Good day everyone, and welcome to the Vicor Earnings Results for the Third Quarter Ended September 30, 2021. My name is Linda, and I am your event manager. I would like to advise all parties that this conference is being recorded. With that, I would like to hand over to Jim Schmidt, Chief Financial Officer. Please proceed.

Thank you, and good afternoon. Welcome to Vicor Corporation’s earnings call for the third quarter ended September 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 financial results for the three months ending September 30. This press release has been posted on the Investor Relations page of our website, www.vicorpower.com. We also filed a Form 8-K today related to the issuance of this press release. I remind listeners that this conference call is being recorded and is the copyrighted property of Vicor Corporation. Various remarks we make during this call may constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Except for historical information contained in this call, matters discussed on this call, including any statements regarding current and planned products, current and potential customers, potential market opportunities, expected events and announcements, capacity expansion, as well as management’s expectations for sales growth, spending, and profitability are forward-looking statements involving risks and uncertainties. We can offer no assurance that any forward-looking statement will prove to be correct, and actual results may differ materially from those set forth in or implied by our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2020 Form 10-K, which we filed with the SEC on March 1, 2021. This document is available via the EDGAR system on the SEC’s website. Please note the information provided during this conference call is accurate only as of today, Thursday, October 21, 2021. Vicor undertakes no obligation to update any statements, including forward-looking statements made during this call, and you should not rely upon such statements after the conclusion of this call. A replay of today’s call will be available beginning at midnight tonight through November 5, 2021. The replay dial-in number is 888-286-8010, followed by the passcode 33342563. This dial-in and passcode are also set forth in today’s press release. I’ll now turn to a review of our Q3 financial performance after which Phil will review recent market developments, and then Patrizio, Phil, and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly change for P&L and balance sheet items and refer you to our press release or our upcoming Form 10-Q for year-over-year comparisons. As stated in today’s press release, Vicor recorded total revenue for the second quarter of $84.9 million, down 11% from the second quarter total of $95.4 million. Revenues came in substantially below expectations because of semiconductor component shortages compounded by our own capacity constraints. Component shortages were due to limited wafer allocation and long cycle time backend semiconductor component packaging processes. Advanced Products revenue rose 6% sequentially, while Brick Products revenue declined 23.7% from the second quarter. Shipments to stocking distributors declined 36.6% sequentially primarily due to a decline in Brick Products. Exports for the second quarter decreased sequentially as a percentage of total revenue to approximately 62.4% of consolidated revenue from the prior quarter's 64.3%, primarily due to decreases in Brick Products. For Q3 Advanced Products share of total revenue increased to 51.2% compared to 43% for the second quarter with Brick Products share correspondingly decreasing to 48.8% of total revenue. Turning to Q3 gross margin, we recorded a consolidated gross profit of 50.4%. Gross margin dollars declined by 14% sequentially due to the decline in volume but increased 28% from the same period a year ago. Margins remain under pressure from high tariff charges though the Q3 charge was approximately the same as Q2’s charge of approximately $1.9 million. We expect to see improvement over time, in part reflecting our ongoing efforts to reduce component imports from China. I’ll now turn to Q3 operating expenses. Total OpEx increased 3.3% from the second quarter driven by increased compensation, legal and consulting fees, and recruitment expense. The amounts of total equity-based compensation expense for Q3 included in cost of goods sold, SG&A, and R&D were approximately $259,000, $1,033,000, and $575,000 respectively, totaling approximately $1.9 million. For Q3, we recorded operating income of $12 million representing an operating margin of 14.1%. Turning to income taxes, we recorded a net tax benefit for Q3 of $886,000 representing an effective tax rate for the quarter of minus 7%. The net tax benefit for Q3 and year-to-date was primarily due to a result of the income tax accounting required for stock options exercised during this period. Net income for Q3 totaled $13.3 million. GAAP diluted earnings per share was $0.29 based on a fully diluted share count of 45,034,000 shares. Before I turn to our financial position, just a brief update about COVID-19 and our workforce. As previously discussed, as a designated essential manufacturer using masks and practicing social distancing from the onset of the pandemic, we have continuously operated three shifts at our Andover manufacturing facility. Cases and absenteeism due to COVID-19 are now negligible. Nevertheless, because much of the potential influence of the COVID-19 pandemic is associated with risk outside of our control, we cannot estimate the extent of such influence on our financial or operational performance or when such influence might occur. Turning to our cash flow and balance sheet. Cash, cash equivalents, and short-term investments totaled $228.9 million at the end of Q3. Accounts receivable net of reserves totaled $51.1 million at quarter end with days sales outstanding for trade receivables, basically steady at 40 days. All balances are current. Inventories net reserves increased 11% sequentially to $63.4 million. Annualized turns decreased slightly to 2.91 from 3.12 for Q2. Operating cash flow totaled $10.1 million for the quarter. Capital expenditures for Q3 totaled $15.2 million. We ended the quarter with a construction in progress balance of $36 million, leaving approximately $20 million of our capital budget scheduled to be spent through the year. Our factory expansion is proceeding on schedule and on budget. I’ll now address bookings and backlog. Q3 book-to-bill came at 2.0, and one-year backlog more than doubled from the same period last year. Turning to our outlook for the fourth quarter of 2021, our practice continues to be to not provide specific quarterly targets. However, given our assessment of available semiconductor components and our capacity, we are planning for a 20% increase in revenue in Q4. Availability of semiconductor components has improved since Q3 because of reduced cycle times and backend processes and a substantial increase in our wafer allocation. Easing supply chain bottlenecks and recent increases in our Advanced Products manufacturing capacity should enable a significant step up in Advanced Products revenue. We continue to focus on improving product-level profitability. Furthermore, we do not anticipate any meaningful increases in operating expenses. While substantial, further improvements in gross margin will have to await production from our new vertically integrated factory. We expect incremental revenue to drive earnings per share, given the scalability of our operating model. With that, Phil will provide an overview of recent market developments and then Patrizio, Phil, and I will take your questions. I ask that you limit yourselves to one question and a related follow-up so that we can respond to as many of you as we can in the limited time available. If you have more than one topic to address, please get back in the queue. Phil?

