Vicor Corp (VICR) 2023 Q1 法說會逐字稿

Welcome, everyone, to today's webinar entitled Vicor Earnings Results for the First Quarter Ended March 31, 2023. My name is Tracy, and I am your operator today. (Operator Instructions) I would like to advise all parties that this conference is being recorded.

And with that, I would like to hand over to Jim Schmidt, Chief Financial Officer of Vicor. Please go ahead.

Thank you. Good afternoon, and welcome to Vicor Corporation's earnings call for the first quarter ended March 31, 2023. I'm Jim Schmidt, Chief Financial Officer, and I'm in and over with Patrizio Vinciarelli, Chief Executive Officer; and Phil Davies, Corporate Vice President, Global Sales and Marketing.

After the markets closed today, we issued a press release summarizing our financial results for the 3 months ending March 31. This press release has been posted on the Investor Relations page of our website, www.vicorpower.com. We also filed a Form 8-K today related to the issuance of this press release. I remind listeners of this conference call is being recorded and is 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 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 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, April 25, 2023. 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 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 Q1 financial performance, after which Phil will review recent market developments, and Patrizio, 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 upcoming Form 10-Q for additional information. As stated in today's press release, Vicor recorded total revenue for the first quarter of $97.8 million, down 7.3% sequentially from the fourth quarter of 2022 total of $105.5 million, but up 10.8% from the first quarter of 2022 total of $88.3 million.

Advanced Products revenue declined 19.3% sequentially to $51.3 million, while Brick Products revenue increased 10.9% sequentially to $46.5 million. Shipments to stocking distributors increased 4.1% sequentially and 43.3% year-over-year. The decline in Advanced Products revenue was due primarily to constraints at our outsourced manufacturing partner. Exports for the first quarter decreased slightly on a dollar basis, but increased sequentially as a percentage of total revenue to approximately 64.3% from the prior quarter's 59.8%. For Q1, Advanced Product share of total revenue decreased to 52.4% compared to 60.2% for the fourth quarter of 2022. With Brick Products share correspondingly increasing to 47.6% of total revenue.

Turning to Q1 gross margin. We recorded a consolidated gross profit margin of 47.6%, which is a 100 basis point increase from the prior quarter, while lower sales volume pressured gross margins, we did benefit from an improvement in the gross tariff rate as a percentage of revenue. During the quarter, we recovered approximately $3 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 Q1 operating expenses. Total operating expense decreased 12% sequentially from the fourth quarter of 2022 to $36.1 million. The sequential reduction was primarily due to a reduction in legal fees. The amounts of total equity based compensation expense for Q1 included in cost of goods, SG&A and R&D was $486,000, $1,520,000 and $811,000 respectively, totaling approximately $2.8 million. For Q1, we recorded operating income of $10.4 million, representing an operating margin of 10.7%.

Turning to income taxes. We recorded a tax provision for Q1 of approximately $1.1 million, representing an effective tax rate for the quarter of 9.2%. Net income for Q1 totaled $11.2 million. GAAP diluted earnings per share was $0.25 based on a fully diluted share count of 44,907,000 shares. Fully diluted EPS increased approximately 39% sequentially compared to $0.18 in the fourth quarter of 2022 and more than doubled from $0.11 per share earned in the same quarter a year ago.

Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $192.9 million in Q1. Accounts receivable net of reserves totaled $61.1 million at quarter end, with DSOs for trade receivables at 35 days. Inventories net of reserves increased 5.9% sequentially to $107.4 million. Annualized inventory turns were 2.1%, operating cash flow totaled $10.1 million for the quarter. Capital expenditures for Q1 totaled $10.1 million. We ended the quarter with a construction in progress balance, primarily for manufacturing equipment of approximately $36 million and with approximately $13 million remaining to be spent.

I'll now address bookings and backlog. Q1 book-to-bill came in below 1 and with one year backlog decreasing 10.9% from the prior quarter closing at $271.3 million. Turning to our factory expansion, as expected, we recently received the final pieces of equipment necessary to complete vertical integration of our new ChiP fab. During the month of May, our manufacturing team will conduct pilot runs using this equipment. Through July, we expect to complete manufacturing qualification of our vertically integrated ChiP fab, and then commence volume production.

