Welcome, everyone to today's webinar entitled Vicor Corporation Earnings Results for the First Quarter Ended March 31, 2023. My name is Trichy and I'm your operator today. During the presentation all attendees will remain in listen-only mode. I would like to advise all parties that this conference is being recorded. And with that, I would like to hand over to Jim Schmidt, Chief Financial Officer of Vicor Corporation. Please go ahead.

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the first quarter ended March 31, 2023. I'm Jim Schmidt, Chief Financial Officer and I'm in Andover with Patrizio Vinciarelli, Chief Executive Officer and Phil Davies, Corporate Vice President, 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 related to the issuance of this press release. I remind listeners this conference call is being recorded and is 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 this 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 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 and/or implied by any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2022 Form 10-K, which we filed with the SEC on February 28, 2023. This document is available via the EDGER system on the SEC's website. Please note the information provided during this conference call is accurate only as of today, Tuesday April 25, 2023. 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. Webcast replay of today's call 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 changes for P&L and balance sheet items, and refer you to our press release or upcoming Form 10-Q for additional information. As stated in today's press release, Vicor recorded a total revenue for the first quarter of $97.8 million, down 7.3% sequentially from the fourth quarter of 2022 total of $105.5 million, but up 10.8% from the first quarter of 2022 total of $88.3 million. Advanced Products revenue declined 19.3% sequentially to $51.3 million, while Brick Products revenue increased 10.9% sequentially, to $46.5 million. Shipments to stocking distributors increased 4.1% sequentially and 43.3% year-over-year. The decline in Advanced Products revenue was due primarily to constraints at our outsourced manufacturing partner. Exports for the first quarter decreased slightly on a dollar basis but increased sequentially as a percentage of total revenue to approximately 64.3% from the prior quarter's 59.8%. For Q1 Advanced Products' share of total revenue decreased to 52.4%, compared to 60.2% for the fourth quarter of 2022, with Brick Products share correspondingly increasing to 47.6% of total revenue. Turning to Q1 gross margin, we recorded a consolidated gross profit margin of 47.6%, which is a 100 basis point increase from the prior quarter. While lower sales volume pressured gross margins, we did benefit from an improvement in the gross tariff rate as a percentage of revenue. During the quarter, we recovered approximately $3 million in duty drawback of previously paid tariffs. We continue to work to reduce overall tariff expense and recover previously paid duty drawback. I'll now turn to Q1 operating expenses. Total operating expense decreased 12% sequentially from the fourth quarter of 2022 to $36.1 million. The sequential reduction was primarily due to a reduction in legal fees. The amounts of total equity-based compensation expense for Q1 included in cost of goods, SG&A and R&D was $486,000, $1,520,000 and $811,000 respectively, totaling approximately $2.8 million. For Q1, we recorded operating income of $10.4 million, representing an operating margin of 10.7%. Turning to income taxes, we recorded a tax provision for Q1 of approximately $1.1 million, representing an effective tax rate for the quarter of 9.2%. Net income for Q1 totaled $11.2 million, GAAP diluted earnings per share was $0.25, based on a fully diluted share count of 44,907,000 shares. Fully diluted EPS increased approximately 39% sequentially, compared to $0.18 in the fourth quarter of 2022, and more than doubled from $0.11 per share earned in the same quarter a year ago. Turning to our cash flow and balance sheet, cash and capital cash equivalents totaled $192.9 million in Q1. Accounts receivable net of reserves totaled $61.1 million at quarter-end with DSOs for trade receivables at 35 days. Inventories net reserves increased 5.9% sequentially to $107.4 million. Annualized inventory turns were 2.1, and operating cash flow totaled $10.1 million for the quarter. Capital expenditures for Q1 totaled $10.1 million. We ended the quarter with a construction in progress balance primarily for manufacturing equipment of approximately $36 million and with approximately $13 million remaining to be spent. I'll now address bookings and backlog. Q1 book-to-bill came in below one and with one-year backlog decreasing 10.9% from the prior quarter, posing a $271.3 million. Turning to our factory expansion. As expected, we recently received the final pieces of equipment necessary to complete vertical integration of our new chip fab. During the month of May, our manufacturing team will conduct pilot runs using this equipment. Through July, we expect to complete manufacturing qualification of a vertically integrated chip fab and then commence volume production. While there will still be some outsourced processing, in Q3, we expect to be vertically integrated across all of the key process steps necessary to manufacture our power modules. This marks a milestone in Vicor's history, aligning our manufacturing capacity in the first global chip fab with the breakthrough design technology Vicor has invented to deliver superior power density. As we said last quarter, we are looking forward to the substantial reduction in cycle time, improved manufacturing efficiency, and full manufacturing control that this facility will allow. And we are anxious to leverage the completion of our chip fab to provide shorter and more consistent times to our customers. Turning to the second quarter of 2023, we expect results to be approximately flat to Q1 with a potential for a modest sequential improvement in overall results, and including a moderate sequential increase in operating expense as we implement our annual merit process. 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 possible in the limited time available. If you have more than one topic to address, please get back in the queue.

