Good day, everyone and thank you for standing by. Welcome to the Q1 2024 Vicor Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference to Jim Schmidt, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon and welcome to Vicor Corporation’s earnings call for the first quarter ended March 31, 2024. I am Jim Schmidt, Chief Financial Officer and I am in Andover with Phil Davies, Vice President, Global Sales and Marketing. Patrizio Vinciarelli, Chief Executive Officer is joining the call from Washington DC ahead of the upcoming patent infringement trial before the International Trade Commission. After the markets closed today, we issued a press release summarizing our financial results for the 3 months ending March 31. 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 related to the issuance of this press release. I remind listeners this conference call is being recorded and it’s 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 risk 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 and/or implied by any of our remarks today. The risk and uncertainties we face are discussed in Item 1A of our 2023 Form 10-K, which we filed with the SEC on February 28, 2024. This document is available via the EDGAR system on the SEC’s website. Please note the…

Thank you, Jim. My remarks this quarter will build on Patrizio’s comments in the press release that we issued earlier today. As a reminder, Patrizio commented, as we confront challenges and pursue opportunities, 2024 will be seen as the year in which our product strategy, selective licensing of intellectual property and clarity of purpose secured Vicor’s future growth and profitability. So, let’s look at this from the point of view of our four business units and the growth opportunities each of them has with our top 100 customers. The current base of our business lies with the Industrial Business Unit and the Aerospace and Defense Business Unit. This year, we will release the production over 20 new high-power density products that leverage our new chip fab capabilities. These products utilize advances in our topologies, control systems, components and packaging to raise the bar on power density and performance. From high-power regulated and fixed ratio DC/DC converters to new AC to DC products aimed at the aerospace industry to a new family of radiation-tolerant factorized power products for both LEO and MEO satellite constellation deployments. Customers from our top 100 are now designing advanced power systems for exciting new product launches that leverage electrification and autonomy in their systems. As part of our industrial and aerospace and defense strategies, we have also consolidated our distribution channel partners to large global distributors who have the customer base, the reach and the market status needed to achieve our broad market growth goals. Our global channel partners, Arrow and Avnet are now placing a higher focus on power conversion and power management as a strategic business and a major growth driver due to the electrification trends in broad industrial and transportation markets. They clearly recognize the advantages and differentiation that our high-density power modules…

Thank you. [Operator Instructions] It comes from the line of Quinn Bolton with Needham & Company. Please proceed.

Hey, guys. I was wondering if you could start with I think the ITC case is going to be heard next week, but I was hoping you could give us just sort of an update on the ITC schedule, what you expect to happen next week? And then what would you expect to sort of follow over the summer until the expected decision date, which I believe is in early October, but anything you could sort of provide us on the – what the next key milestones in the ITC case are would be helpful?

So to your point, the proceedings remain on schedule. There is going to be a trial next week and a decision by the administrative law judge in September with the deadline of early October. We look forward to an outcome that we expect to be fair altogether. We are on the right side of the issues and our opponents are on the wrong side of the issues, and that’s clear or should be clear to everybody. But again, we are going into trial, prepared, confident of positive outcome.

Great. And then you had mentioned both in the press release and the prepared script, the royalty revenue has continued to increase in the March quarter. Just wondering if you might be able to quantify that, how much of an uptick did you see in March? And then would you expect that royalty line to continue to grow through the remaining quarters of 2024?

So generally, we expect the royalty contribution to our revenues and bottom line to continue to expand as far as we can see. And there maybe setup events that occur at certain points in time. But to be clear, we are taking a very long-term view with respect to the opportunity and approaching it with the right balance in terms of Vicor’s interest as well as the interest of OEMs that elect to take a license as opposed to potentially Vicor confronted with lying down situations following exclusion.

I will go back into queue. Thank you.

Thank you.

Thank you. [Operator Instructions] And it comes from the line of Richard Shannon with Craig Hallum. Please proceed.

