EarningsCall · VICR Q2 2023

spk04: Welcome everyone to today's webinar entitled microearnings results for the second quarter ended June 30, 2023. My name is Robin and I'll be the producer for today. During the presentation, all attendees will remain on listen-only mode. If you require assistance at any time, please put a message in the chat box. And with that, I would like to hand the call over to James Smith, Chief Financial Officer. Please proceed.

spk18: Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the second quarter ended June 30th, 2023. I'm Jim Schmidt, Chief Financial Officer, and I'm in Andover with Patricio 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 three months and six months ended June 30th. 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 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, July 25th, 2023. RICOR undertakes no obligation to update any statements, including forward-looking statements made during this call. And you should not rely upon such statements after the conclusion of this call. A webcast replay of today's call will be available shortly on the investor relations page of our website. I'll now turn to a review of our Q2 financial performance, after which Phil will review recent market developments, and Patricio, Phil, and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly changes for P&L and balance sheet items, and refer you to our press release or our upcoming Form 10-Q for additional information. As stated in today's press release, FICO recorded total revenue for the second quarter of $106.7 million, up 9.1% sequentially from the first quarter of 2023, total of $97.8 million, and up 4.5% from the second quarter of 2022, total of $102.2 million. Advanced product revenue increased 31.6% sequentially to $67.5 million, while brick product revenue decreased 15.7% sequentially to $39.2 million. Shipments to stocking distributors decreased 0.5% sequentially and increased 47.6% year-over-year. Exports for the second quarter increased sequentially as a percentage of total revenue to approximately 68.1% from the prior quarter's 64.3%. For Q2, advanced product share of total revenue increased to 63.2% compared to 52.4% for the first quarter of 2023. With BRIC products share correspondingly decreased to 36.8% of total revenue. Turning to Q2 gross margin, we recorded a consolidated gross profit margin of 51.7%, which is a 410 basis point increase from the prior quarter. During the quarter, we recovered approximately 2.8 million in duty drawback of previously paid tariffs. We continue to work to reduce overall tariff expense and recover previously paid duty drawback. I'll now turn to Q2 operating expenses. Total operating expense increased 3.4% sequentially from the first quarter of 2023 to $37.3 million. The sequential increase was primarily due to an increase in R&D spending. The amounts of total equity-based compensation expense for Q2 included in cost of goods, SG&A, and R&D was 570,000, 1,626,000, and $816,000 respectively, totaling approximately $3 million. For Q2, we recorded operating income of $17.9 million, representing an operating margin of 16.7%. Turning to income taxes, we recorded a tax provision for Q2 of approximately $2.5 million, representing an effective tax rate for the quarter of 12.9%. Net income for Q2 totaled $17.1 million. GAAP diluted earnings per share with $0.38 based on a fully diluted share count of 44,906,000 shares. Fully diluted EPS increased approximately 52% sequentially compared to $0.25 in the first quarter of 2023 and increased approximately 58% from $0.24 per share earned in the same quarter a year ago. Turning to our cash flow and balance sheet, cash and cash equivalents totaled $203.8 million at Q2. Account for receivable net of reserves totaled $63.8 million at quarter end, with DSOs for trade receivables at 43 days. Inventories net of reserves decreased 0.7% sequentially to $106.6 million. Annualized inventory turns were 2.1%. Operating cash flow totaled $19 million for the quarter. Capital expenditures for Q2 totaled $8.5 million. We ended the quarter with a construction and progress balance primarily for manufacturing equipment of approximately $23 million and with approximately $10 million remaining to be spent. I'll now address bookings and backlog. Q2 book to bill came in below 1. and one-year backlog decreased 19.9% from the prior quarter, closing at 217.3 million. Turning to the third quarter of 2023, we expect revenue and gross margin to be approximately flat, We also expect a sequential increase in operating expenses, primarily as a result of funding the legal work associated with cases filed earlier this month at the International Trade Commission and in federal court in the Eastern District of Texas against foreign manufacturers of power modules and computing systems infringing VICOR patents covering non-isolated bus converters, NBMs. Legal work associated with these cases and related legal expenses are expected to grow substantially over the next year. Legal expenses are, however, less than the royalties paid to VICOR by licensees of our patents. In our ITC case, we are seeking an exclusion order precluding importation into the United States of power modules, servers, or AI cards that infringe our patents. In our district court case, we are seeking damages for willful patent infringement. With that, Phil will provide an overview of recent market developments, and then Patricio, Phil, and I will take your questions. I ask that you limit yourselves to one question and a related follow-up so that we can respond to as many of you as possible in the limited time available. If you have more than one topic to address, please get back in the queue.

spk16: Phil? Thank you, Jim. Let me begin by summarizing the key messages from the annual shareholders meeting we held in Boston four weeks ago. Our business opportunities have never been stronger given the future growth of AI and the move to 48-volt power distribution in both the high-performance computing and automotive markets. Our investments in 48-volt power distribution and power conversion technology over the past 15 years have put VICO in a unique position with intellectual property to key innovations in power distribution architectures. including factorized power and vertical power delivery, powertrain topologies, control systems, and power module packaging technology. Our new and the world's first chip fab is coming online in September, setting the stage for unprecedented scalability as we start shipping initial quantities of vertically integrated chips to lead customers for their qualification. Our lateral vertical distribution network provides superior performance for advanced GPUs, strengthening our position as the supplier of high performance power systems in HPC markets. In short, as an earlier generation AI program using our third generation factorized power chipset ramps down, A fourth generation chipset is expected to start shipping in Q4 into a next generation AI platform in a lateral or lateral vertical PDN. The lateral vertical PDN will provide nearly 10% higher power system efficiency and superior processor performance. Advanced processes currently in development require current levels that can only be supported with vertical power delivery through complex, stacked VPD structures that VICO pioneered and patented. With a 300% advance in current density, VICO's fifth-generation technology enables a more mature and scalable second-generation VPD, which will soon be key to high-performance AI accelerators. Electrification and autonomy are opening up other markets for us, including industrial, aerospace, and defense markets. Our commitment to a set of top 100 customers globally, achieving operational excellence, supported by our new chip fab, is the focus of our entire company, and execution is now the name of the game. Thank you. Patricio, Jim, and I will now take your questions.

spk17: So, operator, we're ready for questions now.

spk04: I run your Q&A session. We now begin. If you have a question on the WebEx, please click on the raise hand icon at the bottom of your screen. If you'd like to ask a question on the phone, please press star and three. We will pause for a moment to assemble the queue. And the first question is coming from . Please proceed. Your line is open.

