Presentation:.

Good day, everyone, and welcome to Vicor Earnings Results for the Third Quarter Ended September 30, 2022, hosted by James Schmidt, Chief Financial Officer. My name is Peter and I'm your event manager today. During the presentation, your lines will remain on listen-only.

[Operator Instructions] I'd like to advise all parties, this conference is being recorded. And now, I like to hand over to James Schmidt. Please proceed..

Thank you. Good afternoon and welcome to Vicor Corporation's earnings call for the third quarter ended September 30, 2022. I'm Jim Schmidt, Chief Financial Officer.

And I am in Andover with Phil Davies, Vice President of Global Sales and Marketing; our CEO, Patrizio Vinciarelli is unable to join today's call because he is out of state attending the trial relating to IP litigation we referenced on our earnings call last quarter.

After the market closed today, we issued a press release summarizing our financial results for the three-month and nine months ending September 30. This press release has been posted on the Investor Relations page of our website, www.vicorpower.com. We also filed a Form 8-K today 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 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 risks 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 face 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, Tuesday, October 25, 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 November 9, 2022.

The replay dial-in number is 888-286-8010 followed by the passcode 10145508. 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 Q3 financial performance, after which Phil will review recent market developments, and 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 third quarter of $103.1 million, approximately a 1% sequential increase from $102.2 million in the second quarter of 2022 and a 21.4% increase from the same quarter a year ago.

Advanced Products' revenue decreased 12.5% sequentially, while Brick Products' revenue increased 27.2% from the prior quarter. Advanced Products' revenue increased to 36.2% from the same quarter a year ago. Shipments to stocking distributors increased 22.5% sequentially and 27.3% year-over-year.

The Brick Products' revenue increase over the prior quarter is the result of our manufacturing team's ability to adapt to changing circumstances and focus on the open Brick backlog as we have the supply to get the additional output for the quarter.

The sequential decline in Advanced Products' revenue in Q3 was due in part to the issuance of approximately $6 million return material authorization or RMA in the quarter. Product covered by this RMA will be evaluated upon receipt and prior to restocking in advance of its future shipment.

Exports for the third quarter were relatively flat sequentially as a percentage of total revenue at approximately 70.1% from the prior quarter's 69.2%. For Q3, Advanced Products' share of total revenue decreased to 57.4% compared to 66.2% in the second quarter of 2022 with Brick Product share correspondingly increasing to 42.6% of revenue.

Turning to Q3 gross margin, we recorded a consolidated gross profit margin of 45.5%.

Gross margin decreased sequentially from 45.8% in the second quarter of 2022, primarily as a net result of favorable overhead absorption offset by tariff costs, higher costs at outside vendors and incremental in-house manufacturing costs associated with ongoing vertical integration investment in advance of substantial in-house production.

Tariffs continue to be a drag on gross margin at $3 million in Q3 and 2.9% of revenue. Our work to reduce tariffs by reducing imports from China continues. I'll now turn to Q3 operating expenses.

Total operating expense increased 5.4% from the second quarter of 2022, like last quarter and for the same reasons, this above-average sequential increase was largely due to legal fees incurred in connection with intellectual property litigation we've described previously and is disclosed in our filings.

The amounts of total equity-based compensation expense for Q3 included in Cost of Goods, SG&A, and R&D was $479,000, $1,537,000, and $813,000, respectively, totaling approximately $2.8 million. For Q3, we recorded operating income of $9.5 million, representing an operating margin of 9.2%. Income taxes for Q3 were a tax provision of $842,000.

Net income for the quarter totaled $8.1 million. GAAP diluted earnings per share was $0.18 based on a fully diluted share count of 44,898,000 shares. Before I review our financial position, just a brief update about COVID-19 in our workforce.

As previously discussed, as a designated essential manufacturer using mask and practicing social distancing from the onset of the pandemic, we’ve 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 are 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 and the impact and timing of the effect on our results are unpredictable. Turning to our cash flow and balance sheet. Cash, cash equivalents, and short-term investments totaled $202 million at the end of Q3.

Accounts receivable net of reserves totaled $56.3 million at quarter end, with DSOs for trade receivables at 38 days. All balances are current. Inventories net of reserves increased 13.6% sequentially to $94.3 million, and with annualized turns at 2.61. Operating cash flow totaled $6.6 million for the quarter.