Hi, guys. Thanks for taking my questions. I guess I’ve got a couple of interlocking questions on your 5G second-gen PPD product here. I guess I wanted to get a sense of kind of the milestones that we should expect to see over the next coming quarters towards getting bookings and eventual revenues here. I think in the past, you’ve talked about models and tool delivery, which I think I heard some detail that I missed some of that. I think last quarter you talked about some – maybe some more equipment need to be delivered to support that. And then anything about manufacturing experience required for essentially the larger customers to have confidence in the ramp here? If you could kind of detail that what we should be looking for this year that would be great, please?

Sure. So let’s start with the revenue opportunity. I think as we made clear in prior calls, 5G is not a 2024 revenue opportunity. Revenue opportunity starts in 2025. This is a year of delivery of solutions to initial key customers and we’re far long, particularly with one and before too long with more. So I will look again at 2024 is bringing this development effort to fruition, setting the stage with some leading customers before we get into production volumes next year.

Okay. Let me follow-up and kind of looking at the 5G opportunity a different way and certainly understanding it, as you said last quarter that this is not the year for 5G revenues at all here. But I guess, do you expect to be able to intersect with the first generation of 3-nanometer accelerators, GPUs, CPUs, whatever is out there to be ready by then or is that something we might be lagging the leading edge there?

I would say that we high expectations, both premise on our capability, the much higher current density, the other performance attributes of our 5G VPD solution, which is what we call a second-generation VPD distinct from the first generation by the self pioneer and parented in which is being practiced by competitors with a great deal of difficulty from the performance perspective, from the ability perspective and last but not least, from the intellectual property perspective. So we believe that customers with the visibility to all the issues and we’re engaged with some of them. I understand that to get to reliable, scalable and not challenged by touch property issues, Vicor is the source. And at this point in time, no other source for a VPD system that works well, that is scalable, and the is now devoted to intellectual property challenges.

Okay, fair enough. Thank you.

Thank you. [Operator Instructions] It comes from the line of Jon Tanwanteng with CJS Securities. Please proceed.

Hi, good afternoon. Thank you for taking my questions. I was wondering if you could give us an update on the potential for lateral vertical product shipping, if that might contribute to 24% or 25% and if there’s active programs in the pipeline for that?

I’m sorry, I missed the potential for which, if you could repeat?

Lateral vertical products, so the in between product.

Yes. So I think as it turns out, the potential is limited. I will let Phil fill in with more color on this with a global view because the asset depends on which particular end market we’re looking for. Phil?

Yes. So we do have – still have engagement with customers on lateral vertical designs. We’ve also seen lateral vertical be used with some reference designs for the network communications market for the Broadcom model type of processes from some of the contract manufacturers in Asia. So there could still be some revenues on lateral vertical towards the end of this year, early next year. So that’s still a potential for us.

Got it, thank you. And then – so you mentioned something about licensing enabling more rapid scale in automotive. Are you allowing your partners there to produce your designs? Or is this something more similar to the current status quo where you are on allowing people to use your IP from different vendors like it’s happening in the HPC markets?

So we are open to the opportunity for selective licensing in, among others, the automotive market. And there’s been some expression of interest, which you said to them is predicated on the distinct attributes of our solutions, and I’m referring to solutions involving 400-volt, 600-volt bus conversion as well as other solutions, including zonal architecture, which is once again something that Vicor conceived of 10 years ago with respect to which we have the intellectual property. So we have a number of opportunities in the automotive area in particular. There are some are now beginning to develop also related to CDC. I do expect that over time, some of these opportunities may turn into licensing deals.

Okay. Great. And then finally, could you – Jim, could you break out the legal expense in the quarter and what you expect over the next two or three of the ITC case reps up?

Like, we said on the prepared remarks, legal expense was the primary driver of the $4 million incremental OpEx. I would stop short of trying to predict the future on that, Jon. And I might let Patrizio comment as well because he’s obviously been very close to all of it.

Yes. So to Jim’s point, last quarter, there was a significant step-up primarily relating to progressions for the upcoming trial next week. We are not in a position to forecast the evolution of legal expenses. Frankly, they could keep stepping up. They could level off or they come down depending on a variety of scenarios. So I think if you wanted to pick one among those three scenarios, keeping it pretty much level would be probably the middle of the road alternative, but it could step up again because of additional actions we might take.