spk24: Can you guys hear me? Yes. Okay, great. First question is, can you guys share any more details on the 4G lateral power distribution design that you mentioned in the press release for a new AI platform that ramps in the fourth quarter? Can you say, is this a new customer? Have you worked with this customer previously? Can you give us any sense of what the power consumption is for this card? Is it a, you know, high power card? Is it a mid-range power card? Any details you can share would be very helpful.

spk34: It's a distinct customer.

spk09: It's a new... generation for the existing customer. And it's a chipset that can be deployed either in a LADRA PDN, which is substantially handicapped from a power system perspective to the point that it limits power delivery, power capability, processor performance, in that it gives rise to large losses within the copper of the substrate to the GPU that it powers. It gives rise to further losses within the ceiling itself. owing to the limitations of delivery applied at the thousand amp level. With a 4G chipset, we can enable a lateral solution with the same handicaps or with a vertical element using the same chipset a lateral vertical solution, which is unique, highly differentiated, in that it improves system efficiency by about 10% and removes a number of limitations relating to processor performance.

spk24: So, Patricio, I guess to follow up, it sounds like it can be deployed either lateral or lateral vertical. Can you say is the solution going to production in the fourth quarter, is that lateral first with the potential to switch to lateral vertical sometime next year?

spk09: It is likely to be lateral first, followed by lateral vertical.

spk24: Great. And then you had mentioned sort of lateral vertical improves efficiency by 10%, and I think in a press release, you said that would enable a 100-watt power saving. So am I right to be thinking that this AI platform could be consuming nearly 1,000 watts? Is that the right ballpark?

spk09: I'm not going to comment about the power consumption of the platform beyond that which is implied in the earlier comments, which is that, to your point, we expect to save in total about 100 watts, which approximately represents a 10% improvement in system efficiency. But one should keep in mind that while 10%, in some respects, may not sound like a lot, it is a lot. in a number of respects that are somewhat technical and that would be, in effect, somewhat difficult to articulate in sufficient detail in this context today. But whether it's the gradients or voltage differentials across a pin field brought about by lateral current flow across distances on a substrate with substantial resistance, dissipating a substantial amount of power, or the self-heating within that substrate that is caused by the power dissipation of the substrate and the silicon up above. What we're really talking about is something we discussed before. You might recall my pointing to these kinds of limitations and challenges many, many moons ago. It's just indicative of fundamental sampling blocks to what can be accomplished with conventional technology and its constraints within the realm of a power distribution network that is lateral.

spk24: Thank you.

spk10: Thank you.

spk04: The next question is coming from the line of John Dillon. Please proceed. Your line is open now.

spk21: Hello? Hi, John. Can you hear me? Yeah, can you hear me? Yes.

spk22: Okay, great. Hey, I want to follow up on Quinn's question a little bit. Regarding the... John, could you speak up a little louder? Yeah, regarding the... Can you hear me now better? Regarding the lateral vertical opportunity that's coming to production in Q4, is that a high-volume customer, or is it more of a lower-volume or more of a modest-volume customer?

spk09: So, to be clear, I suggested earlier, the same chipset, which is a 4G chipset, supports both a lateral and a lateral vertical. Based on customer inputs and expectations, as of now, is that the ladder implementation will go first. And that's the one we're anticipating for the Q4 ramp. I can't tell you when the ladder vertical would go into production, but my expectation is that it would be after the ladder.

spk22: Yes, but is this going to be a significant customer, or is this more of an incremental volume that you're going to expect?

spk09: This is a significant customer.

spk22: Great, great. That's excellent. Okay. And, Mr. Truccio, do you think your bookings are going to rebound strongly upon completion and the qualification of the new factory?

spk09: We expect bookings to pick up as, in particular, the platform we just referenced, RAMPS, and because of other contributing elements, not least of which, to your point, Bringing online our first FAB, it's no mystery we've had operational challenges and capacity-limited actions within the last couple of years with advanced products relying on unique processes that had to be outsourced. So, common sense in and of itself it would imply that as we overcome these stumbling blocks and bottlenecks and being capable of delivering the kind of solutions that we're uniquely equipped to provide, that bookings and backlog will build back up quite substantially. I know there may be A concern at this point in time in the minds of some shareholders for whether it's worth, it's not my concern.

spk22: Excellent. I'll get back in the queue. Thank you so much.

spk04: There's one more question coming from Quinn Bolton on the WebEx. Please proceed. Your line is open now.

spk24: Patricia, I guess I wanted to ask about the recent actions, legal actions against Delta Electronics and Foxconn, I guess both at the ITC and in the Texas courts. You know, it seems like at least you're a large GPU manufacturer in the industry, current services modules from Delta Electronics on its latest generation platform, and I'm I'd like to know, what do you think the potential effect on your relationship with this GPU manufacturer might be to the extent you're going after one of its power module suppliers?

spk09: I'm not going to be specific for obvious reasons, but as implied by public disclosures, you can read the complaint at the ITC. It's not that difficult to get to it and find out for yourself. We do have licensees of the technology, and those licensees were prudent enough to acquire a license and put themselves in a position where they could source products, including NBMs, that would otherwise infringe our patents, you know, without incurring the risks of infringement. So you should not assume when it comes to data center or AI OEMs that they're all in the same boat. One, notable one, is not because it's a part of the license. The other ones, are going to have to deal with the issues that arise when foreign manufacturers, as scrupulous as they are, copy products that are covered by effective intellectual property.

spk24: Understood. Thank you. And just to clarify, the Andover You still see that is on track for September. And at the shareholder meeting, I think you said that you anticipated an increase in the number of customer visits and customer qualifications as you got into the third quarter here. Is that customer qualification and is that still on track, those customer audits? Thank you.

spk09: We've had customer visits, and we've had praise for what we're doing, the progress with respect to it. And going back to the first part of your question, yes, we are on track to make complete modules in September, late August. September, so essentially starting about one month from now, you know, we're going to be able to, you know, plate up any chip.

spk24: Excellent. Thank you very much, Patricio. I'll go back.

spk04: All right. I will start taking questions on the phone now. If you press star and three, please state your name and company name before asking your question. The first attendee line is open now. Please proceed.

spk15: Hi, Patricio. This is Don McKenna, DB McKenna. Good afternoon. I wanted to follow up on the 4G chipset coming on. When we're talking now, a backlog is roughly six months' worth of current run rates. What are you quoting for lead times at this point in time? And do you expect, if you're going to ramp in the fourth quarter, that you'll be receiving these orders in the third quarter?

