Vicor Corp Q1 FY2022 Earnings Call

Good day, and welcome, everyone, to the Vicor Earnings Results for the First Quarter ended March 31st, 2022. Hosted by Jim Schmidt, Chief Financial Officer. My name is Matta Amrivamager. During the presentation, your lines will remain on listen-only. I would like to advise all parties that this conference is being recorded. And now, I will hand over to James, you may proceed.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the first quarter ended March 31, 2022. 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 March 31. 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 relating 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 that 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 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 risk and uncertainties. In light of these risks and uncertainties, we can offer no assurance that any forward-looking statement will in fact prove to be correct. Actual results may differ materially from those explicitly set forth or implied by any of our remarks today. The risks and uncertainties we faced are discussed in Item 1a of our 2021 Form 10-K, which we filed with the SEC on March 1, 2022. The 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, April 21, 2022. 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 May 6, 2022. The replay dial-in number is 8882868010, followed by the passcode 19042467. 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 now turn to a review of our Q1 financial performance after which Phil will review recent market developments and Patrizio, Phil, and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly change for P&L and balance sheet items, and refer you to our press release or our upcoming Form 10-Q for year-over-year comparisons. As stated in today's press release, Vicor recorded total revenue for the first quarter of $88.3 million, a 2.2% sequential decrease from $90.3 million in the fourth quarter of 2021. Advanced Products revenue increased 3% sequentially, while Brick Products revenue declined 9% from the prior quarter. Advanced Products revenue increased 54% from the same quarter a year ago. Shipments to stocking distributors increased 3.3% sequentially, and decreased 1.2% year-over-year. Exports for the first quarter were relatively flat sequentially as a percentage of total revenue, at approximately 72% from the prior quarter 71.7%. For Q1, Advanced Products share of total revenue increased to 59.9%, compared to 56.9% of the fourth quarter of 2021, with Brick Products share correspondingly decreasing to 40.1% of revenue. Turning to Q1 gross margin, we recorded a consolidated gross profit margin of 42.6%. Gross margin declined sequentially from 45.2% in the fourth quarter of 2021, primarily as a result of lower volume, a full quarter of higher cost of outsourced panel production, an increase in manufacturing and spending associated with higher freight costs incurred to respond to supply chain disruptions, as well as increased staffing and activity levels to support the startup of our manufacturing expansion. In addition, tariffs continue to be a drag on gross margin at $2.2 million in Q1 and 2.5% of revenue. Our work to reduce tariffs by reducing imports from China continues. I'll now turn to Q1 operating expenses. Total operating expense increased 2.8% from the fourth quarter of 2021, driven by increased compensation, engineering activity, and professional services. The amounts of total equity-based compensation expense for Q1 included in cost of goods SG&A and R&D was $251,000, $1,207,000, and $536,000 respectively, totaling approximately $2 million. For Q1, we recorded operating income of $4.8 million representing an operating margin of 5.4%. Income taxes for Q1 were a tax benefit of $48,000. Net income for the quarter totaled $5 million, GAAP diluted earnings per share was $0.11 based on a fully diluted share count of 44,954,000 shares. Before I review 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 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. In particular, the zero COVID policy adopted by China has caused disruptions in parts of our supply chain. The impact and timing of the effect on our results are unpredictable. Turning to our cash flow and balance sheet. Cash equivalents and short-term investments totaled $211 million at the end of Q1. Accounts receivable net of reserves totaled $52.7 million at quarter-end with DSOs for trade receivables at 37 days. All balances are current. Inventories net reserves increased 9.7% sequentially to $73.9 million and with annualized turns at 2.65. Operating cash flow totaled $4.6 million for the quarter. Capital expenditures for Q1 totaled $22.7 million. We ended the quarter with a total construction and progress balance of $50 million and approximately $42 million scheduled to be spent through the year, primarily for manufacturing equipment. Our factory expansion is proceeding on schedule and on budget. I'll now address bookings and backlog. Q1 book-to-bill came in well above 1 and with one-year backlog increasing sequentially by 22.6% from the fourth quarter of 2021. Turning to the second quarter of 2022 and beyond, we expect to bring our integrated ChiP fabrication manufacturing expansion online starting in Q3. ChiP is our acronym for Converter House in Package. Our automated ChiP foundry will establish the in-house process flow to assemble, mold, plate, test, and finish complete high-density power modules in high-volume and at world-class quality levels. Until Vicor's ChiP foundry is online, existing capacity will limit our ability to increase our production and shipment breakdown in the short term. During this quarter, we are working on installation of equipment in our ChiP foundry. Once installed, the production line will undergo full qualification and approval in the period. As the line becomes fully operational in the coming months, we will be positioned to significantly increase capacity, efficiency, and output, which we expect will result in improving operating results in the second half of the year. Also during this quarter, we are finalizing and expect to complete our annual merit process. Our focus remains on our long-term success based on our pioneering approach to integrated high-density power module technology. We're working hard to combine world-class operating performance with the technical advantages of the Vicor power delivery products. We've invested in a unique state-of-the-art U.S. based automated manufacturing facility, which is in close proximity to our development engineering teams and allows for co-development of next-generation products. Our manufacturing strategy also de-risks supply chains, lays the foundation for cost efficiency and cost reduction, and positions us to deliver the output needed in the highest volume most demanding power delivery applications. And we are embarking on an initiative to drive operational excellence across Vicor. At the heart of that initiative is our aim to become a customer-centric company. Our entire organization is engaged to make Vicor the power delivery supplier of choice for customers in a variety of end markets. We are committed to achieving our goal of operational excellence. 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 yourself 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 into queue.