Understood. Thank you.

Thank you. [Operator Instructions] It comes from the line of Don McKenna of D.B. McKenna & Company. Please proceed.

Thank you. Patrizio, the comments that on future sales opportunities, again, are pretty positive. And with the exception of last quarter, the outlook has always been quite positive. And if you go back and read the transcripts, it’s obvious that the potential markets that you envisioned in the superior products that you’re offering just haven’t produced the results you would hope for. And I’m wondering what you’ve learned from that failure to capture the potential and what changes you’ve made in your approach to improve the sales and profitability?

So as suggested in my calls, we believe we are executing well with a clear vision of what challenges and opportunities are. And frankly, I think this is a big part of the answer to your question that has to do with the vagaries of what has been going on with certain leading OEMs where their priorities have taken them in terms of product development. And to keep it at a very high in general level, I would say that from our visibility, a unique perspective with respect to the evolution of our system requirements. Some of the choices that have been made with certain OEMs are going to get those OEMs into a real bind both in terms of the performance of their platforms. And more importantly, the competitive spending relative to other companies that are starting to capture market share, and they see the opportunity of leveraging superior power system technology from Vicor. So I guess I’m not apologetic with respect to how we got to where we are. We don’t control our destiny in every stack. Obviously, we make critical decisions with respect to strategy and how we’re going to make the most of the opportunity both in terms of fab, our 5G technology and importantly, our intellectual property. And I would say that quite excited with how we got to where we are. And I think we have tremendous opportunity. It takes perseverance, clarity of vision, persistence. We have all those trades, and we expect to be far too long capitalized on the opportunity.

Yes. And I realize it’s very difficult for you to try to make any projections on the short-term. Can you give us some kind of a feel for where you would expect revenues as a percentage increase over current, let’s say, 3 years down the road? What would you be satisfied with?

I don’t know that I can honestly give you numbers or general stations without substantial risk in either direction. I think I can say that we do expect to fill our fab. As we know, the fab has got $1 billion worth of capacity and maybe a little more than that. We’re going to be able to fill that fab with opportunities relating to 5G in AI in the center type applications as well as automotive applications. And generally speaking to Phil’s earlier point, our top 100 customers undiversified several markets.

And would you expect to fill that fab in the next 3 years?

I do expect that, that will happen. I don’t know if Phil wants to add some color to this.

No, I would just say that, that’s the objective is to achieve that and to do it with the broad-based market, with our distribution channel on the broad-based level, but also the top 100 focus. And we’re making great progress across the 4 BUs with the top 100. And the new products that we’re introducing this year, not just the Gen 5 but new high-power front-end products are getting designed into these top 100 customers that we’re now focused on. So I’m confident that we’ll fill the path. And I think that some exciting times are ahead of us.

Alright. Great. Thanks, guys.

Thank you.

Thank you. [Operator Instructions] It comes from the line of Alan Hicks with Ainsley Capital. Please proceed.

Yes. Good afternoon. I think I heard you say 48% on BBU and 50% on advanced products. Was that correct?

I’m sorry, could you repeat that? I’m a little bit handicap here with my audio today.

Okay. On the percentage of revenues, advanced products, I think, were a little over 50% and BBU was a little over 48%. Was that correct?

That’s correct. For the first quarter, yes, the mix between advanced products and Brick products change.

Okay. So could we assume that royalties were that other 2%?

I’m sorry, the royalties will?

Was the differential, so it added up to 98% roughly. So for the differential would be roughly 2%.

I wouldn’t make that assumption. I don’t know that I can give you a quantitative measure here. I know as part of our reporting and maybe Jim can comment on that. You can point you to where you can find additional information.

Yes. Alan, the better way to think about it is we said 51.6% advanced, 48.4% brick, which is 100%. And the realty income is associated with advanced products.

Okay. So last quarter, it was $7 million, I believe, did it grow significantly from last quarter?

It grew.