spk09: So we already have backlog for the upcoming ramp. But we expect to get additional backlog. Maybe, Phil, you want to comment on that?

spk16: No, I think that's exactly right. We have existing backlog. And our plan is to obviously begin the ramp with that particular backlog. And then in Q3, Q4, we'll get increased bookings for the follow-on 2024.

spk15: And have you already seen, because your backlog is down now, are you quoting shorter lead times? And has that in turn generated additional bookings for you?

spk09: So let's put things in perspective. We're still playing catch-up. We're going to be completing that catch-up play this quarter. But, you know, we're still with respect to orders that were placed quite some time ago because of the capacity bottlenecks that, again, we're aware of and remind us of earlier in the call. You know, we're still playing catch-up. So while that is the case, and that's going to come to an end relatively soon, our lead times are still long. But once we get caught up, which is imminent, and once we have the benefit of being in control of our destiny with our first fan, then lead times will come down.

spk15: I guess the concern is, you know, when you look at – The bookings this past quarter were somewhere in the $55 million range. Do you foresee a period where the revenues for the quarter are going to diminish, or do you see them continuing to increase as we're going forward?

spk09: I think Jim pointed out that we expect essentially flat revenues this quarter. That's our expectation. Again, to put things in context, if we go back quite some time, We've had an enormous situation with respect to bookings, and we pointed this out a year and a half ago, with very long lead times and capacity bottlenecks, and also in light of general industry conditions. You know, we were... we had booked to be ratios of nearly two, which are obviously not sustainable. So there's a process that has been going on for some time, with a timescale literally of a year, year and a half, of building up the backlog, now bringing it back down to a sustainable level where additional bookings will bring the backlog back up. In terms of our terms business and the relationship between the backlog and projected revenues, right now, we're not in a comfortable position. Obviously, we had a lot more backlog a year ago, but again, that was an anomaly rather than a sustainable condition.

spk15: Understood. I'm sure you can appreciate our concern or nervousness, if you will, when we see that the Incoming orders are so much lower than the revenues for the quarter, and I just hate to see any dips along the way.

spk09: I sympathize with, in effect, the concern of the nervousness. It's certainly justifiable. But again, it's very important when dislocations of this kind have happened over the last year, year and a half, take place to being a safe harbor with an objective view of all of the relevant factors, right? So, as pointed out by Phil in his earlier comments, VIGOR is uniquely positioned because of the convergence of technological trends that we anticipated, invested in, and are uniquely equipped to exploit. And that's the safe harbor that we're operating from. And that's the basis for looking forward. As suggested in Michael's press release, for sustained growth and improving profitability.

spk10: Thank you.

spk04: All right, I will now take the second phone question. Please state your name and company name before asking your question. Your line is open now.

spk03: Hi, good afternoon. Thank you for taking my question. This is John Tan, one time for ZJS. I was wondering if there was any more color or detail behind why the lateral implementation of the product for this new ad product would be launching first. Has there been a delay in the lateral vertical? You know, any more commentary would be helpful there.

spk16: I'm sorry, John, I didn't fully get your question there. You're coming through a little bit muffled. Can you repeat?

spk03: Hi, can you hear me better now? Yeah. I was wondering why the lateral only version of this new product is launching first. compared to the higher performing lateral vertical product?

spk09: So the lateral version, even though the start of its development was over a year after the start of developments based on multi-source, multi-phase, quote unquote competitive alternatives, there was in effect predicated on the same kind of PDM that the multi-phase, multi-source solutions are, in effect, confined to. But because of the fact that its development, even though it was belated, still started early in time, it's gotten to the finish line ahead of a more advanced PDM which we had projected to have the benefits it's proving out to have, but because of the fact that that only got started about six, seven months ago, from a development perspective, it is falling on the heels of a lot of vertical solutions that had been started nearly a year earlier. But it's rapidly catching up, and it's proving out to be as good as we had advertised it to be. And in my belief, because of its much stronger trends, again, in terms of not just power system performance but processor performance, it will soon, I believe, play, you know, catch up and become the solution of choice.

spk16: John, it's key. Patricia said this earlier. It's exactly the same chipset, which is key for the lateral and the lateral vertical. It's a much, much improved layout, better PDN with lateral vertical, placing one of the VTMs underneath the processor that gets the benefits. And we can do that because The packaging is very thin, very thermally adept, so it's got a lot of advantages being the same chipset that gets qualified for the lateral.

spk03: Can I ask, when you actually launch the lateral vertical product with the same chipset, does that get you a higher dollar content per AI card for this product?

spk16: No, the chipset has been quoted for over a year now, and that chipset is a fixed price, and that goes for lateral or lateral vertical implementations.

spk09: But the other vertical implementation, which had been recommended to the customer earlier but did not get started until later, delivers a lot more performance. So the value of a session is much greater, particularly if you look at it in terms of anticipated processor performance.

spk03: Got it. Should we think of the lateral product then as a, you know, similar to a drop-in replacement for the existing multi-phase solution for, you know, as a second source, and maybe your lateral vertical product is a higher performance, higher efficiency type SKU, which may launch later?

spk09: So, the lateral solution using the same chipset is not, quote-unquote, a drop-in because the with different components, you know, the layout itself is different, but it shares a common level of PDM, even fundamentally the floor planning that had been done, which floor planning was, again, predicated on a multi-source, multi-phase solution. So, you know, we're first, in effect, within the same general floor plan, fitting in a solution which is better in many respects, much lower noise, better performance in general, but handicapped by the lack of PDN. So that handicap is a common denominator limitation that can be overcome, as Phil pointed out a moment ago, by, you know, one of the VTMs that supports the primary high current output and redeploying it into a vertical position close to the center of the GPU. And in that location, it can do wonderful things in terms of not just reducing PDN loss for the primary output, but also slash the PDN losses in the secondary and tertiary outputs that are also very high current by large percentages. And with that, improve overall system performance. So the outcome of all this effort, which could have started earlier, but it did not get started until six months ago, will be a superior system with better performance or

spk23: Understood. I'll jump back in queue. Thank you.

spk04: The next question is coming from the land of John Dylan. Your line is open now.

spk22: Can you hear me a little better now? Yes. Okay, great. Phil, the last conference call you discussed, the lateral vertical, that you've got a number of designs that were coming out in the third quarter, I believe. One sounds like it was your high volume customer existing customers doing a re-spend that you talked about, but you had, I think, five other designs that were supposed to come out. Are they still coming out, or are they coming out as vertical lateral or lateral?