Thank you, Jim. I'll begin with an update on our satellite market business development initiatives which we haven't discussed for a while. In December of 2022, we announced that Vicor's radiation tolerant factorized power chipset was on board the launch of Boeing's O3B communication satellite powering the communication ASICs. This was a critical milestone for us, by proving to other satellite customers that Vicor Power modules could improve signal integrity, efficiency and power density, while meeting the tough environmental and quality demands of space applications, building a space heritage opens up an available market opportunity of $175 million with Boeing and other customers. Our initial radiation tolerant chipset is being funded with additional input and output voltage modules, critical for other customers and applications. In early Q3, we will introduce a reference design for AMD's first space grade Versal adaptive System on Chip, which delivers reprogrammable AI inferencing, and high bandwidth signal processing for satellite and space applications. Turning to our automotive market opportunity. At the World Congress event in Detroit last week, Vicor presented four papers on how our power modules solve the toughest power delivery and conversion challenges in the electric vehicle power systems, which are increasingly transitioning to a 48-volt power distribution architecture. Broader adoption of 48-volt power distribution bodes well for us. Given that the 48-volt architecture is one that Vicor has pioneered and innovated around for over 15 years, developing proprietary and patented power distribution networks, topologies, control systems and packaging to deliver the highest power density 48-volt solutions. The chips and applications presented at WCX and on display at our booth had a foundation of our expanding OEM and Tier 1 collaborations and design wins. In Q1, we signed a supplier agreement with a major Tier 1 and expanded our design win pipeline at existing OEMs with additional platforms and applications. We also started three new collaborations and added a major design win with an SOP date of 2026. High voltage power systems designed with our power modules are proving to be three to 10 times smaller and lighter than DC-DC converters built with silicon carbide or GaN power switches. We were also on track to achieve automotive level qualification for several of our power modules in Q2. In Q1, the high-performance computing market saw the introduction of artificial intelligence chatbots, using large language models, which have significantly stimulated the market for AI systems at hyperscalers and social media companies globally. These new chatbot capabilities open up completely new areas of AI to the masses and have a much higher customer satisfaction than traditional search engines. Our Factorized power solutions are being used to power the rollout of this exciting new technology and as higher performing processors are introduced. A lateral vertical solutions will provide the higher current density and lower power delivery network losses that these next-generation AI processes demand with increasing current levels and lower operating voltages. As I commented in our last call, new five-nanometer processes being introduced to the market using lateral power conversion solutions are hindered by high power delivery network loss, which limits performance from otherwise achievable levels. Lateral vertical factorized power enables the full potential of AI processes by reducing processor and power delivery network losses. On the product development front, our Gen 5 technology continues to make excellent progress and is on schedule for introduction to major customers this year. These next generation point of load solutions enable scalable, cost-effective vertical power delivery, which will be a game-changer for the industry and enable next generation processors that would otherwise be handicapped by the power conversion and delivery challenges of multi-phase technology. In summary, all of our four business units are seeing expanding opportunities and major customer engagements across our top 100 customers as electrification, autonomy, and artificial intelligence requirements rapidly expand. Account managers for our top 100 accounts are setting up visits to our new chip fab for Q3 and Q4 as part of our operational excellence initiatives to provide our target customer base worldwide visibility to our scalable capacity and to introduce them to the superior power system capabilities of our Gen 5 chips. That concludes my remarks. Patrizio, Jim and I will now take your questions. Operator, we're now ready to take questions.

