical solutions of the scale of megawatts in data centers, which is Really critical to any data center company. And with our Gen5 technology coming along, I mean, The level of engagement now is very, very high. As I said, we're having substantial conversations now with customers that will Diversify us away from the 2 big guys that we've been doing business with for the next for the last few years. So as I said, I'm Very confident in the future and where we stand. And it's a bit of a complex landscape, as I said, because you've got new programs Starting up, old programs ending.

Speaker 2

There's a bunch of other stuff going on out there with technology and product introduction. So as I say, we're confident in our position in the market.

Speaker 6

Thank you, Phil. I just had a question and this is kind of highlighted in I think some of your legal proceedings and ITC complaints Against Delta, but it looks like one of your big motherboard customers has moved it looks like in Scale to a 2 stage architecture and away from factorized power and I think Delta has come in and 1, some of the sockets away from your MBM. I guess, can you give us any sense of what's going on in the motherboard business? How much of that business do you think goes to stage? How much of it stays single stage?

Speaker 6

Because it seems like A big customer has moved away from Vicor with that transition to 2 stage architecture and Delta has come in to do the 12 volt or 48 volt to 12 volt module.

Speaker 4

So as you may know, Vicor pioneered the MBM bus converter. We have Substantial IP, we've asserted 3 different patterns coming at it from 3 different The actions, they're not the only panels we have that cover that technology. We have licensed it of There are OEMs that we are paying royalties for those NBMs and they are the ones that They have certainty or continuity of supply. There are other ones that have been taking chances and those are going to go right now In the next year, that's what's going to

Speaker 2

Quinn, I would say that when our Gen 5 technology is introduced to the market next year, What have been the CPU requirements have been creeping up, 500, 600 amps now for some of these motherboards. I think our Gen 5 solutions will cause a number of customers to reevaluate that 2 stage approach Given the performance that they can get from our Gen 5. So I think the market has moved from 2 to 1 to 2, and it will go back To one in my opinion.

Speaker 4

Yes. I second that. So to be clear in answer to your question, The NBM is not as much as we love it, we invented, right? But you'll hear from me first. It's not the long term solution to 3 The square millimeter high density VPD scalable robust cost effective VPD For next generation, it is not.

Speaker 4

It's in terms of it's essential. It's an attempt to in effect drive a multi source, multi phase capability that It's fundamentally handicap. It's not really turning out to be when you get up to the kilowatt level or the 1,000 amp level Truly multisource. It has brought about significant trade offs in terms of Performance, which are not sustainable in a competitive landscape.

Speaker 7

Got it. I will get back. Thank you.

Operator

And the next question is coming from John Dillon, you are unmuted. Please go ahead.

Speaker 5

Yes. On the last call you stated you had a lateral and a lateral Opportunity to major customer. And I was wondering if that was for the same

Speaker 4

John, sorry to interrupt you, but it's hard at least for me to hear what you're saying. Yes. Can you hear me?

Speaker 2

Yes. It's coming across a little bit muted and mumbled, John. If you can do something with your speaker there, that would be great. Yes.

Speaker 5

Let me is this a little bit better?

Speaker 4

Yes, that is. Yes.

Speaker 5

Okay. On the last call, you stated you had a lateral and a lateral vertical With a major GPU customer. I was wondering, was that for the same GPU or was it for 2 separate GPUs?

Speaker 2

So what we talked about there was that we have lateral and lateral vertical solutions for not just one customer. We are bringing that solution forward and we have customers looking at that both of those solutions. And Certainly, the number of customers looking at lateral deployments are a little bit higher than the number with lateral vertical, but we have both.

Speaker 4

That's also the way in which systems have evolved. But make no mistake, The future and the future is coming next year, It's no longer with lateral PDMs. In fact, all of the design activity that we're engaged in at this point It's beyond the level of PDM. I'm on a call with an important potential customer tomorrow. We're not even going to consider or entertain a Lada PDM.

Speaker 4

It's either Lada Vertica or What we call 2nd generation VPD, which is a more advanced, more scalable, More robust form of BPD that falls on the yields of the 1st generation BPD that Vigo pioneered And most of those companies have tried to copy.

Speaker 5

Got it. So with the one major customer though, do they have 2 different designs with you? 1 for Are they working with 2 different the one customer, do they have 2 different GPUs that are going to be using 1 using lateral, the other is going to be using lateral vertical? Or is it the same GPU that's initially going to use lateral, then go in the lateral vertical?

Speaker 4

John, we're not going to talk about any one customer. I'm sorry, but bear with us. That's not the level of specificity that we want to get involved with.