Capital expenditures for Q3 totaled $14.4 million. We ended the quarter with a total construction in progress balance of $57 million and approximately $13.5 million scheduled to be spent through the end of the year, primarily for manufacturing equipment. I'll now address bookings and backlog.

Q3 book-to-bill came in below one and with one year backlog decreasing sequentially by 9.4% from the second quarter of 2022. Before addressing our outlook for the fourth quarter of 2022, I'd like to comment on significant external events and developments that have occurred since our last earnings call in July.

Over the course of the last three months, the macroeconomic environment has deteriorated. Many parts of the semiconductor industry have entered a downturn. The Commerce department issued new and stricter export control rules and the CHIPS and Science Act became law.

While it's too soon to tell what the impact of the first three of these developments may mean for our business, they certainly represent headwinds in the near term.

On the other hand, the passage of the CHIPS and Science Act could present an opportunity for Vicor, both in terms of potential funding for new investments in vertically integrated US-based manufacturing and also the possibility of leveraging its investment tax credit.

As we operate in this environment, we are working to control all the factors that we can control. For example, we are taking a more conservative stance on hiring and have recently re-prioritized and reduced open personnel requisitions.

We continue to work to bring our vertically integrated US-based production capacity online, while also looking for opportunities to take advantage of the investment tax credit and the CHIPS Act. Relating to equipment procured after the CHIPS Act became law and is subsequently placed into service after December.

We have taken steps to rebalance our manufacturing production plan in order to make progress catching up with customer demand that we've not been able to adequately support in the past. We are continuing our company-wide work in supporting operational excellence.

And we remain focused on the development of our next-generation power delivery technology, while building the business across our customer base in HPC, automotive, industrial, and aerospace and defense end markets. In all of this, we remain focused on executing our strategy which we laid out at our Annual Shareholders Meeting in June.

Given our continued near-term dependence on outsourced production for certain package process steps, our outlook for the fourth quarter is approximately flat to our Q3 results, with the potential for modest sequential improvement as we increasingly leverage in-house process equipment to alleviate production constraints.

With that, Phil will provide an overview of recent market developments. And then Phil and I will take your questions. I ask that you limit yourselves to one question and a related follow-up, so that we can respond to as many of you as we can in the limited time available. If you have more than one topic to address, please get back in the queue.

Phil?.

Thank you, Jim. As Jim mentioned, our book-to-bill ratio came in below one in Q3, reflecting the second quarter in a row where this has occurred. At a high level, this trend is reflective of the deteriorating macroeconomic environment. However, it's important to point out that we maintain substantial backlog as we enter Q4.

From an end-market perspective, and on a more positive note, the outlook for the data center market in North America at the current time is still good, as hyperscalers continue to build out their machine learning technologies and capabilities, as well as upgrading their CPU racks with the latest Intel and AMD CPUs.

Managing the transitions to newer processor platforms in our customer base will require some maneuvering of our NCNR backlog in Q4 from Gen3 to Gen4 factorized power modules. I remain confident in our position in the HPC market and in the customers that we have worked hard to develop in recent years.

Our factorized power solutions remain the highest performance in terms of current density, low noise, and overall power system efficiency.

Our Generation-5 technology, a new FPA module, which we are now beginning to introduce to lead customers will be a game changer in cloud computing and machine learning with a significant step up in current density.

Our Gen5 technology will also enable direct chip on processor solutions, which will completely eliminate board and substrate PDN losses for our advanced processor customers, while also providing a significant step up in transient performance.

While multiphase buck regulators have increased their power density and represent an attractive alternative due to the multi-sourcing, it remains to be proven if these multiphase solutions can manage significantly higher PDN losses and meet the low noise and high performance required by high-power AI and network processes.

Our industrial and aerospace business remained stable in Q3 and both POS and new orders within our global distributors remained strong. However, we have started to see signs of a potential slowdown in some segments of our industrial business in China and Europe, which reflect macroeconomic headwinds.

Our automotive business development continued its positive trajectory with OEM and Tier-1 power system evaluations making great progress towards securing [starter] (ph) production dates with very attractive volume opportunities at several OEMs.

