Vicor Corp (VICR) 2020 Q2 法說會逐字稿

Good day, and welcome, everyone to the Vicor Earnings Results for the Second Quarter ended June 30, 2020, Conference Call, hosted by Dr. Patrizio Vinciarelli, CEO; and James Simms, CFO of Vicor. My name is Chandor, and I am your event manager. (Operator Instructions) I would like to advise all parties, this conference is being recorded.

And now I would like to hand over to James. Please proceed.

Thanks, Chandor. Good afternoon, everyone, and welcome to Vicor Corporation's earnings call for the second quarter ended June 30, 2020. I'm Jamie Simms, Chief Financial Officer. And with me here in Andover are Patrizio Vinciarelli, CEO; 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 ended June 30. This press release has been posted on the Investor Relations page of our website, 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 statements 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 2019 Form 10-K, which we filed with the SEC on February 28, 2020, as well as in the prospectus supplement associated with our recent share offering, which we filed with the SEC on Form 424B5 on June 9, 2020. Both of these documents are 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 23, 2020. 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 7, 2020. The replay dial-in number is (888) 286-8010 followed by the passcode 41685203. This dial-in and passcode are also 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 start this afternoon's discussion with a review of our Q2 financial performance, after which Patrizio, Phil and I will take your questions.

I'll begin by addressing Vicor's response to the COVID-19 pandemic. As reported last quarter, Vicor has taken substantial measures to protect the health and safety of our employees, following local government and Federal CDC and OSHA guidelines for employee well-being, using masks and practicing social distancing. Since Q1, we have operated 3 shifts at our Andover manufacturing facility while our engineering, sales and administrative personnel are now working in their offices, if allowed to do so under local rules. I refer listeners to our pending Form 10-Q filing, which will set forth updated details regarding our response to the pandemic and the impact it has had on our operations. Although there is uncertainty related to the extent the pandemic will negatively influence our future operational and financial results, we believe our liquidity, flexible operating model, existing raw material inventories and dedicated workforce will enable Vicor to continue to effectively conduct business until the COVID-19 pandemic passes.

We are monitoring changing circumstances worldwide and may take additional actions to address COVID-19 risks as they evolve, particularly if Federal, state, and local governments so require. Because much of the potential influence of COVID-19 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.

Now turning to consolidated results. As stated in today's press release, Vicor recorded total revenue for the second quarter of $70.7 million, up 11.6% sequentially from the prior quarter's $63.4 million. Advanced Products revenue rose 36.1% sequentially, primarily reflecting ramping shipments of our lateral power solutions for AI acceleration. Brick Product revenue rose 2% sequentially, reflecting a recovery of Asian markets, notably China, offset by reduced domestic shipments, reflecting the influence of COVID-19 on U.S. manufacturing. The pandemic contributed to both lower shipments to stocking distributors and overall lower turns volume for the quarter. While we supply a range of essential industries, some domestic customers, including defense contractors, significantly reduced production in Q1 and have yet to return to pre-pandemic demand levels. We are hopeful our U.S. business, once the pandemic abates, will experience the same quick recovery our Chinese business has experienced. We do not believe this demand has evaporated, but consider it postponed.

For Q2, Advanced Products' share of total revenue rose to 34.4%, while Brick Products' share declined to 65.6% of total revenue. Our expectation is that Advanced Products will continue to grow their share of revenues, even as domestic Brick Product demand recovers. Exports increased as a percentage of total revenue to approximately 70%, reflecting the aforementioned recovery of Asian demand for Brick Products and a near doubling of shipments of Advanced Products to Asian subcontract manufacturers, building systems for our OEM customers. Shipments to European customers also recovered. Reflecting the shift in the impact of the COVID-19 pandemic from China to the United States, domestic revenue declined to approximately 30% of total revenue.

Despite higher unit volume, the ongoing impact of the pandemic on our supply chain partners as well as mix considerations caused consolidated gross margins as a percentage of revenue to slip 0.3 percentage point sequentially from Q1's 43.1% to 42.8% for Q2.