Thank you, Jim. Good afternoon, everyone, and thank you for joining us. In Q3, we achieved record bookings, a record book-to-bill, and record backlog. Bookings for AI and data center customers for factorized power solutions and 12-volt to 48-volt bridging bus converters were robust. Our visibility into production programs is longer than we have seen on previous projects. Some of the next-generation programs will also run in parallel with existing programs, which is a new strategy for some of our data center customers. Next-generation AI processor and data center CPU server programs in early stages of development and pre-production will provide $70 to $150 of Vicor content per board. New clustered processor AI applications offer much higher dollar content for our proprietary vertical power delivery solutions, whose IP protection and technical challenges set us further apart from our competitors. Expanding our serviceable available market within the large data center market is always an objective for our teams, and evaluation of our advanced AC to DC solutions has started at lead customers, with derivative products in development that will target applications for both single-phase and three-phase AC to DC across the high-performance computing, industrial, and aerospace and defense markets. We are also engaging with customers who are deploying ASICs for high-speed optical networking units, which have power delivery challenges due to major increases in core rail currents above 1000 amps. Our first major customer in this new market will be in production in Q3 2022. As the data center industry shifts to 48-volt based rack power delivery, the upcoming open compute forum will feature 48-volt power distribution and the need for a more robust ecosystem of high-density modular power solutions rather than low-density discreet approaches. All of this validates decisions we made to commit to this market before it emerged 10 years ago. Our OEM licensing practice will facilitate an ecosystem of high-performance power system solutions for the AI and data center industry. Anticipating power delivery challenges and trends and innovating to deliver solutions ahead of market needs is Vicor’s track record. This is playing out with additional growth in Q3 for our pipeline of automotive opportunities. As electrification commitments grow within OEMs for additional models and new electrified vehicle introduction dates solidify, we are not only seeing more opportunities in pure EV, but also in plug-in and mild hybrid platforms, as well as the truck industry broadening and diversifying our market and customer base. With this backdrop of increasing growth opportunities, we have decided to restructure the front end of our business into market-based business units. The four business units will be high-performance computing, automotive, aerospace and defense, and broad markets. This structure aligns with our five layers of growth strategy and brings a higher level of focus on a global scale to our target markets, customers, and applications, as well as increased responsibility for the team regarding funnel conversion, revenue streams, and gross margin improvement. Because of the high level of technology reuse and applicability of our innovations across markets, engineering and product development will remain centralized. Patrizio, Jim, and I will now take your questions. Thank you.