We have two successful OEM audits in Q3, both OEMs have approved Vicor as a supplier of power modules for their vehicles. In Q3, we also engaged with additional hyperscalers and processor OEMs regarding an OEM license that would ensure continuity of supply ahead of our upcoming campaign to enforce Vicor bus converter patents. Thank you.

Jim, and I will now take your questions..

Okay.

Operator, if you could go ahead and start into the questions?.

Yes, sir. [Operator Instructions] So the first question is coming from the line of Jon Tanwanteng. Please proceed..

Hi, good afternoon. And thank you for taking my questions.

My first one is, how have you seen orders trend in October so far? Has it gotten worse from what you've seen in Q3 and when do you see that kind of picking back up or is it more declines ahead as you look forward and talk to customers and think about what they're needing for '23?.

So the daily order rate in October is below what it was in Q3 Jon. In terms of -- there is lots of uncertainty out there with China and Europe as I mentioned. As I mentioned, the data center, cloud computing, and the hyperscalers and processor guys in North America are still strong.

But they've also got large amounts of backlog, right, in place we Vicor that would allow us to maintain healthy revenue shipments for the foreseeable future.

I think that what's to be seen in that particular market is really the rollout of the new platforms and the success of those and what happens with China business for several of those processor companies. So that's a little bit of an uncertainty there as well.

But like I said, North America is still very strong and investment in capital expenditure in the data center, cloud computing as well as machine learning..

Got it. Thank you.

My next one is, just could you give us an update on the new facility? How is it running so far and kind of what kind of utilization you are expecting out in the near future?.

So, yeah, this is Jimmy. I would say that we're on track as we described it on our last call. I think we said in the range of 80% to 90% vertical integration this quarter and we're on track to do that later this quarter.

We're hitting some significant milestones in terms of bringing up production equipment, it helped us in third quarter, it will help us in fourth quarter as well to really handle some of the backlog and clear some of the backlog. So I would say that that's very much on track as we've described it in the past..

Okay, great. I'll jump back in queue. Thank you..

Thank you. The next question is coming from Quinn Bolton from Needham & Company. Please proceed..

Thanks for taking my question. I guess the question around the China export controls, one of your large customers clearly saw an impact for the tighter restrictions on shipments of GPUs to the China market.

I'm wondering can you quantify or give us some sense as to how that might impact your revenue or what lost revenue might be associated with those tighter export controls..

Yeah, sure. So it's really mostly with our -- we call our legacy business and some of our older chip products. And it's really new companies being added after I think the commerce department is doing more investigations and the types of businesses that these customers are involved in.

So it's not for if you like our Advanced Products, it's really our older products. And we started to see some of the effects of that at the beginning of Q4 as well as some weakness in the general market over there due to the zero COVID policies and factories not yet really getting back to where they were a couple of years ago.

So it's really a legacy business issue, Quinn..

And just Phil just -- one of your large customers, I believe, said that they would be affected by as much as $400 million of their GPUs. And so I guess I'm surprised that you're saying it's more of a legacy impact.

Is it -- can you provide any more color, if one of your larger customers are seeing that level of hit, shipments of their GPUs how that doesn't affect your Advanced Products?.

I think that in terms of increased bookings for those Advanced Products, that's where it would hit. But again like I said, we've got extensive backlog in place with them and they've got really big positions in North America and Europe with different types of data center customers. So that's what we're relying on for the next couple of quarters.

And then I think things will change as the new platform start to roll out..

Great. And then my follow-up is just, lots of questions this year about competition for multi-phase and I think it's pretty clear, your next-generation product from a lead GPU customer is starting off with multi-phase.

But I guess, can you give us any updated thoughts on your position both on current generation GPUs, as well as next-generation GPUs? Do you feel like multi-phase is gaining share? Do you think you're holding share again this is both for current-generation as well as next-generation GPUs? Thanks..

I'm confident in our position with the technology, the factorized power technology, it's a very, very clean solution. It's -- as we've talked about before, power modules which are significantly less component count easier for board layout, much lower noise because of the performance of the parts, better thermal management of the design.

So I'm confident that the Vicor technology will compete effectively because I still think the jury is out with regards to multi-phase and whether or not it can really hit the performance levels that are needed, but that's yet to be seen.

So we'll keep pushing ahead with our stuff and I'm looking forward to the Gen5 stuff even pushing us further out ahead of the competition..

Thanks. I'll go back in queue..