We again encountered production inefficiencies and cost variances as vendors struggled with COVID-19 challenges. Gross margin was also burdened by higher tariff charges totaling $2 million for the period. Unfortunately, U.S. customs has yet to address our duty drawback filings, so we have yet to recover any amount of the total of $9.4 million paid in -- to date in tariffs on Chinese imports.

As previously discussed, we anticipate more than half of this amount is eligible for drawback.

I'll now turn to Q2 operating expenses. Total OpEx declined 4.8% sequentially, with the decline associated with a decline in G&A expenses, namely audit and legal costs; a decline in travel costs with sales and marketing, given the pandemic; and a decline in prototyping and related costs in R&D.

For the quarter, we incurred approximately $236,000 of incremental employee safety and well-being expenses directly associated with our response to the COVID-19 pandemic. Also please note the expenses associated with our June equity offering were recorded as a charge to paid-in capital and were not reflected on our income statement.

As highlighted in our press release, overall Q2 results were affected by a $1.2 million noncash charge associated with the acceleration of equity-based compensation expenses tied to an award of stock options in June. One might expect that the value of the award would be recognized pro rata over the 5-year vesting period of the options. However, because our option plan allows for anyone to retire at age 62.5 and retain their unvested options over the original vesting period, the required accounting is for us to record, at the time of the award, all of the compensation expense for employees who have reached that age. The amounts of total equity-based compensation expense for Q2, including -- included in cost of goods, SG&A and R&D were approximately $277,000, $1 million and $629,000, respectively, totaling $1,936,000.

We recorded operating income of $2 million, representing an operating margin of 3%. Without getting into non-GAAP disclosure, I'll simply point out that absent the $1.2 million compensation charge, the $2 million tariff charge and certain expedite fees and vendor surcharges totaling $1 million for the quarter, our operating margin would have been appreciably higher.

Turning to income taxes. We recorded another small benefit for Q2 of $406,000, although we are forecasting full year profitability. The net tax benefit for Q2 and year-to-date was primarily due to a result of the income tax accounting required for stock options exercised during those periods. Net income attributable to Vicor for Q2 totaled $2.7 million. GAAP earnings per share was $0.06 based on a fully diluted share count of 43,385,000, which includes 1,741,000 exercisable options. As a reminder, we issued 1,767,231 shares, including the underwriter's overallotment option in our June share offering.

Turning to our balance sheet. Cash and cash equivalents sequentially increased $4.2 million before taking into account the $109.7 million net proceeds from our June share offering. Cash at period end totaled $196.7 million. Accounts receivable, net of reserves, totaled $48.5 million at quarter end, with DSOs for trade receivables increasing slightly to 45 days from the prior quarter's 42 days. All balances are current, and we have made no meaningful accommodations to customers due to COVID-19 challenges.

Inventories, net of reserves, rose 4.3% sequentially to $55.6 million as raw materials increased to support our near-term outlook for increasing production. Annualized turns remained at 2.8.

Capital expenditures for Q2 totaled $5.3 million, representing the value of equipment placed in service during the period. In contrast, at quarter end, we had over $47 million of approved capital projects underway. The balance of the budgeted projects currently estimated to be approximately $15 million likely will be approved by year-end, bringing the total for the expansion to approximately $62 million. We expect to disperse approximately $25 million before year-end, with the balance to be dispersed in 2021.

As previously disclosed, construction is now underway at our 400 Federal Street manufacturing facility, but we do not expect much of the total $62 million amount to be placed in service before midyear 2021.

I'll now address bookings and backlog. Q2 bookings rose to $87.5 million, a sequential increase of 24.9%. The overall book-to-bill was 1.24, with Advanced Products at 1.35 and Brick Products at 1.18.

