Good day and welcome everyone to the Vicor Earnings Results for the Second Quarter ended June 30, 2020 Conference Call, hosted by Dr. Patrizio Vinciarelli, CEO; and James Simms, CFO of Vicor. My name is Shandor [ph] and I am your Event Manager. During the presentation, your lines will remain on listen-only. [Operator Instructions] I would like to advise all parties this conference is being recorded. And now, I would like to hand over to James. Please proceed.

Thanks, Shandor [ph]. Good afternoon, everyone, and welcome to Vicor Corporation's earnings call for the second quarter ended June 30, 2020. I'm Jamie Simms, Chief Financial Officer, and with me here in Andover are Patrizio Vinciarelli, CEO; and Phil Davies, Vice President of Global Sales and Marketing. After the markets closed today, we issued a press release summarizing our financial results for the three months ended June 30. This press release has been posted on the Investor Relations page of our website vicorpower.com. We also filed a Form 8-K 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 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 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 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 2019 Form 10-K which we filed with the SEC on February 28, 2020 as well as in the prospectus supplement associated with our recent share offering, which we filed with the SEC on Form 424B5 on June 9, 2020. Both of these documents are…

Thank you very much. So everyone, your question-and-answer session will now begin. [Operator Instructions] All right, we have already received a couple of questions. And the first question is coming from the line of Jon Tanwanteng. Your line is open now. Please proceed.

Good afternoon, gentlemen. Thank you for taking my questions and the very nice quarter.

Hi, Jon.

First one from me, can you discuss how much COVID impact you had in the quarter on a COGS basis and if that's been resolved in July?

I probably could give you a pretty good number, but I won't. The issues are still in play. But we have taken steps to remedy some of the variables and we're hopeful that things will improve, but I suspect that for the coming quarter, we will still face some of the inefficiencies and challenges that we discussed. Is that fair?

Yes. So diminishing, right, the things are more stable now than they were earlier in the year and certainly there has been plenty of opportunity to adjust to the new environment. But with some suppliers, did they see occasional issues.

Yes, I'll point out. As we discussed in the MD&A of the Q, Absenteeism has improved significantly from what we are experiencing coming out of Q1. So we have some areas of less risk, but there is still risk.

Understood. And then moving on to the bookings. $87.5 million is a fantastic number. I was just wondering is that -- is the timing of that any different from your regular order pattern when those are scheduled to be delivered. So we expect that to hit your P&L over the next one to two quarters or are there any different patterns in the delivery schedules involved here?

This is Phil. So yes, it was a good bookings quarter. I think that what Jamie talked about in his remarks here was the strength that we're seeing with Advanced Products as we start to ramp our lateral power delivery solutions and also some standard 48 to 12 or 48 to load products that we supply into the datacenter hyperscalers and HPC type companies. But we've also seen some tremendous strength coming out of China. I mean if you look at what China has gone through from a negative GDP in Q1 to a very large rise of like almost 9% in Q2, huge investments continuing in infrastructure there. So, we benefited from that with really good bookings on our Brick technology, if you like. So those are being laid in for Q2, Q3. Our lead times are still 20 weeks to 24 weeks. We've maintained those. We don't anticipate reducing them anytime soon because of the supply chain challenges, but that factors in a little bit as well.

Got it. And then just to clarify, you are expecting improvement in the next quarter on your orders for Advanced Products, did you also mean that on a blended basis or it's too early to tell, just where you see bookings go to in Q3?

I think we're still going to see a good strength in the Brick line and as Jamie mentioned, increases in the Advanced Products. We see that from our forecast. Yes.

Okay, got it. And then last one from me. A large AI player or at least a unicorn by many standards released their -- or showed off a new product yesterday and I didn't see Vicor at least on the product board they showed to the public. I'm wondering if you're involved in most of these projects as you've been telling people in the past.

Yes, you're talking about the Graphcore?

Graphcore, yes.

Graphcore, yes. So no, so there was another announcement from a company called I think it's Groque [ph] as well. They announced I don't know if you saw that one, that was in AI inference chip, very specialized type of product. And both of those companies are using multiphase at the moment because their current levels are still quite low, they're in that 300 amps range, but I know that next-generation chips are going up significantly. And they are moving to 48-volt systems using Vicor technology.