Thank you. The next question is coming from online no name recorded. [Operator Instructions]. Please unmute yourself, state your name and company..

Yeah. Hello..

Hello..

Yeah.

Am I on?.

Yes. You're on..

Okay. This is Alan Hicks from Ainsley Capital Management. I wasn't able to pre-register.

So did I hear you say you got a licensing deal?.

We are offering. We've stepped up basically our interaction with potential hyperscalers and processor companies that we've now obviously have confirmation about use of alternate bus converters. And so we are offering them to take an OEM license before the action begins in restricting importation of those products into the United States.

So we are in conversation with a number of them at the moment to take a license and that will progress through the next three, four months..

Okay.

So you're getting closer to a licensing deal?.

We already have one licensing deal in place. But as we -- as this move forward, I do expect others to happen..

Okay. And then I had a question on -- you've been paying quite a bit in tariffs. At what point do you think you'll be able to assume that's all from China? At what point -- I think $0.07 this last quarter, $3 million, and $2 million in the previous quarter.

So at what point do you expect to get past those high tariffs?.

So I think that -- thanks for that question. That's a great question. We probably have to say -- we're not as satisfied as we would like to be in terms of extricating ourselves from some of these production operations. They are difficult to move out of China in some cases.

In one case, we actually moved unfortunately a semiconductor process step from an operation that shut down in the US and we had to move it to China. And that will move ultimately likely to South Korea. But we are getting some momentum going on that front.

And I think we're also getting some additional momentum going on what is called duty drawback, where we make application to the customs and border patrol to recover. Some of the tariffs we've already paid in the past. So, I'm hopeful that we're able to talk about better results on that front going forward.

We have seen -- maybe not completely related topic, but we have seen some relief on freight costs, some small amount of improvement there for us. So that's a good indicator for us in terms of the P&L. But we've got more work to do on tariffs and there is a team inside Vicor working very hard on that..

Okay. And then last question, your legal costs were up $4 million from Q1.

Can you give an update on that and how -- when can you get past those legal costs?.

So that's -- as I said in the prepared remarks, that's a function of really a significant amount of ramp and legal expense associated with preparing for the trial, that is happening right now. So I think that will taper down obviously as that ramps up.

But there will be other incremental legal costs coming in as we pick back up where we left off with the ITC activity around what Philip had mentioned, which is the -- basically Vicor as a plaintiff[ph] defending our IP. So I would say there is going to be a net reduction in legal costs over the coming quarters.

But it won't revert back down to the low level had been maybe a year, year and a half ago..

Okay. Thank you very much..

Thank you. The next question is coming from the line of John Dillon from D&B Capital. Please proceed..

Hi guys, thanks for taking my call. Phil, I got a question. Last call we talked about the bubble chart a little bit in particular about the GPU customer bubble, that you had at your annual meeting.

And at that time, you were expecting revenue from that current -- from their current product for a longer time than you initially expected until the new 5-nanometer product would kick in, and then you expected revenue from that, then you expected kind of a fairly smooth transition as far as revenue is concerned.

I'm just wondering is that still the case?.

Yeah. We see that initial -- the big program that we've been involved in to continue through next year even into Q4, it won't be at the same rate as in Q1, Q2, but it will still be there. And then the next generation program will kick in and that will start to take off.

But that A100 project is a very successful project and it's still going very strong..

Okay.

So you're still on all the A100s and you expect to be on the H100s coming up here?.

Yeah..

Excellent. And then, I'm wondering about your next generation vertical lateral -- lateral vertical and you talked about some new design wins.

I'm just wondering if you can give us some color on that? And when we might see some of those come into production quantities?.

Sure. So let's take them as -- just start with lateral vertical, I think that will see production on lateral vertical next year with a couple of processor guys. And then I think that the pure vertical into the cluster computing sort of market will start in Q1. And then a follow-on customer probably Q3, Q4 next year for that.

And I think that, by that time frame, we should have Gen5 technology starting to hit the market where that really is a game changer because we have a significant step up in current density and the packaging gets a lot smaller.

And we can do a lot more with it in terms of vertical power delivery, even we're talking right now to companies where we will partner with them in a way to actually attach the current multipliers directly to their processor silicon.

