Vicor Corp (VICR) 2021 Q3 法說會逐字稿

Good day, everyone, and welcome to the Vicor Earnings Results for the Third Quarter ended September 30, 2021.

My name is Wanda, and I'm your event manager.

(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.

Please proceed.

Thank you, and good afternoon, and welcome to Vicor Corporation's earnings call for the third quarter ended September 30, 2021.

I'm Jim Schmidt, Chief Financial Officer; and I'm in Andover with Patrizio Vinciarelli, Chief Executive Officer; and Phil Davies, Vice President of Global Sales and Marketing.

After the markets closed today, we issued a press release summarizing our financial results for the 3 months ending September 30.

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 that this conference call is being recorded and is the copyrighted property of Vicor Corporation.

I'd 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 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 2020 Form 10-K, which we filed with the SEC on March 1, 2021.

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, Thursday, October 21, 2021.

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 today's call will be available beginning at midnight tonight through November 5, 2021.

The replay dial-in number is (888) 286-8010 followed by the passcode 33342563.

This dial in and passcode also are set forth in today's press release.

In addition, a webcast replay of today's call, along with a transcript, will be available shortly on the Investor Relations page of our website.

I'll now turn to a review of our Q3 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 change for P&L and balance sheet items and refer you to our press release or our upcoming Form 10-Q for year-over-year comparisons.

As stated in today's press release, Vicor recorded total revenue for the second quarter of $84.9 million, down 11% from the second quarter total of $95.4 million.

Revenues came in substantially below expectations because of semiconductor component shortages compounded by our own capacity constraints.

Component shortages were due to limited wafer allocation and long cycle time back-end semiconductor component packaging processes.

Advanced Products revenue rose 6% sequentially, while Brick Products revenue declined 23.7% from the second quarter.

Shipments to stocking distributors declined 36.6% sequentially, primarily due to a decline in brick products.

Exports for the second quarter decreased sequentially as a percentage of total revenue to approximately 62.4% of consolidated revenue from the prior quarter's 64.3%, primarily due to decreases in brick products.

For Q3, Advanced Products share of total revenue increased to 51.2% compared to 43% for the second quarter, with Brick Products share correspondingly decreasing to 48.8% of total revenue.

Turning to Q3 gross margin.

We recorded a consolidated gross profit of 50.4%.

Gross margin dollars declined by 14% sequentially due to the decline in volume but increased 28% from the same period a year ago.

Margins remain under the pressure of high tariff charges, though the Q3 charge was approximately the same as Q2's charge of approximately $1.9 million.

We expect to see improvement over time, in part reflecting our ongoing efforts to reduce component imports from China.

I'll now turn to Q3 operating expenses.

Total OpEx increased 3.3% from the second quarter driven by increased compensation, legal and consulting fees and recruitment expense.

The amounts of total equity-based compensation expense for Q3 included in cost of goods sold, SG&A and R&D were approximately $259,000, $1,033,000 and $575,000, respectively, totaling approximately $1.9 million.

For Q3, we recorded operating income of $12 million, representing an operating margin of 14.1%.

Turning to income taxes.

We recorded a net tax benefit for Q3 of $886,000, representing an effective tax rate for the quarter of minus 7%.

The net tax benefit for Q3 and year-to-date was primarily due to a result of the income tax accounting required for stock options exercised during this period.

Net income for Q3 totaled $13.3 million.

GAAP diluted earnings per share was $0.29 based on a fully diluted share count of 45,034,000 shares.

Before I turn to our financial position, just a brief update about COVID-19 and our workforce.

As previously discussed, as a designated essential manufacturer, using masks and practicing social distancing from the onset of the pandemic, we have continuously operated 3 shifts at our Andover manufacturing facility.

Cases in absenteeism due to COVID-19 are now negligible.

Nevertheless, because much of the potential influence of the COVID-19 pandemic is associated with risks outside of our control, we cannot estimate the extent of such influence on our financial or operational performance or when such influence might occur.