spk16: John, those are lateral designs. The process occurrence there are lower. They're slightly lower performance applications, different types of workloads. And, yeah, the customer count there is about the same, four to five customers, but those are lateral implementations. But, again, using basically the same technology.

spk22: And you expect those to start production in the third quarter also?

spk16: No, I expect those to be in production mostly like Q1 of next year. Okay.

spk22: So would we expect, are those things, do you have bookings on orders? or will we see the bookings next quarter for those?

spk16: We have a small amount of backlog, you know, maybe a few million dollars, just early prototype-type quantities for initial ramps, and then I expect the bookings for those to be Q3, Q4.

spk22: Okay, but they're not as high volume as the other order that you were talking about, correct? Correct. Excellent. Okay, and then when do you expect 5G to actually be production-ready?

spk09: We expect to have demo systems in Q4 for internal bidetion and begin to share with some select customers in Q1.

spk22: Mike, when would you expect that your customers would be able to take those and then ship those to their customers? Are we talking Q2, Q3 of next year?

spk09: As you know, this is just action period, right? Absolutely. Availability to customers, their own design cycle, which is a time constant in round numbers a year. I should not expect, we should not expect 5G to be a contributor to revenues in 2024. I think... the original expectation with respect to 5G contributing to revenues is 25. Now, having said that, I would say the following, and you might have heard me say this at the shareholders meeting. With 5G, we are enabling a much more scalable designing process, and I do expect to have a number of notable applications that have had challenges with high-current solutions were, once again, unscrupulous competitors have been chasing our track in terms of our first-generation vertical power delivery. I do expect those to run into trouble because they are immature. ways of enabling a vertical power delivery system. And with our 5G technology, we have a much better way of implementing VPD without stacking at the power system level. So there could be situations sometime next year, still in 24, where we could intersect or come to the rescue of customers that find themselves once again in trouble because of a variety of technical or IP challenges.

spk22: Gotcha. Gotcha. So we may see a competitor come out with a vertical system, but there are IP challenges and there's also technical challenges that you think they're going to run into.

spk09: They have both technical problems and they have IT problems.

spk22: Why would a customer go with a solution like that if they're technical and IT problems?

spk09: Well, so to some extent, I think the industry is going to go through appear revelations, right? Because, you know, whether it's a technical issue or it's intellectual property issue, OEMs are dependent on their suppliers to be able to follow through on solutions that can be shipped and that work technically or work in terms of ownership of intellectual property that is at the heart of the solution. And failure to be able to support the customer, an OEM customer or another one of those firms, is going to bring about a revolution in the industry. That's my expectation.

spk19: Great. Thank you very much.

spk04: All right, I will open the next phone question now. Please proceed. Your line is open.

spk13: Hello? Hello? Can you hear me? Yes, Alan Hicks from Ainsby Capital. I had a question about is the factory fully up and running? Are you going to be able to hit the ground running in the fourth quarter with this new customer and fully meet their demand?

spk09: So, to be clear, The factory as a whole has been up and running. And my earlier comments with respect to the turn on of certain equipment and processes starting at the end of August and into September, those capabilities are incremental capabilities that we haven't had vertically integrated. They're expected to be vertically integrated in the next two months before the end of this quarter. And that will give us, as I mentioned earlier, total control of our destiny with respect to advanced products in particular that are dependent on those packaging process steps. But, you know, there are many other facets of capacity for which we have made significant investments and, you know, as reflected in all the capital equipment that you've seen being added within the last year, year and a half, that have already been deployed and validated.

spk13: So in Q4, do you expect more of a graphical ramp or really move the needle on revenues?

spk09: Well, I think we're going to have a ramp, and we have the capacity in the equipment to support that ramp.

spk13: Okay. And then a question on your gross margins are up over four points this last quarter. What would you attribute that to?

spk18: So this is Jim here. That's a function of leverage associated with the volume, increase in volume, and also a favorable mix. And we also have the benefit of lower freight in and tariff costs. That are the $2.8 million duty drawback, as well as a reduction in outside processing costs. All of that added up to improvement in the gross margin. Increase royalties as well.

spk13: Okay, that was my next question. You had two royalties last quarter, and what were your royalties this quarter? And they seem to be ramping pretty fast over last year. Is that going to be lumpy, or is that going to continue to grow?

spk18: I think you'll see it in the 10Q when we file on August 4th.

spk09: Let's reserve judgment on that. So let's put it this way. As you've heard us say, over the last 15 years, we've made major investments in the hundreds, several hundred million dollars in technology, all that it takes to bring it about. And thus far, what we've seen with respect to ROI in terms of licensing of international property is still at this stage in terms of both the number of EMs involved and their use of that technology. So we should expect to see those numbers go up. You used the word lumpy. Yes, it could be lumpy at times. have to wait to see how events unfold with respect to the assertion of IP and, you know, the campaign that we're embarked upon to make sure that it gets fully respected.

spk11: Okay. Thank you very much.

spk04: I will take the next phone question now. Please proceed. Your line is open.

spk00: My question was answered. Thank you, Doug.

spk04: All right. Then I will open the next question. Your line is open. Please proceed.

spk15: Patricio, can you give us an estimate of the dollar value of the lost sales due to the infringement?

spk05: Well, so I'm not sure.

spk14: I shouldn't say can you. I should say will you.

spk09: I'm not sure I even can, never mind whether or not it makes sense to go into those kinds of details. Again, the NBM issue is the first issue to be dealt with, and it is significant. But again, from MBMs, we're deriving licensing income as well in a growing amount. So I do expect that the value we've built in IP in the next 10 years is going to be a strong contributor to our top line and even more so to our bottom line. But beyond that very vague statement, it would be really inappropriate of me to make predictions because there is a variety of scenarios and a broad range of outcomes. And I think we need to take a wait and see attitude. And we do have a very well-thought-out plan. We've taken the time necessary to think it through in every stack, and we just began executing it. So let's wait and see what happens.

spk15: Okay, fine.

spk04: Thank you. All right. The next phone line is open now. Please proceed. All right, and we'll move to the next question. Your line is open. Please proceed.

spk03: Hi, it's John again. I was wondering if you expected margins to stay at the current levels organically, or is there some part of the clawback that is changing as you move forward, number one, and follow-up after that?