So that you eliminate completely the PDN resistance and losses associated with that in substrates and circuit boards, I mean, it's almost the perfect power delivery network right, attaching it directly to the silicon. So that's what Gen5 will enable and that'll be later next year and into 2024..

Sounds excellent. I'll get back in the queue. I have some other questions. Thank you very much..

Next question is coming from Jon Tanwanteng from CJS Securities. Please proceed..

Thanks for the follow-up. Just wanted to confirm that -- have that correctly.

You're expecting to be in the H100 at some point in the future?.

Yes..

Okay, great. That's great news. I was wondering also the about the $6 million in RMA product that you mentioned earlier in the call.

What was that all about? And where does that show in your results?.

Yes. So that was about -- was a request to return material that from Vicor's perspective, our quality team and this is where I'm not an expert, but what I can do is comment on what they've told me. It's been fully qualified to industry standard test and it fits for use.

But we work with the customer and as these issues arise and we've agreed to take the product back, it's not a product it's in production, it's a product that we expect to get back vacuum sealed and be able to restock it and resell it..

[Multiple Speakers].

So sometimes customers -- they have harsher environments then we expect and they expect sometimes and it's part of the partnership, right? You work with them to deliver product and then if they've got an application that requires more robustness to work in even harsher environments, then we'll work with them to do that.

And then in this particular case, we have other customers for this product. So it will go on the shelf like Jim said and after it's been fully tested and evaluated and we expect to be shifting that out next year, early next year..

Okay, got it. One more if I could, just as you shift your production in-house in the new facility, what are your margin expectations as we go forward? Are you still going to see a little bit of pressure as you ramp that up? And in Q4, is there going to be more relief as you kind of transition away from [indiscernible].

Yes. So like, it's our practice to not give specific guidance on gross margin. But what I will say is that we've modeled this fairly - extent but not fairly, quite extensively. And the entire transition internally will be accretive.

So as we move more and more of our operation out of this outside operation that we've been using and come internal, we will be generating incremental gross margin and that's before we even get to a point where we're running substantially more volume. So the entire model is based on driving margin by virtue of the volume increasing over time.

But bringing in-house will be savings right away. So we're not going to give specific guidance, Jon. But we're mapping this out to the financial model we've talked about on many occasions, long-term model at 65% gross margin..

Understood. Thank you for the color..

Thank you. The next question is coming from the line of Richard Shannon from Craig-Hallum. Please proceed..

Great. Thanks for taking my questions, guys. So on the last earnings call Patrizio made a comment about next-generation solutions that were approaching availability but not haven't booked those orders yet.

Can you talk about those next-gen solutions, have they gotten to availability, and if you've got any bookings on them yet?.

So I think if I remember rightly, he wasn't talking about the Gen5 stuff, just yet. He was talking still about Gen4, and some of the vertical power delivery products that we've developed for cluster computing companies. And two-stacked chips, and three-stacked chips. I think that's what he was referring to.

We should start seeing revenues, as I mentioned on those products in Q1, bookings in Q1 as well for other customers. So we've got about, I think it's three accounts right now, that should book business in the early part of next year for some of those multi-stack chips on the Gen4 technology..

Okay, fair enough. And also wanted to follow up on one of your comments from the earlier questions, Phil regarding multi-phase and whether the jury is still out there.

Is this a comment regarding kind of the long-term or are you talking about like leading-edge products available from leading accelerated companies next year? Maybe you can delineate that comment a little bit more, please?.

Sure. I think you see the Palo MOSFET, the silicon technology improving in terms of its current density. But you still have a fundamental voltage averaging in a multiphase system with lots of phases required to support some of these very high current processes in AI and also network backplane stuff.

There's a lot more there with regards to getting a controller that's able to meet all of the current accuracies and low noise requirements of the system. So -- and then you also have thermal challenges with the PDN. That isn't simple, it's not easy, I mean it's attractive from the potential of having multi-source.

But again how multisource is, when you have different controllers from different companies that require different layouts all sorts of different considerations, if that 12 phase, 16 phase, 20 phase wherever they are, that's not really a multi-sourcing strategy, but you can make yourself feel good about that.

But there is a lot of issues around getting a multiphase solution to deliver 1000 amps in a very small accelerated card. It's still a lot of work to be done to get that thing ready to go prime time. And that's not just a GPU customer, that's at ASICs and network processors, there is a whole host of applications where there are challenges to do that..