Turning to our cash flow and balance sheet, cash, cash equivalents and short-term investments totaled $228.9 million at the end of Q3.

Accounts receivable net of reserves totaled $51.1 million at quarter end, with DSOs for trade receivables basically steady at 40 days.

All balances are current.

Inventories net reserves increased 11% sequentially to $63.4 million.

Annualized turns decreased slightly to 2.91 from 3.12 for Q2.

Operating cash flow totaled $10.1 million for the quarter.

Capital expenditures for Q3 totaled $15.2 million.

We ended the quarter with a construction and progress balance of $36 million, leaving approximately $20 million of our capital budget scheduled to be spent through the year.

Our factory expansion is proceeding on schedule and on budget.

I'll now address bookings and backlog.

Q3 book-to-bill came in at 2.0, and 1-year backlog more than doubled from the same period last year.

Turning to our outlook for the fourth quarter of 2021, our practice continues to be to not provide specific quarterly targets.

However, given our assessment of available semiconductor components and of our capacity, we are planning on a 20% increase in revenue in Q4.

Availability of semiconductor components has improved since Q3 because of reduced cycle times and back-end processes and a substantial increase in our wafer allocation.

Easing supply chain bottlenecks and recent increases in our advanced products manufacturing capacity should enable a significant step-up in Advanced Products revenue.

We continue to focus on improvement in product-level profitability.

Further, we do not anticipate any meaningful increases in operating expenses.

While substantial further improvements in gross margin will have to await production from our new vertically integrated factory, we expect incremental revenue to drive earnings per share given the scalability of our operating model.

With that, Phil will provide an overview of recent market developments.

And then Patrizio, Phil and I will take your questions.

(Operator Instructions) Phil?

Thank you, Jim.

Good afternoon, everyone, and thank you for joining us.

In Q3, we achieved record bookings, a record book-to-bill and record backlog.

Bookings for AI and data center customers for factorized power solutions and 12-volt to 48-volt bridging bus converters were robust, and our visibility into production programs is longer than we have seen on previous projects.

Some of the next-generation programs will also run in parallel with existing programs, which is a new strategy for some of our data center customers.

Next-generation AI processor and data center CPU server programs in early stages of development and preproduction will provide $70 to $150 of Vicor content per board.

New clustered processor AI applications offer much higher dollar content for our proprietary vertical power delivery solutions whose IP protection and technical challenges set us further apart from our competitors.

Expanding our SAM within the large data center market is always an objective for our teams, and evaluation of our advanced AC to DC solutions have started at lead customers with derivative products in development that will target applications for both single phase and three-phase AC to DC across the high-performance computing, industrial and aerospace and defense markets.

We are also engaging with customers who are deploying ASICs for high-speed optical networking units, which have power delivery challenges due to major increases in core rail currents above 1,000 amps.

Our first major customer in this new market will be in production in Q3 2022.

As the data center industry shifts to 48-volt-based rack power delivery, the upcoming Open Compute forum will feature 48-volt power distribution and the need for a more robust ecosystem of high-density modular power solutions rather than low-density discrete approaches, all of which validates decisions we made to commit to this market before it emerged 10 years ago.

Our OEM licensing practice will facilitate an ecosystem of high-performance power system solutions for the AI and data center industry.

Anticipating power delivery challenges and trends and innovating to deliver solutions ahead of market needs is Vicor's track record.

This is playing out with additional growth in Q3 for our pipeline of automotive opportunities as electrification commitments grow within OEMs for additional models and a new electrified vehicle introduction dates solidify.

We are not only seeing more opportunities in pure EV but also in plug-in and mild hybrid platforms as well as the truck industry, broadening and diversifying our market and customer base.

With this backdrop of increasing growth opportunities, we have decided to restructure the front end of our business into market-based business units.

The 4 business units will be high-performance computing, automotive, aerospace and defense and broad markets.

This structure aligns with our 5 layers of growth strategy and brings a higher level of focus on a global scale to our target markets, customers and applications as well as increased responsibility in the team for funnel conversion, revenue streams and gross margin improvement.