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

Absolutely. We have two upcoming questions already. The first one is from Jonathan Tanwanteng. Please proceed.

Hi, good afternoon, guys. Thank you for taking my questions. That’s a really nice number you have on the sequential increase in Q4. I was just wondering, how much of that is the catch-up from Q3 and how much of that, I guess, is organic demand? I guess that – it’s to the upside of maybe what you had been thinking when you had said that 7% sequential increases over the next several quarters way back in Q1 and Q2.

So, it’s all about demand. Our backlog, as we entered the fourth quarter without any allowance for turns business, would have us up by approximately 20%, and you would expect that turns business would layer on top of that a substantial incremental amount. So, the demand is there. We’re still capacity-constrained, and there are still challenges with respect to semiconductor components. As Jim articulated in his prepared remarks, those challenges have to do with both the back-end processing after completion of wafer fab and wafer allocation. What has improved considerably since Q3 is that the back-end bottlenecks, which were in part related to COVID and other factors, have been largely relieved. So, the components that did not show up in time because of back-end bottlenecks in Q3 have shown up or are about to show up in time for our builds in Q4. Furthermore, we have recently received commitments from some more foundries that result in considerably greater allocation both within Q4 and more significantly into 2022. We believe that in terms of the component gates that in effect either launched within the third quarter in terms of a compound capacity constraint. As we all know, we’re already there. We’ve made a great deal of progress.

Got it. Thank you for sharing that color. And then second, I saw in the press release that it was mentioned that you signed a license with some of your customers, at least one of your customers who was buying these infringing products. Can you talk a little bit more about that? Does that set the tone for the other customers out there that are doing this and kind of – what kind of benefits do you expect to see from this?

So, we’re not at liberty to say anything regarding the identity of the licensee or any of the key parameters of the licensing deal that we executed in the third quarter. I think, in general terms, I can tell you that it points to the beginning of new kinds of relationships on the licensing front. The industry's growth needs and technology needs are very compelling, particularly at the time of capacity constraints that there is a legitimate interest from customers to secure their requirements, and as we said, our enabling technology has only been available from Vicor. That’s something that customers would like to be able to overcome in various ways. So, the OEM license provides customers with the ability to mitigate concerns regarding exclusion orders for the importation of products into the U.S., and procure modules, incorporating those modules into systems even though those modules would otherwise infringe Vicor patents. We believe there will be more licenses, and we view this as a complementary component of our business model to contribute to margins profitability while providing the industry with the ecosystem that many key customers seek to have.

Okay, thank you. I’ll jump back in the queue.

Thanks, Jon.

The next question is coming from Quinn Bolton at Needham & Company. Please go ahead.

Hey, guys, congratulations on the nice bookings activity. Before I get to my bookings question, I just wanted to come back to your outlook for the fourth quarter. Obviously, component availability in your manufacturing capacity are significant constraints. And I’m just curious, do you guys feel confident that where you sit today, you have enough component availability and internal manufacturing capacity to grow the business 20% quarter-on-quarter?

We do, but I want to be clear that this is not a slam dunk, to put it figuratively. In fact, we’re at the beginning of the quarter, and a lot has to happen. It’s not that we have as of today all of the semiconductor components we need in order to make the revenue plan for the quarter. They are on their way, and they will be underway through the first two-thirds of the quarter. So, there are still risks out there, but we feel improvements have been made with respect to the back-end, which has made available components that were destined for us in the third quarter but couldn’t be processed in time. That, coupled with, as I mentioned earlier, the ability to achieve greater utilization of constrained capacity by not being gated by the inability to start due to lack of particular components, sets us off to a much faster start early in the quarter and bodes well with respect to the outcome of the quarter as a whole.

Thank you, Patrizio. My second question is just on orders. Obviously, I think most of us on the line that are following the company have been very impressed with the acceleration in the bookings number, and I think most of that’s being driven by Advanced Product bookings where I think Advanced Product bookings last quarter was probably over $90 million; this quarter it looks like you’ve booked over $100 million, maybe as much as $120 million in Advanced Product bookings. My question is, how broad-based is that Advanced Products booking activity over the past couple of quarters? Is it highly concentrated among just a couple of GPU, CPU, ASIC, accelerator customers, or are you starting to see very good diversification including front-end or AC to DC, including the NBM modules? Can you just give us some color on how broad-based that bookings activity is? Thank you.

