Vicor Corp (VICR) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vicor earnings results for the third quarter ending September 30, 2017.

My name is Natalie and I will be your operator for today.

(Operator Instructions).

As a reminder, this call is being recorded for replay purposes.

And I would now like to turn the conference over to your host for today, Jamie Simms, CFO, and also, Dr. Patrizio Vinciarelli, CEO of Vicor Corporation.

Please proceed.

Okay.

Thanks, Natalie.

Good afternoon and welcome to Vicor's third quarter 2017 earnings call.

I'm Jamie Simms, Chief Financial Officer and with me here in Andover are Patrizio Vinciarelli, Chief Executive Officer; and Dick Nagel, Chief Accounting Officer.

Today, we issued a press release summarizing our financial results for the 3- and 9-month periods ended September 30th.

This press release is available on the Investor Relations page of our website, www.vicorpower.com.

We also filed a Form 8-K earlier today with the SEC related to the issuance of this press release.

As always, 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 the 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 the statements regarding customers, opportunities, sales growth, spending and profitability, are forward-looking statements involving risks and uncertainties.

In light of these risks and uncertainties, we can offer no assurance that any forward-looking statement will, in fact, prove to be correct.

Actual results may differ materially from those explicitly set forth or implied by any of our remarks today.

The risks and uncertainties we face are discussed in item 1A of our 2016 Form 10-K, which we filed with the SEC on March 7, 2017.

Please note, the information provided during this conference call is accurate only as of today, Tuesday, October 24, 2017.

Vicor 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 replay of the call will be available beginning at midnight tonight through November 8, 2017.

The replay dial-in number is (888) 286-8010, followed by the passcode 55711863.

In addition, an audio replay of today's call will be available shortly on the IR page of our website.

I'll start this afternoon's discussion with a review of our financial performance for the third quarter, highlighting certain year-to-date figures and comparisons.

Dick will comment on the pending implementation of ASC 606, and Patrizio will follow with his comments, after which we will take your questions.

Beginning with consolidated results, Vicor recorded, as stated in this afternoon's press release, a net loss for the third quarter of $11,000 representing a breakeven per share figure of nil compared to the second quarter loss of $459,000 or $0.01 per share.

Revenues for the third quarter sequentially decreased $821,000 or 1.4% to $56.9 million from $57.7 million for the second quarter.

Sales of both legacy products and advanced products declined slightly for the period, down 1.4% and 1.6% respectively.

Unfortunately, a large supercomputing customer requested shipments scheduled for the third quarter to be rescheduled to Q1 2018.

Otherwise, our revenue from advanced products would have increased sequentially as would have our total revenue.

On a year-to-date basis, revenue for the 9 months ended September 30th rose 11% year-over-year.

Legacy product sales for the current 9-month period were essentially unchanged, down less than a percentage point, but sales of our advanced products were 49% higher year-over-year.

International revenue, which we identify by the ship-to address, declined by 6.5% largely due to the timing of shipments of advanced products to Asian contract manufacturers of our OEM customers' products.

Turns volume, that is orders received and shipped within the quarter, was $21.5 million representing 37% of Q3 revenue, up slightly from the prior quarter.

To conclude on consolidated revenue, recognized stocking distribution revenue was essentially flat sequentially, rising approximately $100,000 to $5.1 million for Q3.

Dick will now make a few comments regarding our implementation of changes in revenue recognition.

Thank you, Jamie.

As addressed last quarter on January 1, 2018, Vicor will be adopting the revised revenue recognition guidance under Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.

With the adoption of this new accounting standard, we will no longer defer revenue and the associated cost of goods sold when we ship to our authorized stocking distributors, but will recognize revenue when the shipment to the distributor leaves our facility rather than when the distributor eventually sells the products to the end customer.

In other words, the value of the sale will not change, but the recognition of the sale will occur earlier, upon shipment to the distributor.

Similarly, cost of goods sold will be recognized at the time of shipment.

We will capture the potential value of any subsequent stock rotation and price allowances by booking an estimate of such amounts in the form of a sales reserve at the time of shipment.

Such reserves should not and are not expected to yield a materially different net result in terms of Vicor's recognition of revenue and gross profit from sales to stocking distributors.

We do not anticipate this change in reporting will have a material impact on our reported results.

Unlike many other public companies affected by ASC 606, we do not have a wide range of complex contracts defining how we do business with our customers.

