Vicor Corp (VICR) 2021 Q2 法說會逐字稿

Good day, and welcome, everyone, to the Vicor Earnings Results for the Second Quarter Ended June 30, 2021 Call, hosted by James Schmidt, Chief Financial Officer. My name is Lilian. I am your event manager. (Operator Instructions) I would like to advise all parties that this call is being recorded for replay purposes.

And now I would like to hand it over to James Schmidt. Please take it away, sir.

Thank you. Good afternoon, and welcome to Vicor Corporation's Earnings Call for the Second Quarter Ended June 30, 2021. I'm Jim Schmidt, Chief Financial Officer; and I am 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 finance results for the 3 months ending June 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 this conference call is being recorded and is the copyrighted property of Vicor Corporation.

I also remind you various remarks we make during this call may constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Except for historical information contained in this call, the matters discussed on this call, including any statements regarding current and planned products, current and potential customers, potential market opportunities, expected events and announcements and our capacity expansion as well as management's expectations for sales growth, spending and profitability are forward-looking statements involving 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, July 22, 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 August 6, 2021. The replay dial-in number is 888-286-8010, followed by the passcode 18601464. 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 Q2 financial performance, after which Phil will review recent market developments and Patrizio and Phil 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 for 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 $95.4 million, up 7.4% from the first quarter total of $88.8 million. Quarterly, Advanced Products revenue rose 19.7% sequentially. Product shipment growth continued to be constrained by limited component availability due to global semiconductor supply allocation issues experienced during the quarter. Brick Products revenue was basically unchanged from the first quarter. Shipments to stocking distributors rose 43% sequentially, primarily due to an increase in Brick Products shipments. Exports for the second quarter decreased sequentially as a percentage of total revenue to approximately 64% of consolidated revenue from the prior quarter's 69%, primarily due to decreases in Brick Products.

For Q2, Advanced Products' share of total revenue increased to 43% compared to 39% for the first quarter, with Brick Products' share correspondingly decreasing to 57% of total revenue. We believe Advanced Products sales will expand significantly as a percentage of total revenues especially once new manufacturing capacity comes online given the high-growth segments we have penetrated with our 48-volt technology, including AI, data center and automotive, in contrast to the maturity of the segments we serve with Brick Products.

Turning to Q2 gross margin. We recorded a consolidated gross profit margin of 52.3%. Higher volumes and improved mix contributed to higher profitability, as did a reduction in cost variances and process yield improvements. Gross margin dollars rose 11.6% sequentially. Margins remain under the pressure of high tariff charges as the Q2 charge increased approximately 36% from Q1's charge of approximately $1.4 million, primarily due to an increase in receipts of inventories subject to tariffs. Despite the increase, we expect to see improvement through 2021, in part reflecting our ongoing efforts to reduce component imports from China.

I'll now turn to Q2 operating expenses. Total OpEx was essentially even with the first quarter. The amounts of total equity-based compensation expense for Q2, included in cost of goods, SG&A and R&D, were approximately $252,000 and $780,000 and $536,000, respectively, totaling $1.6 million. For Q2, we recorded operating income of $20 million, representing an operating margin of 21%. The sequential 36% increase in operating income reflects the operational leverage in our model.

Turning to income taxes. We recorded a net provision for Q2 of $999,000, representing an effective tax rate for the quarter of 4.9%. Net income attributable to Vicor for Q2 totaled $19.4 million. GAAP diluted earnings per share was $0.43 based on a fully diluted share count of 44,841,000 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 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 $230.2 million in Q2, a sequential increase of 3.2%. Accounts receivable, net of reserves, totaled $55 million at quarter end, an increase of 15.3% over Q1, with DSOs for trade receivables basically steady at 39 days. All balances are current. Inventories, net of reserves, increased 5.3% sequentially to $57.1 million. Annualized turns remained essentially the same at 3.12.

Reflecting the positive operating results, operating cash flow totaled $12.3 million for the quarter. Capital expenditures for Q2 totaled $15 million. We ended the quarter with a construction in progress balance of $28 million, leaving approximately $28 million of our capital budget scheduled to be spent through the year. Our factory expansion project is proceeding on schedule and on budget.