Because of the high level of technology reuse and applicability of our innovations across markets, engineering and product development will remain centralized.

Patrizio, Jim, and I will now take your questions.

Thank you.

Okay.

Operator, we're ready for you to coordinate questions for us.

(Operator Instructions) We have two upcoming questions already.

The first one is coming from Jonathan Tanwanteng.

That's a really nice number you have on a sequential increase in Q4.

I was just wondering, how much of that is just catch-up from Q3?

And how much of that, I guess, is organic demand?

I guess, it's to the upside of maybe what you had been thinking when you had said 7% sequential increases over the next several quarters way back in Q1 or Q2.

So it's all about demand.

Our backlog as we entered the fourth quarter, without any allowance for turns business, would have us up by approximately 20%.

And you would expect that turns business would layer on top of that a substantial incremental amount.

So the demand is there.

We're still capacity constrained.

And there are still challenges with respect to, in particular, semiconductor components, as Jim articulated in his prepared remarks.

Those challenges have to do with both the back-end processing after completion of wafer fab and have had to do with the wafer allocation.

So what has improved considerably since Q3 is that the back-end bottlenecks, which were in part related in some parts of the world to COVID and other factors, those have been largely relieved.

So the components that did not show up in time because of back-end bottlenecks in Q3 have shown up or about to show up in time for our builds in Q4.

And furthermore, we have recently been able to received commitments with some more foundries that result in a considerably greater allocation both within Q4 and more significantly into 2022.

So we believe that in terms of the component gates that, in effect, aid the launch within the third quarter in terms of compounding capacity constraints -- as we all know, we're already there -- we made a great deal of progress.

The capacity constraints are still there.

But being able to start builds on scheduled dates and not having to be as much hand-to-mouth with respect to availability of components will facilitate a substantial capacity increase this quarter.

Got it.

And then second, I saw in the press release that it was mentioned that you signed a license with some of your customers or at least one of your customers who was buying these infringing products.

Can you talk a little bit more about that?

Does that set the tone for the other customers out there that are doing this?

And what kind of benefits do you expect to see from this?

So we're not at liberty to say anything regarding the identity of the licensee or any of the key parameters of the licensing deal that we executed in the third quarter.

I think in general terms, I can tell you that it points to the beginning of new kinds of relationships on the licensing front.

The industry -- as we all know, as growth needs and technology needs are very compelling, needless to say, particularly at the time of capacity constraints, there is a legitimate interest on the part of customers to be able to secure their requirements.

And we said that our enabling technology has only been available from Vicor.

That's something that customers would like to, in various ways, be able to overcome.

So the OEM license, it provides customers with the ability to, without concerns with respect to obviously exclusion orders to the importation of OEM products into the U.S., procure modules, incorporate those modules into systems, even though those modules would otherwise infringe Vicor patents.

So we believe there's going to be more licensees.

And we view this as a complementary component of our business model to contribute to margins profitability while providing the industry with the ecosystem that many key customers seek to have.

The next question is coming from Quinn Bolton.

Congratulations on the nice bookings activity.

Before I get to my bookings question, I just wanted to come back to your outlook for the fourth quarter.

Obviously, component availability and your manufacturing capacity are significant constraints.

And I'm just curious, do you guys feel confident that where you sit today, you have enough component availability and internal manufacturing capacity to grow the business 20% quarter-on-quarter?

We do.

But I want to be clear that this is not a slam dunk, to put it figuratively, in that we're at the beginning of the quarter and a lot has to happen.

It's not that we have, as of today, all the semiconductor components we need in order to make the revenue plan for the quarter.

They are on their way, and they'd be underway through the first 2/3 of the quarter.

So there are still risks out there.

But we feel that improvements have been made with respect to the back end which, in effect, made available the components that were destined to us in the third quarter but couldn't be processed in time.

That, coupled with, as I mentioned earlier, the ability to achieve greater utilization of constrained capacity by not being gated by the inability to start because of lack of material components.