As mentioned, our recognized stocking distribution revenue for the third quarter totaled only $5.1 million.

Typically, purchase orders represent the customer's offer and our sales order acknowledgement represents our acceptance, thereby creating a binding contract for which we have a high degree of certainty of payment.

From time to time, we will enter with a customer into a negotiated agreement which defines mutually specific obligations and responsibilities beyond the scope of our standard terms and conditions as mandated by our sales order acknowledgement.

However, we do not expect such agreements would present any more of a financial reporting challenge than they have under the existing accounting guidance.

Beginning with our Form 10-Q for the first quarter of 2018, we will present a detailed disclosure describing our implementation of ASC 606 including more information about the nature and character of our identified revenue streams.

For more information about the current status of our implementation, please refer to Footnote 11 in our consolidated financial statements in the upcoming Form 10-Q for the third quarter, which we expect to file with the SEC on or about October 27th.

Back to Jamie.

Thanks, Dick.

Returning to the P and L, gross profit for the quarter sequentially decreased to $25.1 million from $25.9 million in the prior quarter, a dollar decline of 3%, and declined slightly as a percentage of revenue to 44.2% from 44.9%.

Gross profit for the Brick Business Unit, which sells our legacy product lines, was sequentially steady despite a volume-related decline in absorption.

Picor and VI ChiP, which sell our advanced product lines, actually experienced improved gross margins before variances, but volume and mix factors contributed to lower absorption for VI ChiP, leading to a decline in gross margin percentage for advanced products of less than 1% quarter-to-quarter.

I highlight this circumstance as Q2 product level profitability for our advanced products was weighted by learning curve costs associated with the ramp of our MCD, MCM components, representing our new Power-on-Package solution.

We did achieve some of the expected progress in gross margin for Q3 for these and other products, but encountered absorption challenges due to the rescheduling into Q1 2018 of large MCD, MCM and RFM orders originally scheduled to ship in Q3.

We also incurred volume, mix and, in certain instances, production scheduling challenges caused by supply chain delivery problems.

As many of you who follow other electronics manufacturers may know, lead times for common raw materials and component-level requirements have stretched far longer than they have been in recent memory, frequently exceeding 16 weeks and, in some instances, extending to as much as 26 weeks.

One of the drivers of our higher inventory balances over recent quarters has been and will continue to be our response to these lengthened lead times as we are building certain safety stock levels of important materials and components in expectation of increased demand next year and, potentially, continuing supply chain uncertainties.

Turning to consolidated operating income, we achieved a modest operating profit as many categories of expense declined, notably within R and D reflecting the absence of prototyping costs incurred in Q1 and Q2 with the rollout of our MCD, MCM products.

The notable increase occurred in equity-based compensation expense, although that is a non-cash expense and was heavily influenced by certain awards made in July of this year.

Total operating expenses declined 5.4% sequentially.

On a year-to-date basis, operating expenses for 2017 were 4.2% higher than the 9-month total for 2016, but reflect the aforementioned rollout of MCDs and MCMs for the current period.

Non-operating income consisted of lease income from our California facility as well as favorable foreign currency exchange gains.

For the first time in many quarters, the calculation of our booked tax provision is worth an explanation.

Our early-adopting customer for Power-on-Package in the supercomputing space is located in Japan.

And we service this customer through our subsidiary, VJCL.

Because of the volume of recent sales by VJCL to this customer, it has recorded an increased level of taxable income.

Because VJCL is not a part of our affiliated group for tax purposes, this income cannot be offset with period losses of the parent.

And as such, we experienced a 6-figure increase in your year-to-date tax provision.

VJCL's higher income also contributed to our higher value of the minority interest we record to arrive at our net income available to Vicor shareholders.

As stated in our press release, we recorded a net after-tax loss of $11,000, which understates the quarter-to-quarter improvement in our financial performance.

So Q3 was better than our reported numbers imply.

Another Q3 topic worthy of explanation is our cash consumption.

For the quarter, our cash balance declined $2.5 million despite positive operating cash flow.

But this was largely the result of planned capital expenditures of $4.5 million, which included over $1 million of deposits on equipment to be brought online this year, and the conscious decision to build raw material safety stocks, which caused inventories for the quarter net of reserves to increase by $3.4 million.