spk18: So, I think we just say, John, as I said in the guidance, we expect growth margins to be approximately flat as well. There is going to be a declining rate of duty drawback because part of it was front-end loaded at recovery of years' worth of tariffs that would have been paid in the past.

spk03: Understood. So the underlying margin should be increasing going forward if that's the case. Understood. Okay. And then where do you actually expect litigation expense to be in the coming quarters compared to this quarter or however you want to phrase it?

spk09: We're not going to be very quantitative about that beyond what Jim said at the outset, which is we're going to have significant legal operating expenses. There may be more actions brought, and so we need to take a wait-and-see attitude with respect to the next year.

spk03: Understood. And then last one for me, just the orders for the next generation products that you're talking about, the lateral vertical products, do you need your factory to be fully qualified before you see those orders or can you ship those currently with the existing capacity regardless if the factory is qualified or not?

spk16: No, I think the two pretty much line up, right, because qualification is occurring in the next four weeks. We're moving forward, you know, into Q3, Q4 on a new program. So it's about the same timing. Timing sort of lines up pretty well.

spk32: Understood. Thank you very much.

spk04: Okay. The next one is coming from Quinn Bolton. Your line is open.

spk24: Hey, guys, just wanted to ask a quick follow-up on this new AI platform that we're thinking for. Should we think about that as sort of a new SKU or VICOR as sole source for the factorized power and hopefully over time you can convert it to the lateral vertical solution? Or will there be a second SKU of this product based on multi-phase and multi-phase and factorized power will sort of share that business going forward?

spk09: So we've been allocated a share of what you might call the baseline platform. And that's something that, again, can be supported from a power system performance perspective using Eladra PDN, handicap as it is. But again, we have proven that The latter vertical is a far superior PDN with major improvements in efficiency. We're not talking, I mean, typically, you know, power components or power systems, you know, within a certain type of PDN differ by one, two percentage points of efficiency. What we're talking about is a 10% difference. So it dwarfs, you know, the minimal differences that often characterize different kinds of components, right? So it's a fundamental difference in the way the power system is architected from the PDN perspective with major benefits with respect to system performance. And you can and I can independently speculate as to what OEM's customers would want to do with that. I don't know that I would know or that if I did, I could tell you.

spk16: One thing I'd want to say, Quinn, would be our job is to obviously give our customer options, right? And I think the lateral vertical gives the customer a great option in terms of increasing performance for its GPUs that are limited by the lateral PDN. And again, it's very important to remember, it's about 100-watt savings per AI card. You have eight of these in a rack system. That's 800 watts of power savings. It's huge. And so you can really start to go after GPU performance with those savings. So we've given customer options. We'll see what happens.

spk24: Understood.

spk04: Thank you. And we have our very last question coming from John Dillon. Please proceed.

spk22: Yes, guys. Follow-up to Quinn's question. With this new customer, this existing customer, I mean, that is going initially with vertical and then, I mean, initially with lateral, then lateral vertical, will that customer see an improvement in performance with your lateral solution, your lateral-only solution? Will they still have... you know, problems with resets and throttling the clock?

spk16: What we've seen and reported back to us from the engineering teams looking at this is that our version of lateral is a better version. It's higher performance.

spk22: So they won't see the degradation as much as they're seeing with the multiphase solution?

spk16: Yeah, it's a better solution.

spk09: Let me put it that way. But, you know, just to be clear, the PDN tends to be an equalizer, right? If you get enough of handicap, it tends to play a handicapping role all around. And that's really the elephant in the room is the handicap associated with the PDN.

spk22: Correct. But it sounds like your lateral solution, lateral only, is going to give a little bit better PDN than the existing solution. Am I correct in assuming that or? Am I hearing that?

spk09: Let me answer it this way. I would not expect the differences in performance between a lateral multi-source, multi-phase, and a lateral factorized power system at these current levels to be all that significant on the scale of the benefit of the lateral vertical. In other words, the lateral vertical removes the handicap that is fundamentally limiting power system capability and processor performance.

spk22: Correct. I'm trying to understand why the customer would switch from their current multi-phase solution to your lateral solution as an intern. Why wouldn't they just wait for your lateral vertical?

spk09: Because the lateral got started earlier, even though it got started late.

spk08: It still got started earlier than the lateral vertical. And they need supplies, George. They need suppliers.

spk22: Okay. They need suppliers, too. Gotcha. Okay. Okay. And it sounds like, is this truly the end of the line for multiphase? I mean, multiphase keeps making improvements. I'm just wondering, is this really the end of the line for that? Sorry, John.

spk09: Did you get that? Is this the end of the line for multiphase? No. It's not the end of the line for multiphase, right?

spk12: I mean, for power levels, if it's high.

spk09: Multi-phase has been around for a long time, and it will not suddenly die. There is a role for multi-phase, but you heard me say this before. It can't keep up with the performance of a factorized power system, particularly leveraging 5G components with a 3x step-up in current density. and much better performance all around. Nor can it keep up with the industry demands with respect to escalating current requirements of decreasing voltages for all the competing AI systems that are underdeveloped and are going to be brought to market over the next few years. I see a fundamental disconnect between what the systems are going to need and what a multi-source, multi-phase can support, particularly as we get into full vertical power delivery type of systems, past lateral, even past lateral vertical. As you get into a full vertical system, these kinds of solutions, the multi-phase, multi-source, are going to be constrained from complexities, challenges of what we call first-generation VPD, which Vigo pioneered, talented, but we have left behind with our 5G approach, which makes the whole VPD solution much simpler, much better, much more cost-effective. So there are handicaps at different levels standing in the way of multi-phase. It's the multi-phase conversion methodology, the averaging down as opposed to the current multiplication. It's also the PDN, and then there is a VPD element to it with related IP issues that is also stamping blocks.

spk22: Gotcha. So with the higher current levels, you really don't expect to see the multiphase making much progress?

spk09: I don't expect it to go away. I think it's going to remain an alternative, but I am confident that the technology gap between the factorized power system solutions using early generation components on the one hand, and our 5G chipset capabilities, that that technology gap relative to multi-phase has improved as we should all expect it to be. But those improvements are not going to be able to keep up with the step-up in performance that we're going to deliver next year with 5G.

spk20: Thank you very much, guys. Good call.

spk18: Thank you. Okay. Thank you, everyone. Operator, I think we're ready to end the call now.

spk04: All right, everyone. That concludes your webinar for today. Thank you for joining, and have a nice day.