That sets us off to a much faster start early in the quarter, and it bodes well with respect to the outcome of the quarter as a whole.

My second question is just on orders.

Obviously, I think most of us on the line that are following the company have been very impressed with the acceleration in the bookings number.

And I think most of that is being driven by Advanced Product bookings where I think Advanced Product bookings last quarter was probably over $90 million.

This quarter, it looks like you booked over $100 million, maybe as much as $120 million, in Advanced Products bookings.

My question is how broad-based is that Advanced Products booking activity over the past couple of quarters?

Is it highly concentrated among just a couple of GPU, TPU, ASIC accelerator customers?

Or are you starting to see very good diversification, including front end or AC to DC, including the NBM modules?

Can you just give us some color on how broad-based that bookings activity is?

Quinn, this is Phil.

So as we've been talking over, I think, the last 18 months, the customer base for our Advanced Products and data center and AI has been broadening quite a bit from 1 or 2 companies, major companies, a couple of years ago to now well over 12, 15 type quantity of customers, which are adding to the backlog and the bookings number.

In terms of the activity there, 48 to 12 as well as the bridging 12 to 48 and 48 to 12 on some of the CPU server boards, it's very strong.

And we're entering the phase of continued AI growth with our existing customer base.

But also with the new Intel and AMD CPU platforms coming on in data centers where some of the hyperscalers have gone 48 volts, we're seeing strength there.

And also, coupled with the AI accelerator growth, which are 48-volt-based, we've seen growth now, significant growth, in our 12- to 48-volt bridging converter business because hyperscalers that are still at 12 volts in their infrastructure need the 12 to 48 to use the latest and greatest accelerator cards and multiple cluster AI accelerator cards.

So it's a very broad spread.

Phil, just a quick follow-up, is it pretty well balanced between the types of MCM or MCD components versus the NBM bridging products?

Or does it skew more heavily to the sort of point of load MCM, MCD components today still?

I think the 48 to load is the largest piece of it.

But the NBMs are doing really well in the 12 to 48 space.

One of the reasons being is that typically in those applications, you've got 6 to 8 NBMs per power board.

So the quantities add up pretty quickly, and the bookings add up pretty quickly.

Just a bit more on that.

The NBM market opportunity next year is quite substantial.

So looking at it from the timing perspective, it hasn't been all that significant, but it promises to be.

In fact, it has been, with recent orders, just within the last couple of days, a $4 million order for NBM, a quite significant as we enter in the first half of next year and the middle of next year.

The next question is coming from Richard Shannon.

I might follow up on the topic of licensing.

Patrizio, while I understand you're not allowed to say much about this, maybe I'll ask a couple of questions to see if you could push the envelope here.

Can you talk about any particular applications that the said licensee is working in?

And then also in terms of the nature of the agreement, whether there's upfront and ongoing royalties or just upfront, just kind of any nature of understanding there would be great, please.

So again, I need to keep it at a very general level that would not, in any way, infringe on the confidentiality constraints we have with the licensee and future licensees.

The license structure is fundamentally a pay-as-you-go, and the mechanism involves the placement of the license deals based on the licensee's choice to get a license for particular products to be used in particular systems.

And it's incumbent on the licensee to decide therefore which product, what type of product may otherwise infringe Vicor patents to get a license.

And so as mentioned in the press release, not only did we get a license executed within the quarter.

From that licensee, we have received license deals and in fact, revenue, even though those POs will result in cash flow starting this quarter.

So I think a representative example of licensing opportunities to come.

We have a well thought-out methodology for this, potential licensees.

[And they might take time] decide whether or not they want a pure license.

They can have a wait-and-see attitude with respect to that.

But there's a serious risk of a potential exclusion order that could affect their systems, which are quite valuable.

And that should motivate them to seek a license earlier than later, mostly because the royalty terms escalate with time.

So to the extent that there is passage of time that brings about a transition from what we call Phase 0 to Phase 1 to Phase 2. With that comes an escalation in the royalty rate.