Speaker 5

Okay. And then one last question. When do you expect the GMs, the gross margins to improve with the new factory?

Speaker 4

Well, I think we are on a general Apple trend, that's not to say that we're going to see a positive improvement each and every quarter, But we have been in the low 50% range. And I think the 3 of us here, Phil, Jim and myself have line of sight To considerably higher numbers, partly due to the unique fab The capabilities that we put in place are considerable investment, but also Significantly in terms of the 5 gs point of load technology that Takes us to a much stronger position in terms of not just performance, but cost effectiveness. And some of that is going to be passed along to customers in the form of More cost effective solutions, but at the same time, those more cost effective solutions at a lower price point in terms of cents per amp The customer will result in substantially higher margins for ViVo.

Speaker 5

Great. Thank you very much.

Operator

The next question is coming from the attendee who joined over the phone. So please introduce yourself before you take your question.

Speaker 7

Hi. Richard Shannon with Craig Hallum. Can you guys hear me?

Speaker 4

Yes.

Speaker 7

All right. Excellent. Let's see here a couple of questions. Maybe following on the topic The bookings here, I think last quarter you felt fairly confident that backlogs would improve either in the ending Q3 or Q4. Now it seems you're less certain of that.

Speaker 7

And I think if I understood one of the answers to a prior question, you're still expecting the design with the major customer to That is still active here. So it seems like a couple of simple explanations for that would be either that design is delayed or Your share of the size of the opportunity is more limited than what you initially had thought or potentially there's other reasons. So can you help us understand those dynamics relative To your last conference call.

Speaker 4

I think I made clear that we really don't want to Go into the level of detail. And to be clear,

Speaker 1

well, I appreciate

Speaker 4

The reason for the interest, the curiosity, it's really got very little to do With Vigors opportunity in the medium and long term, and that's what we're really focused on.

Speaker 7

Okay. I guess I'll jump to another question here, maybe looking a little bit longer term. And then, Bill, I'm going back to your prepared remarks here about timeframe for 5 year technology to be ramping. Think you said in 'twenty five, if I caught my if I caught your commentary correctly. Is this the expectation of one that would intersect with 1st ramp up of 3 nanometer accelerator you should see in the market?

Speaker 7

Or is there some dynamic you're expecting there, is that good?

Speaker 2

No. I think that The 5 gs is, I believe, looking at what it's capable of doing to the market is going to be very ubiquitous. I think we'll see Design ins as we've talked about even down in the low 100 of amps because of the density and cost effectiveness and performance level of the technology. So it's going to So it's going to be ubiquitous across all sorts of different high performance computing markets. But With regards to what we see from a deployment perspective, 2024

Speaker 4

will be obviously

Speaker 2

a big design win year for us with Increasing number of customers and then a ramp to production in the 2025 time frame. Some customers early in 2025, Other customers sort of midway through the year. So it will be a mix and a blend of both domestic and international Customers actually. So again, that's going to set the scene for us to take really significant share in the ever expanding AI market. That's what we're looking at right now, Richard.

Speaker 7

Okay. Thank you. I'll jump back in the queue.

Speaker 4

Thank you.

Operator

The next question is coming from Quinn Bolton. You are unmuted. Please go ahead.

Speaker 6

There we go. I guess just a follow-up there, Philip, to Richard's question. If 2024 is sort of a transition year, design year for Gen 5 and 2025 Since the real ramp of the Gen 5 technology, would you expect quarterly revenue to sort of stay flattish at about Current levels until you get to that Gen 5 ramp or do you see the opportunity that is some of the Gen 4 lateral and lateral vertical solutions come to market that you could actually see growth in quarterly revenue. Now I'm not trying to get you to give Quarter when it may grow. I'm just how do you think about revenue over the next 4 or 5 quarters?

Speaker 6

Do we need Gen 5 to ramp before we see a significant increase in quarterly revenue? Or can that sooner with Gen 4 lateral and lateral vertical? Thanks.

Speaker 2

So Quinn, as we said, it's a complex landscape right now. And we've got In our Gen IV lateral and lateral vertical solutions, we're going to see how that goes. But I believe that, that technology, again, as we talked about, you can't not save megawatts for your end customer I'm not consider it seriously for deployment, right? I'd just go back to that. So it's a very important step for us towards Gen 5.

Speaker 2

But we've got great products that we're going to be ramping this quarter and into next quarter. So we have a bridge, if you like, to the Gen 5.

Speaker 6

Got it. Thank you, Phil.

Operator

The next question is coming from John Baumeng. Please go ahead. You are muted.

Speaker 3

Hi, thank you. I was wondering, Jim, if you could break out the actual legal expense in the quarter and kind of what would you expect the run rate to be as the FTC does its investigation over the next several quarters.

