Good day, and welcome everyone to the Vicor Earnings Results for the Second Quarter ended June 30, 2022. Hosted by Jim Schmidt, Chief Financial Officer. My name is Nandy, and I'm your event manager today. During the presentation, your lines remain on listen-only. [Operator Instructions] I would like to advise all parties that this conference is being recorded. And now, I would like to hand it over to you host, Jim. Please proceed.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the second quarter ended June 30, 2022. I'm Jim Schmidt, Chief Financial Officer. And I am in Andover with Patrizio Vinciarelli, Chief Executive Officer, 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 and six months ended June 30. This press release has been posted on the Investor Relations page of our website www.vicorpower.com. We also filed a Form 8-K today relating 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 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 statement will in fact prove to be correct. Actual results may differ materially, from those explicitly set forth or implied by any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2021 Form 10-K, which we filed with the SEC on March 1, 2022. The 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, Thursday, July 21, 2022. Vicor…

Thank you, Jim. Q2 bookings are a result of securing long term NCNR orders in prior quarters, that now form a large part of our backlog. The outlook for the data center market is positive, as hyperscalers continue to build out their machine learning technologies and capabilities as well as upgrading their 48-volt CPU racks with the latest Intel and AMD CPUs. Our backlog, which stands at over $400 million is strong and made up of major HPC customers with a mix of older and newer programs, that are just beginning their ramps. Our objectives in the next two to three quarters are to catch up with customer demand and reduce lead times. As discussed in our Annual Shareholders Presentation a few weeks ago, we are working on next-generation AI processor and AI systems in the HPC market with the lateral and lateral vertical solutions and with new network processor based designs for backhaul speed upgrades. Since the ASM, we have also agreed to a funded collaboration agreement with an additional automotive OEM. Our legacy product backlog increased in Q2 and although a smaller percentage of our overall business mix legacy products remain important to our business. Many of our 8,000 plus customers representing a very long tail and loyal base are transitioning to our Advanced Products for next-generation programs. This is important to our portfolio, as we build out our broad based industrial and channel business. I cannot emphasize enough how important our new ChiP fab is to not only increasing short-term revenue growth for our Advanced Product customers globally, but also to our mid and long-term strategic goals. Our major HPC customers need access to scalable capacity with shorter lead times in support of their critical production ramps and volume requirements. Our automotive customers also need assurance that the power modules, they use in vehicle platforms are manufactured in an automotive qualified facility under Vicor's full control. In conjunction with world-class manufacturing of chips in our first fab, our company-wide operational excellence initiatives are now being rolled out. Our pivot from a product centric company to a more customer-centric company is at the heart of this change. On the ASM call, I spoke of a focused set of 100 customers, that had the SAMS to get us to $1 billion revenue target. We will be laser focused on this customer set with the objective of achieving the highest possible scores across technology, quality, responsiveness, delivery and cost, more commonly referred to as TQRDC, such that the most impactful companies around the world, trust us to deliver power system solutions with the high performance necessary to enable their innovations. Thank you. Patrizio, Jim and I will now take your questions.

Everyone your question-and-answer session will now begin. [Operator Instructions] And we already have a couple of questions. The first one is coming from Quinn. Your line is open now. Please proceed.

Great. Thank you. Congratulations on the nice increase in quarterly revenue. But I wanted to ask, Phil, you gave a little bit of color on bookings. So it looks like on a quarterly basis bookings declined pretty meaningfully. You mentioned the NCNR orders in previous quarters, but can you sort of just elaborate a little bit more. I'm not sure if I know the term NCNR, so maybe first start with what those are and then perhaps more importantly, when would you expect to see bookings recover, are you already starting to see better bookings in the September quarter or do you expect them to remain subdued as you work down backlog?

So, hi, Quinn. So NCNR is non-cancelable, non-returnable that was necessary pretty much across the board because we are booking out really way beyond some cases 40 weeks. Our lead times are at 32 weeks for Advanced Products, but obviously big customers to secure their supply chain and guarantee they are able to build their product have been placing very large orders with us, NCNR orders with us in prior quarters. Very lumpy, very up, very high, in some cases and so I'm not concerned about bookings at all, with the backlog being so strong and visibility out there, it's, okay. I'm very confident in the backlog.