Thank you, Jim. I'll keep my comments short and focused and primarily on the high-performance computing business, which has received a lot of attention from our investor community. Our backlog growth is driven by our global high-performance computing customers and new supercomputer, Cloud server, and AI-accelerated card solutions being brought to market. The 48-volt bridging applications are now ramping with major hyperscalers as they deploy rack-based clustered GPU AI systems into their Data Center in rapidly increasing numbers. Additionally, GPU and ASIC raised 48-volt accelerated cards, which have very empowered requirements, are ramping with both 48-volt to 12-volt bridging solutions for lower power cards, as well as direct 48-volt, the point of load factorized power solutions for higher power GPUs and ASICs. The technology gap separating Vicor from a multiplicity of aspiring competitors is expanding, not contracting. Specifically, current density and other key performance attributes of Vicor power system solutions are improving at a rate faster than achievable with intermediate bus architecture and multi-phase solutions. High-performance computing applications require the level of performance that only Vicor modules are capable of providing. Very soon, they will require Vicor proprietary power system architectures such as vertical and lateral vertical power delivery. And that is why our Data Center business opportunity is broadening and getting stronger. To be clear, the high-performance computing industry is no different than any other high-volume industry seeking multiple sources to de-risk supply chains. However, wishing to accomplish a multiplicity of sources does not necessarily mean being able to do it with good enough performance. We remain confident that our performance advantages will continue to expand our opportunities and design wins with major customers. With a few current multiplier modules deployed laterally or preferably vertically, a Vicor power system can achieve higher density, lower noise, higher efficiency, and higher performance, and can be achieved with a multi-phased solution consisting of over 100 large, noisy, and complex components. As discussed in previous quarterly calls, the demand for high-density power delivery solutions continues unabated across all of our target markets, with power systems engineers turning to Vicor's modular power solutions to solve their toughest design challenges. As our new vertically integrated capacity comes online in Q3, we will be better positioned to take full advantage of the increased number of high-growth opportunities with our current and new high-performance computing customers who are also eagerly anticipating this key event for Vicor. As we have discussed in previous quarters, Vicor is gearing up for sustained and predictable long-term growth. A major part of our growth strategy will be success in the automotive power train market and having a fully vertically integrated manufacturing process will also enable us to meet the exacting qualification standards demanded by our automotive customers. Our progress in developing this exciting new market and engagements with leading OEMs continues to be ahead of our initial plans. That concludes my remarks, and Patrizio, Jim, and I will now take your questions.

And we've already received our first question and it is coming from the line of Quinn Bolton from Needham & Company, LLC. You may proceed.

Hey, guys. Thanks for taking my question. One of your large customers recently showed its next-generation H100 card powered by a multi-phase voltage regulator architecture, yet this card has power consumption of 700 Watts. I'm wondering if you can talk about this; is this evidence that multi-phase is viable above 400 Watts and 1,000 amps of current or will Vicor participate in this next-generation architecture at that customer?