Inventory turns remained, however, at an annualized rate of 4 times, and accounts receivable, which sequentially declined $1.1 million, posted a decline in day sales to 43 from Q2's 45 days.

With the increased inventory balance, accounts payable also rose, increasing by $1 million.

Recall that Vicor has no debt so despite the decline in cash, our balance sheet remains strong and we expect our liquidity and cash generation to meet our operating needs.

Turning to new orders for the third quarter, bookings increased to $64.3 million, up 8% sequentially.

On a year-to-date basis, 2017 9-months total bookings were 17% ahead of the 9-month 2016 total with legacy bookings up over 3% and advanced products up 55%.

Quarter-to-quarter, legacy product bookings were essentially flat, but advanced product bookings increased over 28% sequentially with many orders placed for the first half of 2018.

Total 1-year backlog stood at $60.1 million at the end of Q3.

But note the dollar value of backlog scheduled for shipment in Q4 of 2017 remained at roughly the $36.5 million level we have recorded for the prior 2 quarters, reflecting, as I just mentioned, the volume of orders placed for 2018 delivery.

Employee headcount at quarter-end rose to 1,001, a sequential increase of 13, of which 5 were full-time and 8 were temporary, reflecting higher volumes late in the third quarter and the addition of a third weekday shift and weekend shifts.

Total full-time employment rose to 969 from 964.

The safety stock we have been building in certain categories of inventory should allow us to better level-load our Q4 production, keeping headcount in check for the quarter and improving factory absorption.

Turning to our outlook, we anticipate net profitability in Q4 and a sequential increase in bookings.

However, given the scheduling of our backlog, we do not anticipate a meaningful change in our quarterly revenue for Q4.

As Patrizio will address in a moment, we are experiencing the highest and broadest level of engagement yet with potential customers for our advanced products.

We believe a number of these customers are approaching completion of their extended product qualifications.

We also are hopeful pre-production orders will be placed in the coming quarters with substantial production orders to follow.

I must remind listeners, as I do every time I speak with you, of the difficulty of accurately forecasting quarterly sales given the characteristics of sales cycles for disruptive innovative technologies.

In many instances, our advanced products enable customers to enhance the performance of their own products, but doing so requires a time-consuming level of evaluation and design work not associated with commodity pin-compatible products.

Also, with the adoption of our advanced products, customers are seizing opportunities to exploit higher efficiency and power density by redesigning their own boards and chassis, which can add delays between their engagement with us and when purchase orders are actually placed.

Similarly, the decisions made by early-adopting customers and their contract manufacturers and the timing of those decisions are subject to changes brought about by many factors out of our control with the consequence being sudden and unanticipated changes in operating and financial forecasts.

Earlier this year, unanticipated DDR4 memory shortages caused server production schedules to slip and contract manufacturers rescheduled our deliveries.

Now these CMs are facing the same lengthening lead times we are encountering across the commodity component supply chain.

With that, I'll turn the call over to Patrizio.

Thank you, Jamie.

As Jamie noted, our third quarter may have looked similar to our second quarter, but financial performance is not necessarily indicative of the progress the organization has made in design wins or production efficiency.

Overall, I am pleased with our Q3 accomplishments, but acknowledge we have much work ahead.

During the quarter, the data center market's enthusiasm for 48-volt solutions continued to build as evidenced by the increasing number of engagements we have with hyper-scalers across cloud and artificial intelligence applications as well as XPU vendors serving these end customers and their captive needs.

We have broadened our engagement in the adjacent in the autonomous vehicle spaces and the potential of the supercomputing space is expanding.

Our expectations for 2018 are based on an existing pipeline including opportunities in aerospace and defense electronics, wireless communications, networking infrastructure and solid-state lighting.

Also included in our 2018 expectations are orders for a large supercomputing installation originally booked for shipments in Q3 that were rescheduled to Q1 2018.

Customers are very interested in our Power-on-Package solutions, a Factorized Power system consisting of modular current multipliers, MCMs, and modular current drivers, MCDs.

Our power stage and partitioning technology has enabled our customers to place MCMs within the XPU package essentially eliminating distribution loss associated with high current by virtue of point-to-load current multiplication.

I spoke about these breakthrough products last quarter, but am compelled to again emphasize the important role we expect them to have in transformation of our company from a relatively high-mix, low-volume vendor serving a fragmented customer base in mature industry segments to a somewhat lower-mix, high-volume vendor serving innovative leaders in high-growth segments.

