Vicor Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 9 speakers on the call.

Operator

Everyone to today's webinar, Insightville's Vicor Earnings Results for the Q2 Ended June 30, 2023. My name is Robin, and I'll be your producer for today. During the presentation, all attendees will remain on listen only mode. If you require a sustained time, please put a message in the chat box. And with that, I would like to hand the call over to James Schmidt, Chief Financial Officer.

Operator

Please proceed.

Speaker 1

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the Q2 ended June 30, 2023. I'm Jim Schmidt, Chief Financial Officer. I'm in Andover with Patrizio Vinciarelli, Chief Executive Officer and Phil Davies, Corporate Vice President, Global Sales and Marketing. After the markets closed today, we issued a press release summarizing our financial results for the 3 months 6 months ended June 30.

Speaker 1

This press release has been posted on the Investor Relations page of our website, www.vicorpower.com. 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 as the copyrighted property of Ichor Corporation, I want to 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 at 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, proved to be correct.

Speaker 1

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 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 Conference call is accurate only as of today, Tuesday, July 25, 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 be available shortly on the Investor Relations page of our website. I'll now turn to a review of our Q2 financial performance, after which Phil will review recent market developments and Patrizio, Phil and I will take 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 Q2 of 106,700,000 up 9.1% sequentially from the Q1 of 2023 total of $97,800,000 and up 4.5 percent from the Q2 of 2022 total of $102,200,000 Advanced Products revenue increased 31.6% sequentially to $67,500,000 while Brick Products revenue decreased 15.7% sequentially to 39,200,000 Shipments to stocking distributors decreased 0.5% sequentially and increased 47.6% year over year. Exports for the Q2 increased sequentially as a percentage of total revenue to approximately 68.1% from the prior quarter's 64.3%. For Q2, Advanced Products' share of total revenue increased to 63.2% compared to 52.4 percent for the Q1 of 2023 with Brick Products share correspondingly decreased to 36.8 percent of total revenue.

Speaker 1

Turning to Q2 gross margin, we recorded a consolidated gross profit margin of 51.7 percent, which is a 4 10 basis point increase from the prior quarter. During the quarter, we recovered approximately 2 point $8,000,000 in duty drawback of previously paid tariffs. We continue to work to reduce overall tariff expense and recover previously paid duty drawback. I'll now turn to Q2 operating expenses. Total operating expense increased 3.4% sequentially from the Q1 of 2023 to $37,300,000 The sequential increase was primarily due to an increase in R and D spending.

Speaker 1

The amounts of total equity based compensation expense for Q2 included in cost of goods, SG and A and R and D was $570,000 $1,626,000 $816,000 respectively, totaling approximately $3,000,000 For Q2, we recorded operating income of $17,900,000 representing an operating margin of 16.7%. Turning to income taxes, we recorded a tax provision for Q2 of approximately 2 point $5,000,000 representing an effective tax rate for the quarter of 12.9%. Net income for Q2 totaled $17,100,000 GAAP diluted earnings per share was $0.38 based on a fully diluted share count of 44,906,000 shares. Fully diluted EPS increased approximately 52% sequentially compared to $0.25 in the Q1 of 2023 and increased approximately 58% from $0.24 per share earned in the same quarter a year ago. Turning to our cash flow and balance sheet.

Speaker 1

Cash and cash equivalents totaled $203,800,000 at Q2. Accounts receivable net of reserves totaled $63,800,000 at quarter end with DSOs for trade receivables at 43 days. Inventories net of reserves decreased 0.7 percent sequentially to 106,600,000 Annualized inventory turns were 2.1. Operating cash flow totaled $19,000,000 for the quarter. Capital expenditures for Q2 totaled 8,500,000 is balanced primarily for manufacturing equipment of approximately $23,000,000 and with approximately $10,000,000 remaining to be spent.

Speaker 1

I'll now address bookings and backlog. Q2 book to bill came in below 1 and 1 year backlog decreased 19.9% from the prior quarter closing at $217,300,000 Turning to the Q3 of 2023, We expect revenue and gross margin to be approximately flat. We also would expect a sequential increase in operating expenses, primarily as a result of funding the legal work associated with cases filed earlier this month at the International Trade Commission and in federal court in the Eastern District of Texas against foreign manufacturers of power modules and computing systems infringing FICOR patents covering non isolated bus converters, NVMs. Legal work associated with these cases and related legal expenses are expected to grow substantially over the next year. Legal expenses are however less than the royalties paid to Vicor by licensees of our patents.