While there will still be some outsourced processing, in Q3 we expect to be vertically integrated across all of the key process steps necessary to manufacture our power modules. This marks a milestone in Vicor's history, aligning our manufacturing capacity in the first global ChiP fab with the breakthrough design technology Vicor has invented to deliver superior power density. As we said last quarter, we are looking forward to the substantial reduction in cycle time, improved manufacturing efficiency and full manufacturing control that this facility will allow. And we are anxious to leverage the completion of our ChiP fab to provide shorter and more consistent lead times to our customers.

Turning to the second quarter of 2023, we expect results to be approximately flat to Q1 with a potential for a modest sequential improvement in overall results and including a moderate sequential increase in operating expense as we implement our annual merit process.

With that, Phil will provide an overview of recent market developments and then Patrizio, 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?

Thank you, Jim. I'll begin with an update on our satellite market business development initiatives, which we haven't discussed for a while. In December of 2022, we announced that Vicor's radiation tolerant factorized power chipset was on board the launch of Boeing's 03b communication satellite powering the communication ASICs. This was a critical milestone for us by proving to other satellite customers that Vicor power modules could improve signal integrity, efficiency and power density, while meeting the tough environmental and quality demands of space applications.

Building a space heritage opens up an available market opportunity of $175 million with Boeing and other customers. Our initial radiation tolerant chipset is being expanded with additional input and output voltage modules critical for other customers and applications. In early Q3, we will introduce a reference design for AMD's first space-grade Versal adaptive SoC, which delivers reprogrammable AI inferencing and high-bandwidth signal processing for satellite and space applications.

Turning to our automotive market opportunity at the World Congress event in Detroit last week, Vicor presented 4 papers on how our power modules solve the toughest power delivery and conversion challenges in electric vehicle power systems, which are increasingly transitioning to a 48 volt power distribution architecture. Broader adoption of 48 volt power distribution bodes well for us. Given that the 48 volt architecture is one that Vicor has pioneered and innovated around for over 15 years, developing proprietary and patented power distribution networks, topologies, control systems and packaging, to deliver the highest power density 48 volt solutions.

The chips and applications presented at WCX and on display at our booth, are the foundation of our expanding OEM and Tier 1 collaborations and design wins. In Q1, we signed a supplier agreement with a major Tier 1 and expanded our design win pipeline at existing OEMs with additional platforms and applications. We also started 3 new collaborations and added a major design win with an SOP date of 2026. High voltage power systems designed with our power modules are proving to be 3x to 10x smaller and lighter than DC/DC converters built with silicon carbide or GaN power switches. We are also on track to achieve automotive level qualification for several of our power modules in Q2.

In Q1, the high performance computing market saw the introduction of artificial intelligence chatbots, using large language models, which have significantly stimulated the market for AI systems at hyperscalers and social media companies globally. These new chatbot capabilities open up completely new areas of AI to the masses and have a much higher customer satisfaction than traditional search engines. Our factorized power solutions are being used to power the rollout of this exciting new technology and as higher performing processes are introduced, our lateral vertical solutions will provide the higher current density and lower PDN losses that these next-generation AI processes demand, with increasing current levels and lower operating voltages.

As I commented in our last call, new 5 nanometer processors being introduced to the market using lateral power conversion solutions are hindered with high PDN loss, which limits performance from otherwise achievable levels. Lateral vertical factorized power enables the full potential of AI processes by reducing processor and PDN losses.

On the product development front of Gen 5 technology continues to make excellent progress, and is on schedule for introduction to major customers this year. These next-generation point-of-load solutions enable scalable, cost effective VPD or vertical power delivery, which will be a game changer for the industry and enable next-generation processes that would otherwise be handicapped by the power conversion and delivery challenges of multiphase technology.

In summary, all of our 4 business units are seeing expanding opportunities and major customer engagements across our top 100 customers as electrification, autonomy and artificial intelligence requirements rapidly expand. Account managers for our top 100 accounts are setting up visits to our new ChiP fab for Q3 and Q4, as part of our operational excellence initiatives to provide our target customer base worldwide, visibility to our scalable capacity and to introduce them to the superior power system capabilities of our Gen 5 chips.

