Q2 2022 Vicor Corp Earnings Call

Speaker 1: Good day and welcome everyone to today's conference call which will begin shortly. If you require assistance at any time please give star 0 on your telephone. In the meantime we will continue to play music. Thank you for your patience.

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Speaker 1: I would also like to advise all parties that this conference is being recorded. And now I would like to hand it over to Jim. Please proceed.

Speaker 2: Thank you. Good afternoon and welcome to ViCorp Corporation's earnings call for the second quarter ended June 30th, 2022. I'm Jim Schmet, Chief Financial Officer, and I am in and over with Patrice Yovinci-Aureli, Chief Executive Officer, and Phil Davies, Vice President of Global Sales and Marketing.

Speaker 2: After the market is closed today, we issued a press release, summarizing our financial results for the three and six months ended June 30th.

Speaker 2: This press release has been posted on the investor relations page of our website, www.VicorPower.com.

Speaker 2: We also filed a form 8K today relating to the issuance of this press release.

Speaker 2: I remind listeners this conference call is being recorded and as the copy rated property of iCore Corporation. I also remind you various remarks we make during this call may constitute forward looking statements for purposes of the safe harbor provisions of the private securities litigation reform act of 1995.

Speaker 2: Except for historical information contained in this call, the matter is discussed on this call, including statements regarding current and planned products, current and potential customers, potential market opportunities, expected events and announcements, and our capacity expansion, as well as management's expectations for sales growth, spending and profitability, are forward-looking statements involving risk and uncertainties.

Speaker 2: And light of these risk and uncertainties, we can offer no assurance that any forward looking statement will in fact prove to be correct. Will in fact prove to be correct.

Speaker 2: Actual results may differ materially from those explicitly set forth or implied by any of our remarks today.

Speaker 2: The risk and uncertainties we face are discussed in item 1A of our 2021 Form 10K, which we filed with the SEC on March 1, 2022. The document is available via the Edgar system on the SEC's website.

Speaker 2: Please note the information provided during this conference call is accurate only as of today. Thursday, July 21, 2022.

Speaker 2: RICOR undertakes no obligation to update any statement, including forward-looking statements, made during this call. And you should not rely upon such statements after the conclusion of this call.

Speaker 2: Every play of today's call will be available beginning at midnight tonight through August 5th, 2022.

Speaker 2: The replay dial-in number is 888-286-8010, followed by the passcode 644-90033.

Speaker 2: This dial in in Pascoot are also set forth in today's press release.

Speaker 2: 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.

Speaker 2: I'll now turn to a review of our Q2 financial performance, after which we'll review recent market developments. I betreat you, Phil and I will take your questions.

Speaker 2: In my remarks, I will focus mostly on the sequential quarterly change for P&L and balance sheet items.

Speaker 2: and refer you to our press release for our upcoming Form 10-Q for Year Over Year Comparisons.

Speaker 2: As stated in today's press release, VICOR recorded total revenue for the second quarter of $102.2 million, a 15.7% sequential increase from $88.3 million in the first quarter of 2022.

Speaker 2: Advanced products revenue increased 27.8% sequentially, while brick products revenue declined 2.4% from the prior quarter.

Speaker 2: Advanced product revenue increased 64.9% from the same quarter a year ago.

Speaker 2: shipments destocking distributors decreased 3.4% sequentially at 34.1% year over year.

Speaker 2: Exports for the second quarter were relatively flat sequentially as a percentage of total revenue at approximately 69.2% from the prior quarter 72%.

Speaker 2: For Q2, advanced product share of total revenue increased to 66.2%, compared to 59.9% in the first quarter of 2022, with BRIC product share correspondingly decreasing to 33.8% of revenue.

Speaker 2: Turning to Q2 gross margin, we recorded a consolidated gross profit margin of 45.8%. Gross margin increased sequentially from 42.6% in the first quarter of 2022.

Speaker 2: Primarily as result of higher volume.

Speaker 2: Headwinds impacting our gross margin, including elevated cost of securing supply, and outsourced capacity, continuing Q2.

Speaker 2: In addition, tariffs continue to be a drag on gross margin at 2.1 million in Q2 and 2.1 percent of revenue.

Speaker 2: Our work to reduce tariffs by reducing imports from China continues.

Speaker 2: I'll now turn to two operating expenses.

Speaker 2: Total operating expense increased 8.3% from the first quarter of 2022.