Okay, great. And one last question for me, I'll jump out of line here. Just about the guidance for the quarter and kind of the broader commentary and the macro.

Maybe you can tell us just generally speaking, how you're expecting the trends in the fourth quarter between Advanced and Brick Products? And to what degree are you seeing the macro affecting either?.

Well, I think that as Phil said, the order rate is depressed going into the quarter. But to get to your first part of the question Richard, our expectations of Advanced Products revenue will rebound this quarter. And Brick may be down sequentially. So there will be kind of a mix shift there. But as we said, I'm looking for approximately flat to Q3.

And as we get more and more activity internal and can rely more on ourselves to produce the product, we might have some modest upside this quarter..

Okay. Fair enough. That's all for me, guys. Thank you..

Thank you. The next question hasn't recorded the name. So you're in the line, please unmute yourself and state your name and company. Thank you..

Yes, this is me. This is Don McKenna, D.B McKenna.

Hello?.

Hi..

Okay. Yeah, I wanted to ask, during the year we've had additions from Wellington Group also from Thrive Financial and of course, Capital Group has continued to add to their positions, where they last I saw the last few quarters, they're 630, they were over 3.5 million shares that they owned.

And I know they held demand, and they're small-cap fund right through the end of September. I've got to think that they have more access to you for information than we're getting on this quarterly conference call.

And I'd like to suggest that, especially in this upcoming blackout period, I'll call it over the next four months before we talk again, that perhaps you schedule a meeting at the new facility like you did, probably 25 years ago when you brought in a lot of the area financial people to have a general discussion beyond what's just happens at the end of the quarter.

So that was my request anyway..

I appreciate that. And I thank you for that. And we did have an -- on May 18, we had -- it was a fairly limited audience. We did have a ribbon cutting. We're really intent on doing that in terms of more of those kind of events.

What we've focused on a lot in the last six months quite frankly is getting this operation up and running and keeping the factory team focused. But that's very good input, we appreciate that..

Have you maintained your position with all these major institutional investors?.

I would say -- I'm not sure if we have, data is out there. I think, we have interest from a large number of investors that are interested in the Vicor story and I think we've got a compelling story..

Yeah. I particularly like the Capital Group taking a long-term approach. That's why I was wondering if they hung through all the way. Thank you. I'll get back in line..

Thank you..

John Grabber from [Lagunitas] (ph). Please proceed..

Yes.

A question, this $6 million return, why -- if that was the case with a minus $6 million in the quarter there, why then can't you get an up quarter given that you -- if you were flat, you'd be at $6 million higher? Why is the quarter so weak given the backlog?.

Well, I think, like I said John, we will get a rebound in Advanced Products, we're counting on that.

One of the reasons we're really a bit challenged with respect to being confident in some of these statements is that there is still a significant process at least step or two that's outside of our control which is going to be the case through the end of this quarter.

So we really are a bit guarded making any kind of more bullish prediction because of that. I think as we get into next year, the early part of next year, we're going to have some of the final pieces come together. And I think as Patrizio said on the last call, it's not an expectation that Vicor is going to be 100% vertically integrated.

It will approach that level, but there is always going to be parts of this that are done outside. However, as we get into next year, the key pieces will be inside Vicor. And until that happens, we just have to be careful about our expectations setting..

Okay. And then the last questionnaire asked a question that we really weren't answered. Do you plan on having an analyst meeting or be more open this quarter to the analysts and the investors than you were last quarter where you were total silent? None of the analysts talk to you Jim or so which was very strange.

So what's the policy going forward?.

I think we will gear up to have an Investor Day. But like I said, our focus has been on execution. Generally, the view is, let the results do the talking in the short term. But we know we have to be open to the idea of an Investor Day and we're going to put that on the docket at some point in next year.

I think I'll feel better about that when the factory is up and running..

Thank you..

The next question is coming from John Dillon, D&B Capital..

Hi, guys. First of all, I would just want to second what Don and John just requested. There is so much misinformation going around about Vicor. And I try to respond to a lot of this, but there's only so much I could do, would be so much better if it came directly from the company.

Jim, I have a question for you, with the vertical integration getting to the 80% or 90% level, will that have a positive effect on turns and that will that positively affect your cash flow?.