At quarter end, backlog totaled $127.5 million, an increase of 15.1% sequentially. We earlier mentioned the challenges faced by customers, and the current backlog balance includes approximately $8 million of orders rescheduled from Q2 into Q3 and Q4, either by us or by customers due to COVID-19 related challenges.

Turning to our outlook for the third quarter, we expect strength in bookings for Advanced Products, given our customers' forecasts. Brick Product bookings in July continued to show strength in Asia, notably in China, but we have not yet seen indications that domestic demand may be resuming. Having said that, based on existing backlogs scheduled for Q3 and, of course, subject to the near-term influences of COVID-19, we are forecasting increased revenue and improved profitability for the third quarter.

With that, Patrizio, Phil and I will take your questions. Operator?

(Operator Instructions) The first question is coming from the line of Jon Tanwanteng.

First one from me. Can you discuss how much COVID impact you had in the quarter on a COGS basis? And if that's been resolved in July?

I probably could give you a pretty good number but I won't. The issues are still in play, but we have taken steps to remedy some of the variables, and we're hopeful that things will improve. But I suspect that for the coming quarter, we will still face some of the inefficiencies and challenges that we discussed. Is that a fair...

Yes.

To the diminishing rate, things are -- you may expect more stable now than they were earlier in the year. And certainly, there's been plenty opportunity to adjust to the new environment. But with some suppliers, there are still locational issues.

Yes, I'll point out as we discussed in the MD&A of the Q, the absenteeism has improved significantly from what we were experiencing coming out of Q1. So we have some areas of less risk, but there's still risk.

Understood. And then moving on to the bookings. $87.5 million is a fantastic number. I was just wondering, is that -- is the timing of that any different from your regular order pattern? When those are scheduled to be delivered? Should we expect that to hit your P&L over the next 1 to 2 quarters? Or are there any different patterns and delivery schedules involved here?

This is Phil. So yes, it was a good bookings quarter. I think that what Jamie talked about in his remarks here was the strength that we're seeing with Advanced Products as we start to ramp our lateral power delivery solutions and also some standard 48-to-12 and 48-to-load products that we supply into the data center hyperscalers and HPC-type companies.

But we've also seen some tremendous strength coming out of China. I mean, if you look at what China has gone through from a negative GDP in Q1 to a very large rise of almost 9% in Q2. We've huge investments continuing in infrastructure there. So we benefited from that with really good bookings on our brick technology, if you like. So those are being laid in for Q2, Q3. Our lead times are still 20 to 24 weeks. We've maintained those. We don't anticipate reducing them any time soon because of the supply chain challenges, but that factors in a little bit as well.

Got it. And then just to clarify, you're expecting improvement in the next quarter on your orders for the Advanced Product. Did you also mean that on a blended basis? Or it's too early to tell just where you see bookings go to in Q3?

I think we're still going to see good strength in the brick line. And as Jamie mentioned, increases in the Advanced Products. We see that from our forecast, yes.

Okay. Got it. And then last one from me. A large AI player, or at least a unicorn by many standards, released or showed off a new product yesterday. And I didn't see Vicor, at least on the product board that they showed to the public. I'm wondering if you're involved in most of these projects, as you've been telling people in the past?

Yes, you're talking about the Groq one?

Graphcore, yes.

Yes. Oh Graphcore. Yes. So no -- so there was another announcement from a company called, I think it's Groq as well. They announced -- I don't know if you saw that one, that was an AI inference chip, very specialized type of product. And both of those companies are using multi-phase at the moment because their current levels are still quite low. They're in that 300 amp range. But I know that next generation chips are going up significantly, and they're moving to a 48-volt systems using Vicor technology.

Got it. So it's more a matter of timing than anything else.

Yes. Yes, a lot of these guys start off in that 300 to 400 amp range for their first silicon. And then the next silicon has got to go up in performance because they're all competing with NVIDIA. So that's where we step in.

So as we discussed in the past, the threshold of pain for 12-volt systems is such that with power levels and current levels of a few hundred amps is still tolerable, but it just becomes intolerable as you get past 400 amps. And all of these -- the whole animal kingdom, unicorn and otherwise, they're all heading for the same boat in terms of being able to compete with each other.

