Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the second quarter ended June 30, 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 and six months ending June 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 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 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, 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 EDGAR system on the SEC's website. Please note the information provided during this conference call is accurate only as of today, Tuesday, July 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. A 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 second quarter of $106.7 million, up 9.1% sequentially from the first quarter of 2023 total of $97.8 million, and up 4.5% from the second quarter of 2022 total of $102.2 million. Advanced products revenue increased 31.6% sequentially to $67.5 million, while Brick products revenue decreased 15.7% sequentially to $39.2 million. Shipments to stocking distributors decreased 0.5% sequentially and increased 47.6% year-over-year. Exports for the second quarter increased sequentially as a percentage of total revenue to approximately 68.1% from the prior quarter 64.3%. For Q2, advanced product share of total revenue increased to 63.2%, compared to 52.4% for the first quarter of 2023, with Brick products share correspondingly decreased to 36.8% of total revenue. Turning to Q2 gross margin, we recorded a consolidated gross profit margin of 51.7%, which is a 410 basis point increase from the prior quarter. During the quarter, we recovered approximately $2.8 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 Q2 operating expenses. Total operating expense increased 3.4% sequentially from the first quarter of 2023 to $37.3 million. The sequential increase was primarily due to an increase in R&D spending. The amounts of total equity-based compensation expense for Q2 included in cost of goods, SG&A, and R&D was $570,000, $1.626 million, and $816,000 respectively, totaling approximately $3 million. For Q2, we recorded operating income of $17.9 million, representing an operating margin of 16.7%. Turning to income taxes, we recorded a tax provision for Q2 of approximately $2.5 million, representing an effective tax rate for the quarter of 12.9%. Net income for Q2 totaled $17.1 million. GAAP diluted earnings per share with $0.38 based on a fully diluted share count of 44,906,000 shares. Fully diluted EPS increased approximately 52% sequentially compared to $0.25 in the first quarter of 2023, and increased approximately 58% from $0.24 per share earned in the same quarter a year ago. Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $203.8 million at Q2, account receivable net of reserves totaled $63.8 million at quarter end, with DFOs for trade receivables at 43 days. Inventories, net of reserves, decreased 0.7% sequentially to $106.6 million. Annualized inventory turns were 2.1. Operating cash flow totaled $19 million for the quarter. Capital expenditures for Q2 totaled $8.5 million. We ended the quarter with a construction and progress balance, primarily for manufacturing equipment of approximately $23 million, and with approximately $10 million remaining to be spent. I'll now address bookings and backlog. Q2 book to bill came in below one, and one year backlog decreased 19.9% from the prior quarter, closing at $217.3 million. Turning to the third quarter of 2023, we expect revenue and gross margin to be approximately flat. We also expect a sequential increase in operating expenses, primarily as a result of funding the legal work associated with cases, filed earlier this month at the International Trade Commission, and in federal court in the Eastern District of Texas, against foreign manufacturers of power modules and computing systems infringing Vicor patents covering non-isolated bus converters, NBMs. Legal work associated with these cases and related legal expenses are expected to grow substantially over the next year. Legal expenses are, however, less than the royalties paid to Vicor by licensees of our patents. In our ITC case, we are seeking an exclusion order, precluding importation into the United States of power modules, servers, or AI cards that infringe our patents. In our district court case, we are seeking damages for willful patent infringement. With that, Phil will provide an overview of recent market developments, and 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.

Thank you, Jim. Let me begin by summarizing the key messages from the annual shareholders meeting we held in Boston four weeks ago. Our business opportunities have never been stronger given the future growth of AI and the move to 48-volt power distribution in both the high-performance computing and automotive markets. Our investments in 48-volt power distribution and power conversion technology over the past 15 years have put Vicor in a unique position with intellectual property to key innovations in power distribution architectures, including factorized power and vertical power delivery, powertrain topologies, control systems, and power module packaging technology. Our new and the world's first chip fab is coming online in September, setting the stage for unprecedented scalability as we start shipping initial quantities of vertically integrated chips to lead customers for their qualification. Our lateral vertical distribution network provides superior performance for advanced GPUs, strengthening our position as the supplier of high-performance power systems in HPC markets. In short, as an earlier generation AI program using our third-generation factorized power chipset ramps down, our fourth-generation chipset is expected to start shipping in Q4 into a next-generation AI platform in a lateral or lateral vertical PDN. The lateral vertical PDN will provide nearly 10% higher power system efficiency and superior processor performance. Advanced processors currently in development require current levels that can only be supported with vertical power delivery through complex stacked VPD structures that Vicor pioneered and patented. With a 300% advance in current density, Vicor's fifth-generation technology enables a more mature and scalable second-generation VPD, which will soon be key to high-performance AI accelerators. The electrification and autonomy are opening up other markets for us, including industrial, aerospace, and defense markets. Our commitment to a set of top 100 customers globally, achieving operational excellence, supported by our new chip fab, is the focus of our entire company. Execution is now the name of the game.