Speaker 1

In our ITC case, we are seeking an exclusion order, precluding importation into the United States of power modules, servers or AI cards that infringe our patents. In our district court case, we are seeking damages for willful patent infringement. With that, Phil will 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.

Speaker 1

Phil?

Speaker 2

Thank you, Jim. Let me begin by summarizing the key messages from the Annual Shareholders Meeting we held in Boston 4 weeks ago. Our business opportunities have never been stronger given the future growth of AI and the move to 48 volt power distribution in both performance computing and automotive markets. Our investments in 48 volt power distribution and power conversion technology Over the past 15 years have put Vicor in a unique position with intellectual property to key innovations in power distribution architectures, including factorized power and vertical power delivery, powertrain topologies, control systems and power module packaging technology. Our new and the world's first chip fab is coming online in September, setting the stage for unprecedented scalability as we start shipping initial quantities of vertically integrated chips to lead customers for their qualification.

Speaker 2

Our lateral vertical distribution network provides superior performance for advanced GPUs, strengthening strengthening our position as the supplier of high performance power systems in HPC markets. In short, As an earlier generation AI program using our 3rd generation factorized power chipset ramps down, Our 4th generation chipset is expected to start shipping in Q4 into a next generation AI platform in a lateral or lateral vertical PDN. The lateral vertical PDN will provide nearly 10% higher power system efficiency and superior processor performance. Advanced Processors currently in development require current levels that can only be supported with vertical power delivery through complex stacked VPT structures that Vicor pioneered and patented. With a 300% advance in current density, Vicos' 5th generation technology enables a more mature and scalable second Other markets for us, including industrial, aerospace and defense markets.

Speaker 2

Our commitment to a set of top 100 customers globally, Achieving operational excellence supported by our new chip fab is the focus of our entire company and execution is now the name of the game. Thank you. Patrizio, Jim and I will now take your questions.

Speaker 1

So operator, we're ready for questions now.

Operator

And the first question is coming from Quinn Bolton. Please proceed. Your line is open.

Speaker 3

Jim, Phil Triczo, can you guys hear me?

Speaker 4

Yes.

Speaker 3

Okay, great. First question is, can you guys share any more details on the 4 gs lateral power distribution design that you mentioned in the press release For a new AI platform that ramps in the Q4, can you say is this a new customer? Have you worked with this customer previously? Can you give us any sense of what the power consumption is for this card? Is it a high power card?

Speaker 3

Is it a mid range power Or any details you can share would be very helpful.

Speaker 4

It's a distinct customer. It's a new generation for the existing customer. And it's a chipset that can be deployed either in Eladra PDN, which is substantially handicapped from a power system perspective To the point that it limits power delivery, power capability, processor performance In that, it gives rise to large losses within The copper of the substrate to the GPU that depowers, It gives rise to further losses within the silicon itself, owing to the limitations of LATA power delivery applied at the 1,000 amp level. With a 4 gs chipset, We can enable a lateral solution with the same handicaps or with a vertical element using the same chipset, a lateral vertical solution, which is unique, highly differentiated in that it improves system efficiency by about 10% and removes a number of limitations relating to processor performance.

Speaker 3

So, Patricia, I guess to follow-up, it sounds like it can be deployed either lateral or lateral vertical. Can you say is the solution going to production in the Q4 is that lateral first With the potential to switch to lateral vertical sometime next year?

Speaker 4

It is likely to be lateral first, followed by lateral vertical.

Speaker 3

Great. And then you had mentioned sort of Vertical improves efficiency by 10%. And I think in the press release, you said that would enable 100 watt Power savings. So am I right to be thinking that this AI platform could be consuming nearly 1,000 watts? Is that the right ballpark?