And yes, it did grow. It stepped up substantially from last quarter.

Okay. And is the factory – are the gross margins also improving on the factory?

Sorry, go ahead for Patrizio.

Okay. Well, so yes to say, capacity is actually in the factory is an issue – was in issues the last quarter, still going to be issued this quarter. And the fact that the revenues facility revenues took a step down last quarter, the DNL with respect to margins. But all the factors that Jim pointed to in his prepared remarks, including beyond licensing income, reduction in tariffs, change in mix, favorable mix, this contributed to a significant improvement in total gross margins. And that’s the trend line that we are satisfied with. I think we represented in the past that we have a goal to achieve substantially higher margins. And that goal is supported by the strategies that we’re implementing and executing with the mix of further advances with respect to our product capabilities as well as the complementary element of, in effect, monetizing some of the value or IP through selective licensing.

So I think those gross margins were easily the best you guys ever had. Bank was 53.6%. I think gross margins for the quarter, Jim, correct me if I’m wrong, about 53 and change, right?

Yes. So I can comment on that, Alan, actually. So 53.8% was the result last quarter, and that was the highest for sure since I’ve been at Vicor.

I’ve got going back over 20 years. So that’s the highest I’ve ever seen. Do you expect that to continue to grow the rest of the year based on royalty increases?

Again, we’re not going to be making detailed quarterly prediction in a year in which so much could happen. So I think we’re just going to add to the ones upon us that are investing in Vicor for the long-term are going to look at this. I think one of the analysts asked a question in the last call about 2024 being a transition year. I think at the time, I didn’t embrace the characterization, I think in hindsight, it’s probably the better way of looking at it. This is a year of transition, which, in effect, a lot of things are going to change and we expect for the better.

Okay. I was at the NVIDIA conference I think it was February or last month. And I stopped by the Delta Brush, and they showed – asked about the NBM product. And they showed it to me and said, we’re not infringing because we have a different process. I don’t know, that’s all said, they kind of shut up. But can you comment on that or?

Yes. The leather B&S come to mind. The fact is that their copycat products, infringes three of our patents. And thus far, the proceedings corroborated that expectation. So let’s wait see what happens with what I expect to be an exclusion order against them.

Okay. And just a quick question on the – there was a product. I think it was showed at the WCX that had DCC converted, 150,000 lots, I think, is that for charging stations?

Phil, could you answer that?

Yes, that was the PSU Patrizio. The demo of the five paralleled NBMs in the PSU, the 150 kilowatt onboard 800 to 400-volt charger, that was on demo we had it in the case out WCS.

But is the application for charging stations?

No, that’s...

It’s not an application for fast charging. And it’s an application where we have a major weight advantage as well as a major efficiency advantage. So that system comprising at the moment, five of our modules. And in fact, we will be able to get to the 150 kilowatt capability with a reduced number of for. That system supports a peak efficiency of over 99%. And it has ethical power density, meaning its volume measured in liters and weight measured in kilograms is a small fraction of any competition.

So that will go both in the car and the charging station?

No, this is a device that certain other makers are going to incorporate within the vehicle in order to facilitate flexible charging.

Okay. How far away are you from design wins there?

We have designed wins with two smaller other makers.

Okay. And one last question. You say you are going to fill the factory to $1 billion in 3 years or whatever. So, that’s in addition to whatever OEMs are also manufacturing or licensing your products?

I feel I am having a hard time here with my audio. Phil, could you respond to that?

Yes. So, our goal is product revenues out of the factory at as Patrizio said, just over $1 billion out of that new fab and OEM licensing activities, adding to that, yes.

Okay. Thank you very much.

Thank you.

Thank you. [Operator Instructions] And it comes from the line of John Dillon [ph] with DMB Capital. Please proceed.

Hi guys. Thanks a lot for taking my questions. I appreciate it. Now, that your factory is finished, and we are seeing processors that are 1,000 watts and higher coming to the market. And also in your prepared remarks, I think I heard you say target production dates for HPC. When will we start seeing evidence of GPUs from major manufacturing factors using the Vicor POL solutions?