I'll now address bookings and backlog. Bookings momentum continued in Q2 with book-to-bill well above 1 and with 1-year backlog increasing sequentially from Q1.

Turning to our outlook for the third quarter of 2021. We expect increased revenue growth in Advanced Products, offset by an anticipated decline in Brick Products revenue. We continue to address the sources of gross margin pressure and are forecasting 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 and Phil will take your questions. (Operator Instructions) Phil?

Thank you, Jim. Good afternoon, and thank you for joining us. First, I'll address our data center business, which showed continued momentum in Q2 with next-generation design wins for both point-of-load factorized power solutions and 48- to 12- and 12- to 48-volt bridging applications for both low-power CPU servers and AI accelerator installations into legacy 12-volt rack-based servers at North American hyperscalers. We also made excellent progress in our new AC-to-DC front-end product development initiatives, and we'll be delivering preproduction units as planned in Q3 to lead customers.

Automotive OEM collaborations continue to advance with OEMs adding additional vehicle platforms as a result of successful testing of our power modules and as their electrification strategies become firmer with larger R&D commitments. As our power density capabilities become more visible to new divisions and with higher management levels within OEMs with which we are collaborating, we are seeing increased opportunities due to the realization of the major advantages that our high-density power modules bring to an electrified vehicle power system. In Q2, we added 2 new collaboration projects with OEMs in Japan and Korea, and we initiated 2 new onboard charging projects in collaboration with a Tier 1 partner. We are on track to ship our first fully automotive qualified modules in Q4 of this year, and we continue to add to our operations quality, reliability and front-end teams with resources that have significant automotive experience.

At our Annual Shareholders Meeting a few weeks ago, I discussed the progress and next steps of our 5 layers of growth strategy, which has seen our market share and new customer acquisition accelerated in the past 4 years. While our 3 -- while our Layer 3 high-growth markets of data center, AI and automotive with a combined SAM of over $20 billion by 2026 are currently dominating our growth and conversations with shareholders, we are focused on building a broad markets business that builds on our legacy product revenues. The opportunities in the broad markets with emerging applications are significant with $1 billion SAM for Advanced Products in 2026 and justify increased focus and attention as customers in emerging growth markets challenged with higher power requirements look for smaller, lower weight and higher performance power delivery solutions. We will be updating our progress in the broad markets in upcoming calls.

With that, Patrizio, Jim and I will now take your questions. Thank you.

Okay. Operator, we're ready for questions.

(Operator Instructions) And as I can see, we have already received a couple of questions. Would you like to receive them?

Yes.

Great. And the first one is coming from the line of Hamed Khorsand.

Just a question here. Why the lack of disclosure this time around compared to your prior research -- earnings releases? You're not providing bookings numbers anymore or backlog number anymore. You're not being specific in guidance anymore. Why the change in commentary?

On the bookings front, what we decided is there's a lot of dynamics in the bookings number on a 3-month basis. And our feeling is that directional indications around book-to-bill are appropriate to help the analysts and the investor community understand the business. It's just -- it's a function of lead time and backlog and churn. So we feel like it's dynamic. And we're going with a relative comparison to book-to-bill of 1, which is actually more than many other companies provide.

And the guidance, why did you decide to go more qualitative than quantitative?

Well, I think what we wanted to point out is that there's accelerating revenue growth in the Advanced Products, as we've been talking about for some time. And we are going to see a sequential decline in the bricks business.

And our next question is coming from the line of Quinn Bolton.

Nice job on the results and particularly on the gross margins. I just wanted to follow up on Hamed's question. If I look at the guidance, you're talking about accelerating growth in Advanced Products, which I think, if I've got my numbers right, should say Advanced Products grew north of 20% sequentially in the third quarter, but you talked about a decline in bricks. Can you give us some sense? Will overall revenue still increase quarter-on-quarter driven by the accelerating growth in AP? Or do you expect a fairly substantial decline in Brick Products?

I think that -- we're not giving specific guidance on quarter-to-quarter sequential change in revenue. I think our mission at this point is to ship Advanced Products, accelerate the growth there. I'd say directionally, you're not far off, Quinn, relative to the quarter-to-quarter change in Advanced Products. And we have to clear the backlog, get the component supply, ramp that business way up. So the success is materializing there. And we're dealing with a decline in Brick, which is not surprising given the strength of that business over the last year. I think net-net -- we're not going to give specific guidance on revenue growth but the momentum is there in the Advanced Products.