I guess maybe a related question you talked about some of the next generation platforms that may ship later this year or in 2023. Should investors assume that perhaps orders for those advanced next-generation platforms were already placed under the NCNR terms that you talked about or would you expect platforms for 2023 to book later this year?

No. We're seeing orders. As I mentioned, the backlog is made up of all the programs and new ones, recent ones and those are NCNR and for the 2023 timeframe, but some of them will start to ship in Q4.

Great. I'll get back in the queue.

Yeah. So to expand on that, if you are referencing next generation solutions are triggering additional bookings, if those are approaching availability, but we have not yet booked orders for those devices.

Got it. Okay. Thank you, Patrizio.

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

Hi. Good afternoon, guys. Thanks for taking my question and nice quarter. I was wondering if you could just give us a little bit more color on what enabled this sequential increase, whether it was your internal capacity freeing up or was it external supply chain just help us get us to where you got today and is that sustainable actually going forward?

It was a combination of a couple of things. I think that the investments we've made in capacity did help us in Q2. So the beginnings of some positive results from particularly Surface Mount Technology, not necessarily the package process steps the plating operations. So we did get some benefit from that. We still have the headwinds associated with the most part, outsource operations and that continues now, as we bring our own lineup. But there was some benefit there. And I think, John, we have to give a lot of credit to our operations team, who worked against long odds to get supply and really drive supply hard in 2Q, to get the revenue lift.

Understood. Thank you. And I think getting better or worse as you head into Q3 in any place. I know that you’re going to start with your new line, but externally should we be thinking of any other headwinds.

Supply is still tight. We've talked about that internally, I've talked to our operations people, it's still a very tight environment for supply.

Okay. Understood. I'll get back in queue. Thanks.

The next question is coming from the line of Don. Please proceed.

Hi, guys. I'm following up on Quinn's question, I was trying to get a feel for the dollar value of the bookings received in the quarter. Am I right to assume that you net out new orders with any cancellations or move-outs of existing orders, when you determine your book-to-bill ratio and if that's the case, could you please identify what the dollar value of new orders were otherwise, it looks like it was only about $76 million.

The bookings were higher than that there is minimal cancellations in our order pattern, really. So I think the book-to-bill was as we said, below one backlog…

Not that far.

Not that far below one. I think the telling number that we quoted was the opening backlog dropped by sequentially by 3% which is on the order.

Yeah.

So it's really the best way to understand it is as Phil described, which is $400 million plus of backlog out multiple quarters. [Multiple Speakers]

Yeah. What I was trying to get a feel for is, how much -- what was the dollar value of the new orders you received during the quarter?

We're not providing detailed information with respect to the bookings, as Jim has pointed out, in the past. Bookings within a quarter are subject to the vagaries. So some large orders falling within the quarter, at the start of the next quarter and they are not necessarily indicative of our long-term trends. I think if you want to draw the right inference with respect to the long-term trend, the key parameter to look at is the progression of our backlog, within the last 12 months. We have to say we've been capacity constrained allocating our capacity and in customers have had to place orders with very, very long lead times and that's been a factor, with respect to within the last several quarters, the bookings pattern, the backlog pattern (ph) and that's ongoing, as Phil pointed out, booking orders is not a concern.

Thank you.

The next question is coming from Doug. Your line is open now.

Yes. Hi, guys. I just have two brief but unrelated questions. Have you received the final piece or pieces of equipment for the new facility. And then switching gears, you guys brought up the litigation, what capital requirements or any distraction will these litigations creates moving forward, and I was kind of under the impression that the technology was not repeatable or recreateable, so I'm a little confused on how these guys are infringing on your technology. Thanks.