We believe the advantages provided to customers by our unprecedented Power-on-Package solutions are applicable far beyond our initial beachhead in the most sophisticated supercomputing and hyper-scale data center applications.

Complex applications such as data mining, autonomous vehicle and artificial intelligence are driving XPU operating voltages well below 1 volt and pushing XPU operating currents to as much as 1,000 amperes.

Our Power-on-Package solution is uniquely suited for these demanding applications offering unmatched efficiency and power density.

Such applications are expanding and represent a significant growth driver on their own.

However, we believe that the dynamics are more long, leading to escalating XPU requirements will drive the combination of very low voltage and very high currents across increasingly sophisticated computing applications, not just those at the leading edge.

Our current (inaudible) the PRM and VTM combination for delivering 48-volt DX to the XPU hold considerable promise over the years ahead, as our Factorized Power approach to 48-volt in increasingly adopted in the enterprise server and data center space.

However, the emergence of 48-volt power distribution in automotive systems holds even greater promise given that automobile electronics drives industry-wide trends.

In all these markets, the high-level differentiation enabled by Power-on-Package solution is likely to define Vicor's presence and market share.

I'm sure listeners have questions so I will open the call.

Operator?

(Operator Instructions).

Your first question comes from the line of [John McKenna].

It's Don McKenna.

Jamie, I wanted to ask you, going back to last quarter's shipments, can you give me an idea of what the percentage of the shipments were that represented orders received during the quarter?

Yes, I've got that.

That's the turns figure that I give you each quarter.

And that number -- do you want the percentage or the absolute?

I think he asked for the percent.

Oh, if you could give me the absolute that would be great.

So the absolute, as I mentioned, was $21.5 million this quarter.

The prior quarter was $20.6 million, and the quarter before that, $22.4 million.

Okay.

So if we had a repeat of last quarter.

We'd be looking at an increase, perhaps, of the -- you're talking in terms of having 36 right now on hand that was due for shipment in the fourth quarter.

Then we might be looking at somewhere in the 58 range for shipments in the upcoming quarter?

That's a reasonable assumption, yes.

The fourth quarter can sometimes be pleasantly surprising, but other times, because of the holidays or sometimes even weather patterns, it can be disappointing.

But that sounds about what our estimate is.

Okay.

And I didn't fully understand the impact on the taxes with the Japanese affiliate.

Nobody does.

Okay.

No.

It's just simply a question of we had a consolidated calculation of our provision for the full year and as we quarterly make our way toward that full calculation, that is our quarterly provision that shows up in P an L that you see, when we made this calculation for Q3, we had a level of profitability in Japan that couldn't be applied against our U.S. loss position.

So we ended up with a higher provision.

Can you give us a dollar figure on what that contract was that moved from shipments in the third quarter to first quarter?

I'll let Patrizio speak to that.

It was several million dollars.

Did you say several?

Yes.

Okay.

That could be anywhere from 3 to 300, right?

I'll let you guess.

It's a wide range.

I know it is.

That's why I was asking for you to be maybe a little bit more specific.

I think several would be single digits, closer to the bottom end of the range that you outlined.

Your next question comes from the line of John Dillon.

Congratulations on the bookings.

That's a really nice number to see.

What I'm wondering is, are we going to see or do you expect another potential increase of 8% to 10% in bookings for the fourth quarter?

I'm not going to pinpoint the percentage, but we do expect a healthy increase in the fourth quarter, and as far as the eye can see, quarterly improvements.

Excellent.

Okay.

With the backlog as big as it is, at $60 million, and then you predicting a flat fourth quarter, it sounds to me like you're going to a pretty big step-up then on the fourth quarter because you're going to have a lot of backlog to ship.

Am I correct in assuming that?

So again, the book to bill was strong in the third quarter.

We expect it to be potentially even stronger in the fourth quarter given how the backlog is shaped at this point in time.

As Jamie commented earlier, we don't anticipate a significant increase in top line in the fourth quarter.

We do expect to see a healthy increase in the top line starting the first quarter because of all the factors that were referenced earlier.

Okay.

Is there any chance we could see a $75 million quarter in the first quarter?

Is that reasonable?

I'm not -- in terms of bookings?

Shipments.

$75 million in the fourth quarter, no, that's not --

No, no, no.

First quarter.

First quarter.