Speaker 4

I'm not going to comment about the power consumption of the platform Beyond that which is implied in the earlier comments, which is that To your point, we expect to save in total about 100 watts, which approximately represents a 10% Improvement in system efficiency. But one should keep in mind that while 10% In some respects, may not sound like a lot. It is a lot in a number of respects that are somewhat technical and that would be in effect somewhat difficult to articulate in sufficient detail in this context today. But whether it's the gradients or voltage differentials across a pin field brought about by lateral current flow across distances on a substrate with substantial resistance, dissipating a substantial amount of power or the self feeding within That substrate that is caused by the participation of the substrate and the silicon up above. What you're talking about is something we have discussed before.

Speaker 4

You might recall my pointing to these Kinds of limitations and challenges many, many moves ago. It's just indicative of Fundamental assembling blocks to what can be accomplished with conventional technology and its constraints within the realm of on a power distribution network that is lateral.

Speaker 3

Understood. I'll go back from the queue and let somebody else ask Thank you.

Speaker 4

Thank you.

Operator

The next question is coming from the line of John Dillon. Please proceed. Your line is open now.

Speaker 5

Hello? Hi, John. Can you

Speaker 6

hear me? Yes. Yes. Okay, great. I want to follow-up on Quinn's question a little bit.

Speaker 6

Regarding Can

Speaker 4

you speak capital louder?

Speaker 6

Yes. Regarding the can you hear me now better? Regarding the lateral vertical Opportunity that's coming to production in Q4, is that a high volume customer or is it more of a lower volume or more of a modest volume customer?

Speaker 4

So to be clear, I suggested earlier, the same chipset, which is a 4 gs chipset, Supports both the lateral and Aladar Vertigo. Based on customer inputs or expectation As of now, is that the latter implementation will go first. And that's the one we're anticipating for the Q4 ramp. I can't tell you when the latter vertical would go into production, but my expectation is that it would be after the latter.

Speaker 6

Yes. But is this going to be a significant customer or is this more of an incremental volume that you're going to expect?

Speaker 4

This is a significant customer.

Speaker 6

Great. That's excellent. Okay. And, Patricia, do you think your bookings are going to rebound strongly upon completion and the qualification of the new Factory?

Speaker 4

We expect bookings to pick up as in particular The platform we just referenced ramps and because of other contributing elements, Not least of which to your point, being online, our first fab, It's from history we've had operational challenges and capacity limitations. So within the last couple of years with Advanced products relying on unique processes that had to be outsourced. So common sense in and of itself would imply that as we overcome these stumbling blocks and bottlenecks and being capable of delivering the kinds of Solutions that we're uniquely equipped to provide that bookings and Backlog will build back up quite substantially. I know there may be A concern at this point in time in the minds of some shareholders for whatever it's worth, it's not my concern.

Speaker 6

Excellent. I'll get back in the queue. Thank you so much.

Operator

There's one more question coming from Quinn Bolton on the WebEx. Please proceed. Your line is open now.

Speaker 3

Patricia, I guess I wanted to ask about the recent actions, legal actions against Delta Electronics and Foxconn, I guess both at the ITC and in the Texas courts. It seems like at least you're a large GPU manufacturer in the industry current services modules from Delta Electronics on its latest generation platform. And I guess I'd like to know what do you think the potential effect on your relationship with this GPU manufacturer might be to the extent you're going after one of its power module suppliers?

Speaker 4

So I'm not going to be specific for obvious reasons, but as implied by Yes, public disclosures and you can read the complaint at the ATC. It's not difficult to get to it and find out for yourself. We do have licensees of the technology. And those licensees were prudent enough to acquire license and put themselves in a position where they could source products, including NBMs that would otherwise infringe our patents without incurring the risks of infringement. So you should not assume when it comes to our data center or AI OEMs That they're all in the same boat.

Speaker 4

1 notable one is not Because it apart the license. The other ones are going to have to deal with The issues arise when farm manufacturers, unscrupulous as they are, coffee Products that are covered by effective international products.

Speaker 3

Understood. Thank you. And just to clarify the Andover qualification, you still see that is on track for September. And at the shareholder meeting, I think you said that you anticipated an increase in the number of customer visits and customer qualifications As you got into the Q3 here, do you is that customer qualification and Is that still on track, those customer audits? Thank you.