It's an existing customer. It's a new generation for the existing customer. And it's a chipset that can be deployed either in a lateral PDN, which is substantially handicapped from a power system perspective to the point that it limits power delivery, power capability, process performance, in that it gives rise to large losses within the copper of the substrate to the GPU that it powers. It gives rise to further losses within the system itself, or into the limitations of lateral power delivery applied at the 1,000 amp level. With a 4G chipset, we can enable a lateral solution with the same handicaps, or with a vertical element using the same chipset, a lateral vertical solution, which is unique, highly differentiated, in that it improves system efficiency by about 10%. And it improves a number of limitations relating to process performance.

Operator, we're ready for questions now.

Jim, Phil, Patrizio, can you guys hear me? Okay, great. First question is, can you guys share any more details on the 4G lateral power distribution design that you mentioned in the press release for a new AI platform that ramps in the fourth quarter? Can you say, is this a new customer? Have you worked with this customer previously? Can you give us any sense of what our consumption is for this part? Is it a high power card? Is it a mid-range power card? Any details you can share would be very helpful.

It is likely to be lateral first followed by lateral vertical.

Great. And then you had mentioned sort of a little vertical improves efficiency by 10%. And I think in a press release, you said that would enable a 100 watt power saving. So am I right to be thinking that this AI platform could be consuming nearly a 1000 watts? Is that the right ballpark?

I'm not going to comment about the power consumption of the platform beyond that which is implied in the earlier comments, which is that to your point, we expect to save in total about a 100 watts which approximately represents a 10% improvement in system efficiency. But one should keep in mind that while 10% in some respects may not sound like a lot, it is a lot in a number of respects that are somewhat technical and that would be in effect somewhat difficult to articulate in sufficient detail in this context today. But whether it's the gradients or voltage differentials across a pin field brought about by lateral current flow across distances on a substrate with substantial resistance dissipating a substantial amount of power or the self-heating within that substrate that is caused by the power dissipation of the substrate and the silicon up above, what we're really talking about is something we discussed before. You might recall my pointing to these kinds of limitations and challenges many, many moons ago. It's just indicative of fundamental sampling blocks to what can be accomplished with conventional technology and its constraints within the realm of a power distribution network that is lateral.

Understood. I'll go back in the queue and let somebody else ask a question. Thank you.

Thank you.

Hello? Can you hear me?

Yes.

Okay, great. I want to follow up on Quinn's question a little bit. Regarding the lateral vertical opportunity that's coming to production in Q4, is that a high-volume customer oriented more towards a lower volume or more of a modest volume customer?

This is a significant customer.

Great, great. That's excellent. Okay. And, Patrizio do you think your bookings are going to rebound strongly upon completion and the qualification of the new factory?

We expect bookings to pick up, as in particular the platform we just referenced ramps. And because of other contributing elements, not least of which, to your point, being online our first ramp, it's from history we've had operational challenges and capacity limitations within the last couple of years with Advanced Products relying on unique processes that had to be outsourced. So common sense in and of itself would imply that as we overcome these stumbling blocks and bottlenecks and being capable of delivering the kind of solutions that we are uniquely equipped to provide that bookings and backlog will build back up quite substantially. I know there may be a concern at this point in time in the minds of some shareholders for whether it's worth. It's not my concern.

Excellent. I'll get back in the queue. Thank you so much.

Patrizio I guess I wanted to ask you about the recent actions, legal actions against Delta Electronics and Foxconn, I guess both at the ITC and in the Texas courts. It seems like at least you’re a large GPU manufacturer in the industry, current services, modules from Delta Electronics on its latest generation platform, and I guess I'd like to know what do you think the potential effect on your relationship with this GPU manufacturer might be to the extent you're going after one of its power module suppliers?