Okay. Let me take that so I’ll start first with the working stand in terms of our new facilities, a federal state and bringing on capacity, as Jim pointed out earlier, we already benefited in Q2 from some of their capacity and equipment is being sold at the high rate and lines within the new facility are being tested in fact one of the lines relating to the packaging process is beginning to be applied that with respect to some of the engineering prototypes. But we will have to wait for the balance of Q3 to have the bulk of the production equipment installed and then we'll have to wait for a fraction of Q4 for us to in effect reclaim the lion’s share of the capacity or production for Advanced Products. So there will be some incremental contribution this quarter and this going to happen, the increasing pace as the quarter progresses, but it will not be until the fourth quarter that in effect all of the production equipment that is in the critical path, just to say, there will be additional production equipment coming next year, but all of the critical production equipment with respect to Advanced Products for that to be in place that would be in Q4.

So simple [indiscernible]

Yeah. Go ahead.

Just a quick question because obviously, I've been on every call as an investor with you guys for eight, nine years now is that -- has that been delayed because my original impression when you guys were starting to facility it was a little bit sooner on the final piece of equipment. Has there been some delay in that, those last couple of pieces of equipment?

I will say generally, no -- that's not to say that given the multiplicity of pieces of equipment and general complexity of what we're bringing together in terms of the first fab, this is the way to think about it for power components is a very first fab. That's being conceived, developed, implemented, that's a major task that has happened pretty much on schedule. So we won't quibble with respect to whether both of the production volumes for Advanced Products would happen in Q3 versus Q4, there may be a couple of months with respect of delay, with respect to our expectation. But regarding the delivery of equipment, it's been remarkably on time, on budget. So we're very happy with what our operations team has executed on that general front.

Yes, I was not questioning the production of your product, I was just simply asking the delivery of the equipment. I'm not worried about your guy's transition, again listen to all your calls, how you've trained your staff. I'm very optimistic about how efficient you guys start pushing out product, I was concerned with just the delivery of some of the equipment, so that you guys can get started. That was the nature of my question.

Yeah. So delivery of the equipment has been pretty much on schedule. Now we've had and we're continuing to add to air freight, some of this equipment is heavy and frankly, they are really costly to ship by air because, so the timelines and the constraints. But for the most part, I think everything was up and pretty much on time. We're now going through in effect of different phase, which is with all the equipment has been delivered. We're bringing up new lines that perform certain portions of the Advanced Products process steps. And there is still some equipment due to be delivered in the next month or so, that would be commissioned late in this quarter, and would become operational in the fourth quarter.

Terrific. And I don't mean to dominate the time, but if you could just talk about the litigation that seems to be a new topic that popped up?

Yeah. So we have some long-standing litigation in which unfortunately, we've had to play mostly defense, which is coming to ahead in October. And there will be behind us in a few months. And in the meantime, we're gearing up for the more important litigation opportunity, which has to do with effect getting return on investment with respect to all of the IP that Vicor has developed in terms of power system technology, power components, and other aspects of the overall power system challenge. So there are, as we've discussed in past quarterly calls, there are on the fringes, instances of infringement regarding the earlier part of your question, as to why these people can "copy". To be clear, nobody has either the technical wherewithal or the hutzpah to copy our Advanced Products, right? Let's be clear with respect to that. Even if they have the hutzpah, then we have the wherewithal.

Good. That's what I wanted to hear. Good.

But on the fringes, the fact that broad based copying is not taking place, it doesn't imply that the recent some aspect of our product portfolio that is being infringed. Now with respect to that, as you might recall from prior our quarterly calls, we've had the program to -- in April OEMs to secure an OEM license for Vicor technology. So that they can source components that would otherwise be infringing from suppliers that are not the directly licensed by Vicor with our concern with respect to adding value to those power components by way of their OEM product, which is then imported in the U.S. So we have a well thought through strategy and litigation partners with respect to asserting our IP to in effect stopping production in the U.S. of any OEM product that incorporates any aspect of Vicor's proprietary technology. Now we've had success in terms of the licensing program. We expect to have additional success on the general front. But ultimately, we need to make clear to those OEMs that, as suggested in Jim's prepared remarks, maybe taking chances as to whether or not we are determined to assert IP to provide that evidence in order to capitalize closure with respect to what they need to do to secure the supply chain.