Thank you, everyone. Your question-and-answer session will now begin. The first one is coming from Quinn Bolton of Needham. Please go ahead.

Quinn, are you there?

Hey, Patrizio, Phil, Jim, can you guys hear me?

Yeah, now we can hear you.

Okay, perfect. Just wanted to start with clarification, a quote from the press release, recent bookings will or may remain weak until AI OEMs capture the benefits of advance power delivery network, with lateral vertical solutions. Can you give us some sense of timing, when do you expect to ramp those lateral vertical positions? Is that going to be in calendar 2023, or do you expect that to eventually move out to '24?

We don't know with a high degree of confidence when this would happen. It could happen later this year. It could happen in Q1 of next year.

Okay. And last fall, you talked about I think, roughly five or six design wins, 5-nanometer ASICs or other sensors. Are you expecting different trends this year? Can you say those wins using just your lateral solutions, or some of those wins you've seen vertical?

We seem to have some interference on the language, some background noise.

You understand most of it?

I mentioned previously that we have ongoing design wins with lateral solutions at about four or five companies. We are also in discussions with other companies that utilize higher current processes, which we believe will need lateral vertical or even pure vertical solutions with Gen 5 technology. There's a lot happening in the market concerning different process nodes and current levels. I expect that lateral vertical and pure vertical solutions will be part of our portfolio for the remainder of this year and into next year. Did you catch that, Quinn?

There appears to be a connectivity issue.

Yeah, I'll try and see if I can dial in on a phone and see if that helps.

That's good. Thanks.

Let's go to the next question, please.

Thank you. The next question is coming from Jon Tanwanteng. Please go ahead with your question. I will unmute you now.

My first one is, what are your biggest customers telling you about the competitiveness of your product stack, compared to a year ago, specifically, in these markets?

What are customers saying about our competitive positioning? It's evident that while our multi-phase technology has advanced in current density, it hasn't yet reached the levels we offer in terms of product density. A crucial aspect is having a very thin package that can be placed on the back of the board for various applications like GPU, ASIC, and CPU. Currently, we're focusing on Gen 5 technology, which represents a significant breakthrough with a threefold improvement in current density, as Patrizio mentioned. This transformation greatly enhances power delivery for high current GPUs and also for optical networking processes. Furthermore, our lateral vertical design is clearly superior to a multi-phase lateral approach.

It's been nearly 40 years. When Vicor introduced its first products, we took converters, which at the time were about one cubic inch to 10-15 watts per cubic inch, at the much higher operating frequency. And our lead in terms of power density, current density key figures, in demanding applications have persisted for four decades. It's not about base, as Phil just suggests, is about to take a major leap forward.

Got it? Thanks, Patrizio. And just regarding the customers, and maybe specifically on the ones that you're waiting for to ramp solutions that are using your lateral vertical solutions? Are they simply waiting for your new facility to qualify before giving you orders? Or is it more of a product timing situation? Can you just give us a little more color as to the status of when you expect those orders coming in? And maybe the reasons why they're maybe a little bit more delayed than we thought it would be.

The shift has occurred from lateral product verticals. Is the PDN or power distribution network architecture changing? This challenge involves various aspects related to the PDN architecture itself, particularly in reclaiming space within the processor socket that has historically been needed to accommodate the dynamic requirements of this processor, which can entail rapid changes in current of up to 10,000 amperes per microsecond. Balancing the dynamic needs of the PDN with mechanical thermal management and other constraints of the application presents a complex challenge, and our intellectual property includes specialized know-how that isn't widely accessible. In summary, this transition is not straightforward and currently requires close collaboration between the OEM and Vicor to develop a solution that satisfies all requirements. One significant advancement with 5G is that this process will become more scalable, putting OEMs in control of their designs. However, with the existing 4G components and the current level of know-how, it remains a somewhat tedious process. In my view, this has been a long-standing barrier to the faster adoption of more advanced architectures.

Great, thank you and it's not a facility issue or anything like that, we're just waiting for that. That's the random work?