The next question is coming from the line of Hamed Khorsand.

I just wanted to see how much of an increase in Advanced Products is related to just inventory stocking?

I don't think any. Phil, do you want to...

Yes. No, I don't think there's any. I think that's the simple answer.

And my other question was, are there -- the manufacturing inefficiencies you encountered, are they manageable? Or is it something that's going to continue for the foreseeable quarter?

So COVID, as we discussed earlier, it was an issue, particularly in the March, April time frame. It's a diminishing issue, but it has been an issue. And as Jamie suggested, it may still, to some degree, be an issue this quarter. Obviously, we all watch the same news and we'll have to wait and see what happens. In our area, things [gather] much better than they used to be. As Jamie mentioned, we're essentially back 100%. But we do have some vendors in other areas that are still under COVID, right?

Now beyond that, when it comes to manufacturing efficiencies, the other factors is not just COVID. It's the scale-up of new platforms. In the early going, it's unusual, particularly with new packaging technology, to have inefficiencies until we made substantial quantities and get yields to where they get once it is maturity and cycles of learning have been reflected into fine-tuning the manufacturing processes. So we're still going to be seeing some of that. It's baked into the results within the last few quarters, and it will impact results going forward to a lesser extent.

Capacity utilization is another big factor with respect to manufacturing efficiency and product margin. And generally speaking, as we scale up Advanced Products, those efficiencies are going to get better and better.

Okay. And my last question was, are you seeing any changes in order patterns with your lateral power delivery products right now, especially with NVIDIA's releasing new products a couple of months ago?

No. We're on a steady ramp. We're increasing and...

Yes. But we really don't want to make comments specific to any one customer or [pre cash], all right? But...

Across the board.

Across the board. Yes. Yes.

We have more than 1 customer for all that stuff. So that's important to reflect that.

And the next question is coming from Quinn Bolton.

Congratulations on the results and the nice bookings number. I guess I wanted to start with bookings. Could you give us the split of the $87.5 million, how much of that was bricks? How much of that was Advanced Products?

Well, I sort of did already, but with the book-to-bill...

Yes. So I think you can do the math based on the numbers that Jim provided earlier in the presentation, right?

Yes. I don't have the specifics right in front of me, Quinn, so.

Understood. Second question, and I understand that this may be a little customer-specific, but one of your lead customers on lateral power has a 48-volt solution as well as a 12-volt PCI solution. Do you have any sense what the mix of that business will be, going forward?

Well, that's obviously aimed at a very different marketplace, right? I mean, PCIe is really struggling right now with the power levels that they're having to pump into those boards. So eventually, they'll move to 48 volts, and that will be a great entry point for us. But -- so it's a very different space than the space that we're in. And most of these guys are in terms of the training workloads that they're having to do. I mean, that's really where we're playing at the moment, Quinn.

I guess, maybe another way to ask it then, do you think most of the training applications will be 48 volt?

Oh, yes. Absolutely, yes. I mean that's such a heavy workload. And again, on the inference side, as it moves out towards the edge, again, those processor power levels are going to continue to increase, so -- and the workloads are going to continue to go up, right? So I see us playing in the edge eventually as well.

Great. And Jamie, obviously, you guys have talked about some of the COVID-related inefficiencies that you're working through. As you continue the expansion of the Andover facility, do you expect any inefficiencies just with that expansion project?

No, we don't. We got that very well planned, very seasoned mature operations team so they got that very well planned. And we just got an update earlier today, everything is on track. We don't anticipate any interference with production within the existing walls. So fundamental strategy is to prep the space, the additional wing and build it up. Needless to say, there's going to be some times when communication conduits have got to be provided between the 2, but that's being planned to happen at particular time, so as not to interfere with the production cycle.