So one of the metrics that's reported on weekly in an update from our manufacturing team is just that very thing turns, and there is incremental improvement that we're getting in the factory. Ultimately, it certainly will affect the level of inventory we have to carry, and ultimately that will affect cash flow that's out in the future.

Right now in the short term, we're still dependent on this outside operation. We have steel beams going up right now inside 400 Federal Street to install various parts of the plating operations. So it's a work in progress.

And I think, what I think should be understood is that the manufacturing team is putting that factory together, it's the same team that's continuing to work with the outsourced supplier. So it's quite a complicated world they're dealing with right now.

But yes, the answer is it -- the answer is, their scorecards, there's metrics that will include WIP, inventory turns, cycle time, all of those metrics..

I would imagine that's going to be fairly substantial because I would imagine you're sending your product out to a third party, having them play it, having them send it back. That will also have time and money to the things. So I would imagine, your cash flow is going to be affected pretty positively.

Is that a fair statement?.

I would say it's fair over time. I don't want to [Multiple Speakers] how soon that is because we still got months ahead of us to get this factory up and running and qualified. So I think I would just ask that to be patient about that culminating in the kind of operational excellence we want with this factory over the coming months..

Got you. I completely understand and I appreciate that.

So with the current economic slowdown and the China situation, can you still ship as much as you can build or some of your orders getting pushed out to the extent your supply is exceeding your demand?.

No, we still got significant overdue even on advanced products and legacy products. So the guys are working hard to get that completed. I think it's going to take a couple of quarters before we get totally caught up with all the legacy stuff and all of the Advanced Products stuff. So there's still a lot of work to do.

Like Jim said, the guys are focusing also on the same guys to do that and also bringing up the new factory. So there's plenty of business here to ship in the short term..

That's great. All looks good. Thanks, guys. I'll maybe get back in the queue maybe not. But I appreciate the update. Thank you..

Thank you..

Next question is coming from an unregistered participant. You're in the line. Please unmute yourself and state your name and company. Thank you..

Hi, this is Doug Combat from Promus capital. I believe I've been put on the line.

Is that correct?.

Yes. Hi, Doug..

Hey, guys. I don't want to sound like a broken record, I've been in the queue for about 30 minutes, 100% endorse with the other guys are saying.

During the quarter, there's just a lot of negativity, there's a lot of misunderstood information, one of your main competitors, that's been called just a production machine as far as efficiency and they're producing the lower end competition for you.

These guys are like doing touchdown dances, they're beating their chest that they're taking business from you. And as an investor of a publicly traded company, and again I don't want to sound like broken record. It would be great to hear from you more than four times a year and maybe two fireside chats.

Now having said that, a specific question, last quarter you guys talked about your backlog and a lot of those orders being non-cancelable, I forgot the exact term, I don't have it in front of me.

Is that still the case? I mean how ironclad is, are the backlog orders that so that "were non-cancelable" economic conditions get tough, stuff can be cancellable, even if it's documented..

You always have to deal with some of that. But no, we've got firm NCNR purchase orders that have been placed with a clear understanding of -- also their end market demands of the different customers that make up that NCNR backlog. So I get it. I mean, but it's -- I'm confident in our backlog position..

Okay. And just one follow-up. What I said at the beginning and what the other guys said, and maybe it's not so much just talking to investors, but you guys get on the call every three months and you talk about your technology and I'm a big believer in the technology that it's better or I wouldn't be an investor in my fun.

However, I just -- I think you guys need to educate whether it's investors or the marketplace or whatever it may be a little bit more. I mean I receive your emails when releasing a new product. I read them, some of it might be above my pay grade, from a technology standpoint. But I'm pretty well versed.

I think moving forward, as you're about to become a much larger company hopefully, there needs to be an education in place. Look, I know the ownership structure, Patrizio owns a lot of the Company, maybe the end game is just a parachute out to an acquisition. I don't know, I'm not asking for a comment.

I'm just saying maybe we just as investors, we have to deal with the volatility and we have to deal with the misconception until the end game. But maybe some of us would like it to be a little more smooth out if you know what I mean..

Yeah, understood. I mean, I know the company is talking about, we all do..

Yeah..