Speaker 4

We've had customer visits and we've had praise For what we're doing, the progress with respect to it and going back to the first part of your question, Yes, we are on track to make complete modules in September, late August September, so essentially starting about 1 month from now, we're going to be able to play that any chip.

Speaker 3

Excellent. Thank you very much, Patricio.

Speaker 4

I'll go back.

Operator

All right. I will start taking questions on the phone now. The First assembly line is open now. Please proceed.

Speaker 7

Hi, Patricia. This is Dan McKenna, DB

Speaker 4

Makena. Good afternoon, Rob.

Speaker 7

I wanted to follow-up on the 4 gs chipset coming on. And when we're talking now roughly a backlog is roughly 6 months worth of current run rates. What are you quoting for lead times at this Point in time. And do you expect if you're going to ramp in the Q4 that you'll be receiving these orders in the Q3?

Speaker 4

So we already have backlog for the upcoming ramp, but we expect to get additional backlog. Maybe Phil, do you want to comment on that?

Speaker 2

No, I think that's exactly right. We have existing backlog and our plan is to We begin the ramp with that particular backlog. And then in Q3, Q4, we'll get increased bookings for the follow on 2024.

Speaker 7

And have you already seen because your backlog is down now, are you quoting shorter lead times? And has that in turn generated additional bookings for you?

Speaker 4

So let's put things in perspective. We're still playing catch up. We're going to be completing that catch up play this quarter. But we're still with respect to orders that were placed quite some time ago because of the capacity bottlenecks That again we're aware of and remind us of earlier in the call, we're still playing catch up. So while that is the case And that's going to come to an end relatively soon.

Speaker 4

Our lead times are still long, but once we Get caught up and which is imminent. And once we have the benefit of being in control of our destiny with our first fab, then lead times will come down.

Speaker 7

I guess the concern is when you look at With the bookings this past quarter were somewhere in the $55,000,000 range. Do you foresee a period where the revenues For the quarter are going to diminish? Or do you see them continuing to increase as we're going forward?

Speaker 4

I think Jim pointed out that we expect essentially flat revenues this quarter. That's our expectation. Again, to put things in context, if we go back quite some time, we've had in a normal situation With respect to bookings and we pointed this out a year and a half ago with very long lead times and capacity bottlenecks And also in light of general industry conditions, we were we had book to bill ratios of Nearly 2, which are obviously not sustainable. So there is a process that has been going on for some time with Timescale literally of a year, year and a half of building up the backlog, now bringing it back down to a sustainable level where additional bookings will bring the backlog back up. In terms of our turns business And the relationship between the backlog and projected revenues, Right now, we're not in a comfortable position.

Speaker 4

Obviously, we had a lot more backlog a year ago, but again, that was An anomaly rather than a sustainable condition.

Speaker 7

Understood. I'm sure you can appreciate our concern or nervousness, if you will, when we see that the incoming orders are so much lower than the revenues For the quarter, just hate to see any dips along the way.

Speaker 4

I sympathize with, in effect, the concern of the nervousness It's certainly justifiable. But again, it's very important when Dislocations of this kind has happened over the last year, year and a half, take place to being a safe harbor with an objective view of all of the relevant factors, right? So as Pointed out by Phil in his earlier comments, Vigor is uniquely positioned because of the convergence of technological trends that we anticipated, invested in and are uniquely equipped to exploit. And that's the Safe Harbor that we're operating from. And that is the basis for looking forward as suggested in my call's press release for sustained growth and improving profitability.

Speaker 4

Thank you.

Operator

All right. I will now take the second phone question. Your line is open now.

Speaker 8

Hi, good afternoon. Thank you for taking my questions. This is John Tanwant from ZJS. I was wondering if there was any more color or detail And why the lateral implementation of the product? So this new ag product will be launching first.

Speaker 8

Has there been a delay in the lateral vertical? Any more commentary would be helpful there.

Speaker 2

I'm sorry, John, I didn't fully get your question there. You're coming through a little bit muffled.

Speaker 4

Can you repeat?

Speaker 8

Hi, can

Speaker 4

you hear me better now? Yes. Yes.

Speaker 8

I was wondering why the lateral only version of this new product is launching first compared to the higher performing lateral vertical product?

