Welcome, everyone to today's webinar entitled Vicor Earnings Results for the Third Quarter Ended September 30, 2023. My name is Jono [ph] and I'm your producer for today. [Operator Instructions] I would like to advise all parties this conference is being recorded. And now, I would like to hand it over to Jim Schmidt, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the third quarter ended September 30, 2023. I'm Jim Schmidt, Chief Financial Officer. And 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 and 9 months ended September 30. This press release has been posted on the Investor Relations page of our website, www.vicorpower.com. We also filed the 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 risk 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 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-K, which we filed with the SEC on February 28, 2023. This document is available via the EDGAR system on the SEC's website. Please note the information provided during this conference call is accurate only as of today, Tuesday, October 24, 2023.…

Thank you, Jim. Let's begin with an update on our high-performance computing or HPC business, which will continue to be our major growth driver in the next few years. For the next few quarters, we will be focusing in 3 key areas. The first will be ramping production of our Gen 4 48-volt bus converter and factorized power point-of-load products in our new ChiP fab. The second will be completing development of our Gen 5 factorized power point-of-load solutions and delivering models and tools in Q1 of 2024. The third will be continuing to expand our customer base beyond the major accounts that dominated our revenues in the HPC market over the past 5 years. Regarding revenues in HPC, we expect customers using both lateral and lateral-vertical Gen 4 products to be in production through 2025 before introducing new processes, utilizing Gen 5 vertical power delivery or VPD solutions midway through 2025. In reference to the expansion of our customer base, we have continued to have substantial discussions with large data center, AI, and network processor companies on their challenges in powering next-generation high-current products. All of these companies recognize they need scalable access to more adept power system technology to effectively address the technical and operational challenges of generative AI at scale. The one major technology challenge that is foremost in everyone's minds and heard repeatedly was power density and power delivery. Power delivery to the processors, power delivery to the AI accelerator cards, and their rack systems. And last but not least, power delivery to the data centers while driving towards a carbon-neutral objective. HPC customers are becoming aware that our current Gen 4 lateral-vertical solutions can reduce power losses in an AI-enabled data center by 1 to 3 megawatts while enabling high processor performance. Future processes will,…

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

[Operator Instructions] And the first question is coming from Jon Tanwanteng.

First one, I was just wondering how qualifications have gone at the new facility. Can you talk about when you'll start shipping volume through the vertical plating capacity and kind of the initial demand that you're seeing and the response that you're seeing from customers?

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

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

Okay. So as Phil pointed out in his prepared remarks, we've had visits at an accelerating pace, frequent visits, weekly visits. As he mentioned, these visits have generally gone quite well. Visitors are impressed with the equipment, the processes, the systems we put in place to achieve much shorter cycle time in scalable capacity. This is very evident to every visitor that has come through the fab. The fab at this point in terms of its vertical integration is what I would say essentially complete. But that's not to say that all the equipment has been delivered and installed. The strategy that the operations team has pursued in terms of enabling initial capacity has been to get the core equipment with respect to our three-dimensional integrated packaging capabilities in place while deferring some of the other measures in order to facilitate some of the challenges by some of the vendors. That automation is coming in and is getting installed over the next few months. But while we are, in effect, not totally done, we are done to a very large extent. We can, at this point, make complete units, including all of the three-dimensional package integration steps that are essential to our 4G products in terms of vertical integrating processes that have been outsourced as well as enabling our 5G platform capability, which has some very exciting new process steps.

To be clear, are you already shipping or are you still in the qualifications and maybe finishing out stages of the facilities? Are you producing out of that piece that you've been working so hard to in-source over the last year or two?

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

Just to follow on, Patrizio, when do you think the book-to-bill will start to creep back over 1 and do you see that your backlog is increasing again?

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

The next question is coming from John Dillon.

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

We may see substantial increases. Again, we don't want to be very specific because of uncertainties that are outside of our control. But there is a range of scenarios that include a pretty steep climb. But then again, it may take a while longer.

Can you just give us a little more color on that? What's going on? It sounds like you could possibly see a nice increase in bookings. But -- and I understand bookings, trust me, I really do. But can you just give us a little more color on that, that'd be helpful.

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

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

John, as you know, I think you've been an investor for a long time. We don't run a company based on what the shorts might do or any near-term type of consideration. We take the long view. We are very committed. We believe we are in a very unique position, the only position that can support critical market needs. So that's how we run the company, that's how we operate. We're not going to get into any debate regarding that, which to us is quite obvious with respect to the tenure of our technology, the need for it. The customers that are literally flocking to us in terms of their next-generation AI needs, it confirms what we believe and is objectively supported by numbers such as current density and PDN flexibility, and vertical power delivery capabilities that are without equal in the industry. So that's what I think investors should be reliant upon. But obviously, they have a choice to believe us or not believe us. We believe ourselves and time will tell with respect to that.