No, a lot of vertical can be done as Phil suggested earlier without 4G building blocks; doing a full vertical can be done but it entails stacking chips or stacking certain functionalities with regard to which Vicor relevance AP, but it's got complexities that with 5G we are doing away with in terms of leveraging the much higher density to facilitate vertical power delivery in a very simple and cost-effective way. Great, thank you. I'll jump back in queue.

Next, we have a question from the line of John Dillon. Please go ahead. I will unmute you now, please also unmute yourself from your end.

I also have a question on the lateral vertical, in particular with the 4G. Are you still planning on doing 4G with lateral vertical? And would that be this year, or is that also going to be pushed out next year? And can you give us a little color on the customers that are looking at your 4G technology for lateral vertical?

So existing design activity for lateral vertical is, as of now still, based on our 4G module, existing 4G modules? Before too long, any incremental activity and expanding level of activity will be enabled by 5G building blocks. But as of now, it is still with existing 4G modules.

And as 4G module opportunities, do you expect them to go to production later this year then?

Well, again we don't have perfect visibility. There could be production ramp with the level of power delivery networks, significant production ramp with level of power delivery networks using 4G modules, or it could be that the production ramp waits for the lateral vertical solution because of its significant improvements in power capability, reduction in loss within the silicon and within the power delivery network itself.

Okay, so you still might have some new 4G lateral opportunity to come the second half of the year? Is that what you're saying?

Yes, John. That's correct.

Okay, great. And do you have any kind of guesstimate on the timing of that? I mean, is that again this year? Or is that also maybe next year?

I think Patrizio expressed it well earlier. We are navigating through this complex situation, but we are making good progress. We will be able to discuss it in more detail in future calls.

Okay. My follow-up question is, Patrizio, I've been invested with you for about 25 years. And you only reflect back, we've had a lot of successes, we've had some setbacks. But I can't remember Vicor being positioned for consistent long-term growth better than you are today. But then again, I've been surprised before when I plugged that before. Am I correct in my views that you are better positioned now than you have been? And if so, what makes it different from the past where we've had the successes and also setbacks?

Well, that's a very good question. I can tell you personally, I feel that way. I think in terms of articulating why I feel that way. I think as suggested in the press release, it has to do with a combination of factors. First of all, we are very close to the first global foundry for chips. There is nothing that comes close or can come close. It is enabling in that it provides scalability in terms of volume and costs, very low cost pressure from very low power levels, it to applications ranging up to literally hundreds of kilowatts in automotive applications. So whether it's a fast charger for an electric vehicle in the hundreds of kilowatts or a current multiplier, in the 1000 amp or several 1,000 amp range on a multiplicity of rails for a future GPU or CPU. The chip foundry is convert for housing package foundry gives us the power unique capability to provide not just the highest power density or current density solution, as the case may be, the way he sees them so AI data centers type application, but enables us to do that with the lowest cost. So we're not going to be seeing any of the essential ingredients necessary to take full advantage of the general adoption of the 48-volt infrastructure that Vicor itself has pioneered. So that's the simple story of where we are. I understand that historically, it hasn't been easy to bring all this about is taken a great deal of focus in terms of the complex facets of the puzzle as a whole, ranging from power conversion engines, control systems, unique components, packaging technology, that is underlying the converter house in package, scalable methodology, there's a way for like, as you know, wafer foundry. And the foundry itself, that we've invested upwards of $100 million to bring about to give us the capacity for about $1 billion in revenues. So that's the simple reason. We think we're well positioned for the market demands for high power density, high current density in a variety of growth and market.

So, John, if I could just add one quick thing to that. I think that from my tenure here the 12-13 years, we've never had a quality set of customers that we're engaged with, like we have now. So that's really critical right to who are you working with? And what does the future hold for those customers in their markets? Are they leaders? It can't just be in high-performance compute with a couple of big companies, hyperscalars or GPU guys. It's got to be right across the four business units that we're now developing long-range revenue plans for and are engaged with great customers right across the globe. So just add that to Patrizio's comments.

Yeah, I get it. And it seems to me like you've always had the performance card. But now the customers actually need your performance, they have to have it, it's not a one to have. And then on top of it sounds like you've got the cost card to go along with it, which is a nice combination where they need your product, and you also are very cost competitive and from the sounds of Gen 5 can be even lower cost competitive down to the commodity server level, which is really exciting, because that really opens up a huge market view.