Got it. So, it's more a matter of timing than anything else.

Yes, yes. A lot of these guys start off in the 300 to 400 amps range for their first silicon and next silicon has got to go up and performance with an all competing with NVIDIA. So that's where we step in.

Understood.

As we discussed in the past, the threshold of pain for 12-volt systems is such that with power levels and current levels of a few hundred amps is still tolerable, but it just becomes intolerable as you get past 400, 500 amps and all of these -- all animal kingdom unicorn and otherwise, so they're all -- they're all heading for the same boat in terms of being able to compete with each other.

Understood. Thank you for the call.

Thank you very much. The next question is coming from the line of Hamed Khorsand. Your line is open now. Please proceed.

Hi, just wanted to see how -- so the increase in Advanced Products is relates just inventory stocking?

I don't think any. Phil, did you…

Yes, I don't think there's any. I think that's the simple answer.

Okay. And my other question was are the manufacturing inefficiencies you encountered, are they manageable or is it something that's going to continue for the foreseeable quarter?

So recoveries as we discussed earlier. It was an issue particularly in the March-April time-frame. It's a diminishing issue but it has been an issue and as Jamie suggested it may still to some degree be an issue, this quarter, obviously. We all watch the same news and we'll have to wait and see what happens in our area, the things again, much better than they used to be. As Jamie mentioned, we are essentially back 100%. But we do have some vendors in other areas that are still under covered, right. Now, beyond that, when it comes to manufacturing efficiencies, the other factors, not just COVID, it is the scale up of new platforms in the early going. It's not unusual, particularly with new packaging technology to have inefficiencies until we made substantial quantities and get yields to where they get one cities maturity and cycles of learning have been reflected into fine tuning the manufacturing processes. So, we're still going to be seeing some of that expecting to dissolves within the last few quarters and it will impact results going forward to a lesser extent. Capacity utilization is another big factor with respect to manufacturing efficiency and product margin and speaking as we scale up our best products those efficiencies are going to get better and better.

Okay. And my last question was, are you seeing any changes in order patterns with your lateral power delivery products right now with, especially with NVIDIA's released new products a couple of months ago?

No, we are on a steady ramp.

Yes. But yes, increasing. But we really don't want to make comments specific to any one customer but across the board. Yes.

Okay. Thank you.

So, I think you have more than one question for that stuff. So it's important to reflect that.

I appreciate. Thank you.

Thank you.

Thank you very much. And the next question is coming from Quinn Bolton. Your line is open now. Please proceed.

Hey, guys, congratulations on the results and the nice bookings number. I guess I wanted to start with bookings. Could you give us the split of the $87.5 million, how much of that was Brick's, how much of that was Advanced Products?

Well, I sort of did already but with good book-to-bill.

Yes. So I think you can do the math based on the numbers that the Jamie provides earlier in the presentation.

Yes. But I don't have the specifics right in front of me, Quinn.

Understood. Second question, and I understand this maybe a little customer specific. But yes, one of your lead customers on lateral power has a 48-volt solution as well as 12-volt PCI solution. Do you have any sense what the mix of that business will be going forward?

Well, that's obviously aimed at the very different marketplace. Right. I mean I mean PCI is really struggling right now with the power levels and that they're having to pump into those boards. So eventually they'll move to 48-volts and that would be a great entry point for us, but it's a very different space on the space that we are in. And most of these guys are in terms of the training, workloads that they're having to do, I mean that's really where we're playing at the moment, Quinn.

I guess maybe another way to ask it then you think most of the training applications will be 48-volt?

Yes, absolutely, yes. I mean that's such a heavy, heavy workload. And again on the inference side as it moves out towards the Edge, again those process of power levels are going to continue to increase. So the workloads are going to continue to go up, right. So I see us playing in the Edge eventually as well.

Great. And Jamie, obviously you guys had talked about some of the COVID-related inefficiencies that you're working through. As you continue the expansion of the Andover facility, do you expect any inefficiencies just with that expansion project?