That concludes my remarks. Patrizio, Jim and I will now take your questions. Operator, we're now ready to take questions.

(Operator Instructions) And we have received a couple of questions already. The first one is coming from Quinn Bolton.

I just wanted to start with -- just a clarification, a quote from the press release where you said bookings will or maybe looking -- until AI -- OEMs capture the benefits of advanced PDN with lateral vertical solutions. Can you give us some sense of timing? When do you expect to ramp this lateral vertical solutions? Is that going to be in calendar 2023? Or do you expect that to potentially move out to 2024?

We don't know with a high degree of confidence when this would happen. It could happen later this year, it could happen in Q1 of next year.

Okay. And last fall you talked about, I think, roughly 5 or 6 design wins 5 nanometer ASICs or other sensors, as you expected (inaudible) this year. Can you say are those wins using just pure, lateral solutions or some of those wins using [convertible]?

We seem to have some interference on the line with some background noise, Quinn (inaudible). I think I got most of it, Quinn, yes. So yes, I think that -- but what I talked about last time was that, we have design wins ongoing with lateral solutions to about 4, 5 companies. And that we're also engaging with other companies that have higher current processes that will require, we believe, lateral vertical or even fewer vertical with our Gen 5 technology. So there's a lot actually happening in the market right now with different process nodes and different current levels. But we -- I expect lateral vertical and pure vertical to be part of the portfolio going through the end of this year and into next year. Quinn, did you get that?

Okay. There appears to be a connectivity issue.

The next question is coming from Jon Tanwanteng.

My first one is, what are your biggest customers telling you about competitiveness of your product? Stack -- compared to a year ago, specifically in (inaudible) markets?

Competitiveness of the products. What...

What our customers telling us with respect to where do we stand competitively vis-a-vis...

Okay. So Jon, so I think it's clear that the multiphase technology is advanced with current density, but it's still not at the levels that we're at in terms of the density of the product and the ability of the product, which in lateral vertical is very important is to be very thin. So you need to have a very, very thin package that you can place on the back of the Board in any sort of GPU, ASIC, CPU type application. So that's number one.

I think that with Gen5 technology, which is where we're focusing the majority of our product development here, now that's a complete game changer in terms of the 3x improvement in current density that Patrizio has spoken about that changes things dramatically with regards to power delivery for high current GPUs and also the optical networking backbone processes. So that's what we're looking at currently. But lateral vertical is certainly superior to a multiphase lateral approach.

Let me add. It's been nearly 40 years when Vicor introduced its first products. We took converters which at the time were about 1 watt per cubic inch to 10 watts, 15 watts per cubic inch at the much higher operating frequency. And our lead in terms of power density, current density, key figures are met in demanding applications. As persisted for decades, it's not about (inaudible), as Phil just suggested, its about to take a major leap forward.

And just regarding the customers and maybe specifically on the ones you're waiting for to ramp solutions that are using your lateral vertical solution. Are they simply waiting for your new facility to qualify before giving you orders or is it more of a product timing situation? Can you just give us a little more color as to the status of when do you expect those orders come in and maybe the reasons why there may a little bit more delay than we thought it would be?

So it changed from [lateral vertical], is it changing PDN or power distribution network architecture. There are many facets to this challenge, having to do with the PDN architecture itself. What needs to happen in terms of reclaiming some of the rear state within the processor socket that historically has been dedicated to capacity by passing to, in effect, keep up with the dynamic requirements of these processor, which entail very quick changes in current up to 10,000 ampere per microsecond.

So managing the combination of PDN dynamic requirements and making it happen with -- in the mechanical thermal management constraints and other constraints of the application is a complex challenger. That there are intellectual property aspects to this, there is know-how that is not generally available. And to make a long story short, this is not an easy transition, it requires, as of now, a close collaboration between the OEM and Vicor with respect to bring to fruition a solution that meets all the requirements.

We are (inaudible) advances with 5G is that this whole process is going to become much more scalable and OEMs are going to be in the driver seat with respect to their designing. But as of now with 4G building blocks and the know-how that is available, it is a bit of a tedious process. And this in my opinion is -- and has been for a while, the obstacle to faster adoption of more advanced PDN architectures.