Speaker 2: This above average sequential increase was largely due to legal fees and incurred in connection with an intellectual property litigation.

Speaker 2: Bikwa is both a defendant in a case scheduled for trial in October and a play to plaintiff in an upcoming ITC case to stop the importation of infringing OEM products into the US. Bikwa is a defendant in a case scheduled for trial in October and a play to plaintiff in an upcoming in a case scheduled for trial in October and a play to plaintiff in an upcoming

Speaker 2: In the larger context, as described previously, Bikler has developed proprietary power modules in system architectures, providing superior power system solutions.

Speaker 2: These capabilities are being broadly adopted by OEMs purchasing Vicor modules.

Speaker 2: By an OEM licensing bichor technology to procure otherwise infringing modules from unlicensed suppliers.

Speaker 2: and by OEMs taking their chances with the importation into the U.S. of infringing products.

Speaker 2: Bikers committed to vigorously enforce its IP.

Speaker 2: The amounts of total equity-based compensation expense for Q2 included in cost of goods, SG&A, and R&D was $431,000.

Speaker 2: One million four hundred and forty thousand.

Speaker 2: and $751,000 respectively, totally approximately 2.6 million.

Speaker 2: For Q2, we recorded operating income of $11.3 million, representing an operating margin of 11.1%.

Speaker 2: Income taxes for Q2 were a tax provision of $802,000.

Speaker 2: Net income for the quarter totaled $10.6 million. Gap diluted earnings per share was $0.24 based on a fully diluted share count of $44,866,000.

Speaker 2: Before I review our financial position, just a brief update about COVID-19 and our workforce.

Speaker 2: As previously discussed, as a designated essential manufacturer, using masks and practicing social distancing from the onset of the pandemic, we have continuously operated three shifts at our Andover manufacturing facility.

Speaker 2: 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 risk outside of our control,

Speaker 2: We cannot estimate the extent of such influence on our financial or operational performance or when such influence might occur.

Speaker 2: 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 effects on our results are unpredictable.

Speaker 2: Turning to our cash flow and balance sheet.

Speaker 2: Cash, cash equivalents ensure term investments total 207.6 million at the end of Q2. Accounts receivable net reserves total 54.5 million at quarter end. With DSOs for trade receivables at 37 days.

Speaker 2: All balances are current.

Speaker 2: Inventory net of reserves increased 12.4% sequentially to 83.1 million, and with annualized turns at 2.62.

Speaker 2: Operating cash flow totaled $10.8 million for the quarter.

Speaker 2: Capital expenditures for Q2 total $14.2 million.

Speaker 2: We entered the quarter with a total construction and progress balance of 50.8 million, and approximately 35.1 million schedules to be spent through the year. Primarily for manufacturing equipment.

Speaker 2: on the how to address bookings and backlogs.

Speaker 2: 2-2 book to bill came in below 1 and with one year backlog decreasing sequentially by 3.2% from the first quarter of 2022.

Speaker 2: Turning to the third quarter of 2022, as we updated at the annual shareholders meeting in June , our CHIPFAB is nearing completion and we expect vertically integrated production in Q4. The next quarter of 2022, the CHIPFAB is nearing completion and we expect vertically integrated production in Q4. The next quarter of 2022, the CHIPFAB is nearing completion

Speaker 2: As it ramps up, our chipfab will provide the capacity we need to further improve output and the efficiency necessary to improve gross margins.

Speaker 2: With that, Phil will provide an overview of recent market developments, and then Patrice Yolfill and I will take your questions.

Speaker 2: 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.

Speaker 2: If you have more than one topic to address, please get back in the queue. Phil?

Speaker 3: Thank you, Jim.

Speaker 2: Q2 bookings are a result of securing long-term NCNR orders in prior quarters that now form a large part of our backlog.

Speaker 2: The outlook for the data center market is positive. As hyperscalers continue to build out their machine learning technologies and capabilities, as well as upgrading their 48-volt CPU racks with the latest Intel and AMD CPUs.

Speaker 2: Our backlog which stands at over $400 million is strong and made up of major HPC customers with a mix of older and newer programs that are just beginning their ramps.

Speaker 2: Our objectives in the next two to three quarters are to catch up with customer demand and reduce lead times.

Speaker 2: As discussed in our annual shareholders presentation a few weeks ago, we are working on next generation AI processor and AI systems in the HPC market with lateral and lateral vertical solutions and with new network processor based designs for backhaul speed upgrades.