spk19: Thanks for using WebEx. Visit our website at www.webex.com. Thank you. Thank you Thank you. you

spk04: Welcome everyone to today's webinar entitled microearnings results for the second quarter ended June 30, 2023. My name is Robin and I'll be the producer for today. During the presentation, all attendees will remain on listen-only mode. If it requires this instant time, please put a message in the chat box. And with that, I would like to hand the call over to James Schmidt, Chief Financial Officer. Please proceed.

spk18: Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the second quarter ended June 30th, 2023. I'm Jim Schmidt, Chief Financial Officer, and I'm in Andover with Patricio 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 three months and six months ended June 30th. 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 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, July 25th, 2023. RICOR undertakes no obligation to update any statements, including forward-looking statements made during this call. And you should not rely upon such statements after the conclusion of this call. A webcast replay of today's call will be available shortly on the investor relations page of our website. I'll now turn to a review of our Q2 financial performance, after which Phil will review recent market developments, and Patricio, Phil, and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly changes for P&L and balance sheet items and refer you to our press release or our upcoming Form 10-Q for additional information. As stated in today's press release, FICO recorded total revenue for the second quarter of $106.7 million. up 9.1% sequentially from the first quarter of 2023, total of $97.8 million, and up 4.5% from the second quarter of 2022, total of $102.2 million. Advanced product revenue increased 31.6% sequentially to $67.5 million, while brick product revenue decreased 15.7% sequentially to $39.2 million. Shipments to stocking distributors decreased 0.5% sequentially and increased 47.6% year-over-year. Exports for the second quarter increased sequentially as a percentage of total revenue to approximately 68.1% from the prior quarter's 64.3%. For Q2, advanced product share of total revenue increased to 63.2% compared to 52.4% for the first quarter of 2023. With BRIC products share correspondingly decreased to 36.8% of total revenue. Turning to Q2 gross margin, we recorded a consolidated gross profit margin of 51.7%, which is a 410 basis point increase from the prior quarter. During the quarter, we recovered approximately 2.8 million in duty drawback of previously paid tariffs. We continue to work to reduce overall tariff expense and recover previously paid duty drawback I'll now turn to Q2 operating expenses. Total operating expense increased 3.4% sequentially from the first quarter of 2023 to $37.3 million. The sequential increase was primarily due to an increase in R&D spending. The amounts of total equity-based compensation expense for Q2 included in cost of goods, SG&A, and R&D was 570,000, 1,626,000, and $816,000 respectively, totaling approximately $3 million. For Q2, we recorded operating income of $17.9 million, representing an operating margin of 16.7%. Turning to income taxes, we recorded a tax provision for Q2 of approximately $2.5 million, representing an effective tax rate for the quarter of 12.9%. Net income for Q2 totaled $17.1 million. GAAP diluted earnings per share was 38 cents based on a fully diluted share count of 44,906,000 shares. Fully diluted EPS increased approximately 52% sequentially compared to 25 cents in the first quarter of 2023 and increased approximately 58% from 24 cents per share earned in the same quarter a year ago. Turning to our cash flow and balance sheet, cash and cash equivalents totaled $203.8 million at Q2. Account for receivable net of reserves totaled $63.8 million at quarter end, with DSOs for trade receivables at 43 days. Inventories net of reserves decreased 0.7% sequentially to $106.6 million. Annualized inventory turns were 2.1%. Operating cash flow totaled $19 million for the quarter. Capital expenditures for Q2 totaled $8.5 million. We ended the quarter with a construction and progress balance primarily for manufacturing equipment of approximately $23 million and with approximately $10 million remaining to be spent. I'll now address bookings and backlog. Q2 book to bill came in below one. and one-year backlog decreased 19.9% from the prior quarter, closing at 217.3 million. Turning to the third quarter of 2023, we expect revenue and gross margin to be approximately flat, We also expect a sequential increase in operating expenses, primarily as a result of funding the legal work associated with cases filed earlier this month at the International Trade Commission and in federal court in the Eastern District of Texas against foreign manufacturers of power modules and computing systems infringing VICOR patents covering non-isolated bus converters, NBMs. Legal work associated with these cases and related legal expenses are expected to grow substantially over the next year. Legal expenses are, however, less than the royalties paid to VICOR by licensees of our patents. In our ITC case, we are seeking an exclusion order precluding importation into the United States of power modules, servers, or AI cards that infringe our patents. In our district court case, we are seeking damages for willful patent infringement. With that, Phil will provide an overview of recent market developments, and then, Patricio, Phil and I will take your questions. I ask that you limit yourselves to one question and a related follow-up so that we can respond to as many of you as possible in the limited time available. If you have more than one topic to address, please get back in the queue. Phil?

spk16: Thank you, Jim. Let me begin by summarizing the key messages from the annual shareholders meeting we held in Boston four weeks ago. Our business opportunities have never been stronger given the future growth of AI and the move to 48-volt power distribution in both the high-performance computing and automotive markets. Our investments in 48-volt power distribution and power conversion technology over the past 15 years have put VICO in a unique position with intellectual property to key innovations in power distribution architectures. including factorized power and vertical power delivery, powertrain topologies, control systems, and power module packaging technology. Our new and the world's first chip fab is coming online in September, setting the stage for unprecedented scalability as we start shipping initial quantities of vertically integrated chips to lead customers for their qualification. Our lateral vertical distribution network provides superior performance for advanced GPUs, strengthening our position as the supplier of high-performance power systems in HPC markets. In short, as an earlier generation AI program using our third-generation factorized power chipset ramps down, our fourth-generation chipset is expected to start shipping in Q4 into a next-generation AI platform in a lateral or lateral vertical PDN. The lateral vertical PDN will provide nearly 10% higher power system efficiency and superior processor performance. Advanced processors currently in development require current levels that can only be supported with vertical power delivery through complex, stacked VPT structures that VYCOR pioneered and patented. With a 300% advance in current density, VICO's fifth generation technology enables a more mature and scalable second generation VPD, which will soon be key to high performance AI accelerators. Electrification and autonomy are opening up other markets for us, including industrial, aerospace, and defense markets. Our commitment to a set of top 100 customers globally Achieving operational excellence, supported by our new chip fab, is the focus of our entire company. And execution is now the name of the game. Thank you. Patricio, Jim, and I will now take your questions.

spk17: So operator, we're ready for questions now.

spk04: Your Q&A session will now begin. If you have a question on the WebEx, please click on the raise hand icon at the bottom of your screen. If you'd like to ask a question on the phone, please press star and three. We will pause for a moment to assemble the queue. And the first question is coming from Quinn Bolton. Please proceed, your line is open.