Speaker 4

So the lateral version, even though The start of its development was over a year after the start of developments based on multi source, multi phase competitive alternatives, That was in effect predicated on the same kind of PDM that The multi phase, multi source solutions are in effect confined to. But because of the fact that Its development, even though it was belated, still started early in time is gathered to the finish line ahead of a more advanced PDM, which we have projected to have the benefits is proving out to have. But because of the fact that that only got started about 6, 7 months ago from a development perspective, It is following on the yields of another vertical solution that had been started and nearly a year earlier. But it's rapidly catching up and it's proving out to be as good as we had advertised it to be. And in my belief, because of its much stronger Trends, again, in terms of not just power system performance, but processor performance, It will soon, I believe, play catch up and become the solution of choice.

Speaker 2

John, it's Keith. Patricio said this earlier, it's exactly the same chipset, which is key for the lateral and the lateral vertical. It's a much, much improved layout, better PDN with lateral vertical, placing 1 of the VTM's underneath the process so that gets the benefits. And we can do that because The packaging is very thin, very thermally adept. So it's got a lot of advantages being the same chipset that gets qualified for the lateral.

Speaker 8

Can I ask when you actually launched the lateral vertical product with the same chipset, does that get you a higher dollar content per AI card for this product?

Speaker 2

No, the chipset has been quoted for Over a year now and that chipset is a price fixed price and that goes for lateral or lateral vertical implementations.

Speaker 4

But rather vertical implementation, which had been recommended to the customer earlier, but did not get started until later, delivers a lot more performance. So the value of Cision is much greater, particularly if you look at it in terms of anticipated processor performance.

Speaker 5

Got it. So should we

Speaker 8

think of the lateral product then as a similar to a drop in replacement for the existing Multi phase solution for as a second source and maybe your lateral vertical product, higher performance, higher efficiency type SKU which may launch later?

Speaker 4

So the lateral solution using the same chipset is not the drop in because With different components, the layout itself is different, but it shares A common Laval PDM, given fundamentally the floor planning that had been done, which floor planning It was again predicated on a multi source, multi phase solution. So we're first in effect within the same general thought plan, fitting in a solution which is better in many respects, much lower noise, better performance in general, but endigap by the VELADA PDM. So that And the gap is a common denominator of limitation that can be overcome as Phil pointed out a moment ago by Taking one of the VTM's that supports the primary current output and redeploying it to into a vertical position Close to the center of the GPU. And in that location, it can do wonderful things in terms of not just reducing PDN loss for the primary output, but also the PDN losses in the secondary and tertiary outputs that are also very high current by large percentages. And with that, improve overall system performance.

Speaker 4

So the outcome of all this effort, which could have started earlier, but It did not get started until 6 months ago, will be a superior system with better performance overall.

Speaker 8

Understood. I'll jump back in queue. Thank you.

Operator

Your next question is coming from the line of John Dillon. Your line is open now.

Speaker 6

Guys, can you hear me a little better now?

Speaker 4

Yes.

Speaker 6

Okay, great. Phil, the last conference call you discussed the lateral vertical that you've got a number of designs that were coming out And the Q3, I believe, one sounds like it's your high volume customer, existing customer is doing a resend that you talked about. But you had, I think, 5 other designs that were supposed to come out. Are they still coming out? Are they slipped?

Speaker 6

Are they coming out as Vertical lateral or vertical? I mean or lateral?

Speaker 2

Yes. So John, those are lateral designs. The process occurrence there are lower. There's slightly lower performance applications, different types of workloads. And yes, the customer count there is about the same, 4 to 5 customers, but those are lateral implementations, but again, using basically the same technology.

Speaker 6

And you Expect those to start production in the Q3 also?

Speaker 2

No. I expect those to be in production mostly like Q1 of next year.

Speaker 6

So would we expect are those things that you have bookings on orders for already? Or will we see the bookings next quarter for those?

Speaker 2

We have a small amount on backlog, maybe a few $1,000,000 just early prototype type quantities for initial ramps. And then I expect the bookings for those to be Q3, Q4.

Speaker 6

Okay. But they're not as high volume as the other order that you were talking about, correct?

Speaker 4

Correct.

Speaker 6

Excellent. Okay. And then, when do you expect 5 gs to actually be production ready?