Okay. Good. Thank you very much. Go get them.

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

Hi, guys. Congratulations first of all on the quarter, but also on the factory, I've got a little of the remodeling project here at my house and I know how hard it is to stay on target and schedule just in this little project. I don't know, how you guys did it for the whole factory, but it's really remarkable. So my question here is for Phil, at the Annual Meeting you presented, what I call the bubble chart and reference to your major customers with the expected forecast for them. So my question is, the bubbles represent revenue bookings or opportunities?

The bubble chart was basically to show the customers, on the progression of customers that we're bringing on. It's really a mix of both bookings and revenue, John. I didn't get that granular on it -- it was really meant as a visual to say to everybody because I always get asked, we only got one or two customers. So the answer is no. We've got a lot of customers and we are building that customer portfolio out in the HPC market. So it was really meant to represent that in a mix of bookings revenue, different programs. And then visually showing how they grow over time.

That's great. This is kind of what I thought, but I guess a little more clarity maybe, since it was bookings and revenue, would you expect the bookings and revenue from the large GPU customer to be back-end loaded next year or is it fairly linear, because that bubble got a little bit bigger? So I'm just wondering is that going to be a linear type of growth or is it going back-end loaded?

So I would say, as I mentioned, in remarks I think a couple of quarters ago, what we're seeing in the industry now is the existing sort of older programs living a little longer and overlapping with some of the newer programs. So that -- in the AI market, particularly this, there is so much change going on and there's so much that you can do still in terms of performance with older GPU or process of platforms. Customers are still taking delivery of those with maybe higher memory content, higher speeds, higher power levels performance levels. And then you've got some of the newer technologies at the 5-nanometer node coming on and being intermingled with that. So we're seeing that at a number of customers, John.

Got you. So the GPU customer sounds like their existing product line maybe continuing a little bit longer than we thought. And then in time for the new product, you expect to get some revenue from the new 5-nanometer product that will continue that growth in that particular customer?

That's correct.

Excellent. Okay. My next question is -- more of the follow-up question is, as you were including 32-week lead times last conference call and you had a $450 million backlog. So I assume that means that you're planning on shipping all that backlog before the end of the year, is that assumption right?

I'm not sure that we want to answer, such a question of any kinds of specificity. So let's talk generalities. As Jim remarked, we are appreciative of the progress that was made within the last quarter in the face of a great deal of headwind on a number of fronts, component availability, outsourced capacity. The operations team did a good job in terms of advancing revenues. This is a trend that we expect to continue this quarter and the quarter after that, particularly as our internal capacity can be brought to bear to, in fact, facilitate the operational challenge. And that's the broad guidance that we can provide. It's clearly supported by the backlog. It's supported by the opportunities with existing products have been designed in. And it will be further supported by major further advances in Advanced Products that come into fruition as we speak.

Thank you. That’s really helpful. Thank you guys. I’ll get back in the queue.

The next question is coming from Richard. Your line is open now. Please proceed.

Hi, guys. Thanks for taking my question. My first question is mostly answered, but I just want to make sure here to understand about the Advanced Products backlog that was down sequentially. Am I correct in assuming that there may have been some push-out with some number -- some customers here of their programs as you have maybe a little bit of a lag into using Phil's words here, just a couple of minutes ago, they may be extending their current generation products while they wait for that. Is that a fair interpretation of what's going on?

I think it's the fact that, Richard, they've got significant backlog, right? And they've had lots of lead times on -- long lead times on their equipment and building there, I mean, those supply chain is stretched right out. So I think that's a big piece of it. And then you've got the new 5-nanometer stuff coming on board. So it's going to be a mix.

Okay. All right. Fair enough. Maybe you can talk about the dynamics here of getting the new manufacturing facility up and particularly with any new and potentially more interestingly, larger volume customers that have been looking for that more predictable delivery? Are these customers, are they waiting to see proof of this new manufacturing facility up and running, get good performance and good cycle time before they place bookings, or are they already happening to some or even a great degree?