Hi, Quinn, this is Phil. So, as we’ve been talking over, I think the last 18 months, the customer base for Advanced Products in our data center AI has been broadening quite a bit from one or two companies, major companies, a couple of years ago to now well over 12 to 15 type quantity of customers, which are contributing to that backlog on the bookings number. In terms of the activity there 48 to 12, as well as the bridging 12 to 48 and 48 to 12 on some of the CPU server boards, it’s very strong. We are entering the phase of continued AI growth with our existing customer base, but also with the new Intel and AMD CPU platforms coming on, and in data centers with some of the hyperscalers that have gone 48-volts, we’re seeing strength there. Coupled with the AI accelerated growth, which are 48-volt based, we’ve seen significant growth in our 12 to 48-volt bridging converter business because hyperscalers that have still at 12-volts in their infrastructure need the 12 to 48 to use the latest greatest accelerator cards and multiple clustered AI accelerated cards. So it’s very broad spread.

So just a quick follow-up, is it pretty well balanced between the types of MCM or MCD components versus the NBM bridging products, or does it skew more heavily to the sort of point of load MCM, MCD components today still?

I think the 48 to 12 – 48 to load is the largest piece of it, but the NBM is doing really well in the 12 to 48 space. One of the reasons being is that typically in those applications, you’ve got six to eight NBMs per power board. So, the communities add up pretty quickly, and the bookings add up pretty quickly.

Got it. Thank you for the color.

Just a bit more on that. The NBM market opportunity next year is quite substantial. Looking at it from the timing perspective, it hasn’t been all that significant, but it promises to be. In fact, it has been with recent orders, just within the last couple of days, a $4 million order for NBMs, quite significant as we enter in the first half of next year and the middle of next year.

Thank you.

Thanks, Quinn.

The next question is coming from Richard Shannon at Craig-Hallum Capital Group. Please go ahead.

Well, hi, guys. Thanks for taking my questions. I might follow up on the topic of licensing. Patrizio, I understand you’re not allowed to say much about this. Maybe I’ll ask a couple of questions and see if you can push the envelope here. Can you talk about any particular applications that the Fed licensee is working in? And then also, in terms of the nature of the agreement, whether there’s upfront in ongoing royalties or just upfront; any nature of understanding there would be great.

So, again, I need to keep it at a very general level that would not in any way infringe on the confidentiality constraints we have with the licensee and future licensees. The license factor is fundamentally a pay-as-you-go, and the mechanism involves the placement of the license deals based on the licensees’ choice to get a license for particular products to be used in particular systems, and it’s incumbent on the licensee to decide for which product – a product may otherwise infringe a patent to get the license. As mentioned in the press release, we have received license deals and, in fact, revenue even though those purchase orders will result in cash flow starting this quarter. So, this is an example of licensing opportunities to come. We have a well-thought-out methodology for potential licensees, and I would like to outline that whether or not we have a license from them, they have a serious risk of a potential exclusion order that could affect their systems, which are quite valuable, and that should motivate them to seek a license earlier rather than later because royalty terms escalate with time. So, we believe that having accomplished the first licensee, there will be more. We’re aware of a number of OEMs that we believe will need a license if they want to continue accessing the kinds of products they need for their systems.

Okay, Patrizio, thanks for all that detail. My second question is on the gross margins. Not only for the fourth quarter, but I guess looking at it in the next few quarters here as well. Jim, I think I heard you correctly in your prepared remarks; you seem to be suggesting a flattening of gross margins here in the fourth quarter until we see some throughput in sales from products in the new facility. Wouldn’t – it wouldn’t go up until then. So, I want to make sure I’m understanding the dynamics here that you were suggesting in your comments and how we should look at gross margins in the next few quarters?