Great. And it's not a facility issue or anything like that or just waiting for that. That's the (inaudible).

No. Lateral vertical can be done as Phil suggested earlier with our 4G building blocks. Do a full vertical with 4G, it can be down, but it entails stacking ChiPs or stacking certain functionalities with regard to which Vicor also IP, relevant IP. But it's got complexities that with 5G we are doing away with in terms of leveraging the much higher density to facilitate DPD in a very simple and cost effective way.

Next we have a question from the line of John Dillon.

I also have a question on the lateral vertical in particular with the 4G. Are you still planning on doing 4G with lateral vertical and would that be this year or is that also -- does that also step out next year? And can you give us a little color on the customers that are looking at your 4G technology for lateral vertical?

So existing designing activity for lateral vertical is as of now still based on 4G modules, existing 4G modules. Before too long any incremental activity and expanding level of activity would be enabled by 5G building blocks, but as of now it's still with existing 5G -- 4G module.

In those 4G module opportunities, do you expect them to go to production later this year then?

Well, again, we don't have perfect visibility. There could be production ramp with the lateral PDN, a significant production ramp with lateral PDN using 4G modules or it could be that the pressure on ramp of ways the latter vertical solution, because of its significant improvements in power capability, reduction in loss within the silicon and within the PDN itself. So...

Okay. So you still might have some new 4G lateral opportunities that come the second half of the year, is that what you're saying?

Yes, John. That's correct.

Okay, great. And do you have any kind of guesstimate on the timing of that? I mean, is that again this year or is that also maybe next year?

I think John, Patrizio put it well earlier, it's working through all this stuff, it's complex, complicated, but we're making good progress and we'll be able to talk about that a little bit more in future calls.

Okay. My follow-up question is, Patrizio, I have been invested with you for about 25 years. And the only reflect back, we've had a lot of successes, we've had some setbacks. But I can't remember Vicor being positioned for consistent long-term growth better than you are today. But then again, I've been surprised before, when I thought that before. Am I correct in my views that you are better positioned now than you had been? And if so, what makes it different from the past, where we've had these successes and also setbacks?

Well, that's a very good question. I can tell you personally, I feel that way. I think in terms of articulating why I feel that way. I think, I suggested in the press release, it has do with a combination of factors. First of all, we are very close to the first global foundry for chips, there is nothing that comes close or can come close. It is enabling that it provides scalability in terms of volume cost, very low cost structure from very low power levels to applications ranging up to literally 100s of kilowatts in automotive applications.

So whether it's a fast charger for an electric vehicle in the 100s of kilowatts or a current multiplier in the 1,000 amp or several 1,000s amp range on a multiplicity of rails for the future GPU or XPU. Our ChiP foundry is converted housing package foundry, gives us an empower unique capability to provide not just the highest power density or current density solution, the case maybe in automotive systems or AI, data centers type applications that enables us to do that with the lowest cost.

So we're not going to be releasing any of the essential ingredients necessary to take full advantage of the general adoption of the 48 volt infrastructure that Vicor itself has pioneered. So that's the simple story of where we are. I understand that historically, it hasn't been easy to bring all this about, is taken a great deal of focus in terms of the complex assets of the puzzle as a whole, ranging from power conversion engines, control systems, unique components, packaging technology that is underlying the converter housing package, scalable methodology, there is wafer like -- as wafer foundry and the foundry itself, that we've invested upwards of $100 million to bring about, to give us a capacity for about $1 billion in revenues.

So that's the simple reason why, I think we're well positioned for the market demands for high power density, high current density in a variety of growth end markets.

John, if I could just add one quick thing to that as a secondary think Patrizio just said. I think that from my tenure here, the 12, 13 years, we've never had a quality set of customers that we're engaged with like we have now. So that's really critical right to who are you working with and what does the future hold for those customers in their markets, are they leaders? And they can't just be in high performance compute with a couple of big companies, hyperscalers or GPU guys. It's got to be right across the 4 business units that we are now developing long range revenue plans for and are engaged with great customers right across the globe. So just to add that to Patrizio's comments.