So, I think Patrizio talked about that, John. I think that as I mentioned in the prepared remarks, we are delivering electrical mechanical thermal models to leading customers right now. Then we will follow that up at the end of Q2 with a demo system that they will be able to check out hardware and test the models against the demo system. And then we will be sampling in the – towards the end of Q3, and we expect production probably towards the second half of 2025. That’s when we will have vertical power delivery and production.

Is that what you are referring to…

There is one notable customer that may well be in production come at the very beginning of next year. And for that customer, the hardware is due to be delivered in the summer months.

Excellent. And Phil is that the target production dates that you were talking about, or is that something different?

No, that’s the target production dates, yes.

Got it. And are there current Gen 4 designs in production or about to go in production that will act as a bridge to the Gen 5?

Yes. We have some Gen 4 design wins. But again, as Patrizio pointed out, there have been some market shifts with people changing strategies with supply chain considerations ahead of performance and technology. But vertical power delivery comes along. We have with the Gen 5 technology, an incredible solution with the current density that we can get to 3x over what the competition will be had. So, I think there will be some really hard reassessments being made as we move forward here with a number of accounts, but we will see that happen. But we have some very good interest from the accounts that are building really big investments into AI and developing their own processor chips, and they are the people that you would expect, and we have great engagements with them right now. So, I am confident Gen 5 is going to be all that it can be. And we are going to be having a very exciting 2025.

And you are pretty confident then that the productization schedule will stay on schedule?

I am personally confident. Patrizio, do you want to comment on that, but…

I am also confident. I think you were leveraging for the most part, processes and equipment that we have installed and have fully vetted. There are a few process steps that are going to be used in order to scale up capacity, not to deliver initial units that are still under some level of refinement. But generally speaking, the capability is in place, and we have a fab with the capacity to build very, very large quantities of panels and system solutions for customers.

So, you guys have working alpha or beta product right now?

So, we have a lead customer that we are going to be delivering functional systems. We started some initial partial delivery, but we are going to be delivering complete systems in late June, July timeframe. That – so the lead application to be followed by others as we get into the other part of the year.

Excellent. I will get back in the queue. Thank you very much.

Thank you.

Thank you. [Operator Instructions] And it comes from the line of Quinn Bolton with Needham & Company. Please proceed.

Hey. Jim, just a question on the royalty, how it works? The royalty revenue you recognized in the first quarter, is that for shipments of your licensee that took place a quarter in arrears, so effectively shipments in the fourth calendar quarter of last year, or is it sort of for shipments that took place in 1Q of ‘24?

It’s real time. It’s based on shipments that basically they take received [ph]. So – but it’s not in arrears, it’s in the quarter.

Okay. Perfect. And then just sort of following up on John’s question around the Gen 5 deliveries, the lead customer is for Gen 5, I assume that, that’s a data center or sort of AI or HPC application, but just wondering if you could give us in broad strokes, what sort of the application is for that first Gen 5 customer?

It’s within the compliance you just defined. But at this point in time, we really don’t want to be specific. We want to give this customer the full advantage being first and having an element of surprise. But it’s within the general field that you identified.

Got it. Okay. Thank you.

Thank you. [Operator Instructions] And it comes from the line of Richard Shannon of Craig-Hallum. Please proceed.

Hi guys. Thanks for taking my follow-on question here. I guess, Phil, following on your prepared remarks here, which has probably had as much focus outside of HPC, as I have heard in some time here, and you kind of alluded to this at your shareholders’ meeting last year as well. But in that context, can you give us some sort of understanding of a split of your advanced product revenues between HPC and other applications. And then also, if you might just give us a flavor of how much of that Advanced Products segment is also point of load versus bridging in other kinds of functionality.

Yes. So, can you hear me?

Yes.

Yes. So, today, the advanced product revenues – yes, advanced products revenue last quarter was 51.6%, about 52% of the total company. Yes, and look, the bulk of that was – well, kit, a number of it was into HPC. There was quite a bit of it’s now going into the industrial, and I think that it’s early days in automotive as everyone knows [Technical Difficulty] that’s growing quite a few new as far as growth in defense and aerospace applications, like the space satellite communication that we have been talking about. We are getting more design wins there. So, it’s really spread amongst those three business units, excluding automotive, Richard.