Understood. And I guess maybe a follow-up. I think it was at the shareholder meeting in late June. You mentioned that Advanced Products could exceed, on a dollar basis, the Brick Products in the third quarter. Do you still think that that's how it's going to shake out for Q3?

Could well be.

And our next question is coming from the line of Jon Tanwanteng.

Great quarter, guys. Just wanted to clarify again with the other 2 callers. Last quarter, you had said that you were probably going to do a 7% sequential revenue growth as you looked out quarters through the end of the year, mostly driven by capacity limitations. Has anything changed from that? Is the outlook that you gave, the qualitative outlook, consistent with that quantitative outlook you gave a quarter ago?

Nothing has changed. So this quarter, the quarter that recently ended, we were able to achieve slightly better than the 7% limitation that we had articulated earlier in the year. I mean that limitation is still there. That's the upper end of its sequential growth as to its magnitude. I mean to Jim's point, it's a very dynamic situation. We have -- just to put it in a different perspective, we are booked solid for this quarter and next quarter.

So it's not lack of demand. The bookings were far above the levels one might expect. The challenge in -- the book-to-bill accordingly was substantially above 1%. The challenge is not demand. The challenge in the short term is the change in mix in an environment where component availability, particularly semiconductor component availability, is an issue. So we need to navigate through that. We are articulated early in the year in terms of sequential growth limitations still in place. We're striving to come close to that limit, given again capacity constraints without vertical integration and component availability considerations. And we'll have to wait to see what we'll actually do.

Got it. Thanks, Patrizio. And my second question, I think last quarter, you had talked about 55% gross margins as your target exiting the year. Has that changed given the change in mix and, I guess, component availability and all the other issues that we're seeing in supply chain?

No. There's no change. Again, there is a goal that we're driving to internally, just like the sequential increases in revenue. Their goals are challenging given a variety of considerations that have been touched upon in the last few minutes. But that has been and remains our goal. And beyond the end of the year, as we get to start utilizing our capacity for the packaging process fabs for Advanced Products, we have plenty of opportunity to go well beyond the 55% level. So I think we are on track with respect to progress in that direction. I think having -- within the last couple of quarters, we've been doing a little better than expected, and that remains our goal.

And the next one is coming from the line of [John Dillon].

Congratulations. Good quarter. I've got a question and then a follow-up. Phil, in the last conference call in response to a question from Quinn, you mentioned the next-generation product technology. I'm just wondering if you can elaborate on that a little bit.

Sorry. [John], the next product generation technology, in sort of what area? That's -- we've -- there's a lot going on.

I was -- I think it was in automotive, but I'm not sure.

Yes. That's -- as I said, there's a lot of new products, next-generation product technology under development. I think in terms of data center, it's vertical power delivery. In automotive, we've got a lot of innovation and product development going on there in the charging area, bridging area and 48-volt conversion areas. AC-DC is a big initiative for us, of course. We're expanding our SAM in the markets for both data center and in some of the industrial segments that we're targeting now in the broad markets. So there's a lot really going on, [John], and it's quite exciting to be in the middle of it.

And if we look under the hood, so to speak, under the hood of the power modules, we are converging on our next-generation control silicon that advances the level of integration, the cost-effectiveness, the dynamic performance, the frequency capability, the scalability of all the power modules, addressing the variety of markets that Phil just pointed to. So that's also exciting. It's not just development of next-generation modules. It's also development of the core silicon control systems. In packaging technology, further advances in packaging technology with advances in material science, they're quite relevant to power components that will enable a further step-up in the key attributes of our products, density, efficiency, speed, low noise and, last but not least, cost-effectiveness.

Great. Thanks, Patrizio. I think that's what I was looking for because, yes, I think it was -- had to do with size and everything. And I'm just wondering, in regard to that, are you accelerating away from your competition? Are you still moving away from your competition with these advancements?

So frankly, when it comes to competing our performance and technology, we look ahead. We don't look in the rearview mirror at competition that tends to be packed in an old predicament of 2-stage power conversion with limited opportunity. It's something that's been refined to the hilt, not to say that further refinements are impossible. But from our perspective, it's pretty much a dead-end road when it comes to what we see as the future of our system technology.