Yes, I get it, and it seems to me like you've always had the performance part. But now the customers actually need your performance, they have to have it, it's not that they want to have. And then on top of it, it sounds like you've got the cost card to go along with it, which is a nice combination, where they need your product and you also are very cost competitive and then from the -- it sounds if Gen5 is going to be even lower cost competitive down to the commodity sever level, which is really exciting, because that really opens up a huge market for you?

Yes. And the vertically integrated factory that Patrizio mentioned, that's really critical for us, right.

Next, we have another question from Jon Tanwanteng.

My question is to Phil, where do we stand today in the migration to 48 volt datacenters as a whole? What inning are we in? How much are you seeing that play out in your bookings and pipeline?

Yes. So that definitely the -- other hyperscalers that we've been waiting for are working on 48 volt native rack systems. In the meantime, we've talked about this, they are buying basically power distribution boards, incorporating our NBMs to do the 12 volt needed to 48 volt level necessary for the advanced AI systems. So -- but we are seeing native rack developments now with the hyperscalers in North America and also overseas, because of the power levels that these -- the addition of AI, chatbots whatever into the datacenters are requiring 48 volt power distribution. And in the supercomputer area, it's even higher, it's up at the 380 volt range where we sell high voltage bus converters.

So the power levels just keep going up, Jon. And we have the technology to do the down conversion to 48, and then the 48 to point of load either with bus converters for low power CPU systems or factorized power for very high power GPUs and ASICs and optical network processor. So we are sitting really well with technology migration in our customers and being able to follow that and even be ahead of that with now our Gen5 solutions coming along later this year.

Got it. One thing I've been surprised with is, just the total power consumption of these next-gen CPUs. They're approaching the levels that -- the last generation AI processes that they use lateral solutions. Do you still CPU markets going to your -- finding your product necessary to drive power users that they're starting to run it?

Yes, I think Gen5 actually opens up CPU -- higher power CPU applications for us. Who knows, maybe even lower power CPUs as the rack goes to 48 volts, direct conversion from 48 volts with Gen5 can be very cost effective and very dense. So we're going to go after that market as well when Gen5 comes along.

But make no mistake, any system today, high-end system, let's say, high-end GPU powered from 48 volt through a lateral PDN is handicapped by the power system. It cannot deliver its compute capability, because of the limitations on power systems.

Understood. If I may ask the question on the quarter, what causes the constraints supplier. I know there has been pretty spotty in the past, is that going to continue into Q2 and give us a little color as to what happened in the quarter compared to what you thought you were going to be?

So I think -- Jon, as we said, it was mostly a function of the outsourced manufacturing partner, which is -- we're in the final stages now, we're bringing the production in-house. So in some cases the supply wasn't as prompt as we needed it to for the quarter and anticipating the output. So as I described, we're into May now with qualification -- June, July qualification. So facilitating the equipment in May that we brought in. So I think as we get into the third quarter, we'll be clear about our ability to generate the output we need.

Okay, great. And then, Jim, just one more follow-up. Do you expect the tariff claw back to be relatively continuous as you go forward, there will still be spotty and kind of unpredictable. How should we think about that and then kind of what's in the backlog you to claim?

In the short-term, we can -- we're sort of expecting the same level for this quarter, that's our anticipation. And then it will kind of throttle down a bit, because we basically been clawing back what amounted 2 years ago worth of tariff payments. So that will come -- that will further down over the course of the year.

(Operator Instructions) Please state your name, and go ahead with your question.

This is Richard Shannon with Craig-Hallum. I was blaming my inputs skills on my phone here, not you guys. I guess, I just wanted to kind of ask a follow-up to a few different past questions including starting with Quinn's about how to think about what you're seeing an inflection point, kind of the characteristics of when that happened. And particularly understand your response to a couple of those has been, you don't have complete clarity on that.

So let me kind of asking a multi-parter on this, and I'll let you kind of go where you would like to as I think you get the gist of my question here. So I'm not exactly sure when that will be -- it sounds like it could be either with lateral vertical. I'm assuming these are with AI accelerator type applications, but also could you characterize whether these are designs that are done and completed and just haven't been relet at the time, or are they still designs in flight? Maybe just kind of help to clarify the dynamics here along those lines, please.