Sure. First of all, I do have to say that it’s our practice to not provide any specific guidance on gross margin in upcoming quarters. I didn’t mean to imply that we have to wait for the new factory to come online for gross margin improvement per se. We have volume increases driving gross margin leverage; that’s a fact in the industry. It’s not something that’s true just for Vicor; it’s true for anybody. We’re not – I didn’t – that’s a comment that I made last quarter as well. It’s just a standard comment we want to make that highlights the fact that we’re all very anxious to get our own factory online. As it comes online, we gain all kinds of efficiencies. There is no outsourcing of some of the process steps. We gain more leverage as volume goes up, leading to greater efficiency inside the factory. That’s going to be a significant milestone for us.

I’ll add to that. Looking at it in terms of the past, I think I’m not saying anything that wasn’t expected, but we’re saying in Q3, the gross margins and profit margins would have been substantially higher if not for the shortfall in revenue. That cost us several points of margin within Q3. To Jim’s point, rising revenues immediately will lead to better margins even before we get the full leverage of the new facility.

Okay, great. Thank you for all the detail, guys. That’s all from me. Thanks.

Thanks, Richard.

The next question is coming from John Dillon. Please go ahead.

Hey, congratulations guys on the bookings in the backlog. Really great numbers. Phil, I do have a question on the bookings number. I’m just wondering if the increase in bookings was due to customers securing a place in line or customers priming the pump, or are those bookings numbers sustainable?

So, the programs that we’re involved in now, John, and the visibility we have, we’re seeing increased demand for the AI accelerator cards across the data centers. The deployment of those cards is significantly increasing with all the hyperscalers on a global level. That’s a very strong robust business. Along with that increase, many of the rack systems are still 12-volt based. They need the 12 to 48 to power those cards, so we’re getting sort of a double whammy, by having the best high-density bus converter in the industry available today. We’re winning on both ends with both the hyperscalers deploying the AI and also with the guys actually with the AI cards. So, it’s strong right now.

So, I think what I’m hearing is the bookings are sustainable and even growing; do you see that in the future?

With Advanced Products, yes, absolutely. Yes.

And then along with that, I would imagine you have pretty good pricing power. Are you guys raising prices?

Well, we’re always looking to price on value. That’s what we do. We look at the value that we bring to our end customers and we do that with the whole portfolio. It isn’t just on Advanced Products but even on our Brick or legacy business. We adjust prices regularly, and we do that on a case-by-case basis by product family, market, or customer, but we really do try to price on value.

Got it. And then a follow-up would be, yes, you mentioned the 12 to 48-volt, so I’m going to scratch my head. Why would customers want to do that? Why customers and why they’re going from high-voltage down to 12 voltage back up to 48? One thing, Patrizio, you kind of mentioned this in the last call, but I mean, aren’t you going to see a huge conversion to all 48-volt racks or do you see that coming?

Well, I don’t think it’s happening overnight. Key developments and turning points in the industry bring about adoption but then adoption requires time to get implemented. It’s absurdity to go all the way down to 12 to go back up to 48, and back down to 1.8-volt or sub-1-volt as necessary, that will provide even greater motivation for the balance of the hyperscalers to convert to 48-volt racks. There is plenty of motivation, but not just coming from the absurdity of unnecessary stages of conversion to voltages that are too low for efficient power distribution back up to voltages that are necessary to achieve what should be done downstream within the rack.

John, this is Phil. Data centers are going to go through major changes over the next three to seven years. If you just look at the amount of AI that’s being added, they’re just not equipped to get the data in and out with speeds that they want. There are huge networking changes that are going to come in terms of moving from gigabytes to terabytes of moving data in and out to support autonomous driving and other machine learning applications. The data center footprints that have all of the renewables to power them require tens of megawatts. It’s not easy to move a data center to a different location. You’ve got to refurbish it and take it to the next level of capacity and capability. All of this is going to change, including 48-volts in the rack, more AI, and higher performance optical networking. It’s really going to go through a significant change over the next three years to seven years.

Another element of the re-engineering of the racks beyond the electric part of it is thermal management. The power levels within the racks motivate the transition to the most efficient power distribution voltage of 48-volts, which is in reality 54-volts, and that motivation brings about thermal management challenges. Before too long, many of these racks should be cooled by liquid cooling instead of air. We should point out that within the third quarter, we delivered the first units of a very high-density liquid-cooled front end to a lead customer for that particular capability.

Guys, this is really exciting. Thank you so much. I’ll get back in the queue. Great quarter. Great visibility. Thank you.

Thanks, John.

We have a question from Gus Richard. Please go ahead.