So I'm not going to be specific for obvious reasons, but it's implied by public disclosures, and you can read the complaint at the ITC. It's difficult to get to it and find out for yourself. We do have licensees of the technology, and those licensees were prudent enough to acquire licenses and put themselves in a position where they could source products, including NBMs, that would otherwise infringe our patents without incurring the risks of infringement. So you should not assume when it comes to the center or AI OEMs that they're all in the same boat. The one notable one is not because it's a part of the license. The other ones are going to have to deal with the issues that arise when foreign manufacturers, as close as they are, copy products that are covered by effective intellectual property.

Understood. Thank you. And just to clarify, the handover qualification, you still see that as on track for September, and at the shareholder meeting, I think you said that you anticipated an increase in the number of customer visits and customer qualifications as you got into the third quarter here. Is that customer qualification, is that still on track, those customer audits? Thank you.

We've had customer visits and we've had praise for what we're doing, the progress with respect to it, and going back to the first part of your question, yes, we are on track to make complete modules in September, late August, September, so essentially starting about one month from now, we're going to be able to play that any trip.

Hi, Patrizio. This is Don McKenna, D.B. McKenna.

Good afternoon.

I wanted to follow up on the 4G chipset coming on. When we're talking now, a backlog is roughly six months' worth of current run rates. What are you quoting for lead times at this point in time? Do you expect if you're going to ramp in the fourth quarter that you'll be receiving these orders in the third quarter?

So we already have backlog for the upcoming ramp, but with respect to get additional backlog, maybe Phil, do you want to comment on that?

No, I think that's exactly right. We have existing backlog, and our plan is to obviously begin the ramp with that particular backlog, and then in Q3, Q4, we'll get increased bookings for the follow-on 2024.

Right. And have you already seen, because your backlog is down now, are you quoting shorter lead times, and has that in turn generated additional bookings for you?

So let's put things in perspective. We're still playing catch up. We're going to be completing that catch-up play this quarter. But we're still, with respect to orders that were placed quite some time ago, because of the capacity bottlenecks that, again, we're aware of and remind us of early in the call, we're still playing catch up. So while that is the case, and that's going to come to an end relatively soon, our lead times are still long, but once we get caught up, which is imminent, and once the benefit of being in control of our destiny with our first fab, then lead times will come down.

I guess the concern is, when you look at the bookings this past quarter, we're somewhere in the 55 million range. Do you foresee a period where the revenues for the quarter are going to diminish, or do you see them continuing to increase as we're going forward?

I think Jim pointed out that we expect essentially flat revenues this quarter. That's our expectation. Again, to put things in context, if we go back quite some time, we've had, in an almost situation, with respect to bookings, and we pointed this out a year and a half ago, with very long lead times, and capacity bottlenecks, and also in light of general industry conditions. We were, we had booked to be ratios of nearly two, which are obviously not sustainable. So there's a process that has been going on for some time, with a timescale literally of a year and a half, of building up the backlog, now bringing it back down to a sustainable level where additional bookings will bring the backlog back up. In terms of our terms business and the relationship between the backlog and projective revenues, right now we're not in a comfortable position. Obviously we had a lot more backlog a year ago, but again, that was an anomaly, rather than a sustainable condition.

Understood. I'm sure you can appreciate our concern, or nervousness, if you will, when we see that the incoming orders are so much lower than the revenues for the quarter. I just hate to see any dips along the way.

I sympathize with, in effect, the concern of the nervousness. It's certainly justifiable, but again, it's very important when these locations of this kind, as have happened over the last year and a half, take place to be in a safe harbor with an objective view of all of the relevant factors. So as pointed out by Phil in his earlier comments, Vicor is uniquely positioned because of the convergence of technological trends that we anticipated, invested in, and are uniquely equipped to exploit. And that's the safe harbor that we're operating from. And that's the basis for looking forward, as suggested in my post to the press release, for sustainable and improving profitability.

Hi, good afternoon. Thank you for taking my questions. This is Jon Tanwanteng from CJS. I was wondering if there was any more color or detail behind why the lateral implementation of the product. So this new product will be launching first. Has there been a delay in the lateral vertical? Any more commentary will be helpful there.

I'm sorry, Jon, I didn't fully get your question there. You're coming through a little bit muffled. Can you repeat?

Hi, can you hear me better now?

Yes.

I was wondering why the lateral only version of this new product is launching first compared to the higher performing lateral vertical product.