Speaker 2: Since the ASM, we have also agreed to a funded collaboration agreement with an additional automotive OEM.

Speaker 2: A legacy product backlog increased in Q2 and although a smaller percentage of our overall business mix legacy products remain important to our business

Speaker 2: Many of our 8,000-plus customers representing a very long tail and loyal base are transitioning to our advanced products for next generation programs.

Speaker 2: This is important to our portfolio as we build out a broad-based industrial and channel business.

Speaker 2: I cannot emphasize enough how important our new chip lab is to not only increasing short-term revenue growth for our advanced product customers globally but also to our mid and long-term strategic goals.

Speaker 2: Our major HPC customers need access to scalable capacity with shorter lead times in support of their critical production ramps and volume requirements.

Speaker 2: Our automotive customers also need assurance that the power modules they use in vehicle platforms are manufactured in an automotive qualified facility under vehicle's full control.

Speaker 2: In conjunction with world-class manufacturing of chips in our first fab, a company-wide operational excellence initiatives are now being rolled out.

Speaker 2: Our pivot from a product-centric company to a more customer-centric company is at the heart of this change.

Speaker 2: On the ASM call, I spoke of a focused set of 100 customers that had the SAMH's to get us to $1 billion revenue target. The SAMH's to get us to $1 billion revenue target.

Speaker 2: We will be laser focused on this customer set with the objective of achieving the highest possible scores across technology, quality, responsiveness, delivery and cost, more commonly referred to as TQRDC.

Speaker 2: such that the most impactful companies around the world trust us to deliver power system solutions with a high performance necessary to enable their innovations.

Speaker 2: Thank you. Patricio, Jim and I will now take your questions.

Speaker 1: Everyone, your question and answer session will now begin. If you wish to ask a question, please give a star and then one on your telephone.

Speaker 1: If you then decide to read your questions simply key start to all questions will be answered in the order received Then you will be advised when to ask your question all other lines you remain only son only

Speaker 1: And we already have a couple questions. The first one is coming from Quinn.

Speaker 4: Your line is open now, please proceed. Great, thank you. Congratulations on the nice increase in quarterly revenue. But I wanted to ask Phil, you gave a little bit of color on bookings. It looks like on a quarterly basis bookings decline pretty meaningfully. You mentioned the NCNR orders in previous quarters. But can you sort of just elaborate a little bit more? I'm not sure if I know the term NCNR, so maybe first start with what those are. And perhaps more importantly, when would you expect to see the

Speaker 4: bookings recovery recover are you already starting to see better bookings in the September quarter or do you expect them to remain some Duke as you work down backlog

Speaker 3: So ha?a?a?a?a?antumana.

Speaker 3: So, SCNR is non-cancelable, non-returnable. You know, that was necessary pretty much across the board because we are booking out.

Speaker 3: really, you know, way beyond some cases 40 weeks. Lead times are at 32 weeks for advanced products, but obviously big customers to secure, you know, their supply chain and guarantee, you know, they're able to build their product. They've been placing very large orders with us, NCNR orders with us in prior quarters. Very lumpy, very up, very high in some cases. And so, you know, I'm not concerned about bookings at all, you know, with the backlog being so strong and visible.

Speaker 4: terms that you talked about or would you expect platforms for 2023 to book later this year?

Speaker 3: No, we're seeing orders, as I've mentioned, the backlog is made up of all the programs and new ones, recent ones, and those are NC and R and for the 23 timeframe, but some of them will start to ship in Q4. But some of them will start to ship in Q4.

Speaker 4: Great. I'll get back in the queue.

Speaker 3: Yes, so to expand on that, if you are referencing

Speaker 3: Next, your national solutions are triggering additional bookings.

Speaker 3: Those are

Speaker 5: up approaching Let's go.

Speaker 5: but we have not yet booked orders for those devices.

Speaker 4: Got it. Okay, thank you, Patricio.

Speaker 1: The next question is coming from the line of John . Your line is open now, please proceed.

Speaker 6: Hi, good afternoon guys. Thanks for taking my question. Nice quarter. I was wondering if you could just give us a little bit more color on what enabled this sequential increase, whether it was your internal capacity, you know, freeing up or was it external supply chain just help us, you know, get to where you got today and if that's sustainable actually going forward. Hey, everybody!