Yeah, and the vertically integrated factory that Patrizio mentioned, that's really critical for us, right?

Yep, yep. Okay, I'll get back in the queue. Thank you so much.

Thank you. Next, we have a question from an anonymous participant who joined via a phone. I will unmute you now.

Hello, we can't hear your question.

Either there is these delays in holding. Operator, please remind questioners, they have to hit star six to unmute themselves.

Yes, from their side as well.

Okay, let's go to the next question then operator.

All right. Next, we have another question from Jon Tanwanteng. Please go ahead and unmute yourself from your side as well.

Thanks for the follow-up. My question is, Phil, just what do we stand today in the migration to 48-volt data centers as a whole? What inning are we in? How much are you seeing that play out in your bookings and pipeline?

Yeah, so definitely the other hyperscalers that we've been waiting for are working on 48-volt native rack systems. In the meantime, we've talked about this they are buying basically power distribution boards, incorporating our MBMs to do the 12-volt native to 48 volt level necessary for the advanced AI systems. But we are seeing native rack developments now with the hyperscalers in North America and also overseas, because of the power levels that these addition of AI chatbots, whatever into the datacenters are requiring for the 48-volt power distribution. And in the supercomputer area, it's even higher. It's up at the 380-volt range where we sell high voltage bus converters. So the power levels just keep going up, John. And we have the technology to do the downconversion to 48. And then the 48 point of load either with bus converters for low power CPU systems, or factorized power for very high power GPUs and ASICs and optical network processors. So we're setting really well with technology migration in our customers and being able to follow that and even be ahead of that with new Gen 5 solutions coming along later this year.

Got it. One thing I've been surprised about is the total power consumption of the next-generation CPUs. They are nearing the levels of the previous generation AI processors that use our solutions. Do you think the CPU market will recognize the need for your product to manage the increasing power consumption they are experiencing?

I believe Gen 5 will enable us to target higher power CPU applications. It's possible we could also see opportunities in lower power CPUs, especially as the rack transitions to 48 volts direct conversion, which can be very cost-effective and efficient. We plan to pursue that market when Gen 5 is available.

But make no mistake, any system today, high-end system. Let's say high-end GPU powered 48-volt to allow PDN is handicapped by the power system. It cannot deliver its compute capability because of the limitations of the power system.

Understood. If I'm asked the question on the quarter, what caused the constraints of your supplier? I know they've been pretty spotty in the past, is that going to continue to Q2 and just give us a little color as to what happened in the quarter compared to where you thought it was going to be?

I think the challenges we faced were primarily due to our outsourced manufacturing partner. We are currently in the final stages of transitioning to in-house production. In some instances, the supply did not meet our needs for the quarter as we had anticipated. As I mentioned, we are now working on qualifications in May, with more expected in June and July as we set up the necessary equipment. I believe that as we move into the third quarter, we will have a better understanding of our capacity to meet our output requirements.

Okay, great. And then Jim, just one more follow-up. Do you expect these tariff clawbacks to be relatively continuous as you go forward? There was really spotty and kind of unpredictable. How should we think about that, and then kind of what's in the backlog for you to claim?

In the short term, we expect to maintain the same level for the quarter. That’s our forecast. Then it will likely decrease a bit because we have been recovering what amounted to two years' worth of tariff payments. This process will continue to lessen over the course of the year.

Okay, great. Thank you.

Okay, all right. Next question.

Yep, and we have again, the person who was about to have a question earlier through the phone line. So please unmute yourself using star and six. I will also unmute you from our end. Please state your name and go ahead with your question.

Hi, this is Richard Shannon with Craig Hallum. Can you hear me?

Hi, Richard. We can.

Excellent. I'm glad I was able to make it in this time. Thanks for taking the questions guys.

We're not trying to drop you.

I was blaming my input skills on my phone here not you guys. I guess want to kind of ask a follow up to a few different past questions, including starting with Quinn's about how to think about when you're seeing inflection points and kind of the characteristics of when that happened, in particular understand your response to that. A couple of those has been you don't have complete clarity in that. So let me kind of ask a multi-parter on this and what you kind of go read like to, is I think it gets the gist of my question here. So not exactly sure when that will be, sounds like could be either with them lateral vertical. I'm assuming these are with AI accelerator type applications. But also could you characterize whether these are designs that are done and completed and just haven't been greenlit at the time? Or are they still designs in flight? Maybe just kind of help clarify the dynamics here, among those lines, please.