As a matter of general policy, we will not comment on specific customers or specific applications, but in general addressing your question, which is not surprising. I think Phil made some key points that are relevant to addressing your question. First of all, the gap separates Vicor technology from the intermediate bus architecture and multi-phase solutions in the context of 48-volt architecture, which usually requires two stages of power processing. Our technology is advancing at a rapid pace that the intermediate bus architecture cannot keep up with. To the point of your question, the intermediate bus architecture and multi-phase continue to make advances, and certainly the last few years, they've made strides with respect to increasing current density and general capability of that solution. But as you know from past comments, those are fundamental handicaps in terms of what can be achieved. And this fundamentally adapts to industry rails that require advanced applications. Increasing current levels, increasing current density, by the way, not just in terms of primary rail, but also in terms of auxiliary rails. And all of these we believe continue to support the choice of Vicor solutions.

Patrizio, maybe just a quick follow-up on that without speaking to a specific customer. If you look at an architecture that's multiple hundreds of watts of power consumption, and say 1,000 amps, can you give us some sense of how much more efficient or what advantage in terms of power efficiency or power savings do you think the factorized power architecture has over today's multi-phase bus architecture approach?

So I'll give you a general example, though I should say an example that we generally apply to the GPU space. We recently benchmarked a lateral vertical solution, which has been adopted by a notable company in the industry. And we benchmarked it relative to our own solution involving a multiplicity of modules or current multipliers deployed on the sides of the ASIC. With the lateral vertical solution, we can increase efficiency by something close to 10 percentage points. And that's an efficiency advantage that sets us far apart from anything else that can be done as you're getting much.

Thank you, Patrizio, I'll get back in the queue and come back with a question later. Thank you.

The next question is coming from the line of Jon Tanwanteng from CJS Securities. You may proceed.

Hi. Good afternoon, gentlemen. Thank you for taking my questions. My first one is a follow-up to that. When a customer using a 700-watt processor decides to go with the traditional power system, is that purely a capacity-related decision from their perspective or are there other factors that they're considering, such as price or maybe something else that we're not thinking of?

Well, to your point, there is a multiplicity of factors at play. Generally speaking, within larger OEMs, there are various consistencies with, as you can imagine, a different set of priorities. But at the end of the day, the solution has to enable the compute density and the advanced computing density that customers expect. In the real world, nobody would understand the proposition that an OEM would like the best of all worlds. Larger multiple suppliers, commodity solutions are limited capacity and the list goes on. In the real world, obviously, not all those opportunities are available. And I think agonizing assessments are often required to satisfy the essential objectives.

Okay, fair enough. Then I think I understand. Having said that, your orders are still up, your backlog is strong. Is there anything at risk in your backlog at this point just because some of these lead times are getting so long and perhaps there is a risk of your customer second-sourcing at this point?

No, Jon, this is Phil. The backlog is strong and I'm very confident in it. I don't see any risk in the backlog at this point in time because customer demands are still really strong and they really want us to deliver that backlog as quickly as we possibly can, which is why the second half of the year is going to look a lot better than the first half for us.

Got it. I'll jump back in queue. Thank you.

The next question is coming from the line of Don McKenna from D.B. McKenna & Co, Inc. You may proceed.

Thank you. Hi, guys. Just to follow-up a little bit on the previous question. Phil, can you just address how much of the increase in the backlog number, I'm coming up with somewhere in the range of $425 million, is the result of the expanded lead times versus strong new demand? My other question, Patrizio, would be to you. In the past, I've spent several years in manufacturing, and the plating process back then was considered much an art as a science, and good operators were highly valued. I'm wondering what you see as the learning curve, how you've been preparing for it, and how long you anticipate it will be before you achieve the same efficiency as your current subcontractor.

Let me take your question first. I expect that very quickly we are going to achieve efficiencies favorable to what we've been able to accomplish working with the outside contractor, and that's because we have better equipment, redundancy, and a well-trained team. So I do expect that we are going to be able to ramp faster and more predictably than we've been able to accomplish with all the unpredictability to the way progress, particularly over the last nine months. Phil?