Speaker 4

We expect it to have demo systems in Q4 for internal by DASH and begin to share with some select customers in Q1.

Speaker 6

Mike, when would you expect that your customers would be able to take those and then ship those to their customers? Are we talking Q2, Q3 of next year?

Speaker 4

As you know, there's a gestation period, right, from Absolutely. Absolutely. Your availability to customers their own design cycle, Which has kind of constant of in round numbers a year. So I should not expect we should not expect 5 gs to be a contributor to revenues in 2024. I think The original expectation with respect to 5 gs contributing to revenues is 25.

Speaker 4

Now having said that, I would say the following and you might have heard me say this at the shareholders meeting. With 5 gs, We are enabling a much more scalable designing process. And I do expect to have a number of notable applications That they have had challenges with iCard solutions were Once again, unscrupulous competitors have been chasing a truck in terms of our 1st generation vertical power I do expect those to run into trouble because they are immature ways of enabling a vertical power delivery system. And with our 5 gs technology, we have a much better way of implementing VPD without stacking at the power system level. So there could be situations Sometime next year, still in 2024 where we could intersect or come to the rescue of customers that find themselves once again in trouble because of a variety of technical or IP challenges.

Speaker 6

Got you. So we may see a competitor come out with a vertical system, but there are IP challenges and There's also technical challenges that you think they're going to run into?

Speaker 4

They have both technical problems and IT problems.

Speaker 1

Why would a customer go

Speaker 8

with a solution?

Speaker 4

The problems they get with MBMs.

Speaker 6

Why would it come from a go with a solution like that if there are technical and IP problems?

Speaker 4

Well, so to some extent, I think the industry is going to go through a period of evolutions, right? Because Whether it's a technical issue or it's intellectual property issue, OEMs are dependent on their suppliers to be able to follow through on solutions that can be shipped And that work technically or work in terms of Ownership of intellectual property that is at the heart of the solution. And failure to be able to Support the customer, an OEM customer, another one of those fronts is going to bring about a revolution in the industry. That's my expectation.

Speaker 6

Great. Thank you very much.

Operator

All right. I will open the next phone

Speaker 5

Yes. Alan Hicks from Hainesby Capital. I had a question about is the factory fully up And are you going to be able to hit the ground running in the Q4 for this new customer and fully meet their demand?

Speaker 4

So to be clear, the factory as a whole is and has been up and running. And my earlier With respect to the turn on of certain equipment and processes starting at the end of August and into September, Those capabilities are incremental capabilities that we haven't had Vertica integrated. They expect it to be virtually integrated in the next 2 months before the end of this quarter. And that will give us, as I mentioned earlier, Total control of our destiny with respect to advanced products in particular that are dependent on those packaging process steps. But there are many other facets of capacity for which we have made significant investments and as reflected in all the capital equipment that you've seen being added within the last year, year and a half That have already been deployed and validated.

Speaker 5

So in Q4, do you expect more of a ramp or really move the needle

Speaker 4

Well, I think we're going to have a ramp and We have the capacity in the equipment to support that ramp.

Speaker 5

Okay. And then a question on your gross margins were up over 4 points this last quarter. What did you attribute that to?

Speaker 1

That's so this is Jim here. That's a function of leverage associated with the volume increase in volume and also a favorable mix. And we also have the benefit of lower freight in and tariff costs, net of the $2,800,000 duty drawback, As well as a reduction in outside processing costs. All of that added up to improvement in the gross margin.

Speaker 4

Increased all.

Speaker 1

Yes, increased royalties as well.

Speaker 5

Okay. That was my next question. You had Well, it is last quarter and what were your royalties this quarter and they seem to be ramping pretty much pretty fast over last year. Is that

Speaker 4

going to be lumpy or

Speaker 5

is that going to continue to grow?

Speaker 2

No, I think you'll see it

Speaker 1

in the 10 Q when we file it August 4.

Speaker 4

Let's reserve judgment, okay? So let's put it this way. As you've heard us say, over the last 15 years, we've made major investments in the 100 Several $100,000,000 in technology, all that it takes to bring it about. And thus far, what we've seen with respect to ROI In terms of licensing of international property, it's still early stage in terms of both the number of OEMs involved and their use of that technology. So we should expect To see those numbers go up, you used the word lumpy.