So we're working with a number, as you point out of AI accelerator car companies. They're all in different stages. Some of them are actually in early sort of pre-production, others are in qualification. Others are also got advanced developments going on that will be qualification later this year and then ramps later this year, maybe more like early next year. So it's across the board, Richard really. And it's a mix of applications, but most of it is lateral. And then we've got some lateral vertical activity going on as well.

Okay, perfect, that is helpful. Needless asking an automotive question here. And I may have, Phil, I may have missed all of your comments about kind of the latest update here in the last quarter. But maybe I'll ask you to kind of do a two-parter here again, which is repeat what you said about those designs, and maybe kind of give us the top-down here and how many designs you have, in what functionalities here. Your comments on the press release talking about applications up to 150 kilowatts, which seem to apply inverters in EVs. Maybe even kind of characterize what functionality are supporting them. And just to clarify, this sounds like calendar '25 timeframe to expect material revenue, is that accurate?

And that was kilowatts, not kilovolts.

So, if you look at the chipset that we showed, basically the power module family that's making up most of the solutions that we're bringing forth, because as we talked about before, this is a very scalable technology. You can have a 5-10-kilowatt, 800-volts to 48-volt system, and then you can add more modules to scale it to 15-20 kilowatts, and so forth. So, that's really loved by the automotive OEMs. And also some of the Tier 1 that we're now working with so. So, the applications are 800-volts to 48 to 12, then you can go 400-volts to 48 to 12, or 400 volts to 12. So, different types of car platforms that use that downconversion capability that we can offer in two or three power modules. On the other side, Patrizio mentioned the 150 kilowatt, that's for an onboard charger for rapid charging. It's a 400-volt 800-volt bidirectional buck-boost converter system with 98% 99% efficiency. If you hold it in the palm of your hand and you can get 30 plus kilowatts out of it. We showed it at WCX last week, and actually in a module form that can achieve I think, was 150 kilowatts in the stack that we have.

In a stack of right now with some OEMs, five modules going down to four modules going down to three modules, with the power density that is literally five times better in terms of volume and weight than any competitive alternative.

So, Richard, in Q1 I mentioned here just briefly again, we had a supplier agreement with a major Tier 1. We signed that expanded design wins that OEMs we started working with almost two years ago, with additional platforms and new applications like the onboard charger example. We also have three new collaborations in the quarter and added a major design win with an SOP in 2026. Those are from my comments earlier. We've got quite a number of collaborations going on now globally. But all of them centered around that 800-volt downconversion to 48 or 12 or 400 volt downconversion 48 to 12. And then also 48 to 12 applications with wire harness type companies. And then also these rapid charge onboard charger systems at very high power levels with a number of OEMs in Tier 1s. So it's a really, it's quite a mix. And as I said before, I'm very excited about it. We're really engaged with a very high-class level of OEMs in Tier 1s now. It's very exciting.

Okay. A lot of detail there to unpack. I think it got some good notes there. I think I'll jump out of line here though. Thank you very much guys.

Thank you. The next question is from Doug Campbell. Please go ahead. I will unmute you now, please also unmute yourself from your end.

Can you hear me guys.

Yes.

Hey. Okay. Just a couple of quick questions. First of all, Patrizio congratulations on the Forbes article. I thought it was really great to see you talking to a broad span of people, obviously, Forbes is a great publication. And I thought it was well written and explained the story pretty well. I thought it was a very handsome photo of you as well. So congrats on that. I guess my only question is with the drawdown in the backlog in some of the timeframes you've given for new products and new OEM contracts. And all of the above with the new factory pretty much not being online till July, August, or in that timeframe. I've kind of viewed this year as a transition year. Do you see the backlog being significantly drawn down? I don't want to say to zero, but, as we enter Q3-Q4. I mean, will the backlog just be eliminated at this point?