So the lateral version, even though the start of its development was over a year after the start of developments based on multi-source, multi-phase, competitive alternatives, that was in effect predicated on the same kind of PDN that the multi-phase, multi-source solutions are in effect confined to. But because of the fact that its development, even though it was belated, still started early in time as gathered to the finish line ahead of a more advanced PDN which we had projected to have the benefits it's proving out to have, but because of the fact that that only got started about six, seven months ago from a development perspective, it is falling on the heels of a lateral vertical solution that had been started nearly a year earlier. But it's rapidly catching up and it's proving out to be as good as we advertised it to be and in my belief, because of its much stronger trends, again in terms of not just power system performance, but processor performance, it will soon, I believe, play catch-up and become the solution of choice.

John, this is Schmidt, as you said earlier; it's exactly the same chip set which is key for the lateral and the lateral vertical. It's a much, much improved layout, better PDN with lateral vertical, placing one of the VTMs underneath the processor that gets the benefits. And we can do that because the packaging is very thin and very thermally adept, so it's got a lot of advantages being the same chip set that gets qualified for the lateral.

Can I ask when you actually launched the lateral vertical product with the same chip set, does that get you a higher dollar content per AI card for this product?

No, the chip set is being quoted for over a year now and that chip set is a fixed price and that goes for lateral or lateral vertical implementations.

But the other vertical implementation, which had been recommended to the customer earlier but did not get started until later, delivers a lot more performance. So the value of the session is much greater, particularly if you look at it in terms of anticipated processor performance.

Got it. So should we think of the lateral product then as similar to a drop-in replacement for the existing multi-phase solution as a second source and maybe your lateral vertical product has a higher performance, higher efficiency type skew which may launch later?

So the lateral solution using the same chip set is not a drop-in because with different components, the layout itself is different but it shares a common lateral PDN, even fundamentally the floor planning that had been done, which floor planning was, again, predicated on a multi-source, multi-phase solution. So, we're first, in effect, within the same general floor plan, fitting in a solution which is better in many respects, much lower noise, better performance in general, but handicapped by the lateral PDN. So that handicap is a common denominator limitation that can be overcome. As Phil pointed out a moment ago by taking one of the VTMs that supports the primary high current output and redeploying it into a vertical position close to the center of the GPU and in that location it can do wonderful things in terms of not just reducing PDN loss for the primary output but also slash the PDN losses in the secondary and tertiary outputs that are also very high current by large percentages and with that improve overall system performance. So the outcome of all this effort, which could have started earlier but it did not get started until six months ago, will be a superior system with better performance overall.

Can you hear me a little better now?

Yes.

Okay, great. Phil, the last conference call you discussed, the lateral vertical that you've got a number of designs that were coming out in the third quarter, I believe. One sounds like it's here. It was your high-volume customer, existing customers doing a re-spend that you talked about, but you had, I think, five other designs that were supposed to come out. Are they still coming out or are they coming out as vertical lateral or vertical?

Yes, so John, those are lateral designs. The processor currents there are lower. They're slightly lower performance applications, different types of workloads. Yes, the customer count there is about the same four to five customers but those are lateral implementations but again, using basically the same technology.

And you expect those to start production in the third quarter also?

No, I expect those to be in production mostly like Q1 of next year.

So would we expect, are those things that you have bookings on orders for already or will we see the bookings next quarter for those?

We have a small amount on backlog, maybe a few million dollars just the early prototype type quantities for initial ramps and then I expect the bookings for those to be Q3, Q4.

Okay, but they're not as high-volume as the other orders that you were talking about, correct?

Correct.

Excellent. Okay, and then when do you expect 5G to actually be production ready?

We expect to have demo systems in Q4 for internal digestion and begin to share with some select customers in Q1. Like when would you expect that your customers would be able to take those and then ship those to their customers? Are we talking Q2, Q3 of next year? As you know, there's a gestation period from availability to customers and their own design cycle, which typically takes about a year. Therefore, we should not expect 5G to contribute to revenues in 2024. A more realistic expectation for 5G revenue contributions would be 2025. That said, we are enabling a much more scalable design process with 5G, and I anticipate several significant applications that have faced challenges with high card solutions. Competitors have struggled with our first-generation vertical power delivery, and I believe they will encounter difficulties due to their less mature methods of implementing a vertical power delivery system. With our 5G technology, we have a more effective way of achieving vertical power delivery without stacking at the power system level. Consequently, there may be instances next year, particularly in late 2024, where we could assist customers who find themselves facing various technical or intellectual property challenges.