I said bad stuff on Volta[ph] five years ago, they said bad stuff on A100 and they say bad stuff on H100 when it comes to NVIDIA just them. And then there are other comments that are made around all the other processor and hyperscaler guys. I mean they just constantly do it.

Not much we can do about that because we can't talk about specific customers without their approval. So it puts us in a bit of a tough spot when there is lot of comments going around like you said. But we're just here executing, doing our job and we are confident in our technology.

And to your point of explaining it better and doing more education around it, we can certainly do that. And Jim puts together that Investor Day, we'll spend some time on that..

Okay. Thank you very much. Appreciate it..

Next question is coming from the line of Quinn Bolton. Please proceed..

Large GPU customers and it's July quarter took a $122 million warranty charge due to the failure of a third party component in its data center products.

And I'm wondering if you guys could go on record whether Vicor was any way involved in that recall or unfortunately net recall or warranty? And whether that might be related to the $6 million RMA you disclosed this quarter. Thanks..

I think we can't talk about any specific customer and I don't know that we can relate what we're doing with that Quinn. I think we should say that there has been a $6 billion RMA we agreed to, to take the product back. Our quality team believes it's fit for use, it's fully qualified.

There is a question about the root cause of some of the analysis that's gone on. But I would say that there is a case here where we have made incremental improvements in the product along the way, and it's been in production for months now. So I guess that's as much as we can say about it..

Yeah, I mean we wouldn't restock it and ship it to other customers if there was something wrong with the product.

But like I said before, you work with customers, we work within the aerospace, and defense or in industrial applications as well, where you come across something that needs a little bit more capability even though you qualify to industry standards and all sorts of specifications, and the customers also test and qualify the product too, right? So, you deal with these things and you have a long-term partnership with these customers.

So we work with them to constantly improve our products, we're always doing that anyway. So that's something that's just normal course of business. So we're going to put that back on the shelves. We're going to retest it first and then we're going to ship it, it's a good product..

I guess it sounds like you're obviously in close dialog with the customer around that $6 million.

Do you think that there has been any long-term impairment in a relationship or do you think the fact that you've agreed to take back this product and hopefully ship different product to that customer that there is no long-term effect on the customer relationship?.

Well, again like I said, we know very much all of our customers' processes and hyperscalers from the guys that we've been shipping to for many, many years. We know our PPM, so the quality levels out in the field, they range from, in some cases zero, perfect quality to 5 or 6 PPM.

Once in a while, you'll get an issue where you've got to work with the customer in partnership to figure out what the challenges are. Sometimes it's their end customers that are doing things that they shouldn't be doing. But you work with them in partnership to build something that's more robust than the spec originally called for.

And you get that work done and they are obviously working closely with us to get that done. So I don't see any problems with customer relationships. We work hard to build them and they are in good shape..

Got it. Thank you..

Sorry for the interruption. There are two questions in the line.

Are you going to take it?.

We take one question..

Yeah. One more..

Certainly. It's coming from John Dillon from D&B Capital. Please proceed..

Hey Phil, just wondering if you can give us an update on the front-end products in the AC to DC as far as design wins, timing, and whatever else you can tell us about that..

Yes. So we are continuing to ship evaluation units to different customers in the high-performance computing area, in edge computing and we also have the defense and aerospace set of variance that will get much higher frequency, 400 hertz instead of the 50 hertz, 60 hertz that you typically have.

Both single phase and three phase products different power levels. So, those will all start to roll out and sample and get on Digi Key miles or another distributor shelves in Q2 of next year. That's going along really well, and that's an exciting new product family. And my team is jumping at the bit to get those parts.

So it's something I think we'll have a lot of positive things to say about next year in terms of wins and future business ramps on that product family..

We've talked in the past about this, and it sounds like the marks for that is as big as a point of load market.

Do you expect an inflection point sometime latter part of next year in that business?.

I think probably -- I would say probably early '24 John. I mean this market still have long gestation period., right, it still takes about a year, 18 months to really get the stuff firmly designed in and then see those ramps go. Some of them could go a little quicker than that, but I would say it's more of an early '24 event..

In the meantime, though I imagine you're still going to see some in the LED display area..

I think the market there is really more to do with high-performance compute and [Multiple Speaker] very high density, high power box into racks..

Got you. It sounds good. Thank you, guys. Appreciate it..

Thank you..

Thank you. I think we're ready to wrap up, Operator..

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