Oh, for the first quarter.

Because it sounded like everything is slipping to the first quarter of 2018.

Yes.

So I'm not going to speculate with respect to that.

I think that, as we know and touched upon in the past, the bookings lead the shipments.

The book to bill getting to 108 and looking strong in Q4 into Q1 should lead to step-up in revenues either itself.

Also the factor, the particular factor that we referenced earlier, which is the rescheduling of the substantial multi-million dollar order from the third quarter into Q1 of next year in terms of itself will move the needle in terms of contributing to Q1 revenues in addition the effect of the healthy book to bill.

So not much of a change in top line this quarter.

A very significant change next quarter.

But beyond that, I think we're going to have to wait and see as to what is after.

Great.

And it sounds like, for your 2018, it sounds like you pretty much have the business identified to see the substantial growth that you've been talking about.

Did I hear that correctly in the prepared remarks?

Yes.

I think that, in general, we're seeing a lot of development activity coming to fruition.

Some very exciting new customers that should drive significant growth contributing potentially even more than some of our largest customers have to date.

That's not going to happen overnight, but it's going to start moving the needle substantially next year, even more so the year after that.

But we're engaged on a number of different programs with these new customers and they're very exciting.

Also with established customers that have represented a significant share of our business in the past, we continue to get design wins that expand our footprint to new types of applications, in some cases involving Power-on-Package.

So as I look at both the customer base that has represented the bulk of our revenues in recent years and the new customers that represent potential in complementary spaces, I think we have the make-up of some real excitement.

At the end of the day, this all ties into the transition from 12-volt to 48-volt.

That transition is far-reaching.

As I think many of us know, Google played a pioneer role with respect to that back at the beginning of last year in contributing to Open Compute, its 48-volt solution.

I think that began to create significant movement in the industry.

I think events that we expect to happen the first half of next year should add a lot of fuel to that fire and bring about an acceleration in the rate of conversion from 12-volt system to 48-volt system.

As noted in the prepared remarks and the press release, there's another factor at play, which has to do with automotive.

There, as you I'm sure know, the early initiatives, and I'm going back a long time, to move away from the traditional 12-volt bus had not gotten to critical mass.

There is now plenty of evidence, for a variety of reasons, that that transition, the transition in automotive from 12 to 48 is also beginning to happen.

It's going to go mainstream.

And that's going to be a big factor in its own right in terms of the comparative value in automotive with the eventual autonomous driving, with other factors at play.

But also, it will have an indirect effect because automotive is a huge market, and I suggested earlier automotive tends to drive standards.

So in one way of looking at it, it used to be the 12-volt and servers and data centers run on 12-volt.

As we started hearing from Google at the beginning of last year, data centers were moving, or had moved in the case of Google itself, to 48-volt.

I think there's more of that coming.

And that is all going to be greatly reinforced by a transition in automotive.

And all that puts Vicor in a very unique position because of our pioneering work, our intellectual property position with respect to technologies that are centered on 48-volt as the hub, both from any kind of high-voltage source, AC or DC, to and from 48-volt to the point-of-load with our Factorized Power System solution with PRM VTMs, which are obviously, at this point, quite established as well as with Power-on-Package, which was recently introduced.

It's already been adopted by some leading customers and we have evidence at this point that it's going to become more widely adopted.

Sorry for the lengthy response, but that summarizes it all.

No, it's good.

So on the beginning of your lengthy response, it sounded to me like you may have one or more new tier one data centers coming online in 2018.

Is that a good assumption?

I think in some ways it is more exciting that, in that I think we have is advanced designing activity that should pull 12-volt solution to 48-volt across the whole data center space.

Your next question comes from the line of Hasnain Karim.

So the first question I have is, is there anyone else shipping 48-volt solutions for production orders from what you can see in the market today?

Yes.

There is a number of players.

But to be clear, there's no solution that comes close to the power density efficiency and the overall performance of our solution.

And also, there's no solution that we're aware of that can be an enabler in terms of Power-on-Packages.

So to quote one customer, in answer to the question, "Is there anybody else that we should think of as an alternate source for your requirements?" the response of the customer was, "No, there's nobody that comes close."

Okay.

With regard to the data center hyper-scale market, you've obviously already hinted that Google is one of your customers and they have come out and pretty much said it outright.

Could you talk about how many hyper-scale or large data centers do you expect to move to 48-volt in 2018?