Okay.

That was helpful.

I would add to that, that the strategy that fill our line with better deviation among different end markets with different trades and different sets of opportunities. That’s fully supported by a product strategy that leverages commonality of per conversion engines, control systems, packaging technology. So, we are able to, in effect, address market needs in markets, and markets that may appear to be some of this like test equipment on the one hand and high car point-of-load VPD applications with modules, in particular, 5G type modules, they are essentially the same. Investors as a part in another way relative to the competition, so to speak.

Okay. Thanks for all that detail. And a quick follow-on question for Patrizio. You talked about consistently from the time that we have covered you and frankly, a lot longer about having a distinct advantage in terms of power delivery at very high current. You talked about delivering samples or whatever to customers up to 2,000 Amps. I wonder if you could characterize the competitive dynamics here in the future with 5G. In the terms of above what do you think you are going to be the only credible solution up there? Is that at a 1,000 Amps or whether that just any characterization so we can think about this as we see the next generation of accelerators kind of the market?

So, we have been able to – systems, they are already up to a few tens of thousands of amperes on a wafer. I would say that’s the most advanced solution in terms of power system capability and from what I can tell, compute capability in the market. So, that’s obviously cutting edge and preferable the more common denominator type applications, which as Phil suggested earlier, are trending up to the 2,000 Amp level. So, we are involved in one important development with a major OEM at the 2,000 Amp level. At that level, fundamentally, you need VPD and you need an advanced form of VPD such as what we call second gen VPD. Yes, you could try to do it with the first gen VPD that has been covered to a high degree by competitors, but what you would be sack with is a system, a power system that is evolves modules very heavy, very thick thermally in-app, difficult to call with very poor yields in assembly and reliability issues, not to mention the IP issues I alluded to earlier. So, we see the market in AI, in particular, quickly getting past the 1,000 Amp level and fundamentally left with VPD-only solutions. The lateral is out, even lateral of vertical, while achieving significant benefits relative to lateral, not as good as a vertical. And fundamentally, what’s going to be needed is a more advanced version of VPD that doesn’t bring about the stacking challenges, the characterized first generation VPDs what currently is in…

Okay. Great. Thank you, guys.

Thank you. [Operator Instructions] Our last question comes from Jon Tanwanteng with CJS Securities. Please proceed.

Hi. Thanks for taking one more from me. I was wondering if you could update us just on the uptick of automotive and when you expect to start shipping in volume of those products. I think you have said for a number of years now that you expected ‘25 to be the year that automotive really starts shipping and making a difference. I am wondering if that remains on track. And if that’s going to be a good source of growth even before your VPD products start shipping in the second half of 2015.

Hi Jon, this is Phil. So, no, the timing for automotive is really ‘26, ‘27 from reasonable revenue ramps beginning. There may be opportunities in Asia Pacific conversations that we have had in the last six months that could pull that in, but those are yet to develop. So, it’s too early to talk about those yet. But this is really a ‘26, ‘27 story for automotive. And although we will begin, as I have mentioned, I think last quarter or even in my remarks, the quarter before, production – early production at the end of this year for high-performance applications. So, I think that that’s sort of the timeframe that we are on with automotive.

Okay. Got it. If you were to characterize what could be a bridge market between then and now, which one will be the most likely to drive some sort of upside, whether it would be HPC or automotive or some of these other applications you are talking about?

Yes. HPC is definitely number one. And I think that we are, again, as I have mentioned, seeing very good design ins and wins in industrial, defense and aerospace. So, there is going to be some really good growth at good margins coming from those markets. But HPC and Gen 5 could just completely dominate that.

Got it. Thank you, guys.

Thank you. I am not showing any further questions in the queue.

Thank you.

Okay. Thank you, operator and thank you everyone for joining.

And with that, everybody, we appreciate your participation, and you may now disconnect.