So it's hard to tell exactly what's going to happen. But in terms of bookings, we believe that the low point took place in Q4, with an improvement in Q1, a further improvement in Q2 expected. But because of the uncertainties with respect to some of these programs, ramping, which is really something we can control. It's hard to tell exactly what is going to happen for the parts of the year with respect to backlog. Our revenues in Q1 were not limited by backlog. We're still playing catch up with respect to the backlog. And even in Q2, we're going to be playing catch up. So in one way of looking at it, in terms of taking care of customer needs in the short term, the monkey is not on the back of the front end of the business it's still on the back end in terms of operations, stepping up to the bar, given the challenges without sourcing of some of the chip processes, which is still being a factor though it was a month, getting the output within the quarter.

I believe you all must be eagerly anticipating the time when you can manufacture everything in-house. As an investor, I'm weary of hearing about the outsourced manufacturing issues. Once you have control over this process, it will transform the game. I initially thought the drawdown would happen because you mentioned new orders or projects in Q4, potentially extending into next year. I expected that most of the revenue in the upcoming quarters would come from that backlog. I understand the importance of the book-to-bill ratio, and while I know we are significantly below one, it seems to be improving. If it remains below 0.6 to 0.7, the backlog could deplete quickly. Have your discussions touched on economic weakness or the potentially severe recession we're all anticipating? It hasn't occurred yet, but many are pointing towards it, which makes me somewhat anxious. Your plan is about to be launched, you have numerous great industries and potential customers, yet I'm also worried about the broader economic situation. How severe might the recession be if it materializes? Are we looking at a situation similar to Q4 of '18, where certain OEMs abruptly stopped their order flow for a while? I know forecasting that is difficult, but are you receiving any insights from larger companies? For instance, Microsoft's recent quarter was strong and exceeded expectations, so I'm curious about what you are hearing.

So I'm not really concerned about these factors. Obviously, they are there. And they have a certain degree of predictability. But I feel I mean it's still callable because of the technologies, the products, the fab, the scalability, the cost effectiveness, the diversification with respect to end markets, the diversification, the diversification with these converging of 48-volt as an infrastructure for power distribution. So all these things the other day will bring about more demand than our fab we'll be able to supply which is a substantial multiple of our current revenues.

But I wanted to hear, I love it.

Level of disability not a lot says, but I'm not losing any sleep with respect to ability to feel the fab.

I just want to conclude by saying that I have no doubts about your future. My concerns are focused on the present. As an investor, that’s what matters to me. I have confidence in where the company will be in two, three, or four years. However, the last couple of quarters and the next few quarters are a bit challenging for me as a fund manager. That’s all.

I think, by the way, your treasure words. This year being a transition year, I think that's very much on point. It is a transitional year for a number of reasons. But the year is progressing to be getting to the end of the year before we got. And all these critical elements are going to be in place.

The future in these industries has unfolded exactly as you predicted years ago. I just hope we all earn a significant profit from it.

Thank you. Okay.

Thank you. Next question is from another caller. So please unmute yourself from your end, using star and six. And I will also unmute you from our side.

Hey, this is Quinn Bolton from Needham. Can you guys hear me?

Hey, Quinn. Yes.

Hey, hopefully this is a better connection. Just a couple of follow ups. Last quarter, you talked about the ability to potentially come in on some redesigns where processors had shipped initially using multi-phase and you saw the opportunity to redesign this board for Vicor components. Can you just give us an update, whether you still see that opportunity and if you do are those going to be the lateral or are those lateral vertical designs?

So, some of these solutions suggested earlier are severely handicapped by their lack of power delivery network. Vicor solution that is still lateral within effect the constraints of the lateral power delivery network offers performance advantages in terms of lower noise, some increase in power density, but not on the scale of a lateral vertical solution and even less so on the scale of full vertical. The transition in terms of the architecture suggested earlier is not as quick and simple as some of us would like it to be because of the nature of the design process with 4G components is a novelty in terms of different kinds of power delivery network that customers, OEMs struggle with in terms of appreciating the benefits through the various stages of the design process. And that's what has led to delays and some level of visibility. But I can generally say that there is growing recognition of major benefits. It's not just slashing the power delivery network losses; OEMs are coming to realize that they use as much of a power saving in the silicon itself, because frankly the handicap results in large voltage differentials within domains the primary rail, and auxiliary rails that require a significant increase in power dissipation within the silicon itself. So the advance that is brought about by our lateral vertical power delivery network even before we get to fully vertical power delivery network gets measured not just that by 50-60-70 watts worth of reduction in power delivery network loss there is just about as much of a reduction in power loss within the silicon and better functionality of the silicon and at lower noise.