You mean the competition is at a dead-end road. Is that what you mean?

The competition is obviously into what I regard as a dead-end.

And our next one is coming from the line of Alan Hicks.

Congratulations on the quarter, especially the gross margins. I think those are the highest since around 1996. So my question is -- so on the BBU unit, I know you've been saying it's going to flatten and decline eventually. How fast can we expect that -- it's a big part of your revenue still. What kind of decline do you expect over time? And I know you've got some good end markets, like semiconductor equipment. I would think you'd want to keep those updated projects for those markets.

Yes. This is Phil. So in terms of -- as you said, the BBU or the brick revenue -- the brick revenue and the brick bookings are very cyclical. They're sort of very macroeconomic-based. And they go up and down with time and with quarters and so forth. And recently, because of lead time extensions and supply constraints and tariffs and the whole trade thing with China that's been going on, that brick bookings and revenue just has been moving up and down. But to your point, it's still relatively steady when you average it out over 2 years, 3 years or 4 years. It -- the line sort of flattens as it were.

So it's still in good shape. As I mentioned on the Annual Shareholders Meeting, it's still an important business to us although declining in terms of its share -- overall share of our revenue. But we are working with those customers to convert them to our new Advanced Products, and that is actually going really well and has been doing well for a couple of years now. So that legacy customer base is still important to us, and we want to convert them over to new technologies and also build new customers on top of that with a bigger focus on the broad markets, which is what I talked about earlier.

Yes. That's actually what I was wondering, if you were going to convert those to new more advanced technology. And would that then fall into Advanced Products? Or would it still fall under BBU?

Yes. It's Advanced Products. We call those products DCMs, DC-DC converters. They're ChiP products. They're not the plated products that you see in the sort of data center AI space. They're the molded package, the black molded package. And that's been going really well. It's just that the classic industrial markets and the legacy customers, they take a while to move to the new technology. The gestation periods are quite long. But the same story applies. Once you're in, you're in for a long, long time with those customers. And I'm pleased with the progress that we're making in conversion in Layer 1, as we call Layer 1 legacy customers.

Okay. So would you say you're actually increasing your penetration with existing customers with new Advanced Products and BBU -- to BBU?

Yes. Because in several market segments within the legacy customer base, those markets have been expanded. For example, high-performance rail, for example, right, I mean you're starting to see high-speed trains, electrification of all sorts of systems in the train railway market. And we had a -- we have a significant share in there with our bricks. That's all being converted over to Advanced Products. As I speak, we're getting some great wins there. And customers love density because it's almost 10x better in density and performance than our older bricks and more cost-effective as well. So it's a big value proposition to convert to Advanced Products.

Yes. They are more cost-effective to the customer and considerably higher margins for Vicor.

For Vicor, yes.

So the BBU revenue line could decline over time, but you're actually increasing your revenues to those existing customers?

That's correct.

Yes. But the demise of BBU revenue line, which has been forecasted to happen for the case now, it's not about to happen. It's just going to become irrelevant because of the growth of [those] products.

It's cyclical.

And our next one is coming from the line of Richard Shannon.

Congrats on nice numbers here. Maybe a question on Advanced Products. So you talked about an acceleration here in the third quarter. When you talk about historically in terms of 3 buckets, data center, AI acceleration and HPC, I wonder if you can kind of delineate if there's any of those 3 buckets growing faster or slower than the others in the third quarter. And maybe if you could extend that into the next couple of quarters even here. It would be great to hear kind of the dynamics you're expecting there.

So -- Richard, this is Phil. So the growth in the end markets there, AI, HPC, data center, are being driven by AI in the interim period here although we've seen some new projects kick in on the HPC side as well adding to that growth. And then the new rollout of the Intel CPUs and AMD EPYC CPUs being used in 48-volt data centers, where the bridging, 48 to 12, is going into quite a substantial market opportunity for us. I talked about that as a $500 million SAM 5 years from now. So that's an important piece and we're playing in it. And that piece is growing as well and will continue to grow over the rest of this year. And into next, we'll see a ramp-up in opportunities there, those CPU platforms from Intel and AMD start to get really rolled out into these hyperscaler data centers. But AI is dominating right now.