spk24: Phil, can you guys hear me? Okay, great. First question is, can you guys share any more details on the 4G lateral power distribution design that you mentioned in the press release for a new AI platform that ramps in the fourth quarter? Can you say, is this a new customer? Have you worked with this customer previously? Can you give us any sense of what the power consumption is for this part? Is it a high power cord? Is it a mid-range power cord? Any details you can share would be very helpful.

spk34: It's an existing customer.

spk09: It's a new generation for the existing customer. And it's a chipset that can be deployed either in a LADRA PDN, which is substantially handicapped from a power system perspective to the point that it limits power delivery, power capability, processor performance, in that it gives rise to large losses within the copper of the substrate to the GPU that it powers. It gives rise to further losses within the silicon itself owing to the limitations of level of power delivery applied at the thousand amp level. With a 4G chipset, we can enable a lateral solution with the same handicaps or with a vertical element using the same chipset, a lateral vertical solution, which is unique, highly differentiated, in that it improves system efficiency by about 10%. and removes a number of limitations relating to processor performance.

spk24: So, Patricia, I guess to follow up, it sounds like it can be deployed either lateral or lateral vertical. Can you say is the solution going to production in the fourth quarter, is that lateral first with the potential to switch to lateral or vertical sometime next year?

spk09: It is likely to be lateral first, followed by lateral vertical.

spk24: Great. And then you had mentioned sort of vertical improves efficiency by 10%. And I think in a press release, you said that would enable a, you know, 100-watt power saving. So am I right to be thinking that this AI platform could be consuming nearly 1,000 watts? Is that the right ballpark?

spk09: I'm not going to comment about, you know, the power consumption of the platform beyond that which is implied in the earlier comments, which is that, to your point, we expect to save in total about 100 watts, which approximately represents a 10% improvement in system efficiency. But one should keep in mind that while 10% in some respects may not sound like a lot, it is a lot in a number of respects that are somewhat technical and that would be, in effect, somewhat difficult to articulate in sufficient detail in this context today. But whether it's the gradients or voltage differentials across a pin field brought about by lateral current flow across distances on a substrate with substantial resistance, dissipating a substantial amount of power, or the self-heating within that substrate that is caused by the power dissipation of the substrate and the silicon up above. What we're really talking about is something we have discussed before. You might recall my pointing to these kinds of limitations and challenges many, many moons ago. It's just indicative of fundamental sampling blocks to what can be accomplished with conventional technology and its constraints within the realm of a power distribution network that is lateral.

spk24: Understood. I'll go back into the queue and let somebody else ask a question. Thank you. Thank you.

spk04: The next question is coming from the line of John Dillon. Please proceed. Your line is open now.

spk21: Hello? Can you hear me? Yeah, can you hear me? Yes.

spk22: Okay, great. I want to follow up on Quinn's question a little bit. Regarding the lateral vertical opportunity that's coming to production in Q4, is that a high volume customer or is it more of a a lower volume or more of a modest volume customer?

spk09: So to be clear, I suggested earlier, the same chipset, which is a 4G chipset, supports both a lateral and a lateral vertical. Based on customer inputs, our expectation as of now is that the lateral implementation will go first. And that's the one we're anticipating for the Q4 ramp. I can't tell you when the ladder of Vertigo would go into production, but my expectation is that it would be after the ladder.

spk22: Yes, but is this going to be a significant customer, or is this more of an incremental volume that you're going to expect?

spk09: This is a significant customer.

spk22: Great, great. That's excellent. Okay. And, Mr. Truccio, do you think your bookings are going to rebound strongly upon completion and the qualification of the new factory?

spk09: We expect bookings to pick up as, in particular, the platform we just referenced, RAMPS, and because of other contributing elements, not least of which, to your point, being online, our first FAB, it's from history we've had operational challenges and capacity limit actions within the last couple of years with advanced products relying on unique processes that had to be outsourced. So common sense in itself would imply that as we overcome these stumbling blocks and bottlenecks, and being capable of delivering the kind of solutions that we're uniquely equipped to provide, that bookings and backlog will build back up quite substantially. I know there may be a concern at this point in time in the minds of Some shareholders, for whatever it's worth, it's not my concern.

spk22: Excellent. I'll get back in the queue. Thank you so much.

spk04: There's one more question coming from Quinn Bolton on the WebEx. Please proceed. Your line is open now.

spk24: Patricia, I guess I wanted to ask about the recent actions, legal actions against Delta Electronics and Foxconn, I guess both at the ITC and in the Texas courts. You know, it seems like at least you're a large GPU manufacturer in the industry, current services modules from Delta Electronics on its latest generation platform, and I'm I'd like to know, what do you think the potential effect on your relationship with this GPU manufacturer might be to the extent you're going after one of its power module suppliers?

spk09: I'm not going to be specific for obvious reasons, but as implied by public disclosures, you can read the complaint at the ITC. It's not that difficult to get to it and, you know, find out for yourself. We do have licensees of the technology, and those licensees were prudent enough to acquire a license and put themselves in a position where they could, you know, source products, including NBMs, that would otherwise infringe our patents, you know, without incurring the risks of infringement. So you should not assume when it comes to data center or AI OEMs that they're all in the same boat. One, notable one, is not because it's a part of the license. are going to have to deal with the issues that arise when foreign manufacturers, as scrupulous as they are, copy products that are covered by effective intellectual property.

spk24: Understood. Thank you. And just to clarify, the Andover You still see that is on track for September. And at the shareholder meeting, I think you said that you anticipated an increase in the number of customer visits and customer qualifications as you got into the third quarter here. Is that customer qualification and is that still on track, those customer audits? Thank you.

spk09: We've had customer visits, and we've had praise for what we're doing, the progress with respect to it. And going back to the first part of your question, yes, we are on track to make complete modules in September, late August. September, so essentially starting about one month from now, you know, we're going to be able to, you know, plate up any chip.

spk24: Excellent. Thank you very much, Patricio. I'll go back.

spk04: All right. I will start taking questions on the phone now. If you press star and three, please state your name and company name before asking your question. The first attendee line is open now. Please proceed.

spk15: Don McKenna Hi, Patricio. This is Don McKenna, DB McKenna. Good afternoon. I wanted to follow up on the 4G chipset coming on. When we're talking now, a backlog is roughly six months' worth of current run rates. What are you quoting for lead times at this point in time? And do you expect, if you're going to ramp in the fourth quarter, that you'll be receiving these orders in the third quarter?