So we think that, as suggested earlier, the combination of Google's initiative and Google's announcement of last year with the next shoe that is going to be dropped in the March-April timeframe of 2018, that that combination will drive widespread conversion to 48-volt.

As to the specific of how many data centers are going to be built in 2018 using 48-volt technology, I think this conversion is going to take some time because it's quite involved.

So we don't expect that other large players are going to be able to convert their infrastructure from 12-volt to 48-volt as early as next year.

But they're going to have compelling motivation to do so sooner than later because the handicap of not doing so is going to become that much more significant in the first half of next year.

Okay.

So I'm a little -- I think you're trying to imply something, but I don't quite understand it.

Do you have a new product or new partnership that you're announcing that's going to enable that through some sort of cost initiative?

Or is there something else that a partner is going to announce?

So we've gone on record with respect to the products and capabilities.

I think I suggested earlier the Power-on-Package is at the heart of a lot of critical initiatives.

So you can expect that to be a significant factor.

And that's all we can talk about it.

I think the developments that we expect to see happening early next year involve partners that we cannot speak for.

Okay.

And then with regards to growth in 2018, do you expect the majority of the growth to come from shipping into the data center end market?

Or is there something else that you expect to ramp next year?

There are a number of other things that we expect to ramp next year.

If you follow the company for some time, it would be clear that we've been very busy converting a huge investment in technology that for many years, 10 years or more, was, to a high degree, in this stage, into actual products that have been announced, that have been sampled to a growing array of customers.

And many of these products are now turning into real programs that are beginning to ramp, including initiatives that, frankly, took way longer than we anticipated; in some cases, took 2-3 times as long as we were told they were going to take.

But they're now real.

They're coming to market.

Some of these applications are front-end solutions that, again, support computing capabilities of one form or another, but not at the point-of-load, but getting to intermediate bus from high-voltage sources.

So it's not just the data center space.

It's not just PRMs and VTMs.

And it's not even going to be just MCDs and MCMs that do.

As I already suggested, those particular products and the particular solutions is going to become a game-changer.

But all of these product opportunities are complemented by other products that will begin to lift also the revenue base associated with our Brick Business Unit.

So as discussed earlier, we have been, in terms of a 10,000-feet picture of the make-up of our revenues, we've been in a situation where the legacy business, which is not point-of-load, which is not data center type of business, but it's a high-mix business that has historically relied for far too long on relatively older products, that business has been relatively flat; at times declining slightly, at times going up slightly.

That business will start growing again not because of the old products, but because of contributions from state-of-the-art new products.

While at the same time, we're beginning to see the point-of-load business getting to close to the 30%-40%-50% level that brings about it moving the needle big time with respect to revenues as a whole.

So it's the growth rate of the new products, the power component products that we talk about in connection with data center type applications, growing rapidly into next year, as well as a pick-up in the level of activity with respect to front-end and power system solutions that complement the point-of-load.

Okay.

And are these all, with regards to front-end, are these -- just to confirm, these are products that are going into production in 2018 so you expect purchase volume, purchase orders in 2018 for shipment.

Well, some of them have been in production.

So the multi-million dollar order that did not ship in Q3 is now expected to ship in Q1, that happens to have a significant contribution, About half of that order is to do with something called (inaudible) is a front-end product that takes 3 Phase into 48-volts.

So that's a front-end product that has got the same power density and high efficiency and complements the point-of-load solution giving our Japanese customer a total power system solution that is truly state-of-the-art from the 3 Phase line all the way to the point-of-load with Power-on-Package at the point-of-load.

Okay.

I guess beyond that you've mentioned you expect the front-end to be one of the driving forces beyond the point-of-load.

I guess what I was trying to ask is, is that something that -- are those programs going to production at your customers?

Is that what's giving you more conviction level with regards to that (inaudible) business?

Yes.

Yes, again the Japanese customer is one that has been in limited production, is going to be larger production soon.

There are other customers that we've been working on with applications that have been in development phase for quite some time with some of the VIA products that go in a different pocket of the market.

But they're also front-end products that will add to revenues in 2018.

Okay.

And then, if you could just describe -- I think I'd asked this a couple of quarters ago -- but with regards to what gross margins look like as your revenues ramp.

I guess as revenues hit into the 60s and, let's say, low 70s, are corporate gross margins most likely going to increase into the low 50s like they have in the past?