Great. And then my last question. You've mentioned some rescheduling of bookings from Q2 to Q3, Q4. I wasn't sure if that was due to some of the production inefficiencies you talked about. You said that there were some suppliers that were having issues. I guess my question is, do you feel like you're leaving demand unfulfilled? Or have you been able to manage to your customer forecast despite some of these inefficiencies?

We're able to match to customer requirements. They tend to change. That's the nature of the industry. While some of the backlog that was in Q2 moved into Q3, this is mere reflection of events schedules with some customers. There's nothing unusual about this particular period relative to other periods. I think it's been relatively routine in that regard.

The next question is coming from the line of John Dillon.

First of all, congratulations, guys. This is a really, really nice quarter to see. My question has kind of been answered, but I was wondering if you can give me a little more color on it, and that's on bookings. I'm just wondering if the bookings increase is due to a couple of your larger customers priming the pump? Or is it more of a steady state from a wider, diverse customer base?

It's both, as well as what we've talked about, which is the growth of the -- or the Asian business sort of returning to strength, so it's sort of across the board. But yes, we're getting some nice bookings ramps, if you like, from the data center AI guys we've been talking about in HPC companies, hyperscalers coming back to ordering what they typically have ordered. And they've gone through a slowdown as well, so they've started to recover. So it's sort of across the board, really.

And you talked about the next quarter, it looks like bookings are going to be up for the Advanced Products and pretty good for the bricks, what about for the next 2 quarters? Do you see increases in bookings for the next couple of quarters?

Again, you're looking very far out in a -- sort of a turbulent time. But yes, I mean, I'm confident that the strength is going to remain with Vicor and the products that we have on both the advanced side and still see good strength on the older products, the Brick Products, too.

So this is predicated not just on what we hear from customers with new applications, but on the transition that is now finally beginning to take place away from 12 into 48, not just in the center AI space, but in automotive. We're seeing a lot of action there, too. Now unfortunately, that's long gestation period, right? There is no instant gratification, it's very [missionary] work still for a couple of years.

But if we look at the medium- to long-term, if you will, past the next couple of quarters into, let's say, the 2022, '23 time frame, there's a lot of action that is taking place in automotive that will bolt on to further developments in AI and data center.

Excellent. And that kind of leads right into my last question. That's if you can give us an update on the design wins, like, are they still increasing? What markets are you seeing? Are they broad-based? And then finally, are you seeing any design wins for the front-end products?

Okay. So front end products for us at this point in time are mainly the high-voltage fixed ratio converters. So yes, we've got lots of design-ins for those in the automotive market, some in the data center area. We also serve robotics companies, emerging robotics companies. That's a very exciting market and that's got some great growth potential for us. And also UAVs, lighting, there's a whole host of markets there, John, that are fairly broad-based with really large numbers of customers entering those marketplaces. So that's good strength for us. So that's on the front end, high-voltage bus converters.

In terms of -- I think your other question was more towards the data center, AI space or automotive space. And yes, we've got more engagements going on pretty much every quarter. There's is something new that we're working on or somebody is coming to us with a challenge or an opportunity.

Yes. It's a very exciting time.

There's, in particular, a project for our 4G-based PSC power system solution that is in the works now, and I think will lead that to what should be, by far, the most advanced AI solution from power system perspective, so soup to nuts, from 3-phase AC all the way down to very high current at the point-of-load to a 48-volt system, where we're going to be providing the whole solution. We're currently providing the solution from 48-volt to the point-of-load. But on the next generation system, we're going to be providing the solution from 3 phase. And this next generation system is going to be a fraction of the volume of the cogeneration because in part of the advances in the front end. And I think it's going to be a game changer for the industry at large.

This is great. And it sounds like we're finally getting the diversification that we're all looking for. This is really great. Congratulations, guys.

The next question is coming from the line of [Kenneth Darwana].

I actually don't have a question because I've been unable to hear 95% of the presentation, so I'll just drop out of all.