Speaker 1

Incrementally, John, I won't quote an exact number, but it's in the 1,000,000 of dollars and it's very substantial for us as a smaller company. But we believe it's well worth taking on because of the strength of our position.

Speaker 3

Do you expect it to increase from what you did in the past quarter here?

Speaker 1

No. We're prepared to

Speaker 4

Invest as much as necessary. Again, in one way of looking at The international property side of our business is profitable, right? The operating expense Relating to a certain intellectual property is more than covered by intellectual property related income. And we expect that to continue to move in the right direction, Particularly as it becomes evident to OEMs who have been taking a wait and see IPO with respect to how This may all play out that they're going to be left in the large by companies that have stolen our technology.

Speaker 3

Got it. Okay.

Speaker 2

So I

Speaker 3

was wondering if you could expand just a little bit on the enthusiasm You're seeing out there for the Gen 5 EPD. What's like the breadth of the customers that you're seeing today versus where you were Maybe in the same time in the development cycle for the current gen of AI processes, would you say that there's a lot more volume and opportunity out there Today, just because of all the I guess the amount of competitors that are out there, number 1. Number 2, the size of the opportunity increasing. Just help me size what that opportunity looks like Gen 4 versus Gen 5, if you can.

Speaker 2

Yes. The current density improvement well, first of all, you've got the drivers of the much Higher currents coming along for all of the processes across networking, AI, CPU, right? That's the first thing. Secondly, the market's expanding at an incredible rate, Particularly on the AI side, but as you add more AI, you also need to add more CPU, you also need to add more networking. So everything sort of getting the big Uplift.

Speaker 2

Now then you factor in that our Gen 5 has got 3 times the current density Over the Gen 4 technology. And the reaction to that, and we've shown a lot of the customers actually, then you go down the list of the majors In data center, AI, Processors or Network Processors, we've shown them examples of the mechanical examples of the packaging That we're going to have. I mean, the reaction is astounding. They're astonished that we can put as much current as we can into that Small of a package. And there, if they're looking at VPD today, because that's where they're going to go, as Patrizio said, All of the conversations now are about VPD.

Speaker 2

It's not about lateral. Their current Gen 4 is lateral vertical, but Gen 5 is all about vertical. They look at that and they say, my God, I don't need to disturb my capacitive layer underneath my board. I can put one of these tiny little current multipliers there. I don't have to worry about mechanicals, thermals, everything sort of fits.

Speaker 2

And so Shen is incredible when compared to companies, similar Chinese companies that are trying to copied our MVMs, Trying to do this thing with VPD, copying basically the wrong thing, which is a stacked package, really heavy, Certainly terrible. They're leading customers down the wrong path and the customers can see that when they see our Gen 5 technology. So The excitement is really incredible and I'm very confident. As I said, we're going to take major share here in this market.

Speaker 4

1st generation VPP is an hour show from a manufacturability perspective And from an IP perspective as well. So there too As Grupo's foreign suppliers are putting not just themselves, But major OEMs have substantial risk with respect to continued supply, both in terms of the viability of the solution From a robustness perspective and from the perspective of viability from an IP perspective Or non infringement perspective, I should say.

Speaker 3

Got it. So fair to say that the pull is much stronger on Gen 5 than it was in the Gen 4, Gen 4

Speaker 4

Yes.

Speaker 2

I think that customers are going to get both performance, right, And power savings and that can be talked about all the advantages of reliability, of cost That add on to all of that. And with our scalable chip fab, we're going to be able to work with customers on Flexible Supply Chain Solutions. So we're sitting in a very good place, John.

Speaker 3

Okay, great.

Speaker 7

Thank you.

Operator

Next question is coming from the attendee who joined over the phone.

Speaker 7

Hi. Richard Shannon from Craig Hallum again. Guys, can you hear me still?

Speaker 4

Yes.

Speaker 7

Okay, great. Thank you. Phil, I wanted to ask about one of your statements in your prepared remarks here about 5 gs technology and kind of targeting 2 different groups with different priorities The last part of that statement was you believe the first group will embrace level of innovation for 5 gs from a multiplicity of chip paths. Since you only have one at least that you've talked about are in plan, can you parse the statement a little bit more and tell us what you mean by that and over what timeframe we could see Let's see a chip fabs, please.