spk09: So we already have backlog for the upcoming ramp. But we expect to get additional backlog.

spk16: Maybe, Phil, you want to comment on that? No, I think that's exactly right. We have existing backlog. And our plan is to obviously begin the ramp with that particular backlog. And then in Q3, Q4, we'll get increased bookings for the follow-on 2024. All right.

spk15: And have you already seen, because your backlog is down now, are you quoting shorter lead times? And has that in turn, you know, generated additional bookings for you?

spk09: So let's put things in perspective. We're still playing catch-up. We're going to be completing that catch-up play this quarter. But, you know, we're still with respect to orders that were placed quite some time ago because of the capacity bottlenecks that, again, we're aware of and remind us of early in the call. you know, we're still playing catch-up. So while that is the case, and that's going to come to an end relatively soon, our lead times are still long. But once we get caught up, which is imminent, and once we have the benefit of being in control of our destiny with, you know, our first fan, then lead times will come down.

spk15: I guess the concern is, you know, when you look at... With the bookings this past quarter, we're somewhere in the $55 million range. Do you foresee a period where the revenues for the quarter are going to diminish, or do you see them continuing to increase as we're going forward?

spk09: I think Jim pointed out that we expect essentially flat revenues this quarter. That's our expectation. Again, to put things in context, if we go back quite some time, We've had an enormous situation with respect to bookings, and we pointed this out a year and a half ago, with very long lead times and capacity bottlenecks, and also in light of general industry conditions. we had booked to be ratios of nearly two, which are obviously not sustainable. So there's a process that has been going on for some time with a timescale literally of a year, year and a half of building up the backlog, now bringing it back down to a sustainable level where additional bookings will bring the backlog back up. In terms of our terms business and the relationship between the backlog and projected revenues, right now, we're not in an uncomfortable position. Obviously, we had a lot more backlog a year ago, but again, that was an anomaly rather than a sustainable condition.

spk15: Understood. I'm sure you can appreciate our concern or nervousness, if you will, when we see that the Incoming orders are so much lower than the revenues for the quarter, and I just hate to see any any dips along the way.

spk09: I sympathize with, in effect, the concern of the nervousness is certainly justifiable. But again, it's very important when dislocations of this kind have happened over the last year, year and a half, take place to be in a safe harbor with an objective view of all of the relevant factors, right? So, as pointed out by Phil in his earlier comments, VIGOR is uniquely positioned because of the convergence of technological trends that we anticipated, invested in, and are uniquely equipped to exploit. And that's the safe harbor that we're operating from. And that's the basis for looking forward. As suggested in Michael's press release, for sustained growth and improving profitability.

spk10: Thank you.

spk04: All right, I will now take the second phone question. Please state your name and company name before asking your question. Your line is open now.

spk03: Hi, good afternoon. Thank you for taking my question. This is John Tan, one time for ZJS. I was wondering if there was any more color or detail behind why the lateral implementation of the product for this new product would be launching first. Has there been a delay in the lateral vertical? You know, any more commentary would be helpful there.

spk16: I'm sorry, John, I didn't fully get your question there. You're coming through a little bit muffled. Can you repeat?

spk03: Hi, can you hear me better now? Yeah. I was wondering why the lateral only version of this new product is launching first. compared to the higher performing lateral vertical product?

spk09: So the lateral version, even though the start of its development was over a year after the start of developments based on multi-source, multi-phase, quote unquote competitive alternatives, there was in effect predicated on the same kind of PDM that the multi-phase, multi-source solutions are, in effect, confined to. But because of the fact that its development, even though it was belated, still started early in time, it's gotten to the finish line ahead of a more advanced PDM which we had projected to have the benefits it's proving out to have, but because of the fact that that only got started about six, seven months ago, from a development perspective, it is falling on the heels of a lot of vertical solutions that had been started nearly a year earlier. But it's rapidly catching up, and it's proving out to be as good as we had advertised it to be. And in my belief, because of its much stronger trends, again, in terms of not just power system performance, but processor performance, it will soon, I believe, play, you know, catch up and become the solution of choice.

spk16: John, you said this earlier, it's exactly the same chipset, which is key for the lateral and the lateral vertical. It's a much, much improved layout, better PDN with lateral vertical, placing one of the VTMs underneath the processor that gets the benefits. And we can do that because The packaging is very thin, very thermally adept, so it's got a lot of advantages being the same chipset that gets qualified for the lateral.

spk03: Can I ask, when you actually launch the lateral vertical product with the same chipset, does that get you a higher dollar content per AI card for this product?

spk16: No, the chipset has been quoted for over a year now, and that chipset is a fixed price, and that goes for lateral or lateral vertical implementations.

spk09: But the other vertical implementation, which had been recommended to the customer earlier but did not get started until later, delivers a lot more performance. So the value of a session is much greater, particularly if you look at it in terms of anticipated processor performance.

spk03: Got it. Should we think of the lateral product then as a, you know, similar to a drop-in replacement for the existing multi-phase solution for, you know, as a second source, and maybe your lateral vertical product is a higher performance, higher efficiency type SKU, which may launch later?

spk09: So the lateral solution using the same chipset is not, quote-unquote, a drop-in because the with different components, you know, the layout itself is different, but it shares a common level of PDM, even fundamentally the floor planning that had been done, which floor planning was, again, predicated on a multi-source, multi-phase solution. So, you know, we're first, in effect, within the same general floor plan, fitting in a solution which is better in many respects, much lower noise, better performance in general, but handicapped by the lack of PDN. So that handicap is a common denominator limitation that can be overcome, as Phil pointed out a moment ago, by, you know, taking one of the VTMs that supports the primary high current output and redeploying it into a vertical position close to the center of the GPU. And in that location, it can do wonderful things in terms of not just reducing PDN loss for the primary output, but also slash the PDN losses in the secondary and tertiary outputs that are also very high current by large percentages. And with that, improve overall system performance. So the outcome of all this effort, which could have started earlier, but it did not get started until six months ago, will be a superior system with better performance or

spk23: Understood. I'll jump back to you. Thank you.

spk04: The next question is coming from the line of John Dylan. Your line is open now.

spk22: Can you hear me a little better now? Yes. Okay, great. Gil, the last conference call you discussed, the lateral vertical, that you've got a number of designs that were coming out in the third quarter, I believe. One sounds like it was your high-volume customer existing customers doing a re-spend that you talked about, but you had, I think, five other designs that were supposed to come out. Are they still coming out, or are they coming out as vertical-lateral or lateral?