So we're working with a number as you pointed out of AI accelerator car companies. They're on the different stages, some of them are actually in early sort of pre-production others are in qualification, others are also got advanced developments going on that will be qualification later this year and then ramps later this year, maybe more like early next year. So it's across the board, Richard, really, and it's a mix of applications, but most of it is lateral, and then we've got some lateral vertical activity going on as well.

Maybe let's ask an automotive question here. And I may have -- Phil, I may have missed all of your comments about kind of the latest update here in the last quarter. But maybe I'll ask you kind of do a 2 parter here again, which is repeat what you said about those designs. And maybe if you kind of give us the top down here and how many designs you have and what functionalities. Your comments on the press release talk about applications up to 150 kilovolts, which seem to apply inverters in EVs. Maybe kind of characterize what functionality you're supporting them. And just to clarify this, it sounds like calendar '25 is the time frame to expect material revenue share, is that accurate?

And it was kilowatts and not kilovolts. Yes.

My apologies.

So if you look at the chipset that we showed basically the power module family that's making up most of the solutions that we're bringing forth, because as we talked about before, this is a very scalable technology, right? You can have a 5 kilowatts, 10 kilowatts, 800 volt to 48 volt system, and then you can add more modules to scale it to 15 kilowatts, 20 kilowatts and so forth. So that's really loved by the automotive OEMs and also some of the Tier 1s that we're now working with.

So the applications are 800 volts to 48 volts, 800 volts to 48 volts to 12 volts, then you can go 400 volts to 48 volts to 12 volts or 400 volts to 12 volts. So different types of car platforms that use that down conversion capability that we can offer in 2 or 3 power modules. On the other side, Patrizio mentioned the 150 kilowatts, that's for an onboard charger for rapid charging. It's a 400 volt, 800 volt bidirectional buck boost, if you like, converter system with 98%, 99% efficiency. You can hold it in the palm of your hand and you can get 30 plus kilowatts out of it. We showed it at WCX last week and actually in a module form that can achieve, I think it was 150 kilowatts in the stack that we have.

In a stack, right now with some OEMs 5 modules going down to 4 modules going down to 3 modules, with the power density that is literally 5x better in terms of volume and way of than any competitive alternative.

So, Richard. In Q1, I mentioned here, just briefly, again we had a supplier agreements with a major Tier 1, we signed that. Expanded design wins, OEMs we've started working with almost 2 years ago with additional platforms and new applications like the on-board charger example. We also have 3 new collaborations in the quarter and added a major design win with an SOP in 2026, those are from my comments earlier. We've got quite a number of collaborations going on now globally, but all of them center around that 800 volt down conversion to 48 volt or 12 volt, or 400 volt down conversion 48 volt to 12 volt, and then also 48 volt to 12 volt applications with wire harness type companies. And then also these rapid charge on-board chargers systems had very high power levels with a number of OEMs and Tier 1s. So it's a really -- it's quite a mix. And as I said before, I'm very excited about it. We are really engaged with a very high class level of OEMs and Tier 1s now, it's very exciting.

Okay. A lot of detail there to unpack. I think I've got some good notes there. I think it will jump out of line here.

The next question is from [Doug Campbell.]

Just a couple of quick questions, first of all Patrizio congratulations on the Forbes article, I thought it was really great to see you talking to a broad span of people obviously Forbes is a great publication, and I thought it was well written and explain the story pretty well. I thought it was a very handsome photo of you as well. So congrats on that. I guess my only question is with the drawdown in the backlog and some of the timeframes you've given for new products and new OEM contracts and all of the above, with the new factory pretty much stopping online until July, August or in that timeframe. I kind of view this year as a transition year. Do you see the backlog being significantly drawn down? I don't want to say zero. But as we enter Q3, Q4, I mean, will the backlog just be eliminated at this point?

So it's hard to tell exactly what's going to happen. But in terms of bookings, we believe that the low point took place in Q4 with an improvement in Q1 and further improvement in Q2, expected. But because of the uncertainties with respect to some of these programs ramping, which is really something we can't control. It's hard to predict exactly what is going to happen through the of the year with respect to backlog. Our revenues in Q1 were now limited by backlog, we're still playing catch up with respect to the backlog. And even in Q2, we're going to be playing catch up.