Speaker 4

Yes, it could be lumpy at times. We'll I have to wait to see how events unfold with respect to the assertion of IP and The campaign that we're embarked upon to make sure that it gets fully respected.

Speaker 5

Okay. Thank you very much.

Operator

I will take the next phone question now. Please proceed. Your line is open.

Speaker 1

My question was answered.

Speaker 7

Thank you, Bill.

Operator

All right. Then I will open the next question. Your line is open. Please proceed.

Speaker 7

Patricio, can you give us an estimate of the dollar value of the lost sales due to the infringement?

Speaker 2

Well, so I'm not sure

Speaker 7

I shouldn't say can you, I should say will you.

Speaker 4

So I'm not sure I even can, never mind whether or not it makes sense to go into the kinds of details. Again, the NDM issue is the first issue to be dealt with And it is significant. And but again from MBMs, we're deriving License income as well in a growing amount. So I do expect that The value we have built in IP in the next 10 years is going to be a strong contributor to our top line and even more so to our bottom line. But beyond that very vague statement, it would be really inappropriate of me to make predictions because there is a variety of scenarios And a broad range of outcomes and I think we need to take a wait and see attitude.

Speaker 4

We do have a very well thought out plan with taking the time necessary To think it through in every respect and we are we just began Executing it. So, let's wait and see what happens.

Speaker 7

Okay, fine. Thank you.

Operator

All right, the next phone line is open now. Please proceed.

Speaker 8

It's John Tanwanteng again. I was wondering if you expected margins to stay at the current levels organically or is there some part of the clawback that is changing as you move forward, Number 1. And a follow-up after that.

Speaker 1

So I think we just say, John, as I said in the guidance, We expect gross margins to be approximately flat as well. There is going to be a declining rate of duty drawback because part of it Front end loaded recovery of years' worth of tariffs that would have been paid in the past.

Speaker 8

Understood. So the underlying margin should be increasing going forward, If that's the case. Understood. Okay. And then where do you actually expect litigation expense to be in the coming quarters compared to this quarter or however you want to phrase it?

Speaker 4

We're not going to Be very quantitative about that, be beyond what Jim said at the outset, which is we're going to have significant Legal operating expenses, there may be more actions growth. And so we need to take a wait and see attitude with respect to the next year.

Speaker 8

Understood. And then last one for me. Just the orders for the next generation products that you're talking about, the lateral vertical products, do you need your factory to be fully qualified before you see those orders? Or can you ship those currently with existing capacity regardless of the factory is qualified or

Speaker 2

No, I think the 2 pretty much line up, right, because qualification is occurring in the next 4 weeks. And so We're moving forward into Q3, Q4 on the new program. So it's about the same timing. Timing sort of lines up pretty well.

Speaker 5

Understood. Thank you very much.

Operator

Okay. The next one is coming from Quinn Bolton. Your line is open.

Speaker 3

Hey, guys. Just wanted to ask a quick follow-up on this new AI platform that runs in Q4. Is that should we think about that as sort of a new SKU or Vicor as Sole source through the factorized power and hopefully over time you can convert it to the lateral vertical solution Or will there be a second SKU of this product based on multi phase and back rise power will sort of share of that business going forward?

Speaker 4

So we've been allocated a share of what you might call the baseline platform. And that's something that again can be supported from a power system performance Using a lateral PDM and the cap as it is, okay. But again, we have proven that the Lava Vertio is a far superior PDM With major improvements in efficiency, we're not talking, I mean typically Power components or power systems within a certain type of PDN differ by 1, 2 percentage points of efficiency. We're talking about is a 10% difference. So it dwarfs the minimal differences that Often characterize different kinds of components, right?

Speaker 4

So it's a fundamental difference in the way The power system is architected from the PDN perspective with major benefits with respect to system performance. And you can and I can independently speculate as to what OEMs, customers would want to do with that. I don't know that I would know or that if I did I could tell you.

Speaker 2

Yes. One thing I'd want to say Quinn would be our job is to obviously give our customer options, right? And I think the lateral vertical gives the customer a great option in terms of increasing performance for its GPUs that are limited by the lateral PDN. So and again, it's very important to remember, it's about 100 watt savings per AI card. You have 8 of these in a rack system.