So we believe that having accomplished the first license fee, there's going to be more.

And we're aware of a number of OEMs that we believe will need a license if they want to continue to access the kinds of products they need for their systems.

Okay.

My second question is on gross margins, not only for the fourth quarter but, I guess, looking at it in the next few quarters here as well.

Jim, I think if I heard you correctly in your prepared remarks, you seem to be suggesting kind of a flattening of gross margins here in the fourth quarter.

And until we see some throughput in sales from products in the new facility, it wouldn't go up until then.

So I want to make sure I'm understanding the dynamics here that you were suggesting in your comments and how we should look at gross margins in the next few quarters.

Sure.

So first of all, I do have to say that it's our practice to not provide any specific guidance on gross margin in out-quarters.

I didn't mean to imply by that statement about waiting until the new factory is online that we have to wait for gross margin improvement per se.

We have volume.

Volume increases drive gross margin leverage.

That's a fact in the industry.

It's not something -- that's actually not just true for Vicor, it's true for anybody.

So we're not, I didn't -- that comment is actually a comment that I made last quarter as well.

It's just a standard comment we want to make that highlights the fact that we're all very anxious to get our own factory online.

And as that comes online, we get all kinds of efficiencies, there's no outsourcing of some of the process steps.

We get more leverage as the volume goes up, greater efficiency inside the factory.

So that's really going to be a significant milestone for us.

I'll add to that.

Looking at it in terms of the past, the rearview mirror, I think I'm not saying anything that wouldn't expect it, but it bears saying in Q3, the margins, the gross margins and the profit margins, would have been substantially higher were it not for the fact that we had the shortfall in revenue that caused us several points of margin within Q3, right?

That's a fact, an unfortunate fact.

To Jim's point, rising revenues immediately will bring about better margins, even before we have the full leverage of the new facility.

The next question is coming from [John Dillon].

Congratulations guys on the bookings and the backlog, really great numbers.

Phil, I do have a question on the bookings number.

I'm just wondering if the increase in bookings was due to customers securing a place in line or a customer is priming the pump?

Are those bookings numbers sustainable?

So the programs that we're involved in now, [John], and the visibility we have, we're seeing increased demand for the AI accelerator cards across the data centers.

The deployment of those cards is significantly increasing with all the hyperscalers on a global level.

So that's a very strong, robust business.

And as I mentioned, along with that increase, a lot of the rack systems are still 12-volt based.

So they need the 12 to 48 to power those cards.

And so we're getting sort of a double whammy, if you like, by having the best high-density bus converter in the industry available today.

So we're winning on both ends as it were with both the hyperscalers, deploying the AI and also with the guys actually with the AI cards.

So it's strong right now.

So I think what I'm hearing is the bookings are sustainable and even growing.

You see that in the future.

The Advanced Products, yes.

Absolutely, yes.

And then along with that then I would imagine you have pretty good pricing power.

Are you guys raising prices?

Well, we're always looking to price on value, right?

That's what we do.

We look at the value that we bring to our end customers.

And we do that with the whole portfolio.

It isn't just on Advanced Products, but even on our brick or legacy business, we adjust prices regularly.

And again, we do that on a case-by-case basis, our product family or market or customer.

But we really do try to price on value.

Got you.

And then a follow-up would be, you mentioned the 12 to 48 volts.

So I'm just kind of scratching my head, why would customers want to do that?

Why don't customers -- why are they going from high voltage down to 12-voltage back up to 48?

Patrizio, you kind of mentioned this in the last call.

But I mean, aren't you going to see a huge conversion to all 48-volt racks?

Or do you see that coming?

Well, an event is coming, but it doesn't happen overnight, right?

So fundamentally, key developments, turning points in the industry being about adoption.

But that adoption requires time to get implemented.

And needless to say the absurdity, to your point, of going all the way down to 12 to go back half to 48 to go down to 1.8 volt or sub-1 volt as the case may be, that will provide even greater motivation for the balance of the hyperscalers to convert to 48-volt racks.

