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 Shandor and I am your Event Manager. During the presentation, your lines will remain on listen-only. Operator instructions were provided. 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, Shandor. 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 three 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 the 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 three 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 recur. 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 Products' revenue rose 2% sequentially reflecting a recovery of Asian markets, notably China, offset by reduced domestic shipments, reflecting the influence of COVID-19 on US 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 US 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 three-tenths of a 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, US Customs is yet to address our duty drawback filings. So we have yet to recover any amount of the total of $9.4 million paid 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 mainly audit and legal costs, a decline in travel costs within 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 reported 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 non-cash 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 five-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, 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 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 underwriters' over-allotment 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 expected to disburse approximately $25 million before year-end, with the balance to be disbursed 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 mid-year 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 Products' bookings in July continue 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 backlog 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?

Thank you very much. So everyone, your question-and-answer session will now begin. Operator instructions were provided. All right, we have already received a couple of questions. And the first question is coming from the line of Jon Tanwanteng. Your line is open now. Please proceed.

Good afternoon, gentlemen. Thank you for taking my questions and the very nice quarter.

Hi, Jon.

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 fair?

Yes. So diminishing, right, things are more stable now than they were earlier in the year and certainly there has been plenty of opportunity to adjust to the new environment. But with some suppliers, did they see occasional issues?

Yes, I'll point out. As we discussed in the MD&A of the quarter, absenteeism has improved significantly from what we experienced coming out of Q1. So we have some areas of less risk, but there is still risk.

Understood. And moving on to the bookings, $87.5 million is a fantastic number. I was wondering, is the timing of those bookings any different from your regular order pattern in terms of when they will be delivered? Should we expect that to hit your P&L over the next one to two quarters, or are there different delivery patterns involved?

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 or 48 to load products that we supply into the datacenter 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 like almost 9% in Q2, 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 weeks to 24 weeks. We've maintained those. We don't anticipate reducing them anytime soon because of the supply chain challenges, but that factors in a little bit as well.

Got it. And then just to clarify, you are expecting improvement in the next quarter on your orders for Advanced Products, 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. One last question from me: a large AI player, or at least a unicorn by many standards, unveiled a new product yesterday, and I didn't see Vicor on the product board they showed to the public. Are you involved in most of these projects as you've been telling people in the past?

Yes, you're talking about Graphcore?

Graphcore, yes.

Graphcore, yes. So no, so there was another announcement from a company called Groq as well. They announced an AI inference chip, a very specialized type of product. And both of those companies are using multiphase at the moment because their current levels are still quite low, they're in that 300 amps range, but I know that next-generation chips are going up significantly. And they are moving to 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 companies start off in the 300 to 400 amps range for their first silicon and next silicon has got to go up in performance to compete with NVIDIA. So that's where we step in.

Understood.

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 it is still tolerable, but it just becomes intolerable as you get past 400, 500 amps and all of these companies, unicorns and otherwise, are all heading for the same boat in terms of being able to compete with each other.

Understood. Thank you for the call.

Thank you very much. The next question is coming from the line of Hamed Khorsand. Your line is open now. Please proceed.

Hi, I just wanted to ask if the increase in Advanced Products is related solely to inventory stocking?

I don't think any. Phil, did you want to add?

Yes, I don't think there's any. I think that's the simple answer.

Okay. And my other question was are the manufacturing inefficiencies you encountered manageable or is it something that's going to continue for the foreseeable quarter?

So recoveries, as we discussed earlier, 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 are much better than they used to be. As Jamie mentioned, we are essentially back 100%. But we do have some vendors in other areas that are still under-covered. Now, beyond that, when it comes to manufacturing efficiencies, the other factors, not just COVID, is the scale up of new platforms in the early going. It's not unusual, particularly with new packaging technology, to have inefficiencies until we make substantial quantities and get yields to where they reach 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, expecting it to dissolve within the next 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 as we scale up our best 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 released new products a couple of months ago?

No, we are on a steady ramp.

Yes. Increasing. But we really don't want to make comments specific to any one customer but across the board, yes.

Okay. Thank you.

Thank you.

Thank you very much. And the next question is coming from Quinn Bolton. Your line is open now. Please proceed.

Hey, guys, 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 Brick's, how much of that was Advanced Products?

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

Yes. So I think you can do the math based on the numbers that Jamie provides earlier in the presentation.

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

Understood. Second question, and I understand this may be a little customer specific. But yes, one of your lead customers on lateral power has a 48-volt solution as well as 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. I mean PCI 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 would be a great entry point for us, but it's a very different space than the space that we are in. And most of these companies, in terms of the training workloads that they're having to do, that's really where we're playing at the moment, Quinn.

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

Yes, absolutely. I mean that's such a heavy, heavy workload. And again on the inference side as it moves out towards the Edge, those power levels are going to continue to increase. So the workloads are going to continue to go up. So I see us playing in the Edge eventually as well.