I'm sorry to hear that. As we mentioned at the beginning of the call, we are recording this conference, so you will be able to listen back and we will investigate. Sorry, cannot -- so have you got any question or can I close your line?

No question now.

Okay. So the next question is coming from Richard Shannon.

Kind of a follow-on from one of the earlier ones. My question is more specific to bookings within the Advanced Products. I want to get a sense of whether there's a broadening of that base here. Obviously, you've got 2 larger customers. I think, in the prior answer, you're talking maybe about some HPC coming in here, but I'm particularly curious about any new hyperscalers and/or customers with OEMs that you're starting to see material bookings for?

So on the OEM side, we've got a lot of design-ins, either 48 to 12 or pure 48 with lateral power delivery. Those companies are bringing those products to market. But again, they're finding their own hyperscaler customers to work with. So it's early days for us to really understand the forecasts and the penetration of those particular chip companies within the hyperscalers. But they tell us they're winning share and are getting good design-in. So that's yet to come, but we're still doing really well in that area.

Also you've got the new sort of VR14 server boards being developed by Intel and Intel's customer base. And 40% of those, 50% is what we're hearing is -- are going to go 48 volts, that's a number that's being confirmed. And in those types of applications, we're providing the 48 to 12, either regulated or unregulated solutions. And that market is a market that has got a number of competitors in it, but nobody's got the density, efficiency and performance that we have. So we expect to get some good design wins in the VR14 area, both at the hyperscaler companies who will do their own reference designs off of the Intel reference designs as well as in the CM companies down in Taiwan and China.

Okay. Great. Just a follow-up on that, Phil. If you listen to the OCP Summit here earlier this spring, they talked about some revenues coming from OEMs here in the second half of the year. It sounds like from your commentary, you might not necessarily expect a whole lot. I wanted to kind of dive into that a little bit. Is that something -- is that a fair interpretation from what you said? Or do you still see [some notable] revenues this year?

I think it will be early next year, Richard. I don't think there will be heavy bookings this year. We'll see some early bookings, obviously, in terms of how they do their early production ramps and get ready to launch. But in terms of the bigger numbers, those will come next year.

Okay. Fair enough. Quick question on gross margin to follow-up from earlier, and I think Patrizio, you were commenting on some previous questions here about getting some maturity in the manufacturing process here. To what degree was that an impact in the second quarter? How much does that help here in the third quarter? And trying to get to the question of how much, if any, should we see gross margins improve here in the third quarter?

So I'm not going to make a very specific position with respect to the amount of improvement in gross margin, beyond saying that we see the gross margins continuing to expand. Obviously, they haven't been expanding recently, but we, I believe, we've seen the bottom in this past quarter.

To your earlier point, it has to do with a combination of factors, as suggested earlier. Scaling up volume production for new products with new packaging technology is a big factor in terms of depressing margins, capacity utilization. And last but not least, tariffs and COVID-related inefficiencies. So going forward, these factors, at least the ones that are under our control, should continue to fade in terms of having a negative impact on margins.

We are, as a company, as a management team now very much focused on seeing our margins expand to the levels of the best analog companies in the industry, which is obviously not single point advances relative to where we are. It's more like 20% or higher, and we're not going to get there overnight, let's be clear. This is going to be a multiyear process. But we have line of sight on how to accomplish that, and we're very much focused on making that happen.

Okay. We look forward to seeing that. My last question. Obviously, we've had some impact in past quarters from the tariffs for products shipped to China here. But you had a very nice return to business in the second quarter. My assumption is based on what I heard that you're expecting China to improve here in the third quarter. But is there some lingering risk here of tariffs continue in any manner that that business is lower or even lost if the view is it will continue for a lengthy period of time?

Well, I don't know that I can really comment on what might happen in terms of some further deterioration or relationships within the countries. We do have contingency plans but we're not pulling the trigger on those contingency plans at this point in time, hoping that cooler heads will prevail, right? So we don't see -- we haven't seen a particularly different or concerning issue of late.