Yeah. And with regards to the backlog, we're not really expanding lead times. We're working very closely with our customers to make sure that they're placing orders at the right rate. Advanced Products are out 32 weeks or so, Brick Products in that 20-week range. We haven't really touched those. It's demand, it's new programs coming on as I mentioned in my prepared remarks. We've got the 48-volt bridging applications now starting to ramp, we've got new programs in the China market, in the European market, North American markets with new customers. And we've also got continued strength in our existing customer base that we expect to go on for quite a while, as I've mentioned previously, so it's really demand-driven.

We do expect to bring in lead times once we have demonstrated the additional capacity of the vertical integration facility, and I'm sure it brought about some other limiting factors because the issue to be clear over the last 10 months hasn't been simply one of factory capacity, it's also been one of component availability and supply chain disruption. As you heard in the past, the issues with respect to in particular, semiconductor component availabilities. If they were to do with some unique semiconductor components that we developed and effective for us and we've been able to secure a major step-up in that capacity. But unfortunately, it's not just a matter of those private semiconductors, even for several types of parts. We've been able to some degree exposed to the vagaries of the supply chain and have laid particularly the disruption that Jim characterized in his remarks. He led into the Chinese zero COVID policy.

Thank you very much, guys.

Thank you.

The next question is coming from the line of John Dillon from D&B Capital. You may proceed.

Hi, guys. First of all, congratulations on the booking numbers, it's really phenomenal. It's a lot greater than I really expected. But today I want to ask you about the technology and about your technology versus multi-phase, which you addressed somewhat in your opening remarks. But I'm wondering, does your point-of-load technology versus the latest multi-phase still lower IO pin count, lower motherboard copper, lower the socket resistance, free up board space, and reduce component counts?

Yes. Our technology, which has gone beyond the now past generation car multipliers and regulators, is capable of delivering on the efficiency front with a lot of vertical integration, double-digit improvements in efficiency. And by the way, if 10% doesn't sound like much in one way of looking at it, in another very relevant way of looking at it, which is the heat generated both by the power system and the heat generated within the ASIC GPU itself, that 10% differential in efficiency is a large amount of heat that the solution doesn't need to manage, and that translates into increased compute capability as the solutions push the envelope as they need to with respect to elevating current requirements, often running too, because they will typically be limited by the ability to manage the solution itself. So in one way to look at it, the efficiency improvement, which then translates into a reduction in need, is an enabler in terms of allowing greater compute density and a bigger value proposition for the OEM relative to its competitors, which we believe is the primary consideration, particularly if capacity is not a limiting factor.

Got you. And that kind of plays on my second question. Let's say you have a 700-watt GPU and you have the Vicor lateral point-of-load solution versus the multi-phase. It sounds like you can save about 70 watts of power loss due to the power distribution network and the efficiency, you're going to be about 70% less than the competitive solutions. That's about right?

The specific example I was given was for the first implementation of what we call a lateral vertical system, which uses the same golden current multipliers you've seen on the sides of GPUs. The vertical system, while those current multipliers gets deployed on the bottom side of the substrate, with that vertical element, the same building block just deployed in a professional way from a power distribution architectural perspective. That kind of multiplier supports the active area of the silicon, particularly in its primary rail to deliver a much more uniform voltage. The voltage distribution within the active area gets reduced by nearly a factor of three, which results in more efficient this action of the silicon itself in its domains. And results in better performance in the silicon itself. In addition to the reduction in heat, and again, the ability to run the solution, overclock it, or run it at the higher operating frequency and compute capability.

So not only are you saving electricity, you're enabling a higher-performance computer?

Yes. So fundamentally, the deficiency advances that include and leverage to some degree the ability to deliver a much more equitable potential surface across the active area or the primary URLs. These advances enable more power to be delivered within the constraints of the thermally managed solution which directly translates into either power savings or more compute capacity.

Got you. And then on top of that, all it sounds like if you're talking about a data center or supercomputer that has thousands of CPUs, you're talking about hundreds of thousands of wasted watts by going with their competing solutions.

There's a green element to this value proposition. Ultimately, I think it's all about compute capacity, which is obviously what drives the industry to continue to raise the bar.

Great, this is really great, guys. I will get back in the queue. Thanks so much.