Okay. Perfect. My follow-up question is on supply constraints. I just wanted to get your update on the state of this if it's gotten worse or improved so much. And when do you see -- do you get any visibility on when this is going to end for you?

So it hasn't gotten worse in terms of the supply constraints, but the demand has gotten bigger. And so fundamentally, the challenge is to meet rapidly growing demand while with respect to some components being on a fixed allocation.

And we have a follow-up question coming from the line of Quinn Bolton.

So I wanted actually to follow up on your comments there on the bridging opportunity. I was kind of looking recently at some of the Intel TDP requirements for the next-generation Sapphire Rapids and beyond processors. I think you're seeing TDP just on a standard server CPU up like 350 watts, maybe higher. And I think that's pretty close to what -- where NVIDIA AI -- sorry, NVIDIA GPUs are today. I mean as you look out that bridging opportunity, how quickly do you think we're going to see the broader hyperscalers be forced to convert from 12- to 48-volt. I mean do you think that this -- that the rollout of these new higher power standard server CPUs is really going to drive that transition over the next couple of years? Or do you think it still takes a longer period of time?

So definitely, the high-power CPUs are obviously adding to the power in the rack, but what you're also seeing is the addition of AI in those data centers. And so the overall power budget is going significantly up. It's on both fronts. The GPUs or the AI currents are, I would say, in that 500 amp sort of TDC type of range. It would -- peaks up to 650, 700. And next generation is way, way above that. But in terms of the conversion of the other hyperscalers to 48-volts, that started in terms of what I -- what we see in terms of internal programs within those companies. And I would expect rack systems to start getting installed 2- to 3-year time period within the other hyperscalers that haven't converted fully over the 48 volts like Google has.

So that is definitely ongoing initiatives because those guys are all developing their own AI ASICs as well for their workloads. And those AI ASICs are high current and need the 48-volt interface. So having a 48-volt rack based system makes a lot of sense when you want to integrate your own chips along with the CPU base.

And conversely, it makes no sense to deliver power from front-end at 12 volts to rack distributed with humongous power distribution losses only to boost it back up to 48 for it to then power point-of-load devices, right? That's clearly nonsense.

Yes. Although we're happy to take the business.

Well, it's definitely an answer, but it's clearly -- it's called [circuit] bridging, bridging of [a circuit].

Right. I guess sort of the follow-on question to that is if the -- I know the AI processors and the GPUs are consuming more power and probably more likely to have 48 volts. But if the power consumption on the standard server processors are going up and you've got 48-volt in the rack, is -- do you see an opportunity to do 48-volt point-of-load for the standard CPUs in addition to the AI? I mean is -- that $500 million bridging, that's just the 12 to 48? Is there a server CPU point-of-load? Or is that in the $1 billion current delivery TAM that you talked about at the shareholder maybe?

Not for the current generational products but going back to the reference I made earlier to our next-generation silicon. That next-generation silicon opens up new kinds of opportunities because of its scalability. And I think a combination of factors would want to converge on that opportunity. Again, great scalability with our next-generation silicon and a trend towards higher power levels, as Phil pointed out earlier, with those CPUs.

And our next one is coming from the line of Jon Tanwanteng.

The first one I wanted to ask was, you guys are obviously a domestic success story and critical to a lot of these AI and EV efforts and -- on top of other industries like military and satellites. Are you able to take advantage of these U.S. semiconductor funding programs that are out there? Is there something out there for you as you think about the next step in capacity expansion?

We certainly hope so, Jon, and we're watching it very closely. The CHIPS Act has to go through the House of Representatives. That's $50 billion. Once that's approved by President Biden, we intend to be part of that. And we have reached out to some experts in the field locally here who have the right contact for us to pursue. We're a poster child for the kind of investment we -- I think the U.S. government would want to participate in. We're a local company. We're critical, as you said, Jon, to infrastructure and electrification. So we fully intend to get our share of that.

Got it. And what kind of benefit would that bring you kind of in terms of the attach to that? Is it just the low interest rate? Or is it like free money? How should we think of it?