Great. And Jamie, obviously you guys had 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 get 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 wall. So fundamentally strategies to perhaps the space, the wing and build it up near to say there is going to be some times when conduits have yet to be provided between the two, but that's being planned to avoid impacting production.

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've 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 are able to manage 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 merely a fraction of advanced schedules. So with some customers, there is nothing unusual about this particular period relative to other periods. I think it's been relatively routine in that regard.

Understood. Okay, thank you.

Thank you.

Thank you very much. The next question is coming from the line of John Dillon. Your line is open now. Please proceed.

Hi. Yes, 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 Asian business sort of returning to strength. So it's sort of across the board, but, yes, we are getting some nice bookings ramps, if you like, from the datacenter AI guys we've been talking about and HPC companies and hyperscalers coming back to ordering what they typically 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 two quarters? Do you see increases in bookings for the next couple of quarters?

Again, looking very far out in a sort of a turbulent time, but yes, I mean, I am confident that the strength is going to remain with Vicor and the products that we have on both the advanced side and we still see good strength on 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. It's not just in datacenter AI space, but in automotive. We're seeing a lot of action there too. Now unfortunately that's a long gestation period. There is no instant gratification; it's initially for a couple of years, but if we look at the medium to long term, say past the next couple of quarters into the '22, '23 timeframe, there is a lot of action that is taking place in automotive that will bolt-on to further developments in AI and datacenter.

Excellent. And that kind of leads right into my last question. That's, if you can give us an update on the design wins: 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 these design-ins for those in the automotive market. Some in the datacenter area. We also serve robotics companies—emerging robotics companies. That's a very exciting market and that has got some great growth potential for us. And also UAVs, lighting, there is a whole host of markets that are fairly broad-based with really large numbers of customers entering those marketplaces. So that's good strength for us. That's on the front-end high voltage bus converters. In terms of the data center AI space or automotive space, yes, we've got more engagements going on pretty much every quarter. This is something new that we're working on and somebody is coming to us with a challenge or opportunity. This is a very exciting time.

In particular, a project for our 4G base PFC solution is in the works now, and I think will lead to what should be by far the most advanced AI solution from a power system perspective. So soon to announce from three-phase AC all the way down to very high currents up to 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 in the next generation system, we're going to be providing the solution from three-phase, and this next generation system is going to be a fraction of the volume of the current generation, because of 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.

Thank you.

Thank you very much. The next question is coming from the line of Kenneth Durana. Your line is open now. Please proceed.

I actually don't have a question, because I've been unable to hear 95% of the presentation. So I just wrap it up.

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. Do you have any question or can I close your line?

No question now.

Okay, sorry. Thank you.

So the next question is coming from Richard Shannon. Your line is open now. Please proceed.

Great. Thanks for letting me ask some questions here as well. Follow on from one of the earlier ones. My question is more specific to bookings within the Advanced Products. So I wanted to get a sense of whether there is a broadening of that base. You've obviously got some larger customers; I think in the prior answer you were 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 48 with lateral power delivery. Those companies are bringing those products to market, but again, they are finding their own hyperscaler customers to work with. So it's early days for us to really understand the forecast on the penetration of those particular chip companies within the hyperscalers, but they tell us that they're winning share and are getting good design-ins. So that's yet to come, but we're still doing really well in that area. Also, you've got the new VR 14 server boards being developed by Intel and some of Intel's customer base, and the data shows that 40% to 50% of those may go 48-volt. That's a number that's been reported. In those types of applications we're providing the 48 to 12 either regulated or unregulated solutions. And that market has a number of competitors in it, but nobody has the density, efficiency and performance that we have. So we expect to get some good design wins in the VR 14 area, both at the hyperscaler companies who will do their own reference designs off of the Intel reference designs, as well as in the contract manufacturers down in Taiwan and China.

Okay, great. Just a follow-up on that, Phil. So if you listen to the OCP summit 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. Is that a fair interpretation from what you said or do you still see some noticeable revenues this year?

I think it will be early next year, Richard. I don't think there'll be heavy bookings this year. We'll see some early bookings 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 margins, a follow-up from earlier and I think Patrizio you were commenting on some previous questions here about getting some maturity in the manufacturing process. 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 projection 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 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 depressing margins, capacity utilization, and lastly 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 and 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 higher than where we are today. We're not going to get there overnight. Let's be clear. This is going to be a multi-year 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. Thanks Patrizio for those thoughts. My last question: obviously, we've had some impact in past quarters from the tariffs for products shipped to China. 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 if tariffs continue in any manner that that business is lower or even lost if the view is that they 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 of relationships between 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. So we don't see—we haven't seen particularly different or concerning issues of late. To your point, the tariffs are still there, both coming and going. We pay tariffs on materials we procure from China. Customers in China pay tariffs on products they procure from us. We are taking constructive steps in terms of diminishing our dependency from a material sourcing perspective from China. I just had an update on that earlier this week and we're going to be largely out of major suppliers in China within the next year to year-and-a-half. It is an ongoing process. Some of it is beginning to happen. It will become more significant next year. Some suppliers are opening operations in Vietnam to mitigate tariffs. Another example would be components that we used to source from Japan that had moved to China for cost reasons; very soon some will come back to Japan because overall costs make sense. These activities are ongoing. When it comes to making our products outside of the US or making some products like Bricks outside of the US, should a worsening of the relationship happen, we have contingency plans, but we have not pulled the trigger on that.