To your point, the tariffs are still there, both coming and going, right? We pay tariffs on materials we procure from China. Customers in China pay tariffs on products they procure from us. We are taking a conservative step in terms of diminishing our dependency from a material sourcing perspective from China. I just had an update on that general strategy earlier this week, and we're going to be largely out of, with respect to major suppliers, out of China within the next year, 1.5 years. And this is an ongoing process. It's not a step function, right? Some of it is beginning to happen. It took some time to bring it about. More of it is going to happen in the second half of this year. It's going to become more significant next year.

Some of what is going on is working actually in concert with some long-standing suppliers based in China, opening up shop in Vietnam, to, in effect, get around the handicap that the tariffs have imposed on their business, not just with us, but with others. So that's a part that we have pulled the trigger on, and we're working very closely with key suppliers. So another example would be for components that we used to source from Japan that had moved to China because of cost reduction opportunities. Very soon they're going to be back in Japan because all told that we can source them with lower overall costs back from Japan. So those activities are ongoing.

When it comes to making our products outside of the U.S. or making some products like bricks outside of the U.S., should a worsening of the relationship happen, we have contingency plans, but we haven't pulled the trigger on that.

Congratulations on great progress, guys. That's all.

The next question is coming from the line of Alan Hicks.

I wanted to ask about some of the projects that -- like the large LED project and satellite project, have those shipped?

So the satellites would be going up. That's one of the projects that got slightly delayed. But I think we're going to be shipping product in Q3 and more product in Q4.

Okay. And the large LED project that you had?

So as you can imagine, that's another one of those where because of COVID, right, and things coming to switching of -- where the installations used to take place for a number of months, things get delayed. But once again, we are not lacking bookings or backlog. So we have plenty to draw from in terms of raising revenue levels from quarter-to-quarter and we'll be ready to ship those programs and those products as the impact of COVID gets behind us.

Okay. So those are still to come?

Oh, yes.

Okay. And then supercomputing, you're expecting that to ramp this year? How is that progressing?

That's going very well. There's been a lot of consolidation there, of course, with HPE buying Cray and so forth. But we're making good progress. We've got both front end business there as well as the point-of-load as well as both on the CPU side as well as the AI GPUs as well. So that's going very well. That's a classic 48-volt market, that market transitioned a while ago. So that's a great market for us, and we're making good progress there, too.

Okay. So you had good shipments there in Q2?

Shipments will be, yes, increasing as we go in through Q3 and Q4. That -- those programs are a little bit longer in terms of they are government programs and they are very high-end sort of programs. So the shipments will really begin in Q3, Q4.

Okay. And then can you give an update on your newer front-end products? And is that progressing as planned?

Yes. So as always, these things end up always taking longer than we like, but we have now everything we need. As I mentioned earlier, we are engaged with one of our key lead customers on a program that will bring about a much smaller, much more powerful machine. Many tens of kilowatts of AI in 1 box is going to be a game changer in the industry and one that will leverage our 4G, PRM, PFC technology. It's very novel in many respects, very dense, very efficient, very flexible.

So that's still maybe a year away for any contribution?

Well, in terms of moving the needle on the revenue front, I would say, probably even more than a year away, but I think in terms of initial power production, less than a year away.

Okay. And then someone mentioned about opportunities on the edge. How significant are your opportunities there?

Again, that's a developing market for us because, again, we're looking at power levels and current levels increasing on those types of processes. So that's a market that I think we'll probably be participating in. And again, sort of a 2022 type of time frame for that.

Okay. Is that -- how significant would the opportunity be?

Well, that's a very -- that's going to be a very large market, right? If you look at the number of processes and inference versus training, you're looking at maybe 5x in terms of the quantity of processes that will go there. So that's a significant market expansion that will come when the -- you see the autonomous vehicles out there and other robotic type delivery system. So that whole infrastructure has to get built out. So...

I had a [cadet] engineer over for dinner last night. He went back today and he's going to be in a 14-day, what do you call it?