Or is the profile of the products you're selling different, going forward?

I expect that as we get to the $65-$70 million level, our margins are going to be in the 50s.

A large share of incremental revenues drops to the bottom line.

We have a cost model that rewards incremental revenues.

And conversely, in times where the revenues aren't growing or have been stagnant penalize us in terms of the margins.

So recent margin levels in the 44% area reflect a revenue level that is in the mid-50s, and as we get that revenue level up by $10-$15-$20 million, the incremental contribution to the bottom line will quickly get the 44% to 50% and higher numbers.

So I'm not at all concerned with respect to the margin.

The focus has been on the top line because from that to the margins, getting to where they should be given the level of proprietorship, intellectual property, uniqueness of the products, that's not difficult at all.

And so we see that on the near-term horizon.

Okay.

And then my final question is with regards to bookings.

As all the comments you've made, it sounds like you have, I guess, a good feel that bookings will continue to increase over the next four to five quarters sequentially.

And when, I think I asked you this last quarter, you mentioned that -- or maybe two quarters ago; a lot of calls now -- you mentioned kind of a slow increase and then a step-function up because of the Skylake introduction, which was complementary to the 48-volt product.

Is that, I guess, is that the type of pace you continue see, is sort of a step-up or more of a linear progression through 2018?

That's the picture we see.

The issues with Skylake are behind us.

I think on a separate front, where we have inroads, without naming names, but in a competing, let's call it that way, in a competing socket.

There have been delays.

This is a non-Intel socket aimed at competing with some of the Intel processors.

There have been delays that echoes some revenue opportunity to also move to the right.

And that's been part of the issue with our earlier forecast for the second half of this year.

Not only do we expect a healthy contribution in the third quarter from the large supercomputing application, but we also, based on earlier predictions, had expected a significant -- the start of a significant contribution from a non-Intel socket that was due to ramp in the fourth quarter of this year, and because of a variety of reasons, that's moved to the right.

But overall these initiatives are, at this point, real potential.

I can't guarantee you that they're all going to come to fruition.

It's high technology and it's very competitive and sometimes what customers get promised in terms of solutions, not by us, but others, doesn't quite pan out and that causes delays.

But looking at the sum of all of these initiatives, there is reason to be optimistic about the revenue opportunity next year.

You have a question online.

That question comes from the line of John Dillon.

Just wondering if you have any update on the new facility or an additional facility, additional plant.

Yes.

So we're completing the due diligence and have some specific plans.

We may break ground as early as April, 2018, with a target date of first quarter of 2019 for occupancy.

So it sounds like you're looking at actually building a whole new plant, not leasing some place.

Yes.

We evaluated various alternatives.

It's not cast in concrete yet, but it sure looks like it's going to be building facility to our specs.

Great.

And it sounds like this is really - this is on your plan.

This is definitely on your plan.

It's not a wish list, but something you're planning for.

Yes.

If there is another question, I will take it.

You have one more question online.

That question comes from the line of Alan Hicks.

To follow up on some of your comments on the front-end applications, and that's in the area of the BBU revenue line, I assume.

You had some orders last quarter.

You said orders increased by $6 million in that area and had one customer of $4 million that you would ship to next year.

Is that still on track?

I think what he's conflating is the supercomputer combination.

Oh that was it.

Okay.

Yes.

I think you're, Alan, you're accurate.

So about half of the bookings and revenue opportunity with the supercomputing application is a front-end product.

Half of it.

Oh, okay.

Yes, I wasn't clear on that before.

And you also mentioned that you've thought in the big picture there could be a horse race between the amount of revenues you get between front-end and point-of-load applications.

Well, so historically, obviously, the bulk of our revenues has been Brick Business, which you could view as power system business, front-end business.

It certainly, given its age -- it's a 30-year-old power component paradigm -- it's not a point-of-load power component paradigm.

I mean the density of those kinds of products is in the 40-50-60 watts per cubic inch.

Our point-of-load solutions are 400,000 watts per cubic inch.

So it's not even a close contest.

The front-end products and Brick products, once again, have provided a revenue base that's enabled us to make the investments in the technological development, the product development that has laid the foundation for eventual growth that I believe is now truly starting.

And which, again, will, to a high degree, be fueled by point-of-load applications.

And these are, again, typically 48-volt to, in the case of Intel processors, 1.3-volt.