Yes, thanks for taking my question. I just wanted to circle back on your constraints. Is the plating capacity still constrained, and do you need the new facility to come up to relieve that?

To your point, that’s the key capacity bottleneck. We’re working on it in a number of ways. We are complementing the capability of our plating partner by deploying our own human resources within their facility to enhance the available capacity. We have also recently taken steps to bring in another partner using an enhanced capability closer to Vicor's main manufacturing facilities. In a couple of weeks, we expect to turn that second partner on for further capacity improvement. These are stepping stones to deploying some very high-volume state-of-the-art plating capability within our own facility. It’s surprising to think of something that is relatively low tech, as far from being the case here. What I’m referring to is about $25 million worth of equipment on 40,000 square feet, which will be state-of-the-art for this class of products.

Got it. That’s very helpful. Thank you. And then on the gross margin pressure, it sounds like it’s primarily absorption, but I was wondering if there was any influence from higher input costs or, and/or mix.

There is no real pressure from mix. Our Brick Business is actually fairly decent gross margin. Regarding higher input costs, we were not accepting inflation costs in our raw materials without passing those costs on in many cases to our facility. So, we’re absorbing that, but I hope that answers your questions.

It does. Thank you. And then the last one for me is just looking at the backlog, and given the supply constraints in the world. Are you seeing any aging in that backlog? Is some of that moving? Is some of it scheduled further out to normal, or has the distribution backlog remained the same over the last few quarters?

We have obviously implemented longer lead times, providing us more visibility. It ranges from 20 weeks out to 30 weeks for different types of product families. The backlog situation, I get asked about people double ordering, and we don’t see that. It’s real demand. We have a very unique product. It’s not a commodity product, not a pin-for-pin compatible market for our products. We have dedicated unique customers that buy our products, which they have for many years on the legacy side. On the Advanced Products side, we’re building a whole new business in data centers and AI. We have good visibility into that and the end market demand and the growth there. I’m very confident in the backlog we have in terms of its validity and reality.

To be clear, it’s within 12 months. Everything is scheduled within 12 months, so that’s what we define to be the backlog.

Got it. Perfect. Thank you so much. That’s it for me.

Thanks, Gus.

We have another question from Jonathan Tanwanteng. Please proceed.

Hi guys, thanks for the follow-up. Just another question on the capacity and the constraints that you have. I guess that you’re putting a lot of good plating capacity in place this quarter and especially the new facility next quarter and in Q1. I was just wondering how confident you are in increasing your wafer allocations and the other component in the chain that you need as we get into the first half of next year, because I know in many other places these things are getting worse and not better. So, I’m just wondering what’s your visibility into the things that you can’t control as you head into the next year.

So, we have visibility, and we’ve been allocated significant step up in wafer outs in November and even more so in December. The numbers for next year are not set in concrete yet, but we have been informed that we’re going to receive the numbers we need. As you can imagine, we have quite a bit of leverage in getting wafer capacity because of the critical programs that our chips support, and this is obviously a factor regarding access to what’s necessary for us to manufacture the products that enable AI and data center systems to operate.

Got it. That’s helpful. And I was wondering if you could give us an update just on the auto business. How many platforms do you have at this point? Are there more coming into the pipeline? Just give us an update on when you think that will become a significant source of profit and revenue for you.

So again, we are starting production in mid-2023 with some early customers there, but we have more collaborations that occurred in Q3. Collaboration typically takes six to nine months to work through in terms of building prototype systems and testing them, and then we’re now moving the customer to a stage where we call the conversion stage, which is where we move to a commitment for a startup production date. Hence, we're always shooting for that. At this moment, we have two large OEMs with start of production dates, and we have a whole host of collaborations moving towards SOP dates in the next six to nine months. It’s a very exciting funnel we have in automotive.

Got it. Thanks, and again, congrats on the big backlog.

Thanks, Jon.

We have a question from Alan Hicks. Please proceed.

Yes, good afternoon. You’ve invested over $0.5 billion on these new products, and it now looks like you’re going to be solidly profitable for you as far as I can see. Where are you at in terms of tax loss carryforwards, and how do you expect to get back to a normal tax rate?