The next question is coming from the line of Richard Shannon from Craig-Hallum Capital Group. You may proceed.

Thanks, guys, for taking my question. Patrizio, my follow-up on this last few questions here. I don't mean to ask something that's similar, but just want to delve in a different way here. What you're describing here, and certainly what I think most people's belief is you have a solution that's much better than others out there. Power savings and heat savings alone would be a dramatic improvement. So are you expecting at the highest levels of power delivery in GPU and other ASIC accelerator systems that you are going to be a sole source? Because it seems like if you're not, then customers are using a steeply sub-optimal solution. So can you state what your expectations are, generally, across existing and new customers at these kinds of power levels?

Let me take that in parts and then Phil will weigh in. So in general, as you can imagine, because of the proprietary nature of our solution as a Factorized Power Solution, and also as a solution, I would say with unique power distribution architecture. Vicor tends to be a single source. And as discussed earlier, customers have to make a choice, which from a mentor it comes down to getting more performance. In effect, a better product, a more capable product. But being single source with Vicor or being a multi-source solution with intermediate bus architecture type of power system comes with its limitations and handicaps. The integration with respect to the performance of the solution itself.

I want to highlight that looking at the new customers we've onboarded in the past six to nine months, they have the option to use multi-phase and bus converters alongside multi-phase technology, but they are choosing not to. Instead, they are utilizing Vicor's lateral solutions, and we are also developing lateral vertical options for higher current ASICs and network processors, as I mentioned in the previous call. This clearly shows that they prefer Vicor, which underscores the advantages of our solutions that we've discussed frequently. These will be exclusive opportunities because they prioritize performance, competing on that front to deliver better products to their customers. This is why they are opting for Vicor over multi-phase solutions.

But just to be clear, it's not that the Vicor solution is the only solution; there are other solutions. The other solutions which tend to be all grouped in the multi-phase bus converter tend to be the bus architecture realm. They can be made to work, lower current densities with modernized, with more challenges from an implementation perspective, to grow in multiplicity of phases that are there to make work reliably. And certainly customers and applications opt for those kinds of solutions if their requirements allow. We're not suggesting they fetch that we have them hopefully on the industry to the contrary, it's a broad industry with a broad sense of applications and requirements, and for less demanding applications multi-phase can be perfectly viable, particularly if the current levels and the overall demands of the applications can make do with a multi-phase application.

We like that as well because we supply the 48 to 12 bus converter. We've got the highest density, highest performance device there and we're increasing its power capability. And I know that's very good business for us as well. So we're happy to support the multi-phase in those low-power applications too.

Okay. Guys, thanks for those insights, appreciate it. My follow-on question here on your comments about the second half being better than the first half. Seems implicit that you have confidence in your manufacturing, getting up to speed. So maybe if you can talk about the next steps here. And, at what point do you have full 100% confidence in you're going to be running at full rate or at least commensurate with demand? When does that happen? That sometimes in the third quarter, the fourth quarter? Not easy to tell right now, maybe you can just give us a little bit more color on why you say this about the second half being better than the first. Thanks.

So I have confidence in our team, particularly, when they can be in control of their destiny as they're going to be very soon with that integration of important process steps. Over the last three quarters, investors have been disappointed. I've been disappointed by the unpredictability of being able to step up unit rates and revenues as we had anticipated. That's been frustrating. But to be fair, there's been a combination of factors at play. Not just the lack of vertical integration with respect to critical process steps, but also the supply chain bottlenecks and upsets that impacted many of the products, including some of the Brick Products and getting in the way of having a predictable output. I think as we get into July and the start of the third quarter, we're going to have had all the equipment then. The last critical piece of equipment is arriving this quarter. At that point in time, our team will be in full control of its destiny. I do expect that we're going to see revenues getting trapped with a backlog that is obviously stretched way out, in terms of customers having again, to place orders with lead times that are longer than they and we would like them to be.

Great. Thanks, guys.

The next question is coming from the line of Doug Combat from Promus Capital. You may proceed.

Yes. Hi, gentlemen. Just a quick follow-up to the previous question. What would have to occur to delay the factory coming online in that July 1st time frame? And as far as components to stock the factory, as you said, the last three quarters, global supply chains are affected; it's impacted you guys deeply. How have you gone about solving those issues and getting the components that you will need internally to produce your products from start to finish and export them out the door to meet customer demand?