So in one way we're looking at it in terms of taking care of customer needs in the short-term. The monkey is not on the back of -- the front-end of the business is still on the backend in terms of actions stepping up to the bar, given the challenges with outsourcing of some of the chip processes, which is still being a factor in recent months, getting the app within the quarter.

Well, 2 things. I have to believe that you guys are counting the seconds before you can produce everything in house because I know as investors I'm not going to be, I'm not going to say, we're so tired of hearing about the outsourced manufacturing problems. When you guys control this, it's going to be a game changer. I guess, I was thinking the drawdown was going to occur because you talked about I guess new orders or new projects in Q4, maybe heading into next year.

So I was thinking that the bulk of the revenue for the next few quarters would come out of that backlog. I do realize it's significant, but with a book-to-bill, again, you don't give specifics, but I know it was significantly below one, it's improving, but if it stays, let's say, below 0.6 or 0.7 that backlog is going to draw down pretty quick. So I mean, have any of your conversations talked about economic weakness or the most forecasted recession that we've ever seen before?

I mean, it hasn't hit yet, but everyone's pointing to it. That also makes me a little antsy in your plans about to come online and you have all these great industry is in all these great potential customers. I'm also concerned about the macro and I'm concerned about how deep will the recession be if there's a recession. We have a repeat of Q4 of '18 where certain OEMs just shut off the order flow for certain period of time. I know you can't predict that, but I'm wondering if you're getting any feedback from any of these larger guys, I mean, Microsoft's quarter was great today, better than expected. I'm wondering what you guys are hearing.

So I'm not really concerned about these factors, obviously they are there, and they have a certain degree of applicability. But I feel I mean it's safe harbor because of the technology, the products the fab, the scalability the cost effectiveness the diversification with respect to end markets, the general electrification with these converging on 48 volts and infrastructure for power distribution. So all these things at the end of the day will bring about more demand than our fab will be able to supply, which is substantial multiple of our current revenues. I have a perfect level of visibility none of our sales, but I'm not losing any sleep with respect to our ability to fill the fab.

So I'll just add -- I'll just finish with this, can I take enough time. I'm not -- I have no doubts about your future. I am just concerned with the present. That's as an investor, that's all I'm concerned with your future to me, 2, 3, 4 years out, I have no doubts where the company will be. Just the last couple of quarters in the next couple of quarters for me as a fund manager, it's a little tricky that's all.

Understood. I think, by the way your choice of words this year being a transition year. I think that's very much on point. It is a transitional year for a number of reasons. But the year is progressing, but we need to be -- get into the end of the year before we realize it, and all of these critical elements are going to be in place.

Well, the future in all these industries has panned out exactly as you forecasted years ago, so I just -- I hope we all make a boatload of money on top of it.

Next question is from another caller. (Operator Instructions)

This is Quinn Bolton from Needham. Hopefully, this is a better connection. Just wanted to a couple of follow-ups. Last quarter you talked about the ability to potentially come in on some redesigns where processors had shipped initially using multiphase and you saw the opportunity to redesign those boards of Vicor components. Can you just give us an update, whether you still see that opportunity? And if you do, are those going to be the lateral, or are those lateral vertical designs.

So some of these solutions suggested earlier are severely handicapped by their lateral PDN. A Vicor solution that is still lateral within -- in effect the constraints of the lateral PDN offers performance advantages in terms of lower noise, some increase in power density, but not on the scale of a lateral vertical solution and even less so on the scale of a fully vertical. The transition in terms of is -- some of us will like it not be because of nature of the design process with 4G components, and the novelty in terms of different kinds of PDN that customers OEMs struggle with in terms of appreciating the benefits through the various stages of the design process. And that's what has led to delays in some level of visibility.

But I can generally say that there is growing recognition of major benefits, it's not just slashing the PDN losses, OEMs are coming to realize that there is as much of a power saving in the silicon itself, because frankly the handicap results into large voltage differentials within domains. The primary rail and obviously the rails that require a significant increase in power dissipation within the silicon itself. So the advance that is brought about by a lateral vertical PDN even before we get to fully Vertical PDN, it gets measured not just by 50 watts, 60 watts, 70 watts worth of reduction in PDN loss. There is just about as much of a reduction in power loss within the silicon and better functionality of the silicon and lower noise from.