Got you. So we may see a competitor to come out with a vertical system, but there are IP challenges and there are also technical challenges that you think they are going to run into.

They have both technical problems and they have IP problems. I think the problems they got with NBMs.

Why would a customer go with a solution like that if they are technical and IP problems?

Well, so to some extent, I think the industry is going to go through a few revolutions because whether it's a technical issue or its intellectual property issue, OEMs are dependent on their suppliers to be able to follow through on solutions that can be shipped in that work. Technically or work in terms of ownership of intellectual property that is at the heart of the solution. And failure to be able to support the customer, an OEM customer or another one of those firms is going to bring about a revolution in the industry. That's my expectation.

Great, thank you very much.

Hello. You hear me?

Yes.

Alan from here. I had a question about if the factory fully up and running, are you going to be able to hit the ground running in the fourth quarter with this new customer and fully meet their demand?

So to be clear, the factory as a whole has been up and running. In my earlier comments with respect to the turn on of certain equipment and processes starting at the end of August and into September, those capabilities are incremental capabilities that we haven't had vertically integrated. The expected to be vertically integrated in the next two months before the end of this quarter. And that will give us, as I mentioned earlier, total control of our destiny with respect to advanced products in particular that are dependent on those packaging process steps. But there are many other facets of capacity for which we have made significant investments and, as reflected in all the capital equipment that you've seen being added within the last year, year and a half, that have already been deployed and validated.

So in Q4, do you expect more of a graphical ramp or really move the needle on revenues?

Well, I think we're going to have a ramp and we have the capacity in the equipment to support that ramp.

Okay. And then a question on your gross margins are up over four points this last quarter. What do you attribute that to?

That's, so this is Jim here, that's a function of leverage associated with a volume, increase in volume and also a favorable mix. And we also have the benefit of lower freight in and tariff costs, none of the $2.8 million duty drawback, as well as a reduction in outside processing costs, all of that added up to improvement in the gross margin.

Increase in all.

Okay. That was my next question. You had two royalties last quarter and what were your royalties this quarter? And they seem to be ramping pretty much pretty fast over last year. Is that going to be lumpy or is that going to continue to grow?

No, I think you'll see it in the 10-Q when we file it on August 4th.

Let's reserve judgment, okay? So let's put it this way. As you've heard us say, over the last 15 years, we've made major investments in the hundreds, $700 million in technology, all it takes to bring it about. And that's why what we've seen with respect to ROI in terms of licensing of international property is still at this stage in terms of both the number of EMS involved and their use of that technology. So we should expect to see those numbers go up. Use the word lumpy. Yes, it could be lumpy at times, we'll have to wait to see our events unfold with respect to the assertional IP and the campaign that we're embarked upon to make sure that it gets fully respected.

Okay, thank you very much.

All right, I will take the next phone question now. Please state your name and company name before asking a question. Your line is open now.

Hi, it's Jon Tanwanteng again. I was wondering if you expected margins to stay at the current levels organically or is there some part of the crawl back that is changing as you move forward number one, and I have a follow up after that?

So I think we just say Jon, as I said in the guidance, we expect growth margins to be approximately flat as well. There is going to be a declining rate of duty drawback because part of it was front-end loaded at the recovery of years' worth of tariffs that would have been paid in the past.

Understood. So the underlying margin should be increasing going forward, if that's the case. Understood. Okay, and then where do you actually expect litigation expense to be in the coming quarters compared to this quarter, however you want to phrase it?

We're not going to be very quantitative about that beyond what Jim said at the outset, which is we're going to have significant legal operating expenses. There may be more actions brought, and so we need to take a wait and see attitude with respect to the next year.

Understood. And then last one for me, just the orders for the next generation products that you're talking about, the lateral vertical products. Do you need your factory to be fully qualified before you see those orders, or can you ship those currently with the existing factory regardless if the factory is qualified or not?

No, I think the two pretty much line up because qualification is occurring in the next four weeks and so we're moving forward into Q3, Q4 on a new program. So it's about the same timing, so it lines up pretty well.

Hey, guys, just wanted to ask a quick follow-up on this new AI platform, Q4. Should we think about that as sort of a new skew or Vicor as sole source through the factorized power, and hopefully over time you can convert it to the lateral vertical solution or will there be a second skew of this product based on multi-phase and multi-phase and factorized power will sort of share that business going forward?