Speaker 2: It was a combination of a couple of things. I think that the investments we've made in capacity did help us in Q2. So the beginnings of some positive of results from particularly service mount technology, and not necessarily the package process steps, the plating operations. So we did get some benefit from that. We still have the headwinds associated with the most part outsource operations, and that continues now.

Speaker 2: as we bring our own lineup, but there was some benefit there. And I think, Ken, you know, we have to give a lot of credit to our operations team who worked against long odds to get supply and really drive supply harder in 2Q to get the revenue lift.

Speaker 6: Understood. Thank you. And I think getting better or worse, as you hadn't Q3 in any place, I know that you could have started your new lines, but externally should we be thinking

Speaker 2: Supply is still tight. We've talked about that internally. I've talked to our operations people. It's still a very tight environment for supply. It's still a very tight environment for supply.

Speaker 6: Okay, I'm just going to get back into thanks.

Speaker 1: The next question is coming from the line of Don.

Speaker 1: Please proceed.

Speaker 4: Hi guys. I'm following up on Quinn's question. I was trying to get a feel for the dollar value of the bookings received in the quarter. Am I right to assume that you net out new orders with any cancellations or move outs of existing orders when you determine your book to bill ratio? And if that's the case, could you please identify what the dollar value of the new orders were? Otherwise it looks like it was only about $76 million.

Speaker 2: The bookings were higher than that. There's minimal cancellations in our order pattern. Really, so I think the book to book was as we said below one. Backlog, not that far below one. I think the telling number that we quoted was you know the opening backlog dropped by sequentially by 3% which is on the order. Yeah.

Speaker 2: So, it's really.

Speaker 2: The best way to understand it is as Phil described, which is 400 plus million of backlog out multiple quarters.

Speaker 4: Yeah, what up when I was trying to get a feel for is

Speaker 4: What was the dollar value of the new orders you received during the quarter?

Speaker 5: So we're not providing detailed information with respect to the bookings. So as Jim has pointed out in the past, bookings within a quarter are subject to the vagaries so some larger are forming within the quarter of the south of the next quarter and they're not necessarily indicative of a long term trend. I think if you want to...

Speaker 5: draw the right inference with respect to the long-term trend, the key parameter to look at is the progression of our backlog within the last 12 months.

Speaker 5: Just to say, we've been capacity-constrained, allocating our capacity, and customers have had to place orders with very, very long lead times. And that's been a factor with respect to within the last of our quarters, the booking spatter, the backlog spatter, and that's ongoing. As Phil pointed out...

Speaker 5: booking orders is not a concern.

Speaker 4: Thank you.

Speaker 1: The next question is coming from Doug. Your line is open now.

Speaker 7: Yes, hi guys. I just have two brief but unrelated questions. Have you received the final piece or pieces of equipment for the new facility and then switching gears you guys brought up the litigation? What capital requirements or any distraction will these litigations create moving forward? And I was kind of under the impression.

Speaker 7: that the technology was not...

Speaker 7: repeatable or recreatible. So I'm a little confused at how these guys are infringing on your technology. Thanks.

Speaker 5: Okay, let me take that, so let's start first of with the working stand in terms of...

Speaker 5: new facilities, a fellow state.

Speaker 5: and bringing on capacity. As you pointed out earlier, we're already benefiting Q2 from some of the capacity. And equipment is being installed at a high rate and lines within the new facility are being tested. In fact, one of the lines relating to the packaging process is beginning to be applied with respect to Q2.

Speaker 5: some of the engineering prototypes.

Speaker 5: but we will have to wait for the balance of Q3 to have

Speaker 5: the bulk of the production equipment installed and then we'll have to wait

Speaker 5: for a fraction of Q4 for us to in effect reclaim the lion's share of the capacity or production for advanced products. So there will be some incremental contribution this quarter, and that's going to happen at an increasing pace as the quarter progresses.

Speaker 5: But it will not be until the forecourt that in effect all of the production equipment

Speaker 5: that is in the critical path. There will be additional production equipment coming next year, but all of the critical production equipment with respect to advanced products, for that to be in place, that would be Q4.

Speaker 7: Yeah, you just a quick question because obviously I've been on every call. I've been an investor with you guys for eight, nine years now. Is that has that been delayed? Because my original impression when you guys were starting a facility was a little bit sooner on the final piece of equipment. Has there been some delay in those last couple of pieces of equipment?

Speaker 5: I would say generally not. That's not to say that in given the multiplicity of pieces of equipment.