And there's plenty of motivation not just coming from the absurdity of unnecessary stages of conversion to voltages that are too low for efficient power distribution back up to voltages that are necessary in order to achieve what needs to be done downstream within the rack.

Yes, [John], this is Phil.

I mean data centers are going to go through major changes over the next 3 to 7 years.

If you just look at the amount of AI that's being added, they're just not equipped to get the data in and out at the speeds that they want.

So there's huge networking changes that are going to come in terms of moving from gigabytes to terabytes of moving data in and out to support autonomous driving and other machine learning applications.

So the data center footprints that have all of the renewables to power them, because you're talking tens of megawatts for these things, you can't move a data center to a different location.

You've got to refurbish it.

You've got a take it to the next level of capacity and capability.

So all of this stuff is going to change, including 48 volts in the rack, more AI, higher-performance optical networking.

It's really going to go through a significant change over the next 3 to 7 years.

It's going to be quite amazing to watch.

By the way, another element of the engineering of the racks beyond the electrical part of it has to do with switching over from 12-volt distribution to 48-volt distribution.

It has to do with thermal management.

So the power levels within the rack that justify or motivate transition to the most efficient power distribution voltage, the 48-volt, which is, in reality, 54-volt, they're still safe.

That motivation, it brings about also thermal management challenges that before too long will have -- a number of these racks would be cooled by liquid cooling as opposed to air.

And in that regard, we should point out that within the third quarter, recently, we have delivered the first units of a very high-density liquid-cooled front end to a lead customer for that particular capability.

And this solution again, liquid-cooled, 3-phased in 52, 54 volts out is, in order to magnitude, more dense than anything else out there.

Guys, this is really exciting.

Great quarter.

Great visibility.

Thanks, [John].

The next question is coming from Gus Richard.

I just wanted to circle back on your constraints.

Is the plating capacity still a constraint?

And do you need the new facility to come up to relieve that?

To your point, that's a key capacity [they'll unlock].

We're working it in a number of ways.

So we are complementing the capability of our plating partner to a high degree, deploying our own human resources within their facility to enhance the available capacity.

We have also recently taken steps to bring about another partner.

It's actually closer to Vicor manufacturing facilities.

And in a matter of a couple of weeks, we expect to turn that second partner on for further step-up in capacity.

And these are stepping stones to the deployment of very high volume state-of-the-art plating capability within our own facility.

And by the way, one thing, so plating is something to think of as something that is relatively low tech.

That's far from being the case here, right?

What we're referring to is about $25 million worth of equipment on 40,000 square feet, which will be state-of-the-art for this class of products.

Got it.

That's very helpful.

And then on the gross margin pressure, it sounds like it was primarily absorption.

But I was wondering if there was any influence from higher input costs and/or mix?

No real pressure from mix.

You know what, it turns out that our brick business is actually fairly decent gross margin.

And higher input costs, what we've done there, generally speaking, even before I arrived at Vicor, we were not accepting inflation costs in our raw materials without passing those costs on, in many cases, to our -- so we're not absorbing that.

I hope that answers your question.

It does.

And then the last one for me is just looking at the backlog and given the supply constraints in the world, are you seeing any aging of that backlog?

Is some of that moving?

Is some of it scheduled further out than normal?

Or has the distribution backlog remained the same over the last few quarters?

So we have obviously implemented longer lead times, so we have a lot more visibility.

So it ranges from 20 weeks out to 30 weeks for different types of product families.

But the backlog is -- I get asked if people are double-ordering and all that, we don't see that.

It's real demand.

We have a very unique product.

It's not a commodity product.

There's not a pin-for-pin compatible type of a market for our stuff.

So we have very dedicated unique customers that buy our stuff.

They have done for many years on the legacy side.

On the Advanced Products side, we're building a whole new business there in data center and AI.

So we have good visibility into that, in the end market demand and the growth there.

So I'm very confident in the backlog that we have in terms of the validity of it and the reality of it.

To be clear, it's within 12 months, right?