Hi, Alan, Jim Schmidt here. At this point we’re not going to comment on next year. I will tell you that the current year is status quo. We expect the tax rate, it’s toggling between 4% or minus 7%. We have a tax benefit often due to stock option exercises that are occurring. We’re not going to comment at this time on next year, but stay tuned. The next call I think we’ll be in a better position to talk about that going forward, but that’s what we are prepared to say now.

Okay. What are you at in terms of your tax loss carryforwards? I think it was in the $30 million range?

I think that’s right. Yes. And that’s still on the books. We’re not – it’s a fairly complicated topic. We’re working with our tax planners on that, and we’re ready to say status quo for the balance of the year. After that, we’ll talk again in January.

Okay. But I would anticipate that you probably used that up next year. I would think if you’re going to make at least $30 million profits next year.

It’s more complicated than that. Please remember there are stock options exercised that are tax benefits along with other variables.

Okay. And then also there was talk a few quarters ago about getting some of the tariffs that were paid applying them back. I think they were, if I remember, six months ago they were in the $4 million range; I think it’s been growing since.

In my prepared remarks, I mentioned that the tariff expense in the P&L and cost of sales was $1.9 million, which is approximately what it was last quarter. We are making progress on license and tariff expense. To total, it’s actually a significant amount of time people are spending on that activity right now, and we did have – we did make incremental progress. Sometimes it’s a bit slow incoming since we’re discussing products from SAM, but that work is in progress.

Okay, so you still expect to get that money back in this quarter?

Yes.

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

Yes, okay, good. Thank you very much.

And we have another question from John Dillon. Please proceed.

Hey, guys. Patrizio, you said that you’ve got some front-end products, I think you delivered this quarter, but I’m wondering if you could give some more color on all the front-end products. Are you guys actually actively booking orders for that? How’s it going? Are they going into the same markets? So, maybe you can give us a little color on that. How are you doing?

As of now, we have two major programs that share a common denominator: three-phase input with high power 48-volt, 52-volt, and 54-volt outputs. These programs reflect the general market needs we aim to address. The lead customers provided us with an opportunity to produce state-of-the-art solutions. In one case, it’s natural convection-cooled, a solution that doesn’t require either a fan or liquid cooling, which is in effect at one extreme. In the other case, it’s an extremely high-density solution that is liquid-cooled and plugs into rack systems, delivering 20 kilowatts in a footprint that is about the size of an iPad. Imagine a very thick and heavy iPad providing 20 kilowatts from three-phase AC to 52-54 volts. That’s the kind of solution that's necessary for market needs in the years to come.

We haven't really stepped on the gas yet with that product. We’re obviously working on some early customers and derivatives, as I mentioned, single-phase and three-phase. But we’ll likely wait until Q2 next year before we really put our foot on the gas and start ramping up activity on that front.

So, Q2 you’ll really start the bookings aspect of it?

Yes, we’ll see a lot of marketing from us, a lot of activity in the customer base worldwide. We’re really going to put our foot on the gas with this stuff because it's very special.

So, along those lines, until you talked about the bookings, the numbers, and you see they’re increasing, if I do my math right, you guys are going to be filling up the new factory very quickly, so you must be looking at a new factory. So, I’m just wondering what are your plans for a new factory and what’s the timing of that new factory?

Jim and I recently visited a candidate for a new facility within the last 10 days. I believe it's still premature to take that step. I think we have quite a bit of capacity within the expanded factory. I’ve had two tours of the expanded factory within the last 10 days. I’ve been very impressed with what the team has done with the foundational expansion. In fact, much equipment was relocated within the existing walls of the factory during the third quarter, which has impacted throughput. There’s been a lot of work within the factory to support a level of capacity that might exceed our targeted goals. We still have time before taking the next step for increased capacity.

Great. So, it sounds like you’re going to beat your goal of $715 million, and a new wing looks like it could also achieve you even higher.

I believe we can. I think this factory will be very efficient. It has greater capacity potential than targeted, partly due to the product mix. Many recent design wins are for thinner chips, which can process faster. We have several degrees of freedom to improve efficiency and capacity. Focusing on that at this point is more critical than securing the next increment of bricks and mortar.

Very good. I love it. Thank you, so much. I’m looking forward to it. It’s really exciting times. Great job, guys.

Thanks, John. I think we’re going to have to close out now. So, operator, we’ll need to close the call. Thank you everyone for participating.

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