Speaker 5: and general complexity of what we're bringing together in terms of the first fab, that's the way to think about it for our components. It's a very first fab that's been conceived, developed, implemented. That's a major task that has happened, pretty much on schedule. So...

Speaker 5: We won't quibble with respect to

Speaker 5: whether, um,

Speaker 8: It's there.

Speaker 5: a work of the production volumes for advanced products.

Speaker 5: would happen in Q3 versus Q4. There may be a couple of months with respect of delay, with respect to expectation. But regarding the delivery of the equipment, it's been remarkably on time, on budget. So we're very happy with what the version of Steam has executed on the travel front.

Speaker 7: Yes, I was not questioning the production of your product. I was just simply asking the delivery of the equipment. I'm not worried about your guys' transition. I've again listened to all your calls, how you've trained your staff. I'm very optimistic about how efficient you guys start pushing out product. I was concerned with just the delivery of some of the equipment so that you guys can get started. That was the nature of my question.

Speaker 5: So the delivery of the equipment has been...

Speaker 5: Now we've had and we're continuing to have to air freight some of this equipment. Some of the equipment is heavy and it's frankly the duty costly to ship by air because of the timelines and the constraints. But for the most part I think everything has happened pretty much on time.

Speaker 5: in effect to the interface, which is with all the equipments being delivered, we're bringing up new lines that perform certain portions of the advanced products process steps.

Speaker 5: And there's still some equipment due to be delivered in the next month or so that would be commissioned late in this quarter and would become operational in the fourth quarter.

Speaker 7: Terrific. And I don't mean to dominate the time, but if you could just talk about the litigation, that seems to be a new topic that popped up.

Speaker 5: Well, so we have some long-standing leadership in which unfortunately we've had to play mostly defense, which is coming to a head in October . s

Speaker 5: And there will be behind us in a few months.

Speaker 5: And in the meantime we're getting up for the more important.

Speaker 5: for the more important.

Speaker 5: Yeah, litigation, opportunity, which has to do with effect.

Speaker 5: getting return on investment with respect to all the AP that the virus developed.

Speaker 5: in terms of our system technology, focal opponents, and other aspects of the overall our system challenge.

Speaker 5: So there are, as we discussed in past,

Speaker 5: quarterly calls.

Speaker 5: that there are on the fringes instances of infringement regarding the earlier part of your question as to why these people can quote unquote copy it to be clear. No body is either the technique of where we though or the who's part two.

Speaker 5: coffee, advanced products. Let's be clear with respect to that. Even if they have the hotspot, they're going to have the world we don't.

Speaker 7: Good, that's what I want to hear, good.

Speaker 5: But on the fingers, it will VELVL effective.

Speaker 5: book-based copy is not taking place. It doesn't imply that it doesn't imply that

Speaker 5: The recent, uh, some...

Speaker 5: aspect of our product portfolio that is being changed. Now with respect to that as you may recall from prior.

Speaker 5: Our quarterly calls. We've had a program.

Speaker 5: to enable Williams.

Speaker 5: to secure.

Speaker 5: in OEM license for Bhagavad-ta College so that they can

Speaker 5: source components that would otherwise

Speaker 5: being infringing, you know, from suppliers, they're not directly licensed by VIGA. With our concern with respect to adding value to those power components by way of their that we have products.

Speaker 5: which is then imported in the US. So we have

Speaker 5: a well-thought-through strategy and litigation partners with respect to asserting IP to, in effect, stop importation in the U.S. of any OEM product that incorporates any aspect of Vigors proprietary technology.

Speaker 5: Now we've had success in terms of the licensing program. We expect to have additional success on the general front. But ultimately we need to make clear to those OEMs that are suggested in Jim's prepared remarks.

Speaker 5: maybe taking chances as to whether or not, you know, we are determined to assert IP to provide that evidence in order to catalyze closure with respect to what they need to do to secure the supply chain.

Speaker 7: Okay, good. Thank you very much. Go get them.

Speaker 1: The next question is coming from John and I'll hand it open now please proceed.

Speaker 6: Hi guys, congratulations first of all on the quarter, but also on the factory. I've got a little remodeling project here at my house, and I know how hard it is to stay on target and scheduled for just this little project. I don't know how you guys did it for the whole factory, but it's really remarkable. I'm going to be a bit chilly remarkable. I'm going to be a bit chilly remarkable.