No, we don't. We got that very well planned, very seasoned, mature operations team. So they get that very well planned and we just got an update earlier today, everything is on track. We don't anticipate any interference with production within the existing wall. So fundamentally strategies to perhaps the space, the wing and build it up near to say there is going to be some times when community cash and conduits have yet to be provided between the two, but that's being planned to app and a particular of time. So as not to interfere with the production cycle.

Great. And then my last question, you've mentioned some rescheduling of bookings from Q2 to Q3, Q4. I wasn't sure if that was due to some of the production inefficiencies, you've talked about, you said that there were some suppliers that we're having issues. I guess my question is do you feel like you're leaving demand unfulfilled or have you been able to manage to your customer forecast despite some of these inefficiencies?

We are able to manage to customer requirements. They tend to change. That's the nature of the industry. While some of the backlog that was in Q2 moved into Q3. This is merely fraction of advanced schedules. So with some customers, there is nothing unusual about this particular period relative to other periods. I think it's been relatively routine in that regard.

Understood. Okay, thank you.

Thank you.

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

Hi. Yes, first of all, congratulations, guys. This is a really, really nice quarter to see. My question has kind of been answered, but I was wondering if you can give me a little more color on it. And that's on bookings. I'm just wondering if the bookings increase is due to a couple of your larger customers priming the pump or is it more of a steady state from a wider diverse customer base.

It's both, as well as what we've talked about which is the growth of the Asian business sort of returning to strength. So it's sort of across the board, but, yes, we are getting some nice bookings ramps, if you like, from the datacenter AI guys we've been talking about and HPC company's hyperscalers coming back to ordering what they typically awarded and they've gone through a slowdown as well. So they've started to recover. So it's a sort of across the board really.

And you talked about the next quarter, it looks like bookings are going to be up for the Advanced Products and pretty good for the Bricks. What about for the next two quarters? Do you see increases in bookings for the next couple of quarters?

Again, looking very far out in a sort of a turbulent time, but yes, I mean, I am confident that the strength is going to remain with Vicor and the products that we have on both the advanced side and we still see good strength on the older products, the Brick products too.

Excellent.

So this is predicated, not just on what we hear from costumers with new applications, but on the transition that is now finally beginning to take place away from 12 into 48. It's not just in datacenter AI space, but in automotive. We're seeing a lot of action there too. Now unfortunately that's long gestation period, right. There is no instant gratification, it's initially for a couple of years, but if we look at the medium to long term, if you will, pass the next couple of quarters into, let's say, the '22, '23 timeframe, there is a lot of action that is taking place in automotive that will bolt-on to further developments in AI and datacenter.

Excellent. And that kind of leads right into my last question. That's, if you can give us an update on the design wins like are they still increasing what markets are you seeing, are they broad based? And then finally, are you seeing any design wins for the front-end products?

Okay. So, front-end products for us at this point in time are mainly the high voltage, fixed ratio converters. So yes, we've got lots of these highlights for those in the automotive market. Some in the datacenter area. We also serve robotics companies -- emerging robotics companies. That's a very exciting market and that has got some great growth potential for us. And also UAVs, lighting, there is a whole host of markets that joined at a fairly broad based with really large numbers of customers entering those marketplaces. So that's good strength for us. So, that's on the front end high voltage BUS converters. In terms of, I think your other question was, but more towards the data enter AI space or automotive space. And yes, we've got more engagements going on pretty much every quarter. This is something new that we're working on and somebody is coming to us with a challenge of an opportunity. And this is a very exciting time…

In particular project for our 4G base PFC solution that is in the works now, and I think will lead to what should be by far the most advanced AI solution from power system perspective. So soon to announce from 3-phase AC all the way down to very high currents up to the point of load to a 48-volt system where we're going to be providing the whole solution. We're currently providing the solution from 48-volt to the point-of-load, but in the next generation system, we're going to be providing the solution from three phase and this next generation system is going to be a fraction of the volume of the current generation, because in part of the advances in the front end and I think it's going to be a game changer for the industry at large.

This is great. And it sounds like we're finally getting the diversification that we're all looking for. This is really great. Congratulations, guys.

Thank you.