I completely understand. I was involved in programs when there was voltage drop, and I understand that all too well. And I don't know if all the investors do, but I completely understand and I'm content with the technology.

So if some don't, that's going to be too bad for them. But I think we need to move on to the next topic.

And the next question is coming from Quinn Bolton.

I guess, first question. Last quarter, you guys seemed pretty excited about this new AI platform that you expected to ramp in the fourth quarter of '23 and throughout 2024. Can you just give us any updates on that program? How you're feeling about it? Is it still on track? Have you started to see more bookings associated for that? And a related question, there are now 2 platforms on the market, one by NVIDIA, one by AMD that I think both are rated at 1,000-watt TDP. It seems like 1,000 watt is kind of the key power level where you guys bring some real advantages, especially with lateral vertical. Can you confirm whether this AI platform is indeed a 1,000-watt here?

So Quinn, this is Phil. So the first part of your question, I think, was what we talked about on the last call. And in my prepared remarks, I basically said that the first area of focus was to ramp in Q4, our 48-volt bus converters and factorized power solutions. So I hope that answers that question pretty clearly. The second, in terms of power, we're seeing 1,000 watt GPUs and network processes and all sorts of ASICs and mixes of CPU, GPU combos out there. As Patrizio talked about, we have the technology to address those that offers, as I mentioned in my prepared remarks as well, significant power savings with lateral vertical solutions of the scale of megawatts in data centers, which is really critical to any data center company. And with our Gen 5 technology coming along, I mean the level of engagement now is very, very high. As I said, we're having substantial conversations now with customers that will diversify us away from the 2 big guys that we've been doing business with for the next -- for the last few years. So as I said, I'm very confident in the future and where we stand. And it's a bit of a complex landscape, as I said, because you've got new programs starting up, old programs ending. There's a bunch of other stuff going on out there with technology and product introduction. So as I say, we're confident in our position in the market.

I guess a question, and this is kind of highlighted, I think, some of your legal proceedings, the ITC complaints against Delta. But it looks like one of your big motherboard customers has moved -- it looks like in scale to a 2-stage architecture and away from factorized power. And I think Delta has come in and won some of the sockets away from your MBM. I guess can you give us any sense of what's going on in the motherboard business, how much of that business do you think goes 2-stage? How much of it stays single-stage? Because it seems like a big customer has moved away from Vicor with that transition to 2-stage architecture and Delta has come in to do the 12 -- or 48 to 12-volt module.

So as you may know, Vicor pioneered the MBM bus converter. We have substantial IP. We've asserted 3 different patents coming at it from 3 different directions. And they're not the only patents we have that cover that technology. We have licensed it. There are OEMs that they are paying royalties for those MBMs, and they are the ones that they have certainty or continuity of supply. There are other ones that have been taking chances, and those are going to go line down in the next year. That's what's going to happen.

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

Yes. I second that. So to be clear, in answer to your question, the MBM is not as much as we love it, we invested, right? But you hear it from me first, it's not the long-term solution to 3 amp square millimeter, high-density VPD, scalable, robust cost-effective VPD for the next-generation AI. It is not since it's societal. It's an attempt to, in effect, drive multisource multi-phase capability that is fundamentally handicapped. it's not really turning out to be when you get up to the kilowatt level or the 1,000 amp level. Truly multisource. It has brought about significant trade-offs in terms of performance, which are not sustainable in a competitive landscape.

[Operator Instructions] And the next question is coming from John Dillon.

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

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

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

Yes. Let me just -- is this a little bit better?

Yes, it is. Yes.

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

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

And that's also the way in which systems have evolved, but make no mistake in the future and the future is coming next year. It's no longer with lateral PDNs. In fact, all of the design activities that we're engaged in at this point is beyond lateral PDN. I'm on a call with an important potential customer tomorrow. We're not even going to consider or entertain a lateral PDN. It's either lateral vertical or what we call second-generation VPD, which is a more advanced, more scalable, more robust form of VPD that falls on the heels of the first-generation VPD that Vicor pioneer and other companies have tried to copy.

So one, with the one major customer though, do they have 2 different designs with you, one for -- are they working with the one customer? Do they have 2 different GPUs that are going to be used in one, using lateral, the other is going to be using lateral vertical? Or is it the same GPU that's initially going to be used lateral and then going to lateral vertical?