Speaker 4: So my question here is for Phil. At the annual maining you presented what I call the bubble chart and referenced your major customers with the expected forecast for them. So my question is did the bubbles represent revenue, bookings, or opportunities?

Speaker 3: The bubble chart was basically to show the customers, you know, and the progression of customers that we're bringing on. It's really a mix of both bookings and revenue, John . I didn't get that granular on it. It was really meant as a visual to say to everybody, because I always get asked, have you only got one or two customers? So the answer is no, we've got a lot of customers and we're building that customer portfolio out in the HPC market. So it was really meant to represent that and a mix of bookings, revenue, different programs.

Speaker 3: visually showing how they grow, you know, over time.

Speaker 4: That's great. That's kind of what I thought. But I guess it might a little more clarity maybe. Since it was bookings and revenue, would you expect the bookings and revenue from the large GPU customer to be back-end loaded next year or is it fairly linear? Because that bubble got a little bit bigger. So I'm just wondering is that going to be a linear type of growth or is it going back-end loaded?

Speaker 3: So, I would say, as I mentioned in remarks, I think a couple of quarters ago, what we're seeing in the industry now is the existing sort of older programs living a little longer and overlapping with some of the newer programs. So, you know, in the AI market particularly, there's so much change going on and there's so much that you can do still in terms of performance with older GPU or processor platforms.

Speaker 3: Customers are still taking delivery of those with maybe higher memory content, higher speeds, higher power levels, performance levels, and then you've got some of the newer technologies, you know, at the 5.9mm node coming on and being intermingled with that. So we're seeing that you know, at the number of customers John .

Speaker 9: Gotcha. So the GPU customer sounds like they're just in product line, maybe continuing a little bit longer than we thought. And then in time for the new product, you expect to get some revenue from the new five nanometer products that will continue that growth in that particular customer.

Speaker 3: That's correct.

Speaker 9: Excellent, excellent. Okay my next question is, the follow-up question is you were quoting 32 week lead times last conference call and you had a 450 million dollar backlog so I assume that means that you're planning on shipping all that backlog before the end of the year. Is that assumption right?

Speaker 5: that we want to ask, such a question of any kind of specificity. So let's...

Speaker 5: doctrineals.

Speaker 5: as Jim remarked.

Speaker 5: You know, we are appreciative of the progress that was made within the last quarter. In the face of a great deal of headwind on a number of fronts, component availability, outsource capacity, the operations team did...

Speaker 5: a good job in terms of advancing revenues. These are trends that we expect.

Speaker 5: to continue this quarter and the quarter after that, your party only is our internal capacity. Your party only is our internal capacity.

Speaker 5: can be brought to bear to in a faceless day in a rational challenge. in a rational challenge.

Speaker 5: And that's the broad guidance that we can provide. It's created supported by the backlog. It's supported by the opportunities. It's supported by the opportunities.

Speaker 5: with existing products have been designed in, and it will be.

further supported by major further advances in advanced products that are coming to fruition as we speak.

Thank you, that's really helpful. Thank you guys, I'll get back in the queue.

The next question is coming from Richard. Your line is open now, please proceed.

Oh, I got a signature taking my question.

My first question is mostly answered, but I just want to make sure here to understand about the advanced products backlog that was down sequentially. Am I correct in assuming that there may have been some push out with some customers here of their programs and see how maybe a little bit of a lot in two using Phil's words here just a couple minutes ago, there may be extending their current generation products while they wait for that. Is that a fair interpretation of what's going on?

I think it's, you know, the fact that, Richard, they've got significant backlog, right? And, you know, they've had lots of lead times on, long lead times on their equipment and building there. The mineral supply chain is stretched right out.

So I think that's a big piece of it, and then you've got the new five nanometer stuff coming on board, so it's going to be a mix.

Okay, all right, fair enough. Maybe you can talk about the dynamics here of getting the new manufacturing facility up and particularly with any new and potentially more interestingly larger volume customers that have been looking for that more predictable delivery. Are these customers waiting to see proof of the new manufacturing facility?

Up and running, you know, get good performance and good cycle time before they place bookings or are they already happening to some or even a great degree. or even a great degree.

Well, anybody that's got us, you know, designed in over the last number of quarters, you know, eagerly awaiting the new facility to get, you know, shorter lead times, right? I mean, that's the key thing and, you know, have that great supply assurance from us, you know, being vertically integrated. With regards to new programs, again, you know, we've talked about single sourcing and, you know, being vertically integrated and having a great factory like this. That's why I mentioned in the remarks, it's so strategically important to us.

to walk into some of these newer customers that we are working on with early programs and show that facility off and be able to stand up and say, you know, we can service you, don't worry. Now obviously there's supply chain of materials to us, but actually making the package, making the product, being vertically integrated is a huge weight off any risk in that supply chain.