Anybody that's got us designed in over the last number of quarters are eagerly awaiting the new facility to get shorter lead times, right? I mean that's the key thing and have that great supply assurance from us being vertically integrated. With regards to new programs, again, we've talked about single sourcing and being vertically integrated and having a great factory like this. That's why I mentioned in the remarks, it's so strategically important to us to walk into some of these newer customers that we are working on with early programs and show that facility often be able to stand up and say, we can service you, don't worry. Now obviously, there's supply chain of materials to us, but actually making the package, making the product being vertically integrated is a huge weight of any risk in that supply chain.

Okay. Fair enough. Let me follow up on that one a little bit later. I guess my question jumping out -- before I jump out the line here, just talking about the [Technical Difficulty] here as you ramp up the new facility, like, I assume that you're going to -- you got a number of iterations, funds and numbers of volumes to get a sense of product performance and then also being able to get the cycle times that you want. How many iterations does this take? And how long is each iteration, meaning you're talking about ramp, I think or at least start panels early in the fourth quarter. When do you think you get that sense that you're going to be able to produce at the amount of throughput that your major customers would like to see?

So I think we're going to be in that privileged position by the end of this year. I think that because of all the learning has been going on over the last 1.5 years, our operations team doesn't have to, in effect, sort through challenging processes by [indiscernible]. They understand what needs to be done. They've aligned themselves in terms of chemicals and equipment and capabilities with proven solutions that we expect will enable us to ramp without glitches, having completed the validation of the equipment and the processes, which, again, is something that has begun, it's taking place already with respect to some of the lines in the upper floor of the new facility, which are dedicated to advanced packaging. And again, that's the process that will continue over the next few months as the balance of the equipment gets delivered, then the balance of the lines get turned on to complete the overall packaging capability.

Okay. Fair enough. I’ll jump out of the line. Thank you guys.

The next question is coming from John. Please proceed.

Hi, guys. I got two follow-ups for you. The first one is, I think I get the sense that you're expecting sequential improvement over the next two quarters. My question is more around Q4 when you actually ramp up your advanced packaging and plating. Are you expecting a step function in margin in Q4 as you migrate away from outsourcing and then towards internal capacity?

John, I think the way to think about it is we're still in an environment of extremely tight supply. We're transitioning to in-house production. I think what we would say is incremental improvement in revenue and gross margin over the coming quarters is the kind of advice and guidance we'd want to give.

Okay. Great. And then second, where do you expect your lead times to be in a quarter or two from now? Should we expect orders to ramp back up again once that gets back down to your more historical range of maybe two quarters and then maybe a little less?

Yeah. I mean as the new programs start to come on and ramp up, dollar content for a lot of those programs is higher, volumes are higher. So yeah, I expect the bookings to start climbing again next year, yeah.

Okay. And where do you expect lead times to be in the next quarter or two?

I think that we should leave that question largely unanswered in that. I think we are at a very interesting inflection point in the business, which makes it in terms of growth rates and opportunity a bit difficult to forecast. I think we're sensitive about now that we're committing and we want to be able to pleasantly surprise in terms of results. So let's not get online ahead of what we expect to happen, which, in general terms, is at the beginning of a long-lasting phase of growth for the company, leveraging the first of its kind ChiP fab, ChiP as in converter housing package. So it's not a silicon fab. But in many respects, it shares similarities with the foundry for silicon in the way in which the products are manufactured in panels similar to wafers, the many process steps, the fact there's a lot process steps are currently getting measured. And the kind of equipment involved is, again, similarities. We have lots of lasers and unique equipment that we have conceived and developed with partners to accomplish these unique packaging steps, which I firmly believe will give Vicor a long-term sustainable cost advantage in addition to a major performance advantage. And backing that up is what I suggested earlier, which is that come into fruition of next-generation technology that in some critical (ph) steps will step up the game by about a factor of two in terms of density and cost effectiveness. So all that paves the way for significant long-term growth. As we suggested earlier, we expect the establishment of revenue growth that our operations team marched to deliver after a few disappointing quarters within the last quarter to continue this quarter, quarter after that. At what rate, let's not get into that, let's wait and see what happens.

Understood. Thanks for that on technology and good luck guys.