Speaker 2

That's 800 watts of power savings. It's huge. And so you can really start to go The GPU performance with those savings. So, we've given customer options. We will see what happens.

Speaker 3

Understood. Thank you.

Operator

And we have our very last question coming from John Dillon. Please proceed.

Speaker 6

Thanks guys. Follow-up to Quinn's question. For your with this new customer, this existing customer, I mean that It's going initially with vertical and then, I mean initially with lateral, then lateral vertical. Will that customer see an improvement and in performance with your lateral solution, your lateral only solution? Will we still have Problems with resets and throttling the clock.

Speaker 2

What we've seen and reported back to us from the engineering teams looking at this is that our version of lateral is a Better version. It's higher performance.

Speaker 6

So they won't see the degradation as much as they're saying with the multi phase solution?

Speaker 2

Yes. It's a better solution, let me put it

Speaker 4

that way. But just to be clear, the PDM tends To be an equalizer, right? If you get enough of handicap, it tends to play in decapping role all around. And that's clearly the elephant in the room is the handicap associated with the PDM?

Speaker 6

Correct. But it sounds like your lateral solution lateral only is going to give a little bit better PDN than the existing solution. Am I correct in assuming that or am I hearing that or?

Speaker 4

Let me ask you this way. I would not expect The differences in performance between a lateral multi source, multi phase And allow the factorized power system at this current levels to be all that significant on the scale of the benefit of the Radhar vertical. In other words, Radhar vertical removes the handicap That is fundamentally limiting our system capability and processor performance.

Speaker 6

Correct. I'm trying to understand why the customer would switch From the current multi phase solution to your lateral solution as an interim, why wouldn't they just wait for your lateral vertical?

Speaker 4

Because the latter gets started earlier. Even though it gets started late, it still gets started earlier than the latter vertical. And they need suppliers, John.

Speaker 2

They need suppliers.

Speaker 6

Okay. They need suppliers too. Got you. Okay. Okay.

Speaker 6

And it sounds like, is this truly the end of the line for multi phase? I mean multi phase keeps making improvements. I'm just wondering, Is this really the end of the line for that?

Speaker 4

Did you get that? No.

Speaker 1

The end of the line is multi phase.

Speaker 4

It's not the end of the line for multi phase, right?

Speaker 6

I mean for power levels, if it's hard.

Speaker 4

The auto pace has been around for a long time and it will not suddenly die. There is a war for auto pace, But you heard me say this before, it can't keep up with The performance of a factorized power system, particularly leveraging our 5 gs components with a 3x step up in current density and much better performance all around. Nor can you keep up with The industry demands with respect to escalating current requirements at the DC voltages For all the competing AI systems that are under development are going to be brought to market over the next few years. I see fundamental disconnect between what the systems are going to need And what a multi source, multi phase can support, particularly as we get into Full vertical power delivery type of systems, I. E.

Speaker 4

Past lateral, even past lateral vertical. As you get into a full vertical system, these kinds of solutions, the multi phase, multi source are going to be Constraint from complexities challenges of what we call 1st generation VPD, which Vigo pioneered Much simpler, much better, much more cost effective. So there are handicaps At different levels standing in the way of multi phase. It's the multi phase, our conversion methodology, The averaging down as opposed to the current multiplication, it's also the PDN And then there is a BPD element to it with related IT issues that is also stand alone.

Speaker 6

Got you. So with the higher current levels, you really don't expect to see the multi phase making much progress?

Speaker 4

I don't expect it to go away. I think it's going to remain an alternative, but I am confident that the technology gap between the factorized Power system solutions using early generation components On the one hand, in our 5 gs chipset capabilities, that technology gap relative to Multi phase has improved as we should all expect it to be. But those improvements are not going to be able to keep up with the step up in performance that we're going to deliver next year with 5 gs.

Speaker 6

Thank you very much guys. Good call.

Speaker 4

Thank you. Okay.

Speaker 1

Thank you, everyone. Operator, I think we're ready to end the call now.

Operator

All right, everyone. That concludes your webinar for today. Thank you for joining and have a nice day.

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Earnings Conference Call
Vicor Q2 2023
00:00 / 00:00