Okay, turn off. Let me follow up on that one a little bit later. I guess my question's jumping out before I jump out of line here. Just talking about the tactic execution here as you ramp up the new facility. As soon as you're going to you got some reverberation. Now I look at another one and this one see me.

numbers of volumes to get a sense of product performance, and then also being able to get the cycle times that you want. How many iterations does this take, and how long is each iteration? Meaning, you are talking about a ramp I think, or at least start panels early in the quarter. When do you think you get that sense that you are going to be able to produce at the amount of throughput that your major customers would like to see?

So I think we're going to be in that.

the previous position by the end of this year.

I think that...

Because of all the learning has been going on over the last year and a half, a lot of Russian teams.

doesn't have

to in effect

??

sort through

Oh.

challenging processes by trial and error. They understand what needs to be done.

They've aligned themselves in terms of chemicals and equipment and capabilities.

with them.

proven solutions that we expect we never have to ramp without glitches having completed.

the validation of the equipment and the processes, which again is something that has begun, is taking place already with respect to some of the lines in the upper floor of the new facility, which are dedicated to advanced packaging. And again, that's the process that will continue in the next few months.

is the power so the equipment gets delivered and the power so the lines get turned on to compete to the world factory capability. So,

the pass or the equipment gets delivered and the pass or the lines get turned on to compete to the overall factory capability. Okay, fair enough. I will jump out of the line. Okay, fair enough.

The next question is coming from John . Please proceed.

Hi guys, I've got two follow-ups for you. The first one is, I think I get the sense that you're expecting sequential improvement over the next two quarters. My question is more around Q4 when you actually ramp up your advanced packaging and plating. Are you expecting a step function and margin in Q4 as you migrate away from outsourcing and towards internal capacity?

So John , I think the way to think about it is we're still in an environment of extremely fight supply. We're transitioning to in-house production. I think what we would say is incremental improvement in revenue and gross margin over the coming quarters is the kind of advice and guidance we'd want to give.

Okay, great. And then second, where do you expect your lead times to be in a quarter or two from now? Should we expect, you know, orders to ramp back up again once that gets back down to a more historical range of maybe two quarters, does it make a little less?

Yeah, I mean as the new programs start to come on and ramp up, dollar content for a lot of those programs is higher, volumes are higher, so yeah, I expect the bookings to start climbing again next year, yeah.

Okay, and where do you expect the time to be in the next quarter?

I think that we should leave that question largely and answer in that I think we are at a very interesting fraction point in the business.

which makes it...

in terms of growth rights and opportunity, a bit difficult to...

If the forecast?

I think we're sensitive about...

not over committing and want to be able to to a pleasantly surprise in terms of results. to a pleasantly surprise in terms of results.

So let's not get on with them. I had a four way back to happen, which in gel terms is the beginning of... It's the beginning of...

a long lasting face of growth for the company. A leveraging the first of its kind.

chip fab, chip as in converter housing package. So it's not a silicon fab, but in many respects, it shares similarities with the foundry for silicon in the way in which the products are manufactured in panels, similar to wafers. The many process steps, the fact that a lot of the process steps came in getting natural. So baffle, bold.irie Woof

And the kind of equipment involved is, again, similarities with lots of lasers and unique equipment that we have...

conceived and developed with partners to accomplish these unique packaging steps, which I firmly believe will give VIGO a long-term sustainable cost advantage in addition to a major performance advantage and backing that app is What I suggested earlier which is the current to fruition of nitrogen and ash of technology that in some January starts Westat pop

the game by a factor of two in terms of density and cost-effectiveness.

So all that paves the way for significant long-term growth.

As we suggested earlier, we expect...

the establishment of revenue growth that our Russian team

you know, managed to deliver after a few disappointing quarters within last quarter. To continue this quarter, what after that? You know, at what rate? Let's not get into that. Let's wait and see what happens.

Understood, thanks a lot, thanks a lot, appreciate you and thank you for coming.

Thanks, I'll appease you, and good luck, guys.

Next question from Quinn. Your line is open now. Please proceed.