Everything is scheduled within 12 months.

So that's what we define to be the backlog.

We have another question from Jonathan Tanwanteng.

Just another question on the capacity and the constraints that you have.

I get that you're putting a lot of good plating capacity into place this quarter and especially the new facility next quarter -- in Q1.

I was just wondering how confident you are in increasing your wafer allocations and the other components in the chain that you need as we get into the first half of next year because I know, in many other places, these things are getting worse, not better.

So I was just wondering what's your visibility to the things that you can't control at the end of the next year.

So we have visibility, and we've been allocated a significant step-up in wafer outs in November and even more so in December.

The numbers for next year are not cast in concrete yet, but we have been informed that we're going to get the numbers that we need.

As you can imagine, we do have quite a bit of leverage with respect to getting wafer capacity because of the critical programs that our chips support.

And that's obviously a factor at play with respect to getting access to what's necessary for us to be able to make the products that make AI and data center systems operate.

Got it.

That's helpful.

And I was wondering if you could give us an update just on the auto business.

How many platforms do you have at this point?

Are there more coming into the pipeline?

Just give us an update on, I guess, when do you think that will become significant for you as a source of profit and revenue?

So again, we're starting production at the end of '23 or mid-'23 with some early customers there.

But we have more collaborations.

That's what I was talking about in my remarks.

We've got more collaborations that occurred in Q3.

Those collaborations typically take 6 to 9 months to work through in terms of building prototype systems and testing them.

And then we're now moving the customer really to a stage where we call the conversion stage, right, which is where we moved to a commitment for a start-of-production date.

So that's what we're always shooting for.

At this point in time, we have 2 large OEMs with start-of-production dates, and we have a whole host of collaborations that are moving towards SOP dates in the next 6 to 9 months.

So it's a very exciting funnel we have in automotive.

And we have a question from Alan Hicks.

You've invested over $0.5 billion on these new projects.

Now it looks like you're going to be solidly profitable as far as I can see.

Where are you at in terms of tax loss carryforwards?

And when do you expect to get back to a normal tax rate?

So Alan, Jim Schmidt here.

So at this point, we're not going to comment on next year.

I'll tell you that the current year is status quo.

So we expect the tax rate -- I know it's toggling between 4% or minus 7%.

We have a tax benefit oftentimes because of stock option exercising that's going on.

We're not going to comment at this time on next year, but stay tuned.

Next call, I think we'll be more in a position to talk about that going forward.

But that's what we're prepared to say now.

Okay.

Where are you at in terms of your tax loss carryforwards?

I think it was in the $30 million range.

I think that's right, yes.

And that's still on the books.

It's a fairly complicated topic.

We're working with our product managers on that.

And we're ready to say status quo for the balance of the year.

After that, we'll talk again in January.

Okay.

But I would anticipate that you'd probably use that up next year, I would think, if you're going to make at least $30 million of profits next year?

It's more complicated than that.

I have people on my shift running the numbers routinely.

And there are stock option exercises that are tax benefits and other pieces of the puzzle in there.

Okay.

And then also there was talk a few quarters ago about getting some of the tariffs that were paid, calling them back.

I think they were, if I remember, 6 months ago, in the $4 million range, I think, and have been growing since?

Well, what we said in my prepared remarks is we said the tariff expense in the P&L and cost of sales were $1.9 million, which is approximately what it was last quarter.

We are making progress on reducing tariff expense.

It's actually a significant amount of time people are spending on that activity right now.

And we did make progress.

It's incremental.

Sometimes it's a bit slow in coming because we're talking about callback from Uncle Sam.

But we're making progress on it.

Okay.

So you still expect to get that money back?

That's the question.

Exactly.

It's not a matter of if, it's a matter of when.

It's a matter of when, yes.

And we have another question from [John Dillon].

Patrizio, you said that you've got some front-end products, I think, you delivered this quarter.

But I'm wondering if you could give some more color on all the front-end products.

Are you guys actually actively booking orders for that?

How is it going?