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

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

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

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

Hi, Richard Shannon [ph] with Craig-Hallum. Let's see, a couple of questions. Maybe a following up on the topic of bookings here. I think last quarter, you felt fairly confident that the backlogs would improve either in the ending third quarter or fourth quarter. Now, it seems you're less certain of that. And I think if I understood one of the answers to a prior question, you're still expecting the design with a major customer to -- that is still active here. So it seems like a couple of simple explanations for that would be either that design is delayed or your share of the size of the opportunity is more limited than what you initially had thought or potentially there's other reasons. So can you help us understand those dynamics relative to your last conference call?

I think I made clear that we really don't want to go into the level of detail. And to be clear, well, I appreciate the reason for the interest, the curiosity, it's really got very little to do with Vicor's opportunity in the medium and long term. And that's what we're really focused on.

I guess I'll jump to another question here. Maybe looking a little bit longer term. And Phil, I'm going back to your prepared remarks here about time frame for 5G technology to be ramping. I think you said in '25, if I caught my -- if I caught your commentary correctly. Is this the expectation of one that would intersect with the first ramp-up of 3-nanometer accelerators you see in the market or is there some dynamic you're expecting to intersect with?

No. I think that 5G is, I believe, looking at what it's capable of doing to the market, it's going to be very ubiquitous. I think we'll see design-ins, as we've talked about, even down in the low hundreds of amps because of the density and cost-effectiveness, and performance level of the technology. So it's going to be ubiquitous across all sorts of different high-performance computing markets. But with regards to what we see from a deployment perspective, '24 will be obviously a big design win year for us with an increasing number of customers and then a ramp to production in the '25 time frame. Some customers are really in '25, other customers are sort of midway through the year. So it will be a mix and a blend of both domestic and international customers, actually. So again, that's going to set the scene for us to take really significant share in the ever-expanding AI market. That's what we're looking at right now, Richard.

And the next question is coming from Quinn Bolton.

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

So Quinn, as we said, it's a complex landscape right now. And we've got confidence in our Gen 5 -- Gen 4 lateral and lateral vertical solutions. We're going to see how that goes, but I believe that that technology, again, as we talked about, I mean you can't not save megawatts for your end customer and not consider it seriously for deployment, right? I'll just go back to that. So it's a very important step for us towards Gen 5, but we've got great products that we're going to be ramping this quarter and into next quarter. So we have a bridge, if you like, to the Gen 5.

The next question is coming from Jon Tanwanteng.

I was wondering, Jim, if you could break out the actual legal expense in the quarter and kind of what you expect the run rate to be as the ITC does its investigation over the next couple of quarters?

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

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

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

So I was wondering if you could expand just a little bit on the enthusiasm you're seeing out there for the Gen 5 VPD. Where -- what's like the breadth of the customers that you're seeing today versus where you were maybe in the same time in the development cycle for the current gen of AI processes? Would you say that there's a lot more volume and opportunity out there today just because of all the I guess, the amount of competitors that are out there, number one. Number two, the size of the opportunity increasing. Just help me size what that opportunity looks like Gen 4 versus Gen 5, if you can.

Yes. The current density improvement. Well, first of all, you've got the drivers of the much higher currents coming along for all of the processes across networking, AI, CPU, right? That's the first thing. Secondly, the market is expanding at an incredible rate, particularly on the AI side. But as you add more AI, you also need to add more CPU, you also need to add more networking. So everything is sort of getting the big uplift. Now then you factor in that our Gen 5 has got 3x the current density over the Gen 4 technology and the reaction to that, and we've shown a lot of the customers actually. When you go down the list of the majors in data center, AI processors, or network processes, we've shown them examples of -- the mechanical examples of the packaging that we're going to have. I mean the reaction is astounding. And they're astonished that we can put as much current as we can into that small of a package. And there, if they're looking at VPD today because that's where they're going to go as Patrizio said, all of the conversations now are about VPD, it's not about lateral. The current Gen 4 is lateral vertical, but Gen 5 is all about vertical. They look at that and they say, "My God, I don't need to disturb my capacitive layer underneath my board. I can put one of these tiny little current multipliers there. I don't have to worry about mechanicals, thermals." Everything sort of fits. And so the reaction is incredible when compared to companies -- similar Chinese companies that are trying to -- that copied our MBMs are trying to do this thing with VPD copying basically the wrong thing, which is a stacked package, really heavy, terribly terrible. They're leading customers down the wrong path and the customers can see that when they see our Gen 5 technology. So the excitement is really incredible, and I'm very confident, as I said, we're going to take major share here in this market.