Well, as we've discussed in the past, with respect to the availability of all our proprietary semiconductors and waivers, we've made strides in that front, both with respect to getting the output and also securing a long-term sourcing at rates that are expected to support the requirements. Regarding getting a variety of parts that have been unavailable because of general supply chain issues, we're very focused on that. I'm beginning to see, and I don't want to be too definitive with respect to this because it's still relatively preliminary, but I'm beginning to see some easing and some increase in availability coming online later this year. Obviously, we're watching that very carefully with respect to making sure that once we have all of the process steps integrated and we have our fab capacity in place, that component availability is not going to get in the way of being able to use.

Yeah, that was where I was done with it. You have all the machines, you have all the people, and then the assembly line standing around because you don't have the parts. That was more my concern because we've all heard about double and triple ordering from most of the layers of the semiconductor world. I was just wondering if you were aggressive in securing the parts you need so that when you do have everything up and running, you guys can start the engine alone.

We do like safety stocks when we can have it. It's been difficult to have it over the last couple of years, and we do have a plan to build some level of safety stock. I wouldn’t call that double if people are ordering. I will say in a different perspective that component availability, particularly when it comes to the bread and butter of some of our doctor components that we are going to use in this guiding for the next several years, it shouldn't be a hand to mouth proposition; that's not the way to run the operation from a logistics perspective. We do our work after inventory. But if you call that double, I wouldn't call it that way. We are looking to build some level of buffer stock where appropriate in order to ensure that I spent the capacity can run without inefficiency of disruption due to the unavailability of critical components.

Terrific. Yes. And I know that's not the normal way to run a business, but we are in very unusual times after COVID. So thank you very much.

Thank you.

The next question is coming from the line of Quinn Bolton from Needham & Company LLC.

Hey, guys, thanks for taking my follow-up. I guess first, just on the backlog. The backlog is up near $425 million, if I've got my numbers right. It looks like you guys did record bookings in the first quarter and wondering if you could confirm that the first quarter was indeed a record bookings quarter for the company?

No, it was a little bit short of one quarter, but we came close.

Okay, so it's sort of Q2 of last year, it sounds like that.

Yeah.

Got it. Second question, you mentioned the vertical power delivery. I know you've got a couple of initial wins on vertical power and some more specialized applications. Could you give us a sense of when vertical power for GPUs or AI-ASIC mic ramp, is that a 2022 ramp or is that out further, say in 2023 or beyond?

So we have two lead customers for fully vertical power delivery. Those are customers that, as with Vicor, are making a calculated choice to be on the very leading edge of technology. With particular sets of components for fully vertical power delivery that are progressing in terms of their general capability and maturity, but not yet at the level of maturity that would provide the level of scalability in the millions of units that is generating part in high-volume applications. So I think to get a good sense of the landscape, it would be good to think of it in the following terms: there is a lot of power availability, and you know what that means. So leading-edge GPU applications have been using a lot of power delivery architecture with in particular current multipliers. It's the north and the south and in some cases, the west or the east of the ASIC, and the current that these devices deliver has to traverse laterally under the active area of the GPU and ASIC to reach the domains of these devices. That architecture works with several entry points of the North, South, East, and West, up to 5,600 amps. Beyond 5,600 amps, Ohm's Law stands in the way of remaining inefficient in scalable power delivery architecture. Now, vertical power delivery is at the other end of the spectrum. It's very advanced, still somewhat bleeding edge, but with vertical power delivery, those losses and voltage drops occur when you try to carry the current from the site under the active area of the silicon essentially go away. There’s another amount of reduction in power delivery losses. If you can supplant the multiplicity of the lateral current multipliers with a vertical power delivery, we call it the DCF. But there’s complexity associated with a full vertical power delivery system into the lateral vertical architecture, which is innovative in essential respects. I think it’s important to have a good technical grasp of the evolution of the power delivery technology. From lateral and its handicaps, the high-volume applications will go into lateral vertical, that provides a threefold reduction in power distribution drops and a major improvement in efficiency within the SCC. Full vertical is being tested by some leading-edge applications. In my opinion, in terms of mass production in very large plants, this is still 1.5 to 2 years away, but it's going to scale for certain applications that are PDN dependent on a VPD system later this year and into next year. So the evolution is lateral, which is obviously a proven technology but with certain PDN limitations that get in the way of 1,000 Amp solutions tracking it from the mass production perspective, lateral vertical, which is a major improvement threefold, but with conventional building blocks, with the same building blocks that we'll be making by the millions of units, to full vertical which is still, in terms of mass production, 1.5, two years away.