Thanks for taking my follow-up question. Patricio or Jim, just wanted to ask, on the vertical integration, when do you think you'll be fully vertically integrated at this point? Is that still sort of by the end of the year or do you think that potentially moves now into the first quarter given you're still taking some equipment for that step in early Q4?

So the way in which we might or that is by, if you will.

percentage of integration, by definition.

you know, by definition.

it will never be literally 100%, right? There's always going to be something that from time to time needs to be done externally. But if we look at the third quarter, the quarter we're in, with respect to a lot of processes, as the quarter progresses, we're going to get to relatively substantial percentage, 20, 30% vertically integrated.IST lifelike

draw a packaging, which is obviously the trust of this land of inquiry. As we get into the far quarter, and as we get towards the end of the far quarter, we're going to be 80-90% vertio integrated.

I hope that answers your question in a quantitative way. This is not a digital proposition. It's not a zero or a one. It is a progression where, as suggested earlier, the advance...

So our packaging involving a combination of lines that perform different process steps get brought up and released to production in increments that achieve a greater level of convenience. Tab.

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we get to Q4, we expect to be substantially integrated.

Meaning, not 100%, but the lion's share of it, which going back to a variety of key considerations ranging from our cycle time, our capacity, the cost effectiveness of the process steps, it will essentially deliver the goal.

Understood. Thank you for choosing the second question. I have just on the lateral vertical, wonder if you might be able to give us an update there. Are those programs still sort of undergoing customer evaluations? Have you started to actually receive bookings or delivery of the lateral vertical solution at this point? Or delivery of the lateral vertical solution at this point?

Understood. Thank you, Patrice. The second question I have is just on the lateral vertical. I wonder if you might be able to give us an update there. Or those programs still sort of undergoing customer evaluations. Have you started to actually receive bookings for delivery of the vertical lateral vertical solution at this point? So there is...

There is a broad range of requirements and to go with that a broad range of capabilities. Obviously we had success stories.

with what we call lateral pdn, so lateral power delivery. And we read the success story is competing with the competitive alternative of, if you will, it was called the intermediate basal chitexia, and my convert to some multi-phase regulators.

So that's been the landscape for the most part over the last 10 years. Most systems have been louder. At the other end of the spectrum, we worked with some industry pioneers.

on fully vertical systems.

Those are still what you might call bleeding-edge initiatives. They involve stacking of our ships.

And they've been supported to a limited degree, leveraging some of our older technology. And without the benefit when it comes to the packaging of the virtual integration, we are soon going to be able to nearly fully deploy. We are soon going to be able to nearly fully deploy.

But they've demonstrated the kind of capabilities that is going to become necessary to support.

Weft scale and cluster computing in leading edge applications that in this year large will require as the

Get up into the 7000X.

And then you get an effect 2

intermediate

intermediate

PDN architectures, one we call lateral-vertigo.

And another one we call vertical auto, as you can imagine.

from the sequence. The latter of vertical is still most reliable, but the voice is a vertical component.

on the other side of the substrate.

to provide for typically one third

of the

requirements over primary rail.

That's relevant because it makes a base of central differs in terms of PDN losses and system capability in the 1500 app range.

of the above the car level.

above that current level.

Vertical lateral becomes an accessory because even the deployment of a vertical component

He isn't enough in order to...

oh

provide the crime density and bandwidth and overall system efficiency that is necessary by systems in the say 2000, see a thousand-and-a-a-tall-a-crime range. So...

again you have a broad range of requirements and with it

a varying landscape ranging from pure ladro, which is in effect.

landscape ranging from pure lateral, which is in effect becoming a thing of the past.

to Lavaro Vertigo, which is becoming a necessity in the 1500-amp range to Vertigo Lavaro, as you get above that. And then when you get to powering, let's say, wafers that may consume 50,000 amps, 100,000 amps, there is no turn of these two puberty.

And we're on the forefront of that technology as well. And with our 5G capabilities, we're going to get to, generally speaking, a much higher level of current density and performance with those applications as well as the vertical lateral and the lateral vertical.

I guess page is quick clarification on the ladder of vertical for 1,000 to 1,500 amps. Is that something to expect to go into production early next year or is that further out?

That's in, I would call it the early development stage and

I hope that we get to, you know, that solution in the second half of next year. We'll start it probably in the second half of next year.

Okay, thank you.

I think that, um,

That's all our time for tonight. I'd like to thank everybody for joining the call and ask the operator, we're ready to conclude the call now.

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