Speaker 4

Well, I'll try to answer that question. Again, given

Speaker 1

The lack of

Speaker 4

sharp visibility with respect to that, so bear with me As I answer your question in general terms, as you know, it took many years and A very substantial investment to bring together a first chip fab. In some respects, this initiative is similar to The kinds of fabs most of us are familiar with semiconductor fabs. And as in that case, The technical complexity, the complexity from the perspective of Equipment and processes is such that bringing to closure a first fab It takes again considerable time, persistence and investment. But the great News with respect to having done it is that replicating it Is something that can be done on a much shorter cycle time with a high degree of irritability And the investment involved, while substantial, it's in the 100 of 1,000,000. On In the right perspective, from the perspective of OEMs wishing to Have flexibility from a sourcing perspective given their System capabilities and value propositions is in that perspective Relatively small investments.

Speaker 4

So we do anticipate more than 1 fab Coming to the market to bring about an ecosystem Where large OEMs that cannot for good reason rely From just the first bicor fab will avail themselves of capacity from power facilities.

Speaker 7

Okay. I guess we'll parse that statement and ask about in the future, Yes. Thanks for that.

Speaker 4

I'm going to

Speaker 7

follow-up on one of your answers to a prior question here talking about, I think and I'll probably not get your term or your wording correct here, but you're only engaged with customers that are Interested in vertical only solutions either 1st or second gen here. Is that essentially saying are you saying that you're not seeing anyone With a sufficient level of power and I'll use 1,000 amps, maybe that demarcation line tell me if it's different, that are not looking are you telling me they're not looking at lateral at all or you're just talking The guys are only looking at Verugel.

Speaker 4

So they are typically looking at Programs on different timescales, in some cases a few months or the better part of the year or a year out With different current requirements. And our focus is to engage where we can contribute substantial Value through in particular 5 gs solutions with their unique set of attributes. And those are particularly differentiated when you get past lateral, right? It can be lateral vertical. We demonstrated that with lateral vertical relative to lateral at Car levels of roughly 1,000 amps, you can achieve something at the order of nearly 150 watts of PDN, both direct and indirect power savings, those are very substantial.

Speaker 4

And those when applied across data centers result Or can result in the megawatt scale savings that Phil referenced earlier. So there's a value proposition there. And that can be done with our 4 gs technology, even though the current density of that technology is A small fraction of current density with 5 gs. So it is a lot of There's a value proposition there and we can engage there to enable customers to achieve their objectives. But the much bigger opportunity is looking a little beyond the next Few months or 6, 9 months.

Speaker 4

Our systems are going to go into production, as Phil said, late next year Or early in 'twenty five, there were with 5 gs MCMs, a few amps per square millimeter. They're all new world capabilities that enable and in turn enable solutions that all around Yes, all those attributes, right? They are scalable, they are robust from a mechanical perspective, they are robust from It's a more management perspective and they're more cost effective.

Speaker 2

So Richard, this is Phil. Just to add on to that. Couple of weeks ago, I got Invited to a big data center company's Strategic Supplier Day where they had their Executives presenting on the future roadmaps and the challenges of building AI out in their existing data centers as well as adding more data centers going forward. As you can imagine, as Patricio mentioned here, we're talking about data centers of the 20 megawatt plus level and getting power into those while also trying to get Carbon neutral is a massive challenge. So if you look at the amount of compute that's going to be needed to support AI going forward, Both on the CPU side and on the GPU or ASIC side, plus the network processing, Even if you save 10 watts or 5 watts per the CPU, that's Savings, when you multiply the amount of compute in a data center, it gets over megawatts very quickly.

Speaker 2

So even to save 10 watts or 15 watts in a 400 amp or 300 amp CPU motherboard And you can do it vertically. Why not do it vertically if you can offer that to your customer base? So that's the change that's going on in the market. To add

Speaker 4

to that, historically, the answer to Phil's historical question, why not do it that way, is that you couldn't do it You need technology that has got both the high current density, the high bandwidth that enables A significant fraction of the caps that historically taken out the socket to be swept away.

Speaker 2

So power savings is going to be it as this stuff gets deployed because you can't power it. You're competing also with all the EVs out there. The same grid supports all of that plus the data center. So they're also trying to use renewables, but really significantly reducing the impact On a megawatt scale is massive value add for any of these data science hyperscalers. It's really important.

Speaker 1

Okay. Operator, I think we're going to have to take maybe one more question please and then we'll have to wrap it up.

Operator

Right. So the last question is coming from John Tomantine. Please go ahead. Your line is unmuted.

Speaker 4

John? I

Speaker 3

didn't have my hand raised. That wasn't me.

Operator

Sorry. In this case, we have no more questions.

Speaker 1

Okay. Thank you. Thank you everyone for joining the call.

Speaker 4

Thank you.

Operator

Thank you, everyone. That marks the end of your webinar. Thank you for

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Earnings Conference Call
Vicor Q3 2023
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