I understand, Patrizio, that the advantages of lateral vertical and vertical only solutions will be seen in the future. What I, and many investors on this call, would like to know is whether we need to wait for the next generation of 3-nanometer processors to see a significant increase in the adoption of lateral vertical or vertical only solutions. Is it possible to implement lateral vertical solutions on the existing 5-nanometer processors within the next year?

Yeah, so as we said earlier in the call, we believe that that may well be ran with the lateral solution because of certain benefits even though the power delivery network is still a handicap. We believe that before too long, there's going to be a ramp for ladder vertical alternatives that have distinct advantages all around and all these are developments that are based on current silicon and have not contingent on the 3-nanometer that Phil made reference to in our most recent prior conference call. What he was pointing to there is it those developments making it practically speaking possible for lateral solutions who are engaging the latest requirement of our 5G platform solution.

We have some feedback on the line Quinn. Hopefully you caught that. Hello Quinn?

Hey guys, I had put at muted, because of the background noise. Hopefully you can hear me again.

Yeah.

Okay, my next question, last quarter you talked about cancellations this quarter I haven't heard you mention cancellations. Just wondering if you saw any meaningful cancellations to backlog or whether you think the cancellation activity has largely subsided at that point.

Yeah, we haven't seen cancellations, Quinn. Backlog looks very good.

Perfect. And the last one for me just you mentioned the last few pieces of equipment I think being delivered in May and qualified in June and July. Does that get you to the full $1 billion run-rate or are those pieces of equipment just bringing you to the sort of the full vertical integration capability but to the extent you want it to ramp to 500 or 750 or a billion dollars you would need several additional lines of whatever equipment was delayed until late-April or May.

So in April, we took receipt of the equipment. Vertical integration through plating of the copper which is the critical process that we had outsourced. The first step was half of the 18,000 panels per month around that capacity where we have the ability to install. And we'll install the balance as we need it, but the plating operation and the vertical integration should position us for, as Patrizio said about a $1 billion capacity. Do you have anything to add?

Yeah, just.

I want to clarify that we have the equipment ready for the plating operation, which we have installed to initiate the process. We can install half of the total capacity, and adding the next segment will be straightforward. We do not anticipate any issues with that. In May, we plan to conduct pilot runs, and by June and July, we will qualify all the equipment, ensuring we have the capacity necessary to produce the required panel output. There will be one minor outsourced process that is simple to manage and will not create a capacity bottleneck in the future.

Okay, maybe let me see if I can clarify with this question. It sounds like with the exception of this one small process, it will remain outsourced, you'll have vertical integration capacity to do about $500 million of revenue by the end of the third quarter.

More than that.

And Quinn, to give you a little bit more color with respect to this. What Jim was referring to is one of the processes that are vertically integrated or about to be vertically integrated. There are many processes in the chip fab that are being vertically integrated, and whose capacity can support the billion dollar revenue in terms of powers per week, powers per month, powers per year. Also, what should be considered is that, depending on the mix between on the one end, data center AI, where the panels are very thin. They're going to be with 5G, 1.6 millimeters thin, or automotive chips, which are considerably thicker, those are front-end products typically 7.4 millimeter thick. The capacity of these equipment scales, in effect in inverse proportion to the thickness of the panel, it's a little bit like in a wafer foundry capacity being a function of the number of masks or layers. So we have actually more capacity in terms of powers per week, data center or OEM applications that we would have for front-end high power automotive type of chips. But generally speaking, looking at the bulk of the capacity, we are going to be as of Q2 in a position to support the lion's share of a billion dollars worth of revenues per year.

Understood. Thank you.

Thank you. We have no further question in the queue.

Operator, I think this will be our last question as we're at the top of the hour.

I think she said that, that there are no more questions.

Okay, fine. Okay, thank you very much. We're ready to conclude the call then operator.

All right. Thank you. Thank you, everyone. This marks the end of your webinar. Thank you for joining and have a nice day.