I understand, Patrizio that the benefits of lateral vertical and vertical only out in the future. I guess, what I'm trying to and I think a number of investors in the company and many on this call are trying to ask is, do we effectively need to wait for next generation 3 XP use before we see the significant ramp of lateral vertical or vertical only solutions. Can you ramp lateral vertical on existing 5 nanometer processors over the next year?

Yes. So as we said earlier in the call. We believe that there may well be ramp with the lateral solution because of certain benefits, even though the PDN is still handicap. We believe that before too long, there's going to be a ramp for lateral vertical alternatives that has got distinct advantages. And all of these are developments that are based on current silicon, have not contingent on the 3 nanometer knows that Phil made reference to in our most recent prior conference call. What he was pointed to there is, those developments making it practically speaking possible for lateral solution to (inaudible) 5G type of solution.

Having some feedback on the line, Quinn. Hopefully you got that.

I have ended up muted, because of the background noise. Hopefully, you can hear me again. My next question was last, last quarter you talked about some cancellations, this quarter I haven't heard you mention cancellations. Just wondering if you saw any meaningful cancellations, the backlog or whether you think the cancellation activity has largely subsided at this point.

Yes, we haven't seen cancellations, Quinn. Backlog looks very good.

Perfect. And then last one for me, just -- you mentioned the last key pieces of equipment, I think being delivered in May and qualify it in June and July. Does that get you to the full $1 billion run rate or is -- are those piece of equipment just bringing you to the sort of the full vertical integration capability, but to the extent you wanted to ramp to $500 million or $750 million or $1 billion you would need several additional lines of whatever equipment was delayed until late April or May.

So in April we took receipt of the equipment for vertical integration through plating of the copper, which is the critical process that we had outsourced. First step was half of the 18,000 panels per month around their capacity, we have the ability to install and we'll install the balance as we needed, but the plating operation and the vertical integration should position us for as Patrizio said about the $1 billion capacity. Do you have anything to add?

Okay. So it sounds like you've got half of the equipment.

I don't want to give the wrong impression. We've got the equipment lined up to do the plating operation, where we've installed just for as a matter of starting the process. Half of the total capacity, we can install. So the next tranche of capacity is very easy to put in, there is no problem at all expected with that. In May we'll do the pilot runs, June, July, we'll qualify all the equipment and we'll have essentially the capacity in place to generate the panel output that we need to get to that level. There will be one minor outsourced process that's very simple to accomplish that will not be a capacity bottleneck in the future.

Okay. Maybe let me see if I can clarify it with this question, it sounds like with the exception of this one small process that will remain outsourced you'll have vertical integration capacity to do about $500 million of revenue by the end of the third quarter.

More than that. To give you a little bit more color with respect to this, what Jim was referring to is one of the process is that vertically integrated are about to be vertically integrated. There is many processes in the ChiP fab that had been vertically integrated in which capacity can support the $1 billion revenue, in terms of barrels per week, barrels per month, barrels per year. Also what should be considered is that, depending on the mix between on the one hand, datacenter, AI, where the panels are very thin, they're going to be with 5G 1.6 millimeter thin. Our automotive chips, which are considerably thicker those are front-end products typically 7.4 millimeters thick, the capacity of these equipment scales in effect in inverse proportion to the thickness of the panel.

It's a little bit like in a wafer foundry capacity being function of the number of mass layers. So we have actually more capacity in terms of barrels per week for datacenter or AI applications, that we would have for front end high power automotive type of chips. But generally speaking, looking at the bulk of the capacity, we are going to be as of Q2 in a position to support the lion's share of $1 billion worth of revenues per year.

Thank you. We have no further questions in the queue.

Operator, I think this will be our last question as we're at the top of the hour.

I think she said that there are no more.

Okay, fine.

Yes. There were no more.

Thank you very much. We are ready to conclude the call then operator.

All right, thank you. Thank you, everyone. This marks the end of webinar. Thank you for joining, and have a nice day.