Are they going into the same markets?

Phil, maybe you can give us a little color on that how you're doing.

So as of now, we have 2 major programs that share a common denominator, 3-phased input, high-power 48-, 52-volt, 54-volt outputs.

These programs are representative of general market needs that we are getting up to address.

The lead customers provided us with an opportunity to do what was necessary to, as suggested earlier, deliver state-of-the-art solutions.

So in one case, it's natural convection cooled.

It's is a solution that doesn't require either a fan or liquid cooling, which is in effect that one extreme.

In the other case, as I was suggesting earlier, it's an extremely high-density solution, which is liquid cooled, and plugs into a rack system delivering 20 kilowatts in a footprint that is about the size of an iPad.

So just imagine a very thick and very heavy iPad, but in the X-Y footprint, 20 kilowatts going from 3-phased AC to 50 to 54 volts.

So that's the kind of solutions the hyperscalers are going to need in years to come in order to get their racks from the low-10s of kilowatts to the much higher power levels that, as suggested by Phil earlier, they're going to need in order to get much greater bandwidth within the footprint of their existing facilities.

[John], this is Phil.

We haven't really stepped on the gas yet with that product.

We've obviously got some early customers.

We're working on some derivatives.

As I mentioned, single-phased and 3-phased.

But I think it will be Q2 probably next year before we really put our foot on the gas and start moving with that stuff.

So Q2, you'll really start the bookings aspect.

Yes.

You'll see a lot of marketing from us, a lot of activity in the customer base worldwide.

We're really going to put our foot in the gas with this stuff because it's very special.

Yes, it's very exciting.

So along those lines, until you talked about the bookings numbers, and you see it increasing, if I do my math right, you guys are going to be filling up that new factory very quickly.

So you must be looking at a new factory.

So I'm just wondering what are your plans for a new factory?

And what's the timing of that new factory?

So Jim and I were together with Mike, our Head of Operations, visiting one such candidate just within the last 10 days.

But frankly, I feel that it's still premature to take that step.

I believe that we have quite a bit of capacity within the expanded factory.

I've had 2 tours of the expanded factory within the last 10 days.

I've been very impressed with what the team has done in terms of laying the foundation for the expansion.

And by the way, it wasn't mentioned earlier, but it should be mentioned.

Within the third quarter, a lot of equipment got relocated within the existing walls of the factory.

And in fact, within the first week of the third quarter, we had no throughput because we actually took the whole factory down to make new facilities for electric power delivery.

So there's a lot of work that's been going on within that factory to set the stage for a level of capacity that I think may well exceed the goals that the team has set and we've reported.

So with that, I think we got a little bit of time to take the right step for the next incremental capacity.

I think it's critically important that over the next 6 months, our focus will be strictly on realizing the major capacity expansion is about to come online, starting with a contribution to capacity in the first quarter and then a bigger contribution to capacity in Q2.

I think once that has happened, then we can take the next step.

Great.

So it sounds like you're going to beat your goal of $750 million.

And with the new wing, it sounds like you're -- it looks like you can beat that number.

I think we can.

I think that this factory will be very efficient, and it's got more capacity potential that we have targeted.

Some of that has to do with the mix of the products.

So case in point, our budget in terms of capacity was predicated on some of the early chips that are relatively thick, that they take more time to process than thinner chips and a lot of the design wins going forward are going to be for thinner chips.

And those thinner panels, you can think of them, in some respects, as wafers with fewer layers that can process faster.

So I think we have a variety of degrees of freedom at play to improve efficiency, improve capacity.

And being focused on that at this point in time is more important than securing the next incremental brick-and-mortar.

Very good.

Very good.

I love it.

I'm looking forward to it.

It's really exciting times.

Great job, guys.

Thanks, [John].

And I think we're going to have to close out now.

So operator, we're going to have to close the call.

And thanks, everyone, for participating.

Thank you very much, everyone.

That concludes your conference call for today.

You may now disconnect.

Thank you for joining, and enjoy the rest of your day.