Next question from Quinn. Your line is open now. Please proceed.

Thanks for taking my follow-up question. Patrizio or Jim, just wanted to ask on the vertical integration, when do you think you'll be fully vertically integrated at this point? Is that still sort of by the end of the year, or do you think that potentially moves now into the first quarter given you're still taking some equipment for that step in early Q4?

So the way in which we monitor that is by, if you will, percentage of integration, right? By definition, it will never be literally 100%, right? There's always going to be something that from time to time, it needs to be done externally. But if we look at the third quarter, the quarter we're in, with respect to our processes, as the quarter progresses, we're going to get to relatively substantial percentage, 20%, 30% vertically integrated. I'm talking advanced packaging, which is obviously the trust of this line of inquiry. As we get into the fourth quarter and as we get towards the end of the fourth quarter, we're going to be 80%, 90% vertically integrated. I hope that answers your question in a quantitative way. This is not easier proposition. It's not zero to one. It is a progression where, as suggested earlier, the advanced packaging involving a combination of lines that perform different process steps, get brought up and released to production in increments that achieve a greater level of vertical integration. And again, as we get to Q4, we expect to be substantially integrated, meaning not 100%, but the lion's share of it, which going back to a variety of key considerations ranging from our cycle time, our capacity, the cost effectiveness of the process steps that will essentially deliver the goal.

Understood. Thank you, Patrizio. The second question I have is just on the lateral vertical. I wonder if you might be able to give us an update there? Are those programs still sort of undergoing customer revaluations? Have you started to actually receive bookings for delivery of the vertical -- lateral vertical solution at this point?

So there is a broad range of requirements and to go with that broad range of capabilities, obviously, we've had success stories with what we call lateral PDNs or lateral power delivery. And we've had the success stories competing with the competitive alternative of, if you will, what's called the intermediate bus architecture and back converter, some multi-phase regulators. So that's been the landscape for the most part over the last 10 years, more systems have been lateral. At the other end of the spectrum, we worked with some industry pioneers on fully vertical systems. Those are still what you might call leading-edge initiatives. They involve stacking our chips, and they've been supportive to a limited degree, leveraging some of our older technology. And without the benefit when it comes to the packaging of the vertical integration, we are soon going to be able to nearly fully deploy. But they have demonstrated the kind of capability that's going to become necessary to support wafer scale and cluster computing in leading-edge applications that the industry at large will require, as lithography gets financed, you get even below 5-nanometer and the current levels get up into the several thousand amps. And then you get, in effect, two intermediate PDN architectures, one we call lateral vertical and another one, we call vertical lateral. As you can imagine from the sequence, the lateral vertical is still mostly lateral, but deploys a vertical component on the other side of the substrate to provide for typically one-third of the current requirements of a primary ramp. That's relevant because it makes a very substantial difference in terms of PDN losses and system capability in the 1,000 amp, 1,500 amp range. Above the current level, vertical lateral becomes a necessity, because even the deployment of a vertical component isn't enough in order to provide the current density and bandwidth and overall system efficiency that is necessary by systems in the, let's say, 2,000 amp, 3,000 amp total power range. So again, you have a broad range of requirements and with it, evolving landscape ranging from pure lateral, which is, in effect, becoming a thing of the past to lateral vertical, which is becoming a necessity in the 1,000 amp, 1,500 amp range to vertical lateral as you get above that. And then when you get to powering, let's say, wafers that may consume 50,000 amps, 100,000 amps, there is no alternative to pure vertical. And we're on the forefront of that technology as well. And with our 5G capabilities, we're going to get to, generally speaking, much higher level of current density and performance with those applications as well as the vertical lateral and the lateral vertical.

I guess maybe just a quick clarification. On the lateral vertical for 1,000 amps to 1,500 amps, is that something you expect to go into production early next year or is that further out?

That's in, I would call it, early development stage, and hoping that we get to that solution sort of probably in the second half of next year.

Okay. Thank you.

I think that that's all our time for tonight. I'd like to thank everybody for joining the call, and ask the operator, we're ready to conclude the call now.

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.