So we've been allocated a share of what you might call the baseline platform. And that's something that, again, can be supported from a part system performance perspective using a lateral PDN and the capacity is okay. But again, we have proven that the lateral vertical is a far superior PDN with major improvements in efficiency. We're not talking, I mean, typically, power components or power systems, within a certain type of PDN differ by one, two percentage points of efficiency. What we're talking about is a 10% difference. So it dwarfs, the minimal differences that often characterize different kinds of components, right? So it's a fundamental difference in the way the power system is architected from the PDN perspective with major benefits with respect to system performance. And you can, and I can independently speculate as to what OEMs, customers would want to do with that. I don't know that I would know or that if I did, I could tell you.

One thing I want to say, Quinn, would be our job is to obviously give our customer options, right? And I think the lateral vertical gives the customer a great option in terms of increasing performance for its GPUs that are limited by the lateral PDN. So, and again, it's very important to remember, it's about 100 watts savings per AI card. You have eight of these in a RAC system. That's 800 watts of power savings. It's huge. And so you can really start to go after GPU performance with those savings. So we've given customer options. We'll see what happens.

Thanks guys. Follow up to Quinn's question. For your, with this new customer, this existing customer, I mean, that is going initially with vertical and then, I mean, initially with lateral, then lateral vertical. Can, will that customer see an improvement in performance with your lateral solution, your lateral only solution? Will they still have problems with resets and then throttling the clock?

What we've seen and reported back to us from the engineering teams looking at this is that our version of lateral is a better version. It's higher performance.

So they won't see the degradation as much as they're seeing with the multi-phase solution?

Yes, it's a better solution. Let me put it that way.

But, just to be clear, the PDN tends to be an equalizer, right? If you've got enough of handicap, it tends to play in the capping role all around. And that's really the elephant in the room is the handicap associated with the PDN.

Correct. But it sounds like your lateral solution, lateral only is going to give a little bit better PDN than the existing solution. Am I correct in assuming that or am I hearing that?

Let me answer it this way. I would not expect the differences in performance between a lateral multi-source multi-phase and a lateral factorized power system at these current levels to be all that significant on the scale of the benefit of the lateral vertical. In other words, the lateral vertical removes the handicap that is fundamentally limiting power system capability and process performance.

Correct. I'm trying to understand why the customer would switch from the current multi-phase solution to your lateral solution as an intern. Why wouldn't they just wait for your lateral vertical?

Because the lateral got started earlier. Even though it got started late, it still got started earlier than the lateral vertical.

And they need suppliers. They need suppliers.

Okay. They need suppliers too. Got you. Okay. Okay. And it sounds like, is this truly the end of the line from multi-phase? I mean, multi-phase keeps making improvements. I'm just wondering, is this really the end of the line for that?

Sorry John. No. It's not the end of the line for multi-phase, right? It's multi-phase. Multi-phase has been around for a long time, and it will not suddenly die. There is a role for multi-phase, but you have been saying this before. It can't keep up with the performance of a factorized power system, particularly leveraging 5G components with a 3x step up in current density, and much better performance around. Nor can it keep up with the industry demands with respect to escalating current requirements at the decision-vaulted case for all the competing AI systems that are underdeveloped and are going to be brought to market over the next few years. I see a fundamental disconnect between what the systems are going to need and what a multi-source multi-phase can support, particularly as we get into full vertical power delivery type of systems. Even past lateral vertical. As you get into a full vertical system, these kinds of solutions, the multi-phase, multi-source, are going to be constrained from complexities, challenges of what we call first generation VPD, which by Vicor pioneer, talented, but we have left behind with our 5G approach, which makes the whole VPD solution much simpler, much better, much more cost-effective. So there are handicaps at different levels, standing in the way of multi-phase. It's the multi-phase power conversion methodology, the averaging down as opposed to the current multiplication. It's also the PDN, and then there is a VPD element to it with related IP issues that is also standing in the way.

Got you. So with the higher current levels, you really don't expect to see the multi-phase making much progress?

I don't expect it to go away. I think it's going to remain an alternative, but I am confident that the technology gap between the factorized power system solutions using early generation components on the one end and our 5G chipset capabilities that technology gap relative to multi-phase has improved as we should all expect it to be, but those improvements are not going to be able to keep up with the step-up in performance that we are going to deliver next year with 5G.

Thank you very much, guys. Good color.

Thank you, everyone. Operator, I think we're ready to end the call now.