Okay. I appreciate the thoughts. That's all the questions from me. Congratulations on great progress, guys.

Yes.

Thank you very much. The next question is coming from the line of Alan Hicks. Your line is open now. Alan, please proceed.

Yes, good afternoon. I wanted to ask about some of the projects, the large LNG project and satellite project and shifts.

So the satellites would be going up, but that's one of the projects that's 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 and the switching and installation delays, things got delayed, but once again, we are not lacking bookings or backlog. So we have plenty to draw from in terms of raising our 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?

Yes.

Okay. And 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 HP buying and so forth, but we're making good progress. We've got both front-end business there as well as the point-of-load, and both on the CPU side as well as the AI GPUs. So that's going very well. That's a classic 48-volt market; that market transitioned a while ago. So it's a great market for us and we're making good progress there too.

Okay. So you had good shipments in Q2?

Shipments will be increasing as we go through Q3 and Q4. Those programs are a little bit longer in terms of their government programs and they're very high-end 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. As always, these things end up 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 kilowatts of AI in one box. It is going to be a game changer in the industry and will leverage our 4G PFC technology. It is 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 more than a year away, but in terms of initial power production, less than a year away.

Okay. And then, I think someone mentioned opportunities on the Edge. How significant are your opportunities there?

Again, that's a developing market for us because we are looking at power levels and current levels increasing on those types of processors. So that's a market that I think we'll probably be participating in and again a 2022 timeframe for that.

How significant will the opportunity be?

That's going to be a very large market. If you look at the number of processors in inference versus training, you're looking at maybe 5x in terms of the quantity of processors that will go into inference. So that's a significant market expansion that will come when autonomous vehicles and other robotic delivery systems scale. That whole infrastructure needs to be built out.

I met an engineer over dinner last night; he went back today and is going to be in a 14-day isolation quarantine working on systems to deliver AI chips and perception capabilities to homes. Wherever I turn, I see these kinds of opportunities. It is going to be a very significant area of opportunity. A lot of these companies are in early development and not all will make it; they're competing with the likes of Amazon. But whatever we look at, we see more and more opportunities for AI and related systems.

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

Okay, great. Congratulations on a great quarter. Thank you.

Thank you.

Thank you very much. The next question is coming from the line of John Dillon. John, your line is open now.

Hi, thanks again for taking my calls or my questions. 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 two 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. Obviously there is going to be no straight line. But I think the trend should be positive with a timescale of a few years to get to where our margins belong, given the level of technology investment, the intellectual property and unique capabilities that we have being well above any competitor in the industry.

Excellent. And somebody mentioned 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 specifically, 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 item.

We have projects where work might be done and the customer might have paid, but we can't recognize revenue yet. We have some of those on the books.

How much deferred revenue do you have?

I'm not sure that we can get into specifics about that on the call, but the balances are presented on the balance sheet.

They're clearly presented in the accounts on the balance sheet.

Excellent, thank you. Thank you very much and again congratulations.

So operator, do we have one more question?

Yes, we actually have the last question and this is coming again from Quinn Bolton. Your line is open now.

Hey, just wanted to follow-up on a question. You made the comment that on the VR 14 board you thought that perhaps 40% to 50% of those boards might be 48-volt giving a great opportunity for the 48 to 12 NBM product. I'm just kind of curious—does that hold beyond your large hyperscale motherboard customer today? Do you see most of the hyperscalers moving to 48-volt with the VR 14 boards?

The data that we've seen is that over 40% of server blade developers are moving to 48-volt. That's what they're moving to for VR 14 and other types of processor CPU boards, not just from Intel but AMD as well. If you look at VR 14, if you've got no AI capability at all, you still dissipate about 500 watts per processor. Once you start adding AI, you 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. The server developers are moving there. And if you look at the hyperscalers, the estimate right now is about 25% of the worldwide hyperscaler companies are putting in place 48-volt datacenters. So that's big compared to where we were two or three years ago. For Vicor, the opportunity is the 48 to 12 where the current levels—the sweet spot being 400-500 amps and up—but some CPUs are still 250-300 amps, where multi-phase is okay. But they're using 48-volt infrastructure now. Opportunities exist for our NBMs and also regulated NBMs, which we call the DCM. So there are opportunities in the general server blade, cloud and search type of applications; that's going to be significant.

Great, thank you.

And that is in addition to the big AI story that we've been spending a lot of time discussing over the last few months.

Right, right. No, that's great.

Thank you very much.

Thank you very much. There are no more questions.

Very well. Talk to you again 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.