Thank you very much. The next question is coming from the line of Kenneth Durana [ph]. Your line is open now. Please proceed.

I actually don't have a question, because I've been unable to hear 95% of the presentation. So I just wrap it up.

I'm sorry to hear you that as we mentioned at the beginning of the call, we are recording this conference. So you will be able to listen back and we will investigate -- so have you got any question or can I close your line?

No question now.

Okay, sorry. Thank you.

So the next question is coming from Richard Shannon. Your line is open now. Please proceed.

Great. Thanks for let me ask some questions here as well. Follow on from one of the earlier ones. My question is more specific to bookings within the Advanced Products. So I wanted to get a sense of whether there is a broadening of that base. You're obviously you've got to larger customers, I think in the prior answer you're talking maybe about some HPC coming in here. But I'm particularly curious about any new hyperscalers and/or customers with OEMs that you're starting to see material bookings for?

So, on the OEM side, we've got a lot of design-ins either 48 to 12 or fewer 48 with lateral power delivery. Those companies are bringing those products to market, but again, they are finding their own hyperscaler customers to work with. So it's early days for us to really understand the forecast on the penetration of those particular chip companies within the hyperscalers, but they tell us that they're winning share and are getting good design and so. So that's yet to come, but we're still doing really well in that area. Also, you've got the new sort of VR 14 server boards being developed by Intel and Intel's customer base and 40% of those 50% is what we are hearing is going to. I'm going to go 48-volt. That's a number that's been confirmed. And in those types of applications we're providing the 48 to 12 either regulated or unregulated solutions. And that market is a market that has got a number of competitors in it, but nobody has got the density, efficiency and performance that we have. So we expect to get some good design wins in the VR 14 area, both at the hyperscaler companies who will do their own reference designs off of the Intel reference designs, as well as in the CM companies down in Taiwan, and China.

Okay, great. Just a follow-up on that, Phil. So if you listen to the OCP summit here earlier this spring, they talked about some revenues coming from OEMs here in the second half of the year. It sounds like from your commentary you might not necessarily expect a whole lot. Wanted to kind of dive into a little bit. Is that something, is that a fair interpretation from what you said or do you still see some noticeable revenues this year?

I think it will be early next year, Richard. I don't think there'll be heavy bookings this year. We'll see some early bookings obviously in terms of how they do their early production ramps and get ready to launch. But in terms of the bigger numbers, those will come next year.

Okay, fair enough. Quick question on gross margins, a follow-up from earlier and I think Patrizio you were commenting on some previous questions here about getting some maturity in the manufacturing process here. To what degree was that an impact in the second quarter? How much does that help here in the third quarter? And trying to get to the question of how much, if any, should we see gross margins improve here in the third quarter?

So, I'm not going to make a very specific position with respect to the amount of improvement in gross margin beyond saying that we see the gross margins continuing to expand. Obviously, they haven't been expanding recently. But we -- I believe, we've seen the bottom in this past quarter. To your earlier point, it has to do with a combination of factors as suggested earlier, scaling up volume production for new products with new packaging technology is a big factor, in terms of depressing margins, capacity utilization and last and all leased tariffs and COVID-related inefficiencies. So going forward, these factors at least the ones that are under our control should continue to fade in terms of having a negative impact on margins. We are, as a company,, as a management team now very much focused on seeing our margins expand to the levels of the best analog companies in the industry, which is obviously not single profit advances relative to what we are is more like 20%, or higher. We're not going to get there overnight. Let's be clear. This is going to be a multi-year process, but we have line of sight on hot to accomplish that and we're very much focused on making that happen.

Okay. We look forward to seeing that. Thanks Patrizio for those thoughts. My last question. Obviously, we've had some impact in past quarters from the tariffs for products shipped to China here. But you had a very nice return to business in the second quarter. My assumption is based on what I heard that you're expecting China to improve here in the third quarter. But is there some lingering risk here of tariffs continue in any manner that that businesses is lower or even lost if the view is that will continue for a lengthy period of time?