Thank you, Patrizio.

Thank you.

The next question is coming from the line of Jon Tanwanteng from CJS Securities.

Hi. Thanks for taking my follow-up, guys. Patrizio, you mentioned something, easing with supply chain possible later this year. I was wondering if you could talk about the new constraints that you're facing actually in Q2. Are they getting worse or better in the near-term and if there are any levers, maybe you can pull, perhaps in pricing, just to help regain a bit of that margin?

I think the environment right now, Jon, is relatively similar to last quarter. We're dealing with some capacity constraints in the outsourced panel production that's the same. We have, as Patrizio mentioned, the semiconductor supply coming in. We do have a new wrinkle to contend with, which is the zero COVID policy in China, and there are implications there that are tough to predict. We're making our way through that. So I think Q2 feels like Q1, and we're working very hard to clear overdue backlog and support customers. That's our focus this quarter. Most notably, I should say, job number one is to get our factory expansion up and running. And the team is working extremely hard to make that happen.

Understood. Thank you and good luck.

The next question is coming from the line of Alan Hicks from Ainsley Capital Management. You may proceed.

Good afternoon. I had a question on the front-end products that you've been talking about for a couple of years, and I know you had very high expectations, potentially as big as point-of-load products. When was that going to move the needle in terms of revenues? And is it dependent on your 5G technology coming out?

Yeah. I think, if I understand your question, it has to do with several front-end products or AC-to-DC products. We've made very good progress. We have two major customer engagements, and we've delivered initial sample quantities. One of these two engagements is going to be scaling up into substantial revenues in the second half of this year, on the order of about $10 million. So the AC-to-DC component of our revenue mix is still at an early stage, but the products have a good deal of appeal for high-density applications. This has been tested by two lead customers. We presume one of them is about to be deployed in substantial quantities.

We've got some Data Center opportunities, some edge computing opportunities, and lighting opportunities. Those are the three large buckets, if you like, that we're targeting. We also have a lot of interest in the higher frequency versions of those AC products in the aerospace area where they need 400 hertz operation here in the United States, 800 in Europe. So we'll be doing sort of defense aerospace versions of those products, which actually is quite a large sum in Europe and North America, somewhere in that $200, $250 million range for an opportunity with very nice gross margin. So we're very interested in having defense aerospace versions of these front-ends too which we are working hard to bring through to the market later this year, to the broad market customers, as I mentioned data centers, edge computing, lighting, defense, and aerospace. Those are the four areas.

So the first major revenue contribution is going to come from lighting in the category of several megawatts of lighting power in one location.

So that's supposed to ship in the second half?

We'll start building that market in the second half revenues next year and then obviously ramping up in '24, '25.

Is that depending on your 5G technology or does that apply across-the-board to Advanced Products?

No, that's also using the same engines and control systems that we use for our other components. We leverage a lot of the technology; the same packaging is the same.

Think of us as the fab of ChiPs; Jim figured it earlier, convert our house in package, whether it's a lighting application requiring three-phase front-ends or it's an automotive application requiring younger volt to find a volt bus conversion at 50, 100, or 150 kilowatts. All these or a point-of-load application requiring the same car multipliers we were describing earlier. They're already going through the same fab, going through the same process steps and leveraging the same common denominator methodologies in terms of components, control systems, and most of all packaging technology and effect, a common denominator pulse.

Okay. And just real quick, when do you anticipate production revenues for the EV item?

By the end of '23 for the first customer, first OEM, and then increasing '24, '25, '26 across.

Okay. Thank you very much.

Thank you.

And I think with that, Operator, could you please call an end to the call?

Of course. Everyone, that concludes the conference call for today. You may now disconnect. Thank you all for joining and enjoy the rest of your day.