In the case of GPUs, XPUs, ASICS, typically 0.8-volts, hundreds of amperes; in some cases more than that.

That's where a lot of action is going to be.

But again, coming back to the front-end business, we have a holistic view of the entire power system challenge.

And as evidenced with our customer in Japan, we can, in effect, uniquely support the entire power system requirement from, in that particular case, the AC source to the point of load or high-voltage AC/DC source to the point-of-load.

And so we see, over time, a significant contribution, a significant in terms of revenue share, coming from front-end type business.

And the Japanese engagement, as has been referenced earlier, is indicative of this in that, again.

half of the revenues have to do with the front-end part of the system; the other half has to do with the point-of-load stuff.

So in the short term, the growth is going to be continuing primarily from the point-of-load stuff.

That's where comparing this past quarter to the corresponding quarter of last year we see, roughly, a 50% increase.

That's the kind of growth we expect to continue to see in point-of-load stuff.

It's going to be a while before that kind of growth gets to be leveraged with the front-end business because, with some notable exceptions, there is additional work that needs to be done to address those kinds of opportunities with key customers in the front-end.

But key customers are very much interested in what we have contributed in the front-end just like they're very interested in our point-of-load solution.

They appreciate the fact that we have a unique technology.

It's truly enabling.

It does make a difference in many ways, most importantly in giving them a competitive advantage relative to their own competitors.

And they want to stretch, to the extent possible, their advantage not just to the point-of-load stuff, but also in terms of front-end capabilities.

So we're frankly getting a lot of pull from the customer base with respect to sharing our front-end solutions.

We are holding back to get them to a higher level of maturity and general capability before taking the next step.

But as we do that in 2018, I expect to see a broadening base of acceptance for front-end solutions that should contribute to the Brick Business, or the front-end business, power system business, that has characterized Vicor for quite some time.

Yes.

I guess the point I'm really trying to get at is that BBU revenue line has been declining for, what, 15 years or so.

But it sounds like --

Not really declining for 15 years, but it's safe to say it's not been going anywhere for 15 years.

It's gone up a little, down a little.

It's really not gone anywhere.

And it's still doing that, I guess, if we compare where we are this year relative to last year; it's not sideways.

So the mission there is to start lifting it by leveraging the new technology in that space.

And again, that's not going to happen overnight.

But I think we have some early evidence of that opportunity.

And as we get a little further along in terms of the maturity of those front-end systems where we're comfortable with enabling them with very high-volume mainstream customers, we'll be doing that.

And they're asking us to share what we have.

Yes.

I wanted to get to the point that it sounds like you're transferring some of your new technology, advanced technology, to the older applications, the power systems and front-end applications.

We are.

And there's a simple reason for it.

There's common denominator; engines, meaning power conversion topologies, the control systems and, most of all, packaging technology.

So our very unique packaging technology, the packaging technology that enables Power-on-Package, MCMs and MCDs and advanced PRMs and VTMs, that technology, the ChiP, or Converter Housed in Package technology, that same technology supports -- is a platform that supports much larger ChiPs for front-end applications with power capabilities ranging up to 6-8 kilowatts per ChiP.

So it's that capability that we're beginning to deploy to address front-end applications, again leveraging a very common denominator capability.

But the issues are somewhat different.

They're complementary.

But it's something that, again, we'll take some time to fully develop, particularly with major customers.

Okay.

So you think you can re-invigorate that revenue line.

I think that, ultimately, half of our business, in very rough terms, should come from the parts of the power system that takes a power source and lands it at 48-volt on the way to the point-of-load.

So as the Factorized Power Solution is going from 48 to the point-of-load by way of PRM, VTM or Power-on-Package continue to grow, we will have some catching up to do with the front-end, but I'm confident that the front-end revenue opportunity will roughly equal the point-of-load opportunity.

And again, we have real evidence of that with the first customer where we've actually enabled that kind of a complete solution.

As that kind of implementation gets spread to other larger customers that have adopted, thus far, point-of-load solutions have expressed an interest in the front-end, but have not yet been even exposed to that capability.

As they get exposed to it and eventually adopt it, they should contribute just as well in terms of front-end business.

And with that, thanks a lot.

And we'll be talking to you in February.

Have a good day.

Ladies and gentlemen, that concludes today's call.

You may now disconnect, and have a wonderful day.