First-generation VPD is an horror show from a manufacturability perspective and from an IP perspective as well. So there too unscrupulous foreign suppliers are putting not just themselves but major OEMs at substantial risk with respect to continuous supply, both in terms of the viability of the solution from a robustness perspective and from the perspective of viability from an IT perspective or non-infringement perspective, I should say.

So it's fair to say that the pull is much stronger on Gen 5 than it was in the Gen 4, Gen 4.5 that you have out there?

Yes. I think that customers are going to get both performance, right, and power savings. And we talked about all the advantages of reliability, of cost that add on to all of that. And with our scalable ChiP fab, we're going to be able to work with customers on flexible supply chain solutions. So we're sitting in a very good place, Jon.

Next question is coming from the attendee who joined over the phone. So please introduce yourself before you have your question.

Richard Shannon from Craig-Hallum, again, guys. Phil, I wanted to ask you about one of your statements in your prepared remarks here about the 5G technology and kind of targeting 2 different groups with different priorities here. The last part of that statement was you believe the first group will embrace level of innovation for 5G from a multiplicity of ChiP fabs. Since you only have one, at least that you've talked about, are in plan, can you parse the statement a little bit more and tell us what you mean by that and over what time frame we could see a multiplicity of ChiP fabs, please?

Well, I'll try to answer that question. Again, given the lack of sharp visibility with respect to that. So bear with me as I answer your question in general terms. As you know, it took many years and a very substantial investment to bring together a first ChiP fab. In some respects, this initiative is similar to the kinds of fabs most of us are familiar with, semiconductor fabs. And as in that case, the technical complexity, the complexity from the perspective of equipment and processes is such that bringing to closure, the first fab takes, again, considerable time, persistence, and investment. But the great news with respect to having done it is that replicating it is something that can be done on a much shorter cycle time with a high degree of predictability. And the investment involved while substantial, it's in the hundreds of millions. On -- in the right perspective, from the perspective of OEMs wishing to have flexibility from a sourcing perspective, given their system capabilities and value propositions is, in that perspective relatively small investment. So we do anticipate more than 1 fab coming to the market to bring about an ecosystem where large OEMs that cannot, for good reason, rely on capacity from just the first Vicor fab will avail themselves of capacity from power facilities.

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

So they are typically looking at programs on different time scales, in some cases, a few months or the better part of the year or a year and a half with different kind of requirements. And our focus is to engage where we can contribute substantial value through, in particular, 5G solutions with their unique set of attributes. And those are particularly differentiated when you get past the lateral, right? It can be lateral-vertical. We demonstrated that with lateral-vertical relative to lateral at current levels of roughly 1,000 amps, you can achieve something at the order of nearly 150 watts of PDN, both direct and indirect power savings. Those are very substantial. And those when applied across data centers, result or can result in the megawatt scale savings that Phil referenced earlier. So there is a value proposition there. And that can be done with our 4G technology, even though the current density of that technology is a small fraction of current density with 5G. So it is a bet, a lot of vertical. There is a value proposition there, and we can engage there to enable customers to achieve their objectives. But the much bigger opportunity is looking a little beyond the next few months or 6, 9 months. Our systems are going to go into production, as Phil said, late next year or early in '25 that we're with 5G MCMs, a few amps per square millimeter, the whole new world of capabilities that are enabled and in turn enable solutions that around go around. They've got all the attributes, right? They're scalable. They are robust from a mechanical perspective, they're robust from a thermal management perspective and they are more cost-effective.

So Richard, this is Phil, just to add on to that. A couple of weeks ago, I got invited to a big data center, the company's strategic supplier day where they had their executives presenting on the future road maps and the challenges of building AI out in their existing data centers as well as adding more data centers going forward. And as you can imagine, as Patrizio mentioned here, we're talking about data centers of the 20-megawatt plus level, and getting power into those while also trying to get carbon neutral is a massive challenge. So if you look at the amount of compute that's going to be needed to support AI going forward, both on the CPU side and on the GPU or ASIC side, plus the network processing. Even if you save 10 watts or 5 watts per the CPU, that's a massive savings. When you multiply the amount of compute in a data center, it gets over megawatts very quickly. So even to save 10 watts or 15 watts in a 400 amp or 300 amp CPU motherboard, and you can do it vertically, why not do it vertically if you can offer that to your customer base. So that's the change that's going on in the market. That's --

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

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

Okay. Operator, I think we're going to have to take --

Maybe one more --

Maybe one more question, please, and then we'll have to wrap it up.

So the last question is coming from Jon Tanwanteng. Jon?

I'm sorry. I didn't have my hand raised. That wasn't me.

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

Okay. Thank you.

Thank you, everyone, for joining the call.

Thank you, everyone. That marks the end of your webinar. Thank you for joining, and have a nice day.