Well, I don't know that I can really comment on what might happen in terms of some further deterioration of relationships between the countries. We do have contingency plans, but we're not pulling the trigger on those contingency plans at this point in time, hoping that cooler heads will prevail, right. So we don't see -- we haven't seen particularly different or concerning issue of late. To your point, the tariffs are still there, both coming and going, right. We pay tariffs on materials we procure from China. The customers in China pay tariffs on products they procure from us. We are taking a constructive step in terms of diminishing our dependency from a material sourcing perspective from China. I just had an update on that earlier this week and we're going to be largely out of with respect to major suppliers out of China within the next year, year-and-a-half. And it is an ongoing process. It's not a set function, right. Some of it is beginning to happen. It took some time to bring it about, more of it is going to happen in the second half of this year. It's going to become more significant next year. Some of what is going on is working actually in concert with some more long-standing suppliers based in China, opening up shop in Vietnam to in effect get around the handicap of that the tariffs imposed on their business, not just with us but also with others. So, that's a part of that we have pulled the trigger on and we're working very closely with key suppliers. So another example would be for components that we used to source from Japan, that had moved to China because of cost reduction opportunities, very soon they're going to be back in Japan, because although that we can source some with lower overall costs back from Japan. So those activities are ongoing. When it comes to making our products outside of the US or making some products like Bricks outside of the US, should a worsening of the relationship happen, we have contingency plans, but we have not pulled a trigger on that.

Okay. I appreciate the thoughts. That's all the questions from me. Congratulations on great progress, guys. That's all.

Yes.

Thank you very much. The next question is coming from the line of Alan Hicks. Your line is open now. Alan, please proceed.

Yes, good afternoon. I wanted to ask about some of the projects that a large LNG project and satellite project and shift.

So the satellites would be going up, but that's one of the projects that's slightly delayed, but I think we're going to be shipping product in Q3 and more product in Q4.

Okay. And the large LED project that you had?

So as you can imagine that's another one of those where because of COVID right and things coming to switching old where the installation has taken place for a number of months. Things got delayed, but once again, we are not lacking bookings or backlog. So we have plenty to draw from in terms of raising our revenue levels from quarter-to-quarter and we'll be ready to ship those programs and those products as the impact of COVID gets behind us.

Okay. So those are still to come?

Yes.

Okay. And then supercomputing your expecting that to ramp this year. How is that progressing?

That's going very well. There's been a lot of consolidation there of course with HP buying and so forth, but we're making good progress. We've got both front-end business there as well as the point-of-load, as well as both on the CPU side as well as the AI GPUs as well so. So that's going very well. That's a classic 48-volt market, that market transitioned a while ago. So it's a great market for us and we're making good progress there too.

Okay. So you had good shipments in Q2?

Shipments will be, yes, increasing as we go through Q3 and Q4. Those programs are a little bit longer in terms of their government programs and they're very high end sort of programs. So the shipments will really begin in Q3, Q4.

Okay. And then, can you give an update on your new -- newer front-end products? And is that progressing as planned?

Yes. So as always, these things ends up always taking longer than we like, but we have now everything we need. As I mentioned earlier, we are engaged with one of our key lead customers on a program that will bring about a much smaller, much more powerful machine, many sensor kilowatts of AI in one box is going to be a game changer in the industry and one that will leverage our 4G PFC technology is very novel in many respects, very dense, very efficient, very flexible.

So that's still maybe year way for any contribution?

Well, in terms of moving the needle on the revenue front, I would say probably even more than a year away, but I think in terms of initial power production less than a year away.

Okay. And then, I think someone mentioned opportunities on the Edge. How significant are your opportunities there?

Again, that's a developing market for us because, again, we are looking at power levels and current levels increasing on those types of processes. So, that's a market that I think we'll probably be participating in and again sort of a 2022 type of time-frame for that.

Okay. Is that how significant will the opportunity be?

Well, that's a very -- that's going to be a very large market. Right. If you look at the number of processes in inference versus training. You're looking at maybe 5x in terms of the quantity of processes that will go there. So that's a significant market expansion that will come when the -- you see the autonomous vehicles out there and other robotic type delivery systems. So that whole infrastructure as to get built out so.