Isolation quarantine.

Isolation quarantine, working on Iveco to deliver to homes with AI chips and a variety of perception type challenges. Wherever I turn, I see these kinds of opportunities, right? It's going to be, I think, a very significant area of opportunity. A lot of these things, for instance, this particular company is in the phase of early development. And for sure, not all of them are going to make it. They're competing, among others, with the likes of Amazon. But again, wherever we turn, we see more and more opportunities for AI in a variety of forms. In autonomous driving in particular.

Yes. Take a look at our new robotics video on our website, that's pretty cool. That will show you some of the areas that we're getting into.

Okay. Great. Congratulations on a great quarter.

The next question is coming from the line of John Dillon.

I think you answered this already, Patrizio, but I just want to make sure I got it right. It was on gross margins. And I think what I heard was you think you saw the bottom on gross margins last quarter. And you expect increases in the next 2 quarters, but it's going to take a while to get to the gross margins that you really expect, and that's maybe 20 points higher, but that's down the road. Is that a fair assessment?

Yes.

Excellent.

So I mean, obviously, there's going to -- nothing is ever a straight line, right? But I think the trend should be a positive trend with a time scale of a few years to get to where our margins belong given the level of technology, the investment, the intellectual property, the patents, the unique capabilities that we have being well above any competitor in the industry.

Excellent. And did somebody mention deferred revenues? Could you talk about that a little bit?

Sorry, what was that, John?

Did somebody mention deferred revenues? Jamie, did you mention that?

I don't recall mentioning it, but it's obviously tied to a lot of our development projects where we book both deferred revenue and deferred cost. And then when we can recognize it under GAAP, we do so. It's a recurring...

We have projects where the work might be done. (inaudible) might have been [a shant], it might even have been paid for, but we can't recognize it, right? We got some.

How much deferred revenue do you have?

I'm not sure that we can get into specifics about that. But...

There are accounts on the balance sheet, you can see them. It's clearly presented.

Again, congratulations.

So operator, do we have 1 more question?

Yes, we actually -- we have the last question and is coming again from Quinn Bolton.

Just wanted to follow-up on a -- just a question. Phil, you made a comment that on the VR14 boards, you thought that perhaps 40% to 50% of those boards might be 48-volt, giving you a great opportunity for the 48 to 12 NBM product. I'm just kind of curious, do you -- I mean, is that true beyond your large hyperscale motherboard customer today? I mean, do you see most of the hyperscalers moving to 48-volt with the VR14 boards?

The data that we've seen is that over 40% of server blade developers are moving to 48 volts. That's what they're moving to for VR14 and other types of processors, CPU boards, not just from Intel, but AMD as well. And then if you look at the -- sorry, if you look at the VR14, just to jump back a little bit here and explain. So the VR14 boards, if they've got no AI capability at all, they're still dual processor, but they dissipate today about 1,500 watts, right? Once you start adding AI in there, they go to about 3 kilowatts. So you get to the point where you really can't have a 12-volt infrastructure and put many of those blades in a rack. So you have to make the jump to 48-volt. So the server developers are moving there.

And if you look at the hyperscalers, the estimate right now is 25% of the worldwide hyperscaler companies, including China, Europe and North America, whatever, about 25% of them are putting in place 48-volt data centers. So that's big numbers compared to right where we were 2 or 3 years ago. So for Vicor, the opportunity is the 48 to 12, where the current levels, Patrizio mentioned earlier, the sweet spot being 400 or 500 amps and up. But some of those CPUs are still 250, 300 amps. Multiphase is okay, but they're 48-volt infrastructure now. Opportunities for us with NBMs but also regulated NBMs, which we call a DCM, so there's opportunities there for us in that general server blade cloud search type of application. Yes, and that's additional to what we've been talking about, which is a big AI story, right? That's what we've been spending a lot of time talking about the last few months.

There are no more questions.

Very well. Talk to you in a few months. Thank you.

Thank you, everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.