We're in the early stages of finding that out. We've had some calls with local experts here and as well in D.C. But we have to kind of dig into the details of how that would play out over time. Let's get the bill passed. And I'd ask all of us to do our best to pressure powers that be to get that through. So -- but we intend to participate in that. And we have the right contacts lined up.

And our next question or comment is coming from the line of Gus Richard.

I just -- I want to make sure I understand. The brick business has rolled over a little bit. Is it just slow summer seasonality? Is it attributable to mil, aero or industrial? Or is it a function of your customers not being able to get parts? Can you give a little bit more color as to sort of the slowdown you're seeing?

It's -- you can call it seasonality. I mean North America started off a little quiet. It's now picking up, defense and aerospace. Europe has been relatively flat. China is sort of up and down depending on quarter-to-quarter. We had big growth in China in 2018 and again at the end of 2019 there due to the trade and the tariff situation. So again, coming back to that business, it's very cyclical, very seasonal, as we want to call it, but it's -- as I said, if you average it out over a longer period of time, it's relatively flat. Now one of the things that we're obviously looking to do there with some of those older products is to have a pricing strategy that makes sense and take opportunities where we can for increased prices and better margins for that business and -- while treating obviously the customer base the right way. But we are looking at those opportunities, and we constantly do so.

Got it. And then for my follow-up, just on the auto business, you've been working with the auto manufacturers for a while now. I was just wondering when you think you might start to get your first revenue and sort of what you see as your content per vehicle. That would be helpful.

Sure. So revenue right now is mostly NRE-based revenue, which is quite healthy because we've got quite a few collaborations ongoing. But in terms of the revenues, those won't really start until the end of '23 with the first OEM partnership that we put together about almost 18 months ago. Content per vehicle depends on whether you look at mild hybrid, plug-in hybrid, or pure electric, ranges from about $100 up to $800 for a very high-performance electric vehicle. We've got content as high as $1,500, $1,600. So it varies across the different platforms, but it's certainly very healthy.

And we have a follow-up question coming from the line of [John Dillon].

Phil, again, on the last conference call, you were talking about auto and you're talking about Vicor might be able to supply more than just modules to the auto industry. I'm just wondering what that means. Can you give us a little more color on that?

Well, our primary business is to supply modules to the automakers, [John], and also to Tier 1s who can then take that and build systems out of it. But in some instances, what we're looking at doing is on the reference design side of things, and providing some early reference designs provides good NRE opportunities and early pre-production. They're not meant for production at this point in time. We're not aiming to get into the full systems business at this point. So our focus right now is on modules and working with OEMs and direct partnerships and also with Tier 1s.

And how is the licensing coming along for both data centers and auto?

So we're in discussions on a few fronts. Again, as suggested in the past, we need to patiently keep key objectives in mind, apply a consistent set of methodologies, and that's why we're proceeding.

Our next question is coming from the line of [Christopher Hillary].

The previous question was pretty much my question but maybe I'll ask in a different way. As you have all these end markets and you have your SAM growing, do you start to contemplate what your next trend of capacity potential might then look like, particularly if some of the licensing agreements are hard to predict?

So if I understood your question, as you've broken up a little bit, you've asked about capacity expansion and, if I understood you correctly, how licensing plays into that. So if that's the question, as we discussed, we are now bringing in the equipment in the expanded Federal Street facility to get to what's been estimated to be a total aggregate capacity of about $750 million on a yearly revenue basis. I happen to think that that's on the conservative side. We may be able to get more than $750 million out of that facility.

We have been looking, at a very preliminary level, at a campus, a different site, both in New Hampshire, not far away from our existing facility; as well as, on a very preliminary basis, in some southern U.S. states. Any decision regarding the next increment of capacity on a different site is still several months away. We need to continue to be focused on bringing to fruition the capacity at the Federal Street. There's a lot riding on that. We're obviously [sub for] capacity right now, and that's the top priority. And with that, we're going to get a substantial step-up again. I believe more than $750 million level. So that will take care of us for a while and give us the big room necessary to make a judicious choice with respect to the next incremental capacity.