So, I think I met an engineer over for dinner last night, he went back today and is going to be in 14 day, what do you call it, isolation quarantine, working on Vicor to deliver to homes with AI chips and a variety of perception type challenges. Wherever I turn, I see these kinds of opportunities right, it's going to be I think a very significant area of opportunity. A lot of these things for instance this particular company is seeing a phase of early development and for sure. Not all of them are going to make it. They're competing among others with the likes of Amazon. But again, whatever we turn, we see more and more opportunities for AI -- idea of farms as long as that having in particular.

If you take a look at our new robotics video on our website. That's pretty cool that will show you some of the areas that we're getting into.

Okay, great. Congratulations on a great quarter. Thank you.

Thank you.

Thank you very much. The next question is coming from the line of John Dillon. John, your line is open now.

Hi, thanks again for taking my calls or my questions. I think you answered this already Patrizio but I just want to make sure I got it right. It was on gross margins and I think what I heard was you think you saw the bottom on gross margins last quarter and you expect increases in the next two quarters. But it's going to take a while to get to the gross margins that you really expect and that's maybe 20 points higher, but that's down the road. Is that a fair assessment?

Yes.

Excellent.

So, I mean obviously there is going to -- nothing is ever is straight line. Right. But I think the trend should be positive trend with a timescale of a few years to get to where our margins belong, given the level of technology investment, the intellectual property of the patents. The unique capabilities that we have being well above any competitor in the industry.

Excellent. And somebody mentioned deferred revenues. Could you talk about that a little bit?

Sorry, what was that John?

Did somebody mentioned deferred revenues. Jamie, did you mentioned that?

I don't recall mentioning it, but it's obviously tied to a lot of our development projects where we book both deferred revenue and deferred cost and then when we can recognize it under GAAP, we do so. It's a recurring.

We have projects where the work that might be done. The largest might have been a $0.01 it might even have been paid for, but we can't recognize it, right. We got some --

How much deferred revenue do you have?

I'm not sure that we can get into specifics about that, but --

Their accounts on the balance sheet, you can see them. It's clearly presented.

Excellent, thank you. Thank you very much and again and congratulations.

So operator, do we have one more question.

Yes, we actually, we have the last question and this coming again from Quinn Bolton. Your line is open now.

Hey, just wanted to follow-up on a -- just a question, so you made the comment that on the VR 14 board you thought that perhaps 40% to 50% of those boards might be 48-volt giving a great opportunity for the 48 to 12 NBM product. I'm just kind of curious from I mean, is that true beyond your large hyperscale motherboard customer today. I mean do you see most of the hyperscalers moving to 48-volt with the VR 14 boards?

The data that we've seen is that over 40% of server blade developers are moving to 48-volt. That's what they're moving to for VR 14 and other types of processes CPU boards and not just from Intel but AMD as well. And then if you look at the, sorry -- If you look at the VR 14 just to jump back a little bit here and explain. So the VR 14, if they've got no AI capability at all, they still do a processor, but they dissipate today about 50,00 watts. Once you start adding AI and there they go through about 3 kilowatts. So you get to the point where you really can't have a 12-volt infrastructure and put many of those blades in a rack. So you have to make the jump to 48-volt. So the server developers are moving there. And if you look at the hyperscalers, the estimate right now is 25% of the worldwide hyperscaler companies including China, Europe and North America, whatever, about 25% of them are putting in place 48-volt datacenters. So that's big numbers compared to right where we were two or three years ago. So for Vicor, the opportunity is the 48 to 12 where the current levels Patrizio mentioned earlier the sweet spot being 400-500 amps and up, but some of those CPUs are still 250-300 amps, multi-phase is okay, but they're 48-volt infrastructure now. Opportunities for us with NBMs but also regulated NBMs which we call the DCM. So there is opportunities there for us in that general server blade, cloud, search type of application; that's going to be quite a lot.

Great, thank you.

Yes. And that's -- that is additional to what we've been talking about which is a big AI story right; that's what we've been spending a lot of time talking about the last few months.

Right, right. No, that's great.

Thank you very much.

Thank you very much. There are no more questions.

Very well. Talk to you again in few months. Thank you.

Thank you, everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.