Regarding licensing, which I think was part of your question, any licensing opportunity will not detract from the need for incremental capacity for our own modules. The kind of licensing we're pursuing, which is licensing OEMs to enable OEMs to source otherwise infringing products from third-party manufacturers, that kind of licensing while providing OEMs with a continuous supply, supply assurance from module makers that could otherwise put them in a very difficult spot, it doesn't really distract from the opportunities for our own modules and power system capabilities. So I would view this as very complementary developments without any kind of interference.

If I may, one other. You referenced in the press release the increasing demands from the AI and automotive markets. Is this -- would you describe it as continuing along the same continuum of challenges? Or as these systems continue to progress, does it create a new set of challenges that you're trying to solve with your products?

So I would say that in AI, advanced computing in general, there are escalating challenges because there is an insatiable appetite for more and more current at lower voltages. And fundamentally, the value proposition there is, "Give me as much current as you can," because it translates directly into performance. And customers there, in order to have advanced solutions, are willing to go to extremes with respect to satisfying their power needs. And that's the rationale for a number of initiatives we've had for some time, ranging from further advances with respect to our point-of-load power components to vertical power delivery to stacking of chips within panels and so on and so forth.

So AI in particular and its rapidly escalating demand for car poses technical challenges that within Vicor is equipped to address -- uniquely equipped to address because of the investments we made in developing all of the key facets of our technology in terms of conversion engines, control systems, unique components and processes and, last but not least, packaging technology. I think on the automotive front, detecting our challenges are not nearly as pressing as they are in AI. But with our with our power component methodology, one of the key benefits is that we have, in effect, common denominator engines, common denominator control systems, common denominator components and processes and packaging technology.

So inherent in that is the opportunity to -- as we make advances to address the extreme demands in AI in particular, we also get to leverage those kinds of developments, the same developments for applications in other end markets, where the technical challenges may not be as demanding at least at this point in time. But the opportunity in other ways is right for the same kinds of solutions.

And our next one is coming from the line of James Liberman.

Great. These are wonderful numbers and a terrific indication of how you're positioned in the marketplace. I wonder if you could comment on the opportunities evolving in the low-altitude 5G satellite Internet business down the road.

Sure. So as we said in our press release earlier, we engaged with Boeing to develop our first chipset for that particular marketplace. So those products are starting to ship and roll out. And I think the company that Boeing is aligned with has announced they will be putting satellites up towards the end of this year and then rolling out -- I think it's about 8 satellites in total for the O3b platform over the next year. And obviously, we've been taking that in the early chipset to other companies that participate in that same LEO constellation market. Boeing is actually a MEO, but they're taking them to the LEO guys, which have much higher numbers, larger constellations at the lower earth orbits. And there's been a lot of interest in the product family due to its density. It's low noise for these very sensitive networking ASICs.

So we're seeing really good customer engagement there, and we are continuing to look at advancing those products to the next level of performance for that marketplace and engaging with other customers and other collaborations. So that's going well. Hopefully, we can make further announcements on that early next year.

And our last question in the Q&A is coming as a follow-up from Alan Hicks.

I just had a quick question on when do you expect to book significant revenues from your front-end products?

So we already booked significant revenues from -- for our front-end products. We have a $13 million project that is shipping within the next 12 months. And there's going to be quite a bit more coming. The -- as suggested earlier, these product capabilities, in terms of their relative merits, sells apart from competitive offerings in a dramatic fashion again in terms of density and other key attributes.

So in particular, when it comes to density, our solution, front-end solution can be about 1/10 the size of competing alternatives. And that's very attractive in a number of end markets. Coming back to, in particular, computing AI, there are opportunities there with systems now that -- whose power density requires liquid cooling in particular. Again, the drive to more and more performance, demand in high and higher current, and high and higher power levels in solutions that have, from a packaging perspective, the key ingredients, including density and thermal management requiring liquid cooling, those represent very ripe opportunities for us and our front-end systems.

Did I hear you say a $50 million customer, 5-0?

$13 million, 1-3, 1-3. It actually started out as $10 million. It's become $13 million. And that's about to go into production in the next few months.

Okay. And so that would ship over the next 12 months?

Yes. It will all ship by, I think, the middle of July of next year.

Okay. Thank you. Operator, I think we're ready to conclude.

Thank you very much. And thank you, everyone. You may now disconnect. That concludes the call for today. And please enjoy the rest of your day.

